What are the Pros and Cons of Filing Bankruptcy to Stop Foreclosure?

Filing bankruptcy usually results in an automatic stay, a period of time during which creditors cannot contact or harass a debtor. Thus, some people consider filing bankruptcy to stop foreclosure, because this will prevent their home from being auctioned off by the lender, at least at that time. This can give homeowners a chance to reorganize their finances and decide their next step. They may even be able to come up with the money to become current on their mortgage, stopping foreclosure in most cases. On the other hand, filing bankruptcy to stop foreclosure is only a temporary solution and usually ends up ruining a person's credit rating for several years.

An automatic stay can prohibit a lender from continuing with the foreclosure process, at least temporarily; this means the use of bankruptcy to stop foreclosure gives homeowners time to regroup. During this period, they can think about whether to take steps toward getting caught up on the mortgage payments or letting the house go. If they choose the latter, they can take this time to find another place to live and can begin packing. While the result is both foreclosure and bankruptcy, such homeowners will see the benefit of getting rid of many of their overdue bills, as well as the stress caused by creditors constantly calling seeking their money.

Some homeowners use the time granted by the automatic stay to scrape together the money they need to become current on their mortgage payments. This feat is often possible because the bankruptcy filing means they are not required to pay their other bills, which frees up money to pay their mortgage. It also gives them time to decide who they can borrow money from, if necessary, after they decide to file bankruptcy to stop foreclosure.

Bankruptcy can only temporarily help to avoid foreclosure, so it is not always considered the best route. Those who do not use the automatic stay to gather the money to pay the lender may end up with both a bankruptcy and a foreclosure on their record. The result is a credit rating that is ruined for about a decade, preventing them from buying a home or making other large purchases — such as a car — for several years unless they are willing to pay particularly high interest rates. Thus, filing bankruptcy to stop foreclosure is meant only to be used as a last resort, because it may make a bad financial situation worse.