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Over 23 percent of American homeowners are underwater. If you owe more on your home than its current market value, you are also part of that statistic. Like many underwater homeowners you might be struggling to pay your mortgage and face the possibility of foreclosing in your mortgage. Many in your situation have considered filing for bankruptcy in a last ditch effort to save their home. Is this a good idea? This article will help you answer that question and understand what your options are.
Let’s start by saying that bankruptcy should always be your last and final option. Bankruptcy has serious financial consequences that will follow you for years. For instance, lenders are unlikely to approve a future loan application if you have a bankruptcy in your credit history and employers will sometimes disregard applicants who have filed for bankruptcy.
Having said that, in extreme situations a bankruptcy may be the only way of saving your underwater mortgage from foreclosure. Well, let us qualify that statement. Bankruptcy can never save your home from foreclosure, but it can delay foreclosure and give you the opportunity of finding a way to reduce your mortgage payments and keep your home.
There are two main chapters you can file under bankruptcy law when facing foreclosure: Chapter 7 and Chapter 13.
Filing under Chapter 7 will provide you with an immediate stay on the foreclosure, but unless your financial situation changes and you can afford your mortgage payments, it will only be a temporary solution. A Chapter 7 bankruptcy is a type of personal liquidation, where all of your assets are sold to pay your creditors. The advantage of a Chapter 7 bankruptcy is it allows you to keep exempt assets such as your automobile and personal items. Chapter 7 also allows you to keep a percentage of the equity on your home. Of course, if you are underwater you have no equity on your home, so that doesn’t help much.
Chapter 13 provides a better chance to save your home from foreclosure if you have negative equity (i.e. are underwater) on your home. Filing under Chapter 13 will give you the chance of restructuring your debts and late payments over a period of 3 to 5 years. You will have to prepare a repayment plan, which you must then “sell” to your lender. If the judge and your lender (or lenders) accept your repayment plan, you can keep your house as long as you stay current on your payments.
In conclusion, bankruptcy is a last-ditch option for homeowners who do not qualify for a mortgage refinance or a loan modification and want to keep their home. Always apply for a loan modification before you consider filing for bankruptcy. If you have negative equity on your home and you want to save your property from foreclosure, you may want to consider filing under Chapter 13. A Chapter 7 requires you to liquidize all your non-exempt assets, which includes your home if is used as a security for a loan.
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