How Can Bankruptcy Help You With Foreclosure?

If you’re a homeowner who has fallen behind on your mortgage payments, you run the risk of foreclosure. If a mortgage lender or servicer forecloses, it will give you notice that your loan is in default. It will also give you a notice that a foreclosure sale has been scheduled. If you’re unable to catch up on your payments before the foreclosure sale, you can file a Chapter 13 bankruptcy case. While bankruptcy can stop foreclosure and almost all other collection actions, it harms your credit, so you should consider your options carefully before committing to this plan of action.

Foreclosure and Bankruptcy

When a borrower defaults on their mortgage loan by missing or getting behind on payments, they risk having their home foreclosed. Foreclosure is a process that allows a lender to sell or repossess a mortgaged property to recover what the borrower owes. A foreclosure occurs after you miss one or more mortgage payments and don’t become current within a specific time. Typically, it’s 30 days. Once you are over 30 days past due on your mortgage, your lender may invoke the acceleration clause in your mortgage contract. This allows the lender to “accelerate” the full repayment of the loan.

The foreclosure process is governed by state law, so foreclosure requirements are different in every state. But there are two main types of foreclosure: judicial and nonjudicial. Judicial foreclosures require lenders or mortgage servicers to file a court action to initiate the foreclosure. This is used in all the states. Nonjudicial foreclosures don’t require a lawsuit. They’re only used in some states.

Under a 2014 federal law, mortgage loan servicers can’t officially start the foreclosure process until you’re more than 120 days delinquent. Before 2014, foreclosures typically began when a mortgage loan was 90 days overdue or even sooner. This means that the foreclosing lender or servicer can’t give you notice of foreclosure or initiate a lawsuit for a judicial foreclosure until you’re at least 120 days behind on your mortgage payments. In a nonjudicial foreclosure, the foreclosing party can’t initiate a foreclosure by recording or publishing the first notice until after the 120th day of delinquency.

Bankruptcy as a Tool To Stop Foreclosure  

If you can’t pay the amount to get current on your mortgage by the foreclosure sale, filing for bankruptcy is a way to stop the sale. Becoming current means paying the amount due on the mortgage loan, plus any costs and attorney fees the lender incurred to start the foreclosure process. This isn’t easy for homeowners with financial problems.

Bankruptcy is a legal process under federal law that helps consumers and businesses find debt relief during difficult financial times. Most individuals file Chapter 7 or Chapter 13 bankruptcy cases. Most bankruptcy lawyers offer free consultations and can tell you more about the bankruptcy process and the difference between these two chapters. 

Filing a bankruptcy case is a way to stop a foreclosure sale. That’s because federal bankruptcy contains a unique tool known as an automatic stay. It goes into effect the moment you file a bankruptcy petition. The automatic stay bars most collection activities including foreclosure sales. What happens next depends on which type of bankruptcy you file. 

If you file a Chapter 7 bankruptcy and don’t have the money to get current on your mortgage, the foreclosing party can ask the bankruptcy court to remove the automatic stay. Chapter 7 doesn’t wipe out secured debts like a mortgage, so in this case, filing a Chapter 7 bankruptcy is only a temporary fix. That said, if the lender completes the foreclosure sale and the sale proceeds aren’t enough to cover what you owe on the loan, you may be responsible for the shortfall or deficiency. This varies by state. But if your lender does get a deficiency judgment against you, you can discharge this debt by filing bankruptcy. 

Chapter 13 may be a better option for homeowners who want to keep their homes because it allows you to reorganize your debt and puts you on a 3-5 year repayment plan. You can include your past-due mortgage payments, plus any other costs or fees, in this plan. This postpones the foreclosure sale for the duration of the repayment plan. If you complete the plan and get current on your mortgage, you’ll permanently stop the foreclosure sale. If you don’t complete your plan and resolve the issues with your mortgage, the foreclosure sale may be rescheduled.

Foreclosure, Bankruptcy, and Your Credit Score

If you let the foreclosure sale occur, it will affect your credit. A foreclosure will appear as a negative event on your credit report and can lower your credit score by as much as 100 points. Having a foreclosure in your credit history will also make it more difficult to get loans in the future. A foreclosure remains on your credit report for seven years from the date of the first missed or late mortgage payment.  

If you file a Chapter 13 bankruptcy case, it will also affect your credit. It will remain on your credit report for the same amount of time as a foreclosure — seven years. The clock starts when you file your bankruptcy case.

Can You File for Bankruptcy To Stop Foreclosure?

Bankruptcy is one of the best debt relief tools to stop foreclosure. Why? The automatic stay stops debt collectors from initiating and/or continuing most collection activities. It's so powerful that a bankruptcy petition filed at 9:59 a.m. will stop a foreclosure sale scheduled for 10 a.m. It’s also so powerful that creditors must formally request permission from the court to lift or remove the stay.

Your Home and Chapter 7 Bankruptcy

Although filing for Chapter 7 bankruptcy can delay a foreclosure for weeks or even months, that is not a guarantee. Unlike a Chapter 13 bankruptcy, it offers no way for borrowers to get current on their past-due mortgage payments. In the long run, it doesn’t permanently stop a foreclosure sale. It only delays it.

If you’re current on your mortgage but still need debt relief because of other financial problems, filing a Chapter 7 bankruptcy may be helpful. You may be able to protect your home if your state provides a homestead exemption, as most states do.

Your Home and Chapter 13 Bankruptcy

To keep your home in the long run, you must file a Chapter 13 bankruptcy case. This type of bankruptcy allows you to repay your mortgage arrearages (past-due payments) over the length of your Chapter 13 repayment plan. It can also help you eliminate a second or third mortgage, like a home equity loan. Under Chapter 13, this type of debt is recategorized as an unsecured debt, which allows it to be discharged in a Chapter 13 filing.

To make Chapter 13 work for you, you must have enough money to resume making your regular monthly mortgage payments in addition to paying off the arrearages in your 3-5 year Chapter 13 payment plan.

Should You File for Bankruptcy Before or After Foreclosure?

Chapter 7 and Chapter 13 bankruptcies come with different benefits. Filing a Chapter 7 bankruptcy case can stop a foreclosure sale, but only temporarily. It allows you to discharge most of your unsecured debts like credit cards and medical bills but not secured debts like a mortgage. A Chapter 7 bankruptcy stays on your credit report for up to 10 years. 

Filing a Chapter 13 bankruptcy case stops foreclosure and allows you to reorganize your finances in a 3-5 year repayment plan and to keep your home. It stays on your credit report for up to seven years.

If you’re facing foreclosure and are considering filing bankruptcy, you can decide when to file based on your goals. If you want to keep your home and believe you can solve your current financial problems in the short term, it makes sense to file for bankruptcy before foreclosure. Doing so will buy you enough time to pursue loss mitigation options like forbearance or loan modification, which allow you to keep your home. If you can’t keep your home, filing bankruptcy can still buy you time to find another option to resolve your mortgage debt like a short sale or deed in lieu of foreclosure. 

If you live in a state that requires you to pay the deficiency balance after a foreclosure sale, it may be beneficial to file for bankruptcy after foreclosure. You’ll be able to discharge this debt in bankruptcy and avoid paying anything more on your foreclosed mortgage loan.

Let's Summarize...

The terms of your mortgage or deed of trust usually define what constitutes default. When you’re in default for more than 120 days, your mortgage lender or servicer will likely initiate foreclosure proceedings. At this point, you have few options other than paying your past-due mortgage payments. Though you may be able to request loss mitigation options like loan modification or forbearance. 

All homeowners have the option to stop a foreclosure by filing for bankruptcy. A Chapter 7 bankruptcy may only temporarily stop the foreclosure process, but it will allow you to discharge a deficiency balance after a foreclosure. Filing Chapter 13 bankruptcy may allow you to keep your home by allowing you to make up your past-due payments via a 3-5 year repayment plan.