While filing for bankruptcy can provide you with the financial breathing room you need, it also carries some long-lasting consequences.

If you’ve fallen far enough behind on your monthly bills that you’ve begun to consider bankruptcy as an option, you’re not alone: each year, around 800,000 Americans file for Chapter 7 or Chapter 13 bankruptcy protection as a way to gain freedom from oppressive expenses or liens. While filing for bankruptcy can provide you with the financial breathing room you need, it also carries a number of long-lasting consequences, so it’s important to go through this process with your eyes open.

For many, thoughts of bankruptcy can come part and parcel with the foreclosure of your home’s mortgage. You may be wondering whether bankruptcy can help you avoid foreclosure; in other cases, when you’re certain you can’t afford to keep your home, you may wonder whether filing for bankruptcy before or after your mortgage is foreclosed is more advantageous.

Read on to learn more about how bankruptcy and foreclosure laws intersect, as well as how filing bankruptcy pre-foreclosure could affect your ability to retain your home.

The Relationship Between Bankruptcy and Foreclosure Laws

Bankruptcy laws are administered through federal bankruptcy courts and are standard throughout the US, although some jurisdictions may be more strict (or permissible) than others. In contrast, foreclosure laws are handled at the state level, with each state’s legislature promulgating procedures, time limits and other foreclosure processes.

This can mean that the answer to if you should declare bankruptcy before or after your home is foreclosed can vary by jurisdiction. Some states have a redemption period, in which you can repurchase your home even after it’s sold at sheriff’s sale as long as you can come up with the sale price. Other states have more draconian laws that prevent any redemption and allow foreclosures to proceed quickly.

If you’re facing both bankruptcy and foreclosure, it’s best to consult an experienced local attorney
as quickly as possible. Your attorney can help you better understand the options available to you, as well as the time limits and procedures you’ll need to know before your proceed.

Advantages of Filing for Bankruptcy Before (and After) a Foreclosure Judgment

Depending upon your financial situation and your wishes for the future, there can be some distinct advantages to filing for bankruptcy both before and after a foreclosure is initiated.
Keep Your Home
If you’d like to keep your home and are certain you’ll be able to afford your mortgage payments going forward, you may opt to file for either a Chapter 7 discharge or a Chapter 13 reorganization before your home is foreclosed. A Chapter 7 will discharge your consumer debt, giving you a fresh start and allowing you to “reaffirm” your mortgage once you’ve brought your payments current.

When you reaffirm your mortgage, you’re essentially just renewing your promise to pay. This means that despite your bankruptcy’s impact on your other debt, your mortgage will remain unaffected as long as you continue to pay the agreed-upon amount each month. Once you’ve paid off your mortgage, you’ll own your home free and clear, just as you would have absent any bankruptcy.
Vacate Your Home
If you’re certain your home’s mortgage is no longer affordable, you may wonder whether letting a foreclosure proceed uncontested is your best option. You may assume that contesting the foreclosure will simply put off the inevitable while vacating your home immediately can provide the bank with more opportunity to fix it up and sell it.

However, even if you don’t want to retain your home, it can be worthwhile to defend yourself. Often, you may be able to negotiate a non-foreclosure alternative that can lessen the impact of a foreclosure on your credit, like a deed instead of foreclosure or a short sale.

Depending on the terms of your mortgage, you may be held legally responsible for any deficiency judgment (or the difference between the amount you owed on your home pre-foreclosure and its sale price at auction). In many cases, you may be able to discharge a deficiency judgment in bankruptcy, helping give you the clean start you desire.