Study finds bankruptcy effective against foreclosure

Illinois readers may be interested in the findings of a university study regarding the effectiveness of bankruptcy actions in forestalling or avoiding home foreclosure. The study, conducted by the UNC Center for Community Capital, concluded that filing for bankruptcy protection reduces the likelihood that those in foreclosure will lose their homes by 70 percent. Despite its advantages, only 8 percent of people filed for bankruptcy as a means of foreclosure defense, according to the study. One bankruptcy attorney suggested that the small percentage may be because people do not realize the level of protection bankruptcy can provide.

There are two types of bankruptcy available for most individual filers: Chapter 7 and Chapter 13. In a Chapter 7 bankruptcy, the debtor's assets are liquidated and the proceeds generated are distributed to creditors. Following liquidation, remaining unsecured debts are generally discharged, with certain exceptions for things like student debt and back child support. Chapter 7 is often the simpler of the two options, but it not does offer the level of protection from foreclosure that Chapter 13 offers.

In a Chapter 13 bankruptcy, the debtor enters into a repayment plan lasting between three and five years. During that time, the debtor is to make monthly payments, the amount of which are determined based on the debtor's ability to pay. At the conclusion of the repayment period, any remaining debts are generally discharged, again with exceptions for certain kinds of debt. Filers are usually able to keep their homes if they successfully complete their Chapter 13 plan.

According to the UNC study, those who filed for protection under Chapter 13 were five times more likely to avoid losing their homes to foreclosure than those who filed under Chapter 7. A bankruptcy attorney may be able to help a client understand the advantages and disadvantages of Chapter 7 and Chapter 13, based on the specific circumstances of the client's situation.

Source: The Motley Fool, " Bankruptcy Can Save Your Home From Foreclosure", Dan Rafter, August 16, 2014

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