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What is Foreclosure and How Do You Avoid It?

Banks initiate foreclosure on homes in an effort to recover the outstanding balance on a mortgage or loan on which the borrower has stopped making payments. Mortgages and other home loans are categorized as secured loans — loans taken against specific, physical collateral. If you fall too far behind on your loan payments, the lender will try to get its money back by seizing and selling the collateral.

The single easiest way to prevent foreclosure is simply to not fall behind on your payments. Even if other purchases and priorities have to be put off for a few months, stay current on your mortgage payments. Many lenders will raise your interest rates after the first missed payment, another reason to stay current.

If you know that you cannot make your payment this month, communicate with your bank. Banks would rather have your money than your house, and almost all mortgage lenders will work with you to modify your loan or your payment schedule in a way that works for you. You may even be able to refinance your mortgage, lowering your monthly payments by lowering your interest rate.

If all else fails and you don't see your financial circumstances improving very soon, or if foreclosure proceedings have already begun, you may want to consider declaring bankruptcy. Filing for bankruptcy automatically puts any foreclosure proceedings on hold. If you declare Chapter 7 or liquidation bankruptcy, the final outcome depends on how much equity you have in your home. Consulting with an experienced bankruptcy attorney is the surest and fastest way to figure out whether you will be able to keep your home despite a Chapter 7 bankruptcy.

If you declare Chapter 13 bankruptcy and want to stay in your house, you, your bankruptcy lawyer, and the Chapter 13 bankruptcy trustee will develop a bankruptcy plan that allows you to come current on your mortgage and continue making payments throughout the bankruptcy repayment period and afterwards, if necessary.

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