Some people spend as much as 30% of their monthly income on their mortgage and housing expenses. Your downpayment will also contribute to your overall amount of equity. Every time you make an improvement to your house or invest in system upgrades, you possibly increase the overall value of your home and how much equity you have.
All of that value could wind up at risk if you fall behind on your mortgage payments. Your lender will eventually advise you of your default and take action against you. If you miss payments, they will eventually initiate foreclosure proceedings. In a foreclosure, the bank reclaims your home as the collateral property for the mortgage they wrote.
You lose all the payments you’ve made and the equity accrued if the bank successfully reclaims your house. Filing for bankruptcy doesn’t always resolve foreclosure issues, but it can help protect you in three distinct ways.
- Bankruptcy temporarily halts collection efforts
Whether your mortgage company has started calling you every single day or has served you with paperwork for foreclosure proceedings, your bankruptcy filing gives you a little time to take action.
The automatic stay issued with a bankruptcy filing prohibits creditors from continuing collection activity unless they make a special request during an individual hearing with the courts. Although the automatic stay doesn’t mean a creditor can’t continue collection effort or foreclosure, they have to take special steps to get permission to do so.
- Bankruptcy gives you more leverage to help with negotiations
Big financial institutions will sometimes work with borrowers because they lose money on foreclosures. Sometimes, however, they aren’t as accommodating as they could be.
Especially if you file for Chapter 13 bankruptcy that involves restructuring some of your debts, your mortgage lender may be more inclined to work with you and adjust the terms of your mortgage or repayment plan to make the process easier for you.
- A successful bankruptcy will let you focus on your most important bills
When the courts approve your bankruptcy filing and order a discharge of your unsecured debts, your monthly obligations will drop substantially. You will no longer have to make payments on credit cards, medical debt and other unsecured debt included in your discharge.
Those funds can become part of your standard monthly budget, which will make it easier for you to cover your household costs without using credit. It will also make it easier for you to prioritize your mortgage and avoid falling behind again in the future.
For those desperately trying to regain control of their finances, personal bankruptcy may be a powerful tool to help them keep their home.