Can bankruptcy stop foreclosure?

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.

This is an interesting issue to examine. Either Chapter 13 or Chapter 7 bankruptcy can help temporarily or even permanently avoid foreclosure. However there are advantages and disadvantages to either route that must be thoroughly considered prior to filing.

When one files a Chapter 13 or Chapter 7 bankruptcy petition, the Bankruptcy Court automatically issues an order for relief that includes an "automatic stay." The automatic stay directs creditors to immediately cease collection activities. The sale of any foreclosed home will be legally postponed, usually at least three months, while the bankruptcy is pending. You can stay in your home until the stay is lifted and/or a settlement is reached. The lender too can ask for the motion to be lifted by the court, but even then you would typically have a two month delay in the foreclosure proceedings.

If you have some regular income, Chapter 13 can be a tool for keeping your home. Chapter 13 bankruptcy allows you to create a Court approved repayment program, typically five years, for the missed payments. Homeowners can spread out unpaid payments over the length of the repayment plan which makes this more affordable to debtors. Chapter 13 bankruptcy can also lead to the elimination of second and third mortgages if the primary mortgage is secured by the entire market value of the home. These unsecured mortgages would become unsecured debt which moves the debt holders to the back of the line.

Chapter 7 bankruptcy is less helpful to homeowners. It relieves the debtor of personal liability but does not relieve the lien on the house or the foreclosure proceedings. Therefore the bank will have the right to take your home in order to cover their losses on the loan. However it would still allow you some more time to live in your home for free and possibly work out a payment plan with the lender. It will also serve to cancel any second mortgages or home equity loans on the property.