Why Bankruptcy May Be Risky as a Foreclosure Alternative

by Donald Hanz on Bankruptcy

For homeowners facing foreclosure, filing for bankruptcy is one of the options that can be explored. But based on the assessment of the Mortgage Bankers Association, choosing to do might have a significant impact on lending in the long run.

When a troubled borrower can no longer keep up with his mortgage payment and has suffered from a crippling financial loss such as unemployment, medical emergency or divorce, it is not unusual for him to think of bankruptcy as the best way to stop foreclosure.

If you are also considering such option, you should first be aware of some facts about bankruptcy. For starters, you should know that bankruptcy judges can reduce or even eliminate some of your debts but the total mortgage debt you owe and the existing interest rate cannot be altered. This means, that sooner or later, you will still have to deal with the entire amount you owe in mortgage loan.

Democrats and consumer advocates have been rallying behind the revision of existing bankruptcy laws in order to benefit distressed homeowners. If certain adjustments and changes could be made, it would become easier for homeowners to be free from their mortgage debts.

But for the Republicans and the entire mortgage industry, such change might drive interest rates up since lenders will be unwilling to take the risks involved. According to the MBA, mortgage rates could go up by as much as 1.5 percent.

For some experts, a bankruptcy filing can only be beneficial if it would allow you to eliminate some of your debts and help you focus on your mortgage payments. On the other hand, if you are just hoping that your mortgage can be reduced or eliminated, then you are looking at the wrong option. You might want to consider a loan modification instead.

It should be clear to troubled borrowers that a bankruptcy option can only be explored if you are only planning to walk away from your mortgage debt even if you have an above average income and could actually afford it. Under the present bankruptcy law, you can only declare a Chapter 7 bankruptcy under special circumstances.

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