Although many homeowners look to bankruptcy as an alternative to foreclosure, it is only a temporary solution. Based on my personal experience helping hundreds of homeowners, it is my opinion that in most cases bankruptcy is neither a necessary nor beneficial means of avoiding foreclosure.

There are two main types of bankruptcy; chapter 13 which forces your debtors to accept a payment plan, and chapter 7 which involves liquidation of your assets to satisfy debt.

Both types of bankruptcy are promoted as ways to avoid foreclosure, but because of the consequences that can arise from filing bankruptcy, other options should be considered.

I generally do not recommend a chapter 13 bankruptcy as a means of avoiding foreclosure. Creditors, especially lenders, do not need to be forced into a payment plan. Most creditors will be glad to allow you to set up a payment plan; all you have to do is ask them. By doing this they avoid the cost associated with the foreclosure process.

There are some cases where a chapter 13 bankruptcy may be in the homeowner’s best interest. If the homeowner has numerous debts in addition to their mortgage, it may be overwhelming or impractical to structure payment plans with each of them. In this case a chapter 13 bankruptcy might be beneficial, but I would only recommend it if your credit has already been destroyed. Under those circumstances a chapter 13 bankruptcy would allow the homeowner to rebuild their credit as long as they keep up on their payment plan.

Caution should be used when deciding to use a chapter 13 bankruptcy, however. I have seen many homeowners get behind on their chapter 13 payment plan. When this happens the lender continues the foreclosure process from the point where they left off. This leaves the homeowner further in debt, homeless, and with both a bankruptcy and a foreclosure on their credit report.

I recommend avoiding the use of a chapter 7 bankruptcy, because the home can be sold along with other assets in order to pay off creditors. This can leave the homeowner homeless and without money. Like Chapter 13, there are a few cases where a chapter 7 might make sense. If the property is upside down or overleveraged and the lenders are unwilling to settle for less than what is owed, an investor won’t be able to purchase the property. If the homeowner is faced with losing their house anyway, a chapter 7 could be used to avoid having the foreclosure affect credit.

Over the past six years, I have helped hundreds of homeowners not only avoid all of this, but I have often helped them walk away from the situation with enough money for a fresh start, and helped them rebuild their credit.

A property, even one with little or no equity, can be sold to an investor for cash. The homeowner can sell the property to an investor leaving the existing financing in place. Doing this will create value to the investor and, in most cases, the homeowner can walk away from the situation with enough money for a fresh start. The investor would then cure and reinstate the mortgage by making up the missed payments. This helps the previous owner by keeping a foreclosure off their credit, and as the investor makes the monthly payments, it also helps to rebuild their credit.

Before filing bankruptcy all alternatives should be looked at and considered carefully. If you feel your financial situation is not going to change or you’re uncertain about making payments on a payment plan, look for an alternative to bankruptcy. Call me anytime for a free consultation.