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Is it Always Best to Handle A Foreclosure Through Bankruptcy?

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Many bankruptcy sites and forums emphasize the importance of the automatic stay in bankruptcy, especially when it comes to foreclosures. These sites might suggest to you that filing bankruptcy is the best way to stop the foreclosure process. But, is it always best to handle a foreclosure through the bankruptcy process?

A Misconception About Foreclosure and Bankruptcy

While it is true the automatic stay will stop the foreclosure process in its tracks, it is not necessarily true that filing bankruptcy is always the best way to handle the foreclosure process. Many times, filing for bankruptcy protection will only stop the foreclosure process temporarily. The automatic stay of bankruptcy is good only as long as the bankruptcy is in process or until a creditor has successfully won an adversarial proceeding in the bankruptcy court. So, it is a misconception to believe filing bankruptcy is always a permanent solution to the foreclosure problem.

When Filing Bankruptcy Might Not Be Ideal for Handling Foreclosure

In any bankruptcy reorganization plan, like filing a chapter 13, secured property that is potentially going to be foreclosed on is normally built into the plan as long as the debtor wants to keep the secured property. In this case, filing for bankruptcy protection might solve a foreclosure problem. A chapter 13 will allow the filing debtor to build payment arrears in their plan to catch up on any defaults, and the mortgage lender will not be able to foreclose on the property if the deficits are satisfied during the bankruptcy process.

In a chapter 7 bankruptcy, a mortgage lender can file an adversary proceeding to lift the automatic stay of bankruptcy to proceed in the foreclosure process. This can be done whether or not the debtor has defaulted on payments if the mortgage contract contains a bankruptcy clause. All the creditor need do is show the bankruptcy court cause, and they will most likely be granted the lift of the stay, and the foreclosure can proceed.

If a debtor feels they have a wrongful foreclosure suit against the mortgage lender, they can fight the adversary proceeding in the bankruptcy court. If protection of the mortgage contract from foreclosure is one of the only reasons a debtor is filing a chapter 7 bankruptcy, the debtor can most likely accomplish the same thing in a state court without having to file for bankruptcy protection, and at a similar cost.

Remember, a bankruptcy court judge will more likely send most wrongful foreclosure suits to either a state or a federal district court. If you are already in bankruptcy and have the right to control litigation, as a debtor in possession, you can file the suit in most state courts. You are not required to file the suit in bankruptcy court.

Whereas filing for bankruptcy protection can stop foreclosures, it is not always a good idea to file for bankruptcy for the sole purpose of saving your house. If you are still not sure of your situation, consult with both foreclosure and bankruptcy lawyers before making your decision to file.

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