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Bankruptcy to Stop Foreclosure

Bankruptcy is the voluntary or involuntary declaration of a debtor's insolvency (inability to pay his/her debts). In a federal court proceeding, consumers typically file under Chapter 7 or Chapter 13. Chapter 11 bankruptcy usually involves a corporation or partnership reorganizing its debts in order to stay in business.

Some homeowners who are facing foreclosure consider filing bankruptcy. Although for some people this might be an option, there are a lot of other things that you should try before filing bankruptcy to stop foreclosure. Remember, under the new bankruptcy laws passed in 2005, you have to get credit counseling from an approved non-profit credit counseling agency for 180 days prior to filing Chapter 7 or Chapter 13 bankruptcy. Creditors are not restrained from collection efforts while you are undergoing this mandatory counseling, so the foreclosure can still proceed.

If you manage to keep your house out of foreclosure for the six months you are in counseling, you still are not out of the woods because Chapter 7 will only temporarily sidetracks a lender's right to foreclose. The lender can still request and receive "relief from the automatic stay" from the court unless the creditor agrees and homestead (exemption) laws stop the trustee from selling the property.

Chapter 13 plan provides for continuing monthly payments on the mortgage and paying off the arrearages over the life of the plan (three to five years). However, if you miss one trustee payment, the trustee can ask the court to dismiss your case. If your case is dismissed, creditors will again to take all of their collection actions which may include repossession, garnishment and foreclosure.

Another problem with filing for bankruptcy is the impact it has on your credit scores. According to MSN Money, filing for bankruptcy is the worst 'negative' you can have on your credit report. Unlike other negatives, which stay on your report for seven years, bankruptcy can be there for 10 years. Foreclosure is the second-worse negative you can have on your credit reports. It too can stay on your credit reports for up to 10 years. So, if you file for bankruptcy and lose your house to foreclosure, imagine the damage it will inflict to your credit rating, so what do you do? Try a loan modification. Like bankruptcy, a loan modification will stop foreclosure proceedings, and it will probably stop the proceedings for good.

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