Filing for bankruptcy can be an effective way to stop foreclosure, but it shouldn't be your first option when dealing with a potential foreclosure. Bankruptcy should be a last resort, only to be considered after you exhausted all other options for avoiding foreclosure, including working out a payment plan with your lender, refinancing your mortgage or selling your home. If none of these other steps are an option, than you can start considering whether or not to file for bankruptcy.
There are two types of bankruptcy to consider: Chapter 7 and Chapter 13 bankruptcy. Chapter 7 bankruptcy will put an immediate hold on all lenders or creditors seeking to collect from you. It also halts a foreclosure dead in its tracks, and can give you the time you need to get back on your feet or settle your debt. Unfortunately, if a lender petitions a court, they can have the hold removed and proceed with a foreclosure, whether you're ready or not, and that's why most people looking to avoid foreclosure file for Chapter 13 bankruptcy.
A Chapter 13 bankruptcy puts an immediate hold on all of your creditors and lenders as well, but also allows you to work out an alternate payment plan for your debts with your mortgage lender. A Chapter 13 bankruptcy allows you 3 to 5 years in which to pay off your debt and get back up to date on your mortgage payments, which for many people is more than enough time. Best of all, you get to stay in your home without any chance of a court order allowing a foreclosure to proceed. A Chapter 13 bankruptcy can also have any second mortgage on your home rendered as 'unsecured debt', meaning you may never have to pay it back at all.
The process of how to file for bankruptcy can differ from state to state, so your best option is to consult one of the many bankruptcy attorneys out there willing to help. They often have a very deep knowledge of local bankruptcy laws and can coach you on how to go about the process and get the most out of it. Just remember to explore all of your options before resorting to bankruptcy, as working out another solution will potentially be less of a headache in the long run.
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