It's sad but true. Americans are increasingly filing for bankruptcy in order to avoid foreclosure.Katherine Porter, a bankruptcy expert at Harvard Law School, estimates that 75 percent of Chapter 13 filings fall into this category. "Despite all the government programs, bankruptcy is probably the most commonly used foreclosure prevention technique," Porter tells HousingWatch.
If you'd like to file for bankruptcy but are worried about your credit, Porter says don't worry. "Those who have a foreclosure filing against them, their credit score has already taken such a big hit that the additional blemish of bankruptcy is not particularly significant," she says.
It's sad that we've had to resort to this, but the truth is that bankruptcy filing stops the foreclosure process cold. Lenders aren't even allowed to try collecting debts until a judge gives them the OK.
It's only a short reprieve though, says Porter, lasting a couple of months at the most because by then most court cases have been resolved.
So how do you go about this delicate maneuver?
The first step is filing for Chapter 13 bankruptcy. You could also file for Chapter 7, but that doesn't really work very well, as CNN Money points out. Borrowers usually lose their homes in a Chapter 7, because the home becomes an asset that can be used to pay off other debtors.
Porter recommends sticking to Chapter 13 filings because a court will look at all your finances -- incomes, bills and disposable income -- and set a three to five year repayment plan that determines how much you must pay each month to make up your arrears. Someone with good income might be all caught up by the end of five years, but most people end up just paying off a fraction of their debt.
Don't do it if you're not sure this will work, however. Legal fees for Chapter 7 will cost you more than $1,500; for Chapter 13 it's around $3,000.
Beware: Filing for bankruptcy doesn't work for everyone. Says Porter: "Chapter 13 works poorly for people whose mortgage is totally unaffordable." It only makes sense if you have a job, and enough income to pay your mortgage and other bills. Otherwise you could find yourself unable to keep up with the court-mandated payment plan, which would put you in the same tight spot again a year from now. At that point, you won't be able to file for bankruptcy because there are legal limits on how often you're allowed to do it.
In other words, bankruptcy will give you a leg up in catching up with your payments; and it won't let you make the same mistakes all over again.
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