In October 17, 2005, President Bush has declared the new bankruptcy reform law officially takes effect. According to this law, the borrower in default can file for bankruptcy to stop all collection debts from his lender. The borrower is also required to take credit counseling from a non-profit credit counseling agency accredited by the government. Credit counseling must be done for 180 days before filing Chapter 7 or Chapter 13 of bankruptcy.
What effect does this new bankruptcy law have for those who are facing foreclosure? Because credit counseling agencies are more equipped to negotiate with credit card companies on behalf of creditors, this leaves mortgage foreclosure customers at risk. Why?
Process of Bankruptcy
Once they receive a notice of default from their mortgage lender, naturally, they would be required to seek credit counseling first before they can file for bankruptcy. Remember that credit counseling would take 180 days. Moreover, during this period, credit counselors cannot do much help on your foreclosed property. This means while you’re taking up counseling, the countdown on the foreclosure of your home continues. Obviously, the mortgage company can complete a sale on your property before you even have the chance to file for bankruptcy.
Even worse, this would leave you without your home property and without much money left in your account. It also leaves a derogatory mark on your credit history. Bear in mind that a record of bankruptcy will stay on your credit report for seven years. Add this to the record of foreclosure and you create a very bad credit reputation for your future lenders.
Can You Prevent Bankruptcy?
If you are the borrower in default, is there something you can do to save your property, stop foreclosure and avoid the pain of bankruptcy? The answer is yes. In fact, it is recommended that you take this action immediately right after your lender sends you a notice of foreclosure. Better yet, you can do something as soon as you realize you will not be able to keep up with your monthly mortgage due to some financial problems.
The appropriate action would be to discuss your problem with your mortgage lender immediately. The truth is, lenders are not too happy about foreclosing people’s home properties. This is because foreclosure or sale of the property takes a long time to process and involves costs as well. Lenders would still need to pay lawyer’s fee, court fees, taxes and other costs involved in a foreclosure procedure.
Therefore, mortgage lenders are more willing to reach an agreement with the borrower to help their clients get back on track without going through the whole process of foreclosure. This is called loss mitigation. For most lending companies, this option is a far better option than pursuing to foreclose or repossess one’s property.
Clearly, when confronted with foreclosure, bankruptcy should not be seen as your only option to be saved from your creditors. There are still some ways you can take to turn your situation around and it all starts with personally meeting with your lender.