Chapter 7 Bankruptcy and Foreclosure

Chapter 7 can eliminate second liens after foreclosure

For a homeowner who has decided to go ahead and surrender their home through foreclosure, Ebert said a Chapter 7 may be useful for extinguishing potential claims by secondary lienholders, such as in the case of a home equity loan or second mortgage, who might otherwise seek repayment by laying claim to other assets held by the homeowner. Some states allow this, others do not - this is one of the areas where a bankruptcy attorney licensed to practice in your state can be helpful.

It should be noted that a bankruptcy does not provide relief from all debts - unpaid taxes, child support, alimony and loans obtained through fraud, among certain other debts, cannot be extinguished by bankruptcy.

Impacts on credit

Finally, there are the impacts on ones credit rating to consider. As mentioned above, a bankruptcy remains on your credit rating for 10 years, a foreclosure for only seven. However, many mortgage lenders may prefer to write a mortgage for someone with a bankruptcy on their record rather than a foreclosure.

Furthermore, many lenders will actively seek out persons who have recently filed for bankruptcy - Ebert said it's not uncommon for persons to receive credit card offers during the process itself. The bottom line is, credit can still be available after a bankruptcy - but it's going to be much more expensive than before. Bankruptcy and its impacts on your personal and financial life can be very complicated. That's why it's important to talk with a qualified bankruptcy attorney and preferably, a personal financial advisor as well to sort out the pros and cons before taking such a major step.