Avoid bankruptcy if not facing a mortgage foreclosure deficiency judgment

13 Apr Avoid bankruptcy if not facing a mortgage foreclosure deficiency judgment

You may not need to file for bankruptcy if you’re facing a mortgage foreclosure.

Sometimes debts can take care of themselves. In many states, the mortgage company can’t sue you for the difference between your mortgage and the value of the property. This is called the deficiency. So if you can’t get sued for the deficiency, mortgage foreclosure alone won’t force you into bankruptcy. For example in Wisconsin, a mortgage company can’t sue for a deficiency on your home mortgage unless it waits 12 months. In Arizona lenders can’t sue for a deficiency judgment in non-judicial foreclosures of residential property on less than 2.5 acres – almost all foreclosures fall within these limits. California has the “single action rule” which almost always saves the homeowner from deficiency claims.

I’ve met many debtors who are generally in pretty good financial shape except for their mortgage. In fact, if they can walk away from their mortgage, they may be able to avoid bankruptcy altogether. Since you can get discharged from your debts only once every 8 years in chapter 7, it’s important to use this remedy cautiously.

If you have a bit of cash, and just a few debts, you might be better off settling your credit card debts. It is possible to do this – sometimes at a considerable discount. Debt settlement plans are not for everyone. And there are many bogus debt-settlement agencies you have to watch out for.

Bottom Line

If you are facing foreclosure, bankruptcy is not always necessary. If you aren’t facing a deficiency judgment, consider your alternatives to bankruptcy before filing.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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