When you have a mortgage you can't afford and refinancing isn't an option, don't dismiss the possibility that a Chapter 7 bankruptcy may actually help you in the long run.

"There's no more need to pretend/Cause now I can begin again," says a lyric from the Smashing Pumpkins song "The Beginning is the End is the Beginning." The line might spur you to realize that Chapter 7 bankruptcy is the right solution to your mortgage problem.

Here's a devastating scenario: You can't make your mortgage payments, your house is up for sale, and you're madly shopping various lenders to find a mortgage refinance. Desperation sets in as you realize that no one wants to buy the home at your price, and lenders aren't interested in helping you out, either. Now you're thinking about hunting for government assistance, or possibly filing a Chapter 13.

You'll do whatever it takes to keep your home. But have you considered whether you really want to keep it? If you can't refinance, you probably can't afford to have it.

Can't lose what isn't yours

Your dreams of sidestepping foreclosure may be motivated by an unwillingness to walk away from your equity. Such a sentiment is understandable, of course, but perhaps not realistic. If you can't sell the home, you don't have any equity to protect. Equity value is based on the home's real market value-which is not the same thing as your asking price, or what you paid for the property originally.

Free as a bird

If you have no realistic chance of continuing to make ends meet or ever paying off your big debt balances, a Chapter 7 liquidation bankruptcy can change your life dramatically. Naturally, there are drawbacks, but the rewards may be even more positive.

The drawbacks. Your credit score will be destroyed for a while, and you won't have access to unsecured debt or mortgages for at least a couple of years. Because your creditors will be allowed to seize their collateral, you'll be left with no home and, possibly, no car. You'll have to move into an apartment and find some way to buy a car.

The rewards. Most, if not all, of your unsecured debt will be discharged. You'll have no property taxes or mortgage insurance to worry about. Chances are that your income will be sufficient to support a modest lifestyle, including rent, food, and even a short vacation once in a while. Without those oppressive debt payments, you can start funding a savings account and making retirement plan contributions. You'll learn the ways of living on cash, which sets you up to be financially stronger in the long run. When your credit score recovers and lenders start soliciting your business once more, you'll know what it takes to avoid the mistakes of the past.

If it comes down to it, go ahead and file Chapter 7. Embrace it as a new beginning and open up a new chapter in your life.

Published on October 9, 2013