I have been in the mortgage side of the real estate industry for over seven years…and there's just been a handful of times that I've advise someone to consider talking to a professional about bankruptcy.   It's a very heavy subject and not easy to suggest to anyone.  Lately the topic is coming up more often.   I just stumbled across this article from the Wall Street Journal and thought it would be worthy to share:

"Most consumers filing for bankruptcy continue to do so under Chapter 7 of the federal Bankruptcy Code. Under that provision, a person must forfeit certain assets — including, in some cases, a portion of home equity. Those assets are sold to pay off debts.

While Chapter 7 filings stop foreclosure proceedings, the break is usually only temporary. As a practical matter, many homeowners who file under Chapter 7 lose their homes.

In recent months, however, an increasing number of homeowners have filed for bankruptcy under Chapter 13, which staves off foreclosure proceedings while the homeowner works out a plan to pay off mortgage debt and other obligations over time — usually three to five years. To qualify, debtors must have a regular income and must stay current on their new bills. About four in 10 filers today are filing under Chapter 13 — up from three in 10 two years ago. The 2005 change in bankruptcy laws was designed in part to shift more filers to Chapter 13, which forgives less debt than Chapter 7….Consumer advocates say the homeowners who are most likely to benefit from Chapter 13 are those facing foreclosure because of a temporary financial setback, but who expect to be able to cover their mortgage payments in the future."

To be very clear, chapter 13 bankruptcy isn't going to hold off your foreclosure. If you file for a bankruptcy, the court will require you to file for a chapter 13 in many cases.

All bankruptcy filing temporarily stop collection and foreclosure activity. But don't breathe a sigh of relief too long. Because any secured creditor can file for a relief of stay. That means they can then continue the foreclosure process.

The bankruptcy filing is only temporarily going to do anything. But if you have accumulated delinquent payments that you owe, you will stil have to get your mortgage lender to reinstate your loan and they may require all those delinquent payments. So the bankruptcy isn't going to be of much help.

Let's talk about bankruptcy filings when it comes to credit. Not so good. Bankruptcy is the worst thing you can do to your credit report.

Too many people will end up filing bankruptcy in a panic. It will be a chapter 13 filing. They will have to come up with a payment plan. Their lender will get the stay lifted and proceed to foreclosure sale. And now the homeowner has a bankruptcy on her credit report, and a foreclosure. And she isn't out of the woods because the court requires a payback on a chapter 13 of old debts. Maybe not the whole amount, but a lot of it.

Now let's see what Rhonda Porter has to say in the same blog post we were discussing:

If there are extenuating circumstances that caused the bankruptcy, Fannie Mae and Freddie Mac may allow transactions 24 months after the discharge as long as the borrower has reestablished their credit during that time.   FHA may allow transactions while someone is in a Chapter 13 as long as they are current on the repayment and the Trustee approves the transaction.   Late payments following a bankruptcy is not only damaging to your credit scores, it also pretty much eliminates the chance of having an "a paper" mortgage anytime soon.

Even if you have just a sniffle of financial distress, seek professional advise now.  Bankruptcy is not something to enter into causally, you will need to consult with an attorney who specializes in bankruptcy. 

If you have a mortgage that's adjusting within the next 12 months, or you don't know the terms of your mortgage, please contact your Mortgage Professional.

All true. But I will add that I think bankruptcy attorneys are essential to consult, if you are having problems paying your bills. I would also add that you don't want to just do what they tell you without really questioning it. I have heard from a lot of folks who have filed bankruptcy and weren't aware that their lawyers' advice wasn't the best for them. Many bankruptcy lawyers see bankruptcy as the answer to everyone's problems.

Here's the truth. The 2005 bankruptcy reform laws made bankruptcy even worse as a choice for most people. I think you should consult with a bankruptcy lawyer but try to work things out without bankruptcy.

First, get your home loan mortgage lender to agree to lower your payments.

Second, negotiate your debts down. You can in fact settle your debts for dimes on the dollar in many cases, and avoid bankruptcy. You can fix your credit at the same time. And if you can't afford your house, you can sell it, even if you owe more than it's worth, again in many cases.

But the lawyers won't tell you about this. They get fees for bankruptcy and not for much else.

Beware.