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Can filing for bankruptcy prevent foreclosure?

Bankruptcy can be many things to many people in that it can bring relief from a variety of burdensome debts and become the means of a new beginning. One of the not uncommon motivations for a bankruptcy filing is to avoid or delay foreclosure. A recent article in the Huffington Post took on this topic, pointing out that bankruptcy acts as a sort of foreclosure “kill switch,” a last resort for underwater homeowners who have been unsuccessful in obtaining relief from their lenders.

Filing for personal bankruptcy—whether Chapter 7 or Chapter 13—triggers an automatic stay on debt collections, meaning creditors are at least temporarily unable to continue collecting on debts. As the article points out, though, the automatic stay of bankruptcy is not an effective solution to preventing foreclosure for many homeowners, since lenders are not required by bankruptcy law to provide homeowners with loan modifications or other relief and they can obtain relief from the automatic stay. 

In such cases, filing for bankruptcy it is a matter of delaying the inevitable. Unfortunately, some frustrated homeowners unwisely develop illegal strategies to file for bankruptcy multiple times to push back foreclosure in hopes that their lender will agree to cooperate with them.

Filing for bankruptcy to prevent bankruptcy can work when a lender is open to offering relief as a result of the bankruptcy filing, or when the debtor obtains enough financial relief from the bankruptcy to allow him or her to resume mortgage payments while making back payments in the bankruptcy process. Many debtors are not lucky enough to have such circumstances, though. Those who are can certainly benefit from filing for bankruptcy. 

Source: Huffington Post, “Bankruptcy: The Foreclosure Kill Switch,” Jorge Newbery, April 22, 2014. 

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