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Can a Bankruptcy Filing Keep Your Home Off the Auction Block?

Are your late mortgage payments piling up? Are you worried that your lender is ready to begin foreclosure proceedings? You do have an option to save your home, though it does come with its own challenges: You can file for bankruptcy protection.

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A 2014 study by the University of North Carolina Center for Community Capital says that homeowners facing foreclosure reduced the chances of losing their home in a foreclosure auction by 70 percent when they declare bankruptcy.

Chapter 13 bankruptcy protection is an especially effective way for homeowners to halt the foreclosure process. According to the North Carolina study, owners who filed for Chapter 13 bankruptcy protection were five times less likely to lose their homes at a foreclosure auction than were homeowners who instead filed a Chapter 7 bankruptcy.

Two types of bankruptcy

Can a Bankruptcy Filing Keep Your Home Off the Auction Block?

Homeowners facing foreclosure can choose from two popular types of bankruptcy protection: Chapter 13 and Chapter 7.

Chapter 7 bankruptcy filings usually result in the discharge of most of the debts faced by consumers. But Chapter 7 bankruptcy also comes with a serious downside: Consumers will usually have to give up their most valuable assets, including their homes, during the process. That’s because the money generated from the sale of these assets is used to pay off some of the money owed to creditors.

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Because of this, Chapter 7 is rarely a good choice for homeowners hoping to hold onto their homes. Instead, Chapter 13 is the better choice.

In a Chapter 13 bankruptcy, consumers must follow a debt-repayment plan that allows them to pay back at least some of their debt with monthly payments that they can afford. During this time, creditors can’t send collection agencies after consumers. Usually, a portion of consumers’ debt is forgiven in this type of bankruptcy, often after consumers make three to five years of payments.

The biggest positive of a Chaper 13 bankruptcy? Consumers can usually keep assets such as their cars and homes.

Negatives

Can a Bankruptcy Filing Keep Your Home Off the Auction Block?

Filing for bankruptcy protection might save your home. But it will inflict lasting and significant damage to your credit score. The damage from a bankruptcy filing will vary depending on several factors, including your credit history before a bankruptcy filing. But you can expect your score to drop by 100 points or more after you file a Chapter 13 or Chapter 7 bankruptcy.

And a bankruptcy will remain on your credit score for a long time. A Chapter 7 bankruptcy will remain on your credit reports for 10 years before finally disappearing. A Chapter 13 bankruptcy will remain on your credit report for seven years.

The impact of a bankruptcy will diminish over the years, even before it falls off your credit report. But borrowing money will prove challenging when a bankruptcy remains on your credit report. If you do get approved for a loan or credit card, you’ll most likely be saddled with high interest rates.

You’ll have to weigh whether the negative impacts of a bankruptcy filing are worth keeping your home.

Foreclosure is a stressful event on you and your family. Foreclosure also has as much of a negative impact on your credit score as does a bankruptcy filing. Foreclosure remains on your credit reports for seven years, the same number of years as a Chapter 13 bankruptcy filing.

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Is bankruptcy, then, the right choice for you? That depends on how desperate you are to hang onto your home.

Photo Credit: ©iStock.com/BackyardProduction, ©iStock.com/mactrunk, ©iStock.com/Devonyu

Dan Rafter Dan Rafter has been writing about personal finance for more than 15 years. He is an expert in mortgages, refinances and credit issues. Dan's written for the Washington Post, Chicago Tribune, Phoenix Magazine, Consumers Digest, Business 2.0 Magazine, BusinessWeek online and dozens of trade magazines.
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