When you're going through foreclosure, many people will tell you that you can use bankruptcy to slow or stop the process. And they're right. But what they usually don't tell you are the consequences of filing bankruptcy and the fact that over 95% of bankruptcy workout plans fail. It can work great in certain circumstances, but you need to go in with your eyes wide open.
Affects of Bankruptcy on Your Credit
The bankruptcy can stay on your credit for up to 10 years. The impact, however, is not much worse usually than if you had several defaults on other debts. And if you're already severely behind on your mortgage payments, the damage has already been done. Of course that damage usually only lasts for 2 or 3 years if you don't have any other defaults and pay all you other bills on time.
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Some creditors actually target people coming out of Chapter 7 cases because they know they don't have any debt and cannot file for bankruptcy again for another 8 years.
Filing for bankruptcy will probably pose a problem if you try to get another home loan. If you maintain a good payment and credit record for 2 - 4 years after your bankruptcy, though, your credit score will rebound slowly and lenders will consider you again. Just like having a foreclosure on your credit report, you'll need to take a slow, steady approach to building your credit back, but within 5 - 7 years, you should be back where you were before your late payments if you're diligent.
Helpful Tips
The National Consumer Law Center (NCLC) put together a list of 13 Important Considerations About Bankruptcy that we recommend you read and consider carefully. I highly recommend downloading it (see link below). A bankruptcy does not always stop a foreclosure...in most cases it just slows it down and if you fail in your bankruptcy repayment plan, the foreclosure will pick up again right where it left off before you filed the bankruptcy motion. And over 95% of these plans fail! You must get qualified legal advice from a bankruptcy attorney. I recommend you get as much information as you can from a trusted source like Nolo Press books and then put together a plan you think will work. Take that plan to an attorney and see if they agree. Spend the $150 or $200 it will cost you rather than going into court blind, not knowing what to expect. If you think there is even a remote chance you'll file bankruptcy, get the required credit counseling as soon as possible. Go to the Department of Justice website below to find a counseling agency to work with.
Recommended web sites:
Search for 13 Important Considerations about Bankruptcy at the NCLC's site. Also see the Department of Justice Trustee Program
Is Bankruptcy Right For You? Talk to Bankruptcy Attorneys Free and Confidential. Licensed bankruptcy attorneys are available. Attorneys will call you to discuss your case for free. Find out if bankruptcy is right for your situation.
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