You can file for bankruptcy whenever it is most appropriate to do so in your foreclosure situation. When you file will have a lot to do with the final outcome of the foreclosure and your ownership of the house, though, as well as any lasting financial repercussions.
If you file before the sheriff sale, the sale will be immediately stopped. The automatic stay goes into effect, and the bank can not keep trying to collect on the mortgage, which means it can not go through with a foreclosure auction. Depending on what type of bankruptcy you file, how long the bank can not collect will vary.
In a Chapter 7, you can discharge your unsecured debts and try to free up enough income to make higher payments to the bank until you are back on track. You can also discharge your mortgage completely, but you will have to give the house back to the lender.
In a Chapter 13, you will enter into a payment plan with the court and your lenders to pay back a portion or all of what you are behind. You will have to pay back all of the payments you have missed on the mortgage, plus your regular monthly payment, plus trustee fees per month. This can be an expensive option for many homeowners who have not fully recovered from a financial hardship.
If you wait until after the auction of your home, you will no longer be the owner of the house and can not include the mortgage debt or the house on your lists of assets and liabilities. However, you can discharge any deficiency judgment the bank gets against you. Deficiency judgments are unsecured debts and usually result from a separate lawsuit after the home has been sold at sheriff sale.
Thankfully for homeowners, very few banks actually pursue deficiencies. They reason that it will cost more to hire attorneys and begin the lawsuit than they are ever likely to collect. Thus, this type of lawsuit is somewhat rare in the real estate market, unless banks are able to request it as part of the initial lawsuit (a condition that exists under only a few state foreclosure laws).
Homeowners should consult with a personal bankruptcy lawyer before deciding whether to file at all, or which type would be most appropriate in their situation. While they may be able to use a book or website to file the petition on their own and work with the bankruptcy court to discharge debts and reorganize others, at least an initial consultation (which many attorneys provide free of charge) can help borrowers determine the best route to take in stopping foreclosure through the courts.
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