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When Should You File for Bankruptcy if You Face Foreclosure?

Chapter 7 bankruptcy and foreclosure often go hand in hand. Mortgage debt is one of the most common causes of bankruptcy, so if you know you face foreclosure and also know you are planning on filing for bankruptcy protection, you must decide whether you will file for bankruptcy before or after the foreclosure. In most cases, if you have the choice, you will find it is more beneficial to file bankruptcy before the foreclosure occurs.

When houses are sold in foreclosure, they typically go for a much lower price than the outstanding mortgage debt. This difference between the total debt amount and the actual selling price is referred to as the “deficiency.”

In most states that allow lenders to pursue a foreclosure without filing a lawsuit against the borrower in court, lenders are allowed to go after borrowers for the cost of the deficiency only if they file a separate lawsuit. Lenders typically avoid doing this because of the expense of the lawsuit and the few benefits that come with taking legal action against a person with few assets.

However, if your lender does decide to forgive the deficiency, you could potentially owe money in taxes. If you waited to file for bankruptcy until after the foreclosure went through, that tax debt would most likely not be forgiven.

If you file for bankruptcy before the foreclosure, your mortgage debt will be forgiven and you will not have to worry about any tax liabilities as a result of the forgiven deficiency debts. Filing early also allows courts to issue an automatic stay order to your collectors to prevent them from pursuing additional collection activities, including foreclosure actions.

For more information on filing for bankruptcy protection when you face a potential foreclosure, speak with a dedicated Atlanta attorney at DebtStoppers. Give us a call at 404-796-7161 or contact us online today.

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