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Filing for Bankruptcy To Stop Foreclosure: Chapter 7 vs. Chapter 13

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In a Nutshell

Filing for bankruptcy can help homeowners to prevent foreclosure. Most of the time, filing for Chapter 13 bankruptcy is most effective at preventing foreclosure, as it allows homeowners to repay their overdue mortgage debt over a 3-5 year period of time.

Written by Todd Carney, J.D. Harvard Law 2021.  
Updated November 11, 2021


If you’ve missed mortgage payments, your home is at risk of foreclosure, which allows your lender to take your home. Filing for bankruptcy can pause the foreclosure process and can potentially help you avoid losing your home. Bankruptcy won’t wipe out your mortgage debt, but it can help you get rid of overwhelming credit card and medical debt. This can help you get back on track with your mortgage payments. This article will explain how foreclosure and bankruptcy relate.

Foreclosure vs. Bankruptcy

Foreclosure and bankruptcy can be easy to confuse since both involve situations wherein you’re on the financial brink. When you fail to make payments on your mortgage for several months, you risk having your home foreclosed on by the lender. Your mortgage loan is secured or backed up by your home, which is the collateral. So when you default on the loan, the mortgage lender has the right to start foreclosure proceedings, which include taking your home and selling it in a foreclosure sale. 

While your lender or mortgage servicer starts the foreclosure process, you can start the bankruptcy process if you can’t afford to make your debt payments. Bankruptcy is a way to get debt relief. It’s a legal tool you can use to wipe out certain debts. Depending on which approach you choose, bankruptcy can also help you restructure your debts to make their repayment more manageable. 

The process varies based on whether you file Chapter 7 or Chapter 13 bankruptcy. Chapter 7discharges most unsecured debts like credit card bills and medical bills. Chapter 13 reorganizes your debt and puts you in a 3-5 year repayment plan to pay down your debt based on what you can actually afford, not the minimum payments the lender might want. 

Bankruptcy and foreclosure each have short-term and long-term effects. Bankruptcy can hurt your credit in the short term, but it benefits you in the long term by freeing you from various debts. This allows you to get your finances in order and rebuild your credit. Also, as time passes, bankruptcy will affect your credit less and less until it falls off your report.

Unlike bankruptcy, foreclosure has harmful impacts in both the short-term and long-term. You lose your home, your credit will be damaged, and you may owe money even after a foreclosure sale. Also, having a foreclosure on your credit history can hurt your chances of getting another mortgage in the future. 

Despite the fact that both will harm your credit score initially, bankruptcy will usually improve your financial situation long-term, whereas foreclosure likely will not. 

Filing for Bankruptcy To Save Your Property

So, you might ask, can bankruptcy stop foreclosure? It depends on how much equity you have in your home and which type of bankruptcy you file. Chapter 7 bankruptcy doesn’t stop foreclosure outright, but it does buy you some time (because of the automatic stay, discussed below) and ultimately allows you to discharge unsecured debts. This may help you get current with your mortgage payments. Paying off your past-due mortgage payments or embracing an alternative “loss mitigation” strategy are the only ways to prevent a foreclosure in this case. But at the end of the day, the lender can still foreclose if you can’t come up with the necessary money.

Rather than eliminating your debts outright, Chapter 13 bankruptcy sets you up on a repayment plan. You can roll your missed mortgage payments into this repayment plan to help you get current on your mortgage. On the payment plan, you’ll also be paying less on many of your other debts, and after 3-5 years, remaining balances attached to eligible debts may be discharged. 

Some bankruptcy courts even provide a Mortgage Modification Mediation Program to streamline the mortgage modification process. In those districts, filers who are behind on their mortgage can bring the mortgage current through any modification options the lender may have. This then allows them to either dismiss the Chapter 13 case or convert it to one under Chapter 7

Chapter 7 Bankruptcy and Foreclosure

It’s important to understand how Chapter 7 bankruptcy can help with foreclosure and what the requirements are to file. To be eligible, you’ll have to pass the Means Test, which looks at your household income in comparison to the median household income in your state.

When you file Chapter 7, an automatic stay goes into effect, which stops creditors from collecting most debts. Once the bankruptcy process is complete, the debts that are dischargeable via bankruptcy can be eliminated. Through the use of bankruptcy exemptions, you can keep most of your personal property, such as a car, furniture, and clothes. The whole process exists for those in need to get the debt relief they deserve. You should never feel ashamed of using bankruptcy to get a fresh start.

It’s important to understand how Chapter 7 can and can’t help with foreclosure. As mentioned above, you can’t eliminate your mortgage debt in a Chapter 7 and save your house. If you’re current with your mortgage when you file Chapter 7, everything will stay basically the same. If you’re behind, the most Chapter 7 can do is buy you a little bit of time to either catch up or complete a loan modification with the mortgage company. 

Chapter 13 Bankruptcy and Foreclosure

Chapter 13 bankruptcy is similar to Chapter 7 in the sense that it’s a way to discharge your debts. Like Chapter 7, when you file Chapter 13, an automatic stay goes into effect to protect you from creditor collections. But unlike Chapter 7, Chapter 13 restructures your debt into a 3-5 year payment plan. A bankruptcy trustee then distributes the money you’re paying under the plan to your creditors. To be eligible for Chapter 13, you’ll need to show that you have enough monthly income to make these payments.

Filing and completing a Chapter 13 repayment plan is the only surefire way to stop your foreclosure for good because it gives you up to five years to catch up your payments. Plus, while the case is pending, the mortgage company can’t foreclose as long as you’re making all your monthly mortgage payments and Chapter 13 plan payments. At this time, you can also continue (or start) any loan modification programs your lender may offer. Given all this, Chapter 13 is often a better bankruptcy option for fighting foreclosure, specifically. 

Chapter 13 bankruptcy cases are complicated. For example, with a Chapter 13 bankruptcy filing, you can turn a second or third mortgage (also known as a junior mortgage) from a secured debt into an unsecured debt and discharge it. This is only possible if you have no home equity because the balance you owe to your mortgage company on the first mortgage is greater than the home’s value. Because of these nuances, if you need to file Chapter 13 to catch up on a real estate loan, it’s best to speak to a local bankruptcy attorney about your options.

Automatic Stay

The automatic stay takes effect as soon as you file for any type of bankruptcy. At the very least, the automatic stay buys you some time to deal with the foreclosure. During this time you can get current on your mortgage or try to renegotiate it. The automatic stay can be lifted though. If you’re behind on your mortgage when your case is filed, the bank can ask the court for relief from the automatic stay. If the motion is granted, the foreclosure process can continue.

Generally, the only way to prevent this in a Chapter 7 case is to show there’s enough equity to protect the creditor even if they haven’t been receiving regular payments for a time. In a Chapter 13 case, as long as the plan provides for the repayment of all missed mortgage payments, the mortgage company typically won’t ask for stay relief. They want your money more than they want your house. 

Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy 

Chapter 7 and Chapter 13 bankruptcy are both ways to get debt relief. With each, exemptions protect much of your personal property — including your clothes, furniture, and car — and both result in a discharge if all requirements are met. When you file either type of bankruptcy, an automatic stay stops creditors from collecting on your debts and buys you time to deal with your finances and a potential foreclosure. Finally, both involve going to court, paying a filing fee, and receiving credit counseling.

But there are some differences. Chapter 7 only takes 3-4 months, while Chapter 13 will take 3-5 years. Chapter 13 requires you complete a repayment plan, while Chapter 7 discharges your eligible debts without any repayment. Chapter 13 is more effective in dealing with foreclosures when you want to keep your house but you’re behind on payments. That’s because it has a mechanism to help you catch up over time. Chapter 7 doesn’t. 

Each person’s financial situation is different. If you’re not confident about whether and how bankruptcy can help you stop foreclosure and permanently get your home loan out of default, it’s a good idea to reach out to a bankruptcy attorney for legal advice. Many attorneys will provide you with a free consultation.

Let's Summarize…

Although bankruptcy can’t outright prevent a foreclosure, it can give you time to come up with the necessary money to stop a foreclosure. Chapter 13 provides homeowners with more tools to prevent foreclosure, since it provides initiatives like streamlining the mortgage modification process and lien stripping junior mortgages. 

Either bankruptcy process will allow you to use a stay to temporarily hold off foreclosure, but a mortgage company can get the stay lifted. Speak with an attorney to learn more about how bankruptcy and foreclosure can impact your unique situation.



Written By:

Todd Carney, J.D. Harvard Law 2021

LinkedIn

Todd Carney is a writer and graduate of Harvard Law School. While in law school, Todd worked in a clinic that helped pro-bono clients file for bankruptcy. Todd also studied several aspects of how the law impacts consumers. Todd has written over 40 articles for sites such as RealC... read more about Todd Carney, J.D. Harvard Law 2021

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