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Filing Bankruptcy may Stop Foreclosure

Filing bankruptcy is an important decision that has far-reaching effects. Although personal bankruptcy can help consumers get back on track financially, other debt elimination plans should be attempted when possible. Bankruptcy alternatives include debt consolidation, debt settlement, credit counseling and budgeting.

When filing bankruptcy is the only option, it is important to understand the pros and cons of this action. When debtors petition the bankruptcy court, an "automatic stay" is put into place. The stay prevents creditors from moving forward with debt collection and will temporarily stop foreclosure. However, when people file bankruptcy to prevent losing their home, they must continue making mortgage payments until their repayment plan is approved by the court.

In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act. BAPCPA implemented a provision requiring consumers to repay a portion of their debts. The amount of repayment is determined through the "means" test; a financial tool which compares the debtors income to their states' median income level. Additionally, debtors must undergo credit counseling through an approved U.S. Trustee Program agency.

Due to the new bankruptcy laws, the majority of consumers are now required to file Chapter 13 bankruptcy. A repayment plan is devised to repay outstanding debts over a period of 3 to 5 years. Homeowners who want to keep their house out of foreclosure must show proof they have the financial means to make monthly mortgage payments. In addition to the regular mortgage payment, there will be an added payment to cover delinquent payments.

If debtors are unable to adhere to the repayment plan and fail out of bankruptcy, creditors and mortgage lenders can request the bankruptcy be dismissed. If the court dismisses the bankruptcy, creditors can immediately resume collection action. Foreclosure proceedings can resume where they left off before the debtor filed. In cases where homeowners waited until the last minute to file for bankruptcy protection, they could be evicted from their home in a matter of days.

Filing bankruptcy generally requires the assistance of a lawyer. BAPCPA regulations are complex and complicated. Individuals unable to afford a bankruptcy attorney might be entitled to low-cost or free counsel through the American Bar Association.

Keep in mind the following facts before making a final decision to file bankruptcy:

• Bankruptcy will remain on your credit report for ten years.
• During the term of repayment, no new debt can be taken on without the approval of the bankruptcy Trustee.
• A large percentage of disposable income must be contributed toward repayment.
• If you fail out of bankruptcy, the court can dismiss your case and you will lose bankruptcy protection.

On the flip side, filing bankruptcy can provide consumers with a fresh start. Before making a final decision, consult with a bankruptcy lawyer or download bankruptcy manuals at U.S. Bankruptcy Courts.

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Published on September 28, 2008 at 04:53 AM

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