Imagine this scenario, you missed out on many months of your mortgage payments and now, you are at the risk of losing your property as the lender may move towards foreclosure. Should you file for bankruptcy before or after the foreclosure? Provided that the risk of auction cannot be avoided, filing for Chapter 7 bankruptcy before foreclosure is often better and can bring with it a host of advantages.
Buys You Time The most important advantage of filing for Chapter 7 bankruptcy before foreclosure is that it allows you to buy time. After filing for bankruptcy, the court will issue an automatic stay period, usually a duration of between three to six months. During the stay period, the lender cannot collect debts, nor schedule a foreclosure of your property. You can utilize the stay period to open negotiations with your lender.
Can Help You Save During the stay period, you don’t have to make debt repayments or pay rent because of foreclosure, which allows you to build up your savings. Furthermore, given the current state of the US real estate market, many properties are valued less than what they were mortgaged at. The outstanding amount owed to the lender after the sale of the property is called a “deficiency.” In Texas, lenders have the right to file a deficiency lawsuit after a foreclosure.
Because your mortgage debt is discharged if you file for bankruptcy before foreclosure, once the property is sold, there is no deficiency your lenders can sue you for.
You Don’t Owe Taxes on Forgiven Debt Fortunately, most lenders are not hawkish enough and often forego their right to sue you for a deficiency after foreclosure. However, this still leaves you to contend with the IRS. In their view, the forgiven outstanding debt translates to an income that they can tax. If you are not exempt under the Federal Mortgage Debt Relief Act of 2007, filing for Chapter 7 bankruptcy before foreclosure can save you from acquiring a tax liability.
Allows You a Fresh Start Some debtors may hesitate in filing for Chapter 7 bankruptcy before foreclosure. After all, it can leave them with a bad credit score. But foreclosure can similarly do likewise or worse, while still leaving you with some debt remaining. The harm you suffer from filing bankruptcy is temporary, and it allows you a fresh start to regain your financial health.
Filing for bankruptcy can be a strenuous process, so it is often wise to seek legal help while doing so. At the Law Offices of Sean T. Flynn, PLLC, in Austin, TX, I provide personalized legal service to my clients filing for bankruptcy under Chapter code 7 and 13. With over 8 years of experience in the field, I will assist you in mitigating your financial troubles. To schedule an appointment, call 512.640.3340 or book one directly online.