A mortgage is typically the largest debt a person assumes throughout their entire life. Most mortgages require three decades to pay in full.
All it takes is a few months of financial hardship for a property owner to be at risk of losing their home and the equity they have accrued in the house during their time living there. When people have missed multiple mortgage payments, they may start to panic.
Some homeowners facing foreclosure decide to file for personal bankruptcy. Why does bankruptcy sometimes seem like a reasonable solution for those who have missed mortgage payments?
The automatic stay halts foreclosure
The same day an individual files their initial bankruptcy paperwork, the courts grant them an automatic stay. Creditors, including mortgage lenders, have to temporarily stop all collection efforts.
Any pending foreclosure proceedings must wait until the courts resolve the bankruptcy case. Those fearing imminent foreclosure after multiple missed payments can give themselves time to think and plan by filing for bankruptcy before the matter goes to court.
Bankruptcy offers leverage for modifications
Mortgage lenders that know that homeowners are in the middle of bankruptcy may be more open to modification requests. Especially in a Chapter 13 bankruptcy, the lender may need to work with the filer to help make their mortgage more sustainable.
People can move their missed payments to the end of the mortgage, increase the repayment period or even lock in the lower interest rate as part of the mortgage modification process.
For some people, simply eliminating other financial obligations through a discharge can make it possible to bring a mortgage back into good standing. Discussing personal bankruptcy with a skilled legal team can help people concerned about foreclosure evaluate their options. A bankruptcy filed before foreclosure could help people protect their equity and address their debts at the same time.
