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Foreclosures and Bankruptcy: Is it a Good Alternative?

The AP today reported that, according to the Mortgage Bankers Association, nearly 1 in 8 U.S. households with a mortgage was recently either behind in loan payments, or facing foreclosure. Worse yet, one economist indicated that the housing market isn't expected to recover until after the unemployment market recovers ... Considering the state of the employment market, the same economist noted this might just be, well, no time soon.

In light of the dire statistics and forecasting, there are likely many people wondering about ways to avoid foreclosure. Short sales have already been discussed as one possible alternative, but for people who have reached the end of the line in options, bankruptcy just might be the last resort. For anyone out there wondering whether bankruptcy offers anything (and if so, what) to people facing foreclosures, here are a few potential pluses, minuses, and general considerations for weighing foreclosure or bankruptcy:

1. "Catching up" on payments. For homeowners who would like to keep their home but are behind in payments to the point that it has become impossible to do so, Chapter 13 bankruptcy may be able to help. Chapter 13 is used to set up a plan for repaying debts you've incurred. However, homeowners must make payments on the "plan" plus their current mortgage payments. So this solution usually only works if homeowner can afford a mortgage in the first place, but fell behind for other reasons.

2. Elimination of debt. Unlike Chapter 13's plan to repay amounts owed, Chapter 7 is a different option which allows for the cancellation of debts, including mortgages. The downside? Chapter 7 might not stop people from losing their home if it is used to cancel their mortgage(s).

3. It can buy some time. Filing for bankruptcy results in a court-ordered "automatic stay" that essentially freezes lawsuits and other efforts to collect on debts against the individual(s) filing. This can apply to foreclosure sales too, which may be delayed for a few months. Sometimes this can provide a little breathing space to consider options, negotiate, or simply make plans for moving on.

4. Provide a fresh start for credit. Most people know bankruptcy typically has a pretty horrific effect on a credit score. But foreclosures also hammer credit scores, particularly if looking for a new home is in someone's future. Also, unlike a foreclosure, someone with a bankruptcy may essentially be writing on a relatively clean credit slate since the remainder of their debts could be discharged, and they'll probably be in better shape to stay current on future debts.

These are just some of the considerations that come into play when considering bankruptcy during, or prior to, a foreclosure. It's probably always adviseable to talk to a local attorney to discuss a homeowner's specific circumstances when coming to a decision, one way or the other.