When homeowners consider filing bankruptcy to put a hold on the foreclosure process, most are attempting to save their homes and establish some sort of payment plan. Unfortunately, legal payment arrangements established in a Chapter 13 bankruptcy can often be too expensive for homeowners just recovering from a financial crisis. This is why filing Chapter 7 to eliminate the mortgage and other debt may be a better solution and provide better peace of mind for some borrowers unable to keep their homes.
Contrary to conventional wisdom, mortgage loans (firsts, seconds, HELOCs, and so forth) can be discharged in Chapter 7 bankruptcy proceedings so that homeowners no longer have to worry about paying an expensive loan when their income has dropped. But with a discharge, the owners will not be able to keep their house or remain living there for very long, as the bank will receive the collateral back as a result of the loan being eliminated. So there must be other reasons for owners to consider this tactic, since it does not actually save the house.
The main benefit of doing this is that homeowners are able to stop foreclosure from moving any further along in the legal process, meaning no more court documents, lawsuit paperwork, sheriff sale dates, or eviction hearings. Even if the borrowers move out of their house before the foreclosure process is completed, the courts will still move ahead with the necessary procedures to sell the house to satisfy the mortgage lien. Discharging the mortgage through bankruptcy ends the lawsuit immediately — the mortgage company must cease all collection efforts on the loan, which will then disappear completely upon discharge.
Another important reason to consider filing Chapter 7 to eliminate the mortgage and move out of the house is the possibility of avoiding deficiency judgments after foreclosure. Although few banks sue their former clients again after the sheriff sale for the difference between what was owed and what the property sold for, it may be best just to discharge the mortgage and not worry about any further lawsuits regarding this property. With the credit crisis in full swing, some banks may get desperate enough for cash that they start attempting to collection on deficiencies from borrowers who obviously had problems paying their debts just a few months ago.
Bankruptcy is an important legal defense that homeowners have against unmanageable debt burdens and aggressive collections efforts, whether they are from credit cards, collection agencies, or mortgage companies. Collectors will never give up trying to go after a debt, and every day of the foreclosure process can be a nerve-wracking experience for owners unfamiliar with how it works and the time frames for each step. Although the social stigma of bankruptcy may be severe, many debtors will liberated and generally much feel better with a fresh start and no extra debt.
One concern homeowners may have is that they do not want a foreclosure and a bankruptcy to appear on their credit reports, which will virtually guarantee they do not receive a new loan for years. But if there is no way to save the home, using bankruptcy to stop foreclosure may be the best solution to get all of the bad over with at once. If the bank tries to go after a deficiency judgment months or a year after the sheriff sale, and borrowers are forced into bankruptcy anyway, they have merely prolonged the time it will take to repair their credit.
Discharging a mortgage in Chapter 7 bankruptcy is one of the lesser-discussed methods of avoiding foreclosure, potentially because it has some of the worst aspects of any solution. Homeowners neither save their home nor do they preserve much of their credit scores. But this tactic should be considered by debtors who know their financial conditions will not allow them to keep making the mortgage payment and who just want to escape from their large debts and get a fresh start in life.