Bankruptcy Not the Best Solution to Avoiding Foreclosure

For homeowners who have found themselves struggling to keep up with their mortgage payments after an increase in their rate or a change in their personal finances, such as with the loss of a job, in general, trying to negotiate changes or modify a home loan is a better option to avoiding foreclosure rather than filing bankruptcy.  Bankruptcy typically is a solution to an unmanageable financial burden when it consists of other debts in addition to your mortgage, like credit card and medical bills.

Bankruptcy judges are able to reduce and eliminate certain debts, but a first mortgage on a primary residence (a home that is occupied by the owner) is not one of them.  A judge can not alter the total amount owed, the interest rate or any other term on these home loans.  Alternatively though, a bankruptcy judge can reclassify second and third mortgages as unsecured debt which decreases their priority in being repaid, but unfortunately the weight of a “mortgage burden” is usually due to the first mortgage on a property.

Bankruptcy is a better prospect for homeowners struggling with a mortgage on a rental or investment property, in which case a bankruptcy judge does have the power to enforce a modification.

Regardless of the type of ownership on a property, if the homeowner is facing foreclosure, the only real tangible benefit to filing for bankruptcy that applies across the board is that it will postpone the foreclosure proceeding by at most a couple  of months, only providing some temporary relief.  There is also some anecdotal evidence that filing for bankruptcy can put a mortgage lender in a position that prevents them from allowing or being inclined to modifying a home loan.  With the federal government’s insistence on lenders to negotiate new manageable terms on home loans, pursuing a loan modification should be the better option to preventing foreclosure.

Tags: bankruptcy, loan modification