Foreclosure or bankruptcy?

The scenario has become all too common during the economic crisis of recent years. You lose your job and fall behind in your house payments. What should you do? What can you do? Foreclosure looms. Bankruptcy is a possibility. Neither is desirable. But which choice is worse?

There are a lot of factors that may come into play here, from individual state laws to individual circumstances, but if I had exhausted all the possibilities of working things out with my mortgage lender, I would file for bankruptcy. Foreclosure is worse.

To put it in the simplest terms, with foreclosure you lose your home. Bankruptcy buys you that precious commodity, time.

The bankruptcy code includes a powerful weapon—the automatic stay. Although there are certain exceptions, this provision prohibits creditors from taking any further action against a debtor who is petitioning for bankruptcy, unless they get permission from the bankruptcy court. If your lender has initiated foreclosure proceedings, the stay means that those proceedings are temporarily put on hold. If the lender plans to sell your house, that sale is postponed.

You can remain in your home while, under the bankruptcy code, you formulate a repayment plan. The repayment plan is another advantage of bankruptcy. Here, too, you gain time: you're not forced to repay your debts all at once. Moreover, a bankruptcy petition may enable you to shed some unsecured indebtedness, such as credit card debts, which may have been interfering with your ability to make your mortgage payments in the first place.

I'd be remiss if I suggested that this advice applies to everyone in every circumstance. If you're facing foreclosure, seek out a financial advisor and/or lawyer with expertise in bankruptcy. But, in my view, the better option is bankruptcy.

—Frank Top '84 P'14. Top is a managing partner with Chapman and Cutler LLP. To classmates looking for a freebie, he notes that nothing above shall be deemed to be the rendition of legal advice or services.