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Can I File Bankruptcy for Foreclosure Debt?

Those facing foreclosure are often advised to attempt options such as a short sale or a loan modification to avoid the consequences of a foreclosure on their credit score. In order for most of these alternatives to work, however, both the lender and borrower must agree to the foreclosure alternatives. While many lenders may be willing to work with borrowers to avoid a foreclosure, some may not, leaving many borrowers wondering what their last alternatives might be. Anyone who is facing foreclosure but has received little to no help from their lender may be able to find financial relief by filing bankruptcy for foreclosure debt. When a person files for bankruptcy, an “automatic stay” is initiated that requires all lenders to cease all collection attempts, mortgage lenders included.

This process can buy valuable time for the homeowner if more time is needed to research other foreclosure alternatives or find a new place to live. The automatic stay will be in effect until the bankruptcy is finalized. The bankruptcy court may or may not decide to discharge the mortgage debt, but in the event that they don’t, the borrower is at least able to keep a roof over their head for that much longer. Like most laws, bankruptcy laws carry their fair share of loopholes. If a borrower facing foreclosure files for bankruptcy, the lender may counter the efforts of the borrower by filing a motion to lift the stay. This would essentially lift the automatic stay for the individual lender who requested it. If a person files for bankruptcy and a lender’s request to lift the stay is approved, only the lender who requested the stay to be lifted would be authorized to continue collection efforts. No other lender would be authorized to re-initiate collection efforts unless they file a stay of their own. Just because a mortgage lender is able to file a motion to lift a stay, it does not mean that it will be granted, it does not mean that the lender will file it immediately, and it does not mean that the lender will even bother to file the motion. Filing bankruptcy for foreclosure debt can stall the foreclosure process by up to two months even if the lender files the motion and it is granted. This is due to the time that is required to compile necessary information, the time that is required to file the motion and the time that is needed for the court to approve or deny the motion.

While bankruptcy may not discharge a person’s entire foreclosure debt (or even at all), making the decision to file for bankruptcy for foreclosure debt can give homeowners the valuable time they need to adjust to their life changing financial situation. The good news is that even if mortgage lenders are authorized to continue collection efforts and even if the bankruptcy fails to discharge the mortgage debt, the bankruptcy can still serve to discharge some or all of a person’s other debts. This relief can make a big difference when looking at the long term road of debt recovery.