Can Bankruptcy Stop Foreclosure?

When finances have slid completely out of control and a wide variety of debts are looming, including past-due mortgage payments, it can be tempting to ask, Can bankruptcy stop foreclosure? Although in many cases declaring bankruptcy can bring foreclosure proceedings to a halt, there are additional considerations to keep in mind when deciding whether declaring bankruptcy is the best option.

How Does Bankruptcy Stop Foreclosure?

When an individual files for either Chapter 7 or Chapter 13 bankruptcy, a stay is automatically issued on any foreclosure proceedings, provided filing occurs before the date of a foreclosure sale. Neither is a guarantee that the foreclosure will not occur, but both can stop the proceedings for a period of time. With Chapter 13, a payment plan is worked out so that the mortgage can be paid down over time. With Chapter 7, it is more likely that the stay of the foreclosure will only be temporary. Chapter 7 also usually involves loss of property to discharge the debt, and so might not be the best option for the homeowner. The best way to avoid foreclosure is always to negotiate directly with the lender as soon as payments become difficult.

Long-Term Effects of Bankruptcy

One important consideration when thinking of pursuing bankruptcy to stop foreclosure is the long-term effect of bankruptcy. A foreclosure is undeniably a traumatic event, and will have a strongly negative effect on your credit. Bankruptcy could arguably produce an even longer-lasting hit to your overall credit rating. After foreclosure, your credit rating will undoubtedly be much lower, but you can bring it back up through concentrated effort to repay outstanding debts and return to paying bills on time. By contrast, a bankruptcy stays on your credit rating for a minimum of seven to ten years regardless of other efforts you make to repair your credit.

If you find yourself wondering, can bankruptcy stop foreclosure, the answer is a qualified yes. But be sure to consult with a financial professional to be sure you understand all the ramifications of the decision before taking this step.