Can Bankruptcy Stop Foreclosure and Repossession

Can Bankruptcy Stop Foreclosure and Repossession?

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Can Bankruptcy Stop Foreclosure:
That Depends Where You Live

The differences in legislation between the US and the UK mean that the answers to the question of whether bankruptcy can stop foreclosure or repossession are different in each country. US residents please look at the next section below. I will deal with the UK situation first because this is quick and simple.

Declaring personal bankruptcy in the UK means that control of all your assets, including your home, is taken over by the appointed Trustee. All your assets can be sold to pay off your creditors, which can include your home if the size of the debt makes it necessary. This applies even if it is mortgaged or jointly owned.

However, if repossession proceedings are already taking place against you, declaring personal bankruptcy will legally stop the repossession process. The repossession proceedings cannot continue until your bankruptcy is over or if the mortgage company manages to get court permission to carry on.

A possible alternative to bankruptcy for UK customers could be an IVA. See the Bankruptcy Rules page for more information on bankruptcy law in the UK.

The Situation in the US

Can Bankruptcy Stop Foreclosure - Different Types of Bankruptcy

You first need to understand the differences between Chapter 7 bankruptcy and Chapter 13 bankruptcy. In Chapter 7 bankruptcy the court takes over responsibility for paying all your debts, but in exchange for this they can take control of your home or other property you own and can sell it to pay off your debts.

Chapter 13 bankruptcy involves setting up an arrangement through the court by which you agree to pay back your debts over a period of time. The repayment amounts and the proportion of your debts that you ultimately repay will depend on various things including your income, the size of your debt and the value of the property you own. As long as you can file for Chapter 13 bankruptcy before the foreclosure sale date, the bankruptcy proceedings will at least delay the foreclosure sale.

The problem is that the US Government brought new legislation in during 2005, which has a detrimental affect on the 'automatic stay' (which prevents the creditor taking further action) that was part of the old bankruptcy legislation. The new law requires you to have credit counselling for 180 days before you can file for bankruptcy. While counselling is no doubt a good thing, it can have a seriously negative effect if the foreclosure proceedings and sale of your home take less than 180 days, because your home could be sold before you can file Chapter 13 bankruptcy to prevent it.

Can Bankruptcy Stop Foreclosure - Conclusions

Once your mortgage lender begins foreclosure proceedings against you, the only options you really have are to either pay off the balance of the loan in full or file for Chapter 13 bankruptcy to try to stop the foreclosure. Even so, this is not a guaranteed or long term position, and ultimately you are still going to have to negotiate with your mortgage company to agree how you are going to pay them back.

Declaring personal bankruptcy must always be a last resort. When you file bankruptcy you are handing over control to someone else, which is never a good thing if you can avoid it. So, can bankruptcy stop foreclosure? Yes, if you are able to file in time, but even then only temporarily. At best bankruptcy will only buy you time, and it is a very serious step to take as a temporary measure. The ideal option is obviously to try to negotiate a settlement with your mortgage company before foreclosure proceedings begin, and only use bankruptcy if you are already beyond that point and have no other option.

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Can Bankruptcy Stop Foreclosure?

Declaring Personal Bankruptcy