When you are overwhelmed with debt, it is difficult to know what to do next – especially if your mortgage lender is threatening a foreclosure. Bankruptcy can be one way to help you put off foreclosure, or even stop it altogether.
Bankruptcy: Automatic Stay
When you file for bankruptcy, the court issues an “automatic stay.” This means that creditors have to stop trying to collect from you. As a result, a foreclosure sale of your home is postponed. You can stay in your home while the issue is resolved.
Your lender can file a motion to lift the stay, though. Additionally, in some states you might be out of luck if there is an advanced notice of foreclosure. If that advanced notice is filed, the lender might be able to proceed, even though you have filed for bankruptcy.
In many cases, though, the automatic stay you receive for filing bankruptcy can at least buy you a little bit of time to avoid foreclosure.
Chapter 13 vs. Chapter 7 Bankruptcy and Foreclosure
If you want to have a chance of retaining your home by filing bankruptcy, you need to file for Chapter 13. You are allowed to present a plan to pay off your late unpaid payments over time. However, you need the income to afford your current mortgage payments, as well as to make payments from the past that you might be behind with. If you can follow the payment plan approved by the court, you can avoid foreclosure. On top of that, you might even be able to have your second and third mortgages “stripped off” and re-categorized so that they aren’t threatening your ability to keep your home. This means that these mortgages are no longer secured by the equity in your home.
Chapter 7 bankruptcy is another matter, though. Even though you can cancel what you owe, and be relieved of personal liability for the debt, you likely have signed a lien agreement, using the home to secure the debt. As a result, your debt is cancelled, but the lender still has a right to take the home in an attempt to recover its losses. Chapter 7 bankruptcy will not cancel a foreclosure, and if you go this route, you could lose your home.
Whether you end up with bankruptcy or foreclosure your credit score will be affected. Bankruptcy has a bigger impact and stays on your report for seven to 10 years. A foreclosure also remains on your credit report for seven to 10 years, but you can usually buy a home two to five years after a foreclosure. You might have more difficulty buying a home after a bankruptcy.
Before filing for bankruptcy, consult with a knowledgeable lawyer about the impact of bankruptcy on a foreclosure in your state and in your case.