Bankruptcy…by just saying it some people feel ashamed.  But did you know that in some circumstances bankruptcy can stall a foreclosure on your property?  It can even be used if you owe more than what the property is worth.  Of course, each state has its own set of laws with regards to foreclosure, but bankruptcy is federal — it’s rule is universal in each of the 50 states.  I’m going to give you some information in regards to how some of my clients…even how some of my family and friends — have used bankruptcy to stall the foreclosure of their property.

First off, there’s three different types of bankruptcy.  Chapters 7, 11 and 13.  The one that MOST people are going to fall under is Chapter 7, so we’ll focus more on that one.  Now, the two questions that are usually the first I hear from clients…number one — how much does it cost?  Of course prices are going to vary, but your average chapter 7 can be filed for about $1000-2500.  And do yourself a favor, get an attorney to make sure its done properly.

The second question is always “How does it work?”  Well, in the state of California, the time you stop paying your mortgage until the date the bank forecloses on your property is roughly about 6 months.  If you’re attempting a loan modification, that will add some more time.  If you’re attempting a short sale, THAT will add some more time…however, if a loan modification with the bank and a short sale both fail, the bank will proceed to foreclose on your property.  Before the foreclosure, the bank will have to publicly advertise the sale date.  Usually they’ll mail this info to you or post it on the front door.

At least a month before the foreclosure date, you sit down with a bankruptcy attorney and get all the paperwork in order.  Once you have the date of the foreclosure, you wait until there’s about a week remaining before the sale date and you FILE for bankruptcy.  This will stall the foreclosure for about 3 to 4 months.  Does this ultimately save your house?  Not usually…but it buys you TIME to save up and continue on with your life.

Now of course, I always get a few different reactions when I tell this to people.  One of the more rare reactions I get is regarding the ethics of the using foreclosure as a financial tactic against the bank.  To that I say simply — yes…I personally view it as 100% ethical.  If multibillion dollar companies file for bankruptcy simply to get rid of debt they don’t want to handle, then why can’t your average American do it too?  Bankruptcy is just that — a financial tactic.

Another reaction I get is clients ask if the bankruptcy judge will take all their money??  Well with a Chapter 7, you can EXCLUDE $25,000 worth of money, vehicles, furniture, whatever.  If you have a car valued at $5000 and $10,000 in the bank, that’s only $15,000 — you’re fine.  Clients also ask if a bankruptcy ruin their credit?  …well of course, but so does a foreclosure!

So long as the numbers make sense, I believe that anyone who has the ability shouldn’t hesitate when using extenuating and legal financial tactics to help them in an extenuating circumstance such as losing their property in an economic downturn like this…now that’s good to know. 🙂

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