Bankruptcy and foreclosure are closely related issues. Many folks know that filing for bankruptcy can, in some cases, be a way to avoid foreclosure, or at least to postpone it for a time.

Obviously, foreclosure can take place regardless of whether bankruptcy has been filed. All that is required for foreclosure is missing your mortgage payments. As far as the foreclosure process itself, it varies from state to state. The two basic approach, though, are judicial and non-judicial.

In a judicial foreclosure process, a court handles the foreclosure. Generally, the borrower receives a complaint telling them they are past due on their mortgage payments and reminding them of the lender's lien against the property and their ability to foreclose. If the lender has a valid complaint, the court will issue a judgment against the borrower and an order permitting the lender to sell the property at a sheriff's sale. At the public auction, any party may bid and purchase the property.

In a non-judicial foreclosure process, statutes govern the procedure, which varies from state to state. Generally speaking, the lender will send the homeowner a letter letting them know they are in default. If no action is taken, the notice is filed with a local county recorder's office. After an established time period, the lender then issues of notice of sale. The property is then sold at a public auction. Again, anybody may bid on and purchase the property.

Many choose to file for bankruptcy to avoid foreclosure. Because bankruptcy puts an "automatic stay" on foreclosure, creditors are prevented from collecting their debts for a certain time. Filing for a Chapter 13 bankruptcy can prevent foreclosure altogether, since it gives the homeowner to get current on their mortgage payments. That isn't necessarily an easy thing to do, but it is possible.

Chapter 7 bankruptcy will allow an underwater homeowner stave off foreclosure, allowing them to save money, cancel debt and cancel tax liability on some property loans, but it will not cancel the foreclosure itself.

Individuals facing foreclosure should not indiscriminately file bankruptcy. It is wise to speak with an attorney to determine you options.

Source: Fox Business, "Skip Bankruptcy with Foreclosure?," Justin Harelik, Sep 20, 2011.