Can Bankruptcy Stop Foreclosure?
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There are a number of different ways that you can prevent foreclosure, even if you ultimately need to give up your home. Don’t be afraid to explore your options, including Chapter 7 and Chapter 13 bankruptcy and find what’s right for your family and personal financial situation.
Written by Attorney Andrea Wimmer.
Updated December 12, 2021
Yes, filing bankruptcy can stop a foreclosure. At the very least it’ll buy you some time. Whether filing a bankruptcy case can help you prevent a foreclosure for good depends on how far behind you are on your mortgage payments and what type of bankruptcy you’re filing. But, let’s start with a few foreclosure basics, first.
The foreclosure process often depends on the type of mortgage loan you have. But, no matter what the specific state law says, generally speaking, a foreclosure happens when a homeowner falls behind on their mortgage payments. If they can’t catch up quickly enough, their mortgage lender forecloses on the mortgage or other real estate loan. As part of the foreclosure process, the lender either takes the house or sells it to a third party.
Each state has laws that govern foreclosure proceedings. In some states, all foreclosures involve a lawsuit against the homeowner. That’s called a judicial foreclosure. Other states have alternative - nonjudicial - foreclosure options. In Arizona, for example, the mortgage company just has to notify the homeowner that they’re foreclosing at least 90 days before the foreclosure sale is scheduled to take place. The state court is not involved at all.
Right Of Redemption
Depending on your state’s law, you may be given a certain amount of time to redeem the property. A redemption typically requires the homeowner to make a lump sum payment paying off the outstanding mortgage balance and the foreclosure costs. The specifics depend on your state’s laws.
If the bank can’t sell the property for more than the mortgage balance, they may try to collect the deficiency judgment from the homeowner. For example, if the mortgage balance at the time of the foreclosure sale is $250,000 but the highest bidder only offers $200,000, the bank can turn around and sue the homeowner for the $50,000 difference. After getting a judgment, the lender can start a garnishment to collect the deficiency. Some, but not all states have anti-deficiency statutes to protect their residents against these deficiency judgments.
Some homeowners attempt to sell their property through a short sale to avoid issues with a deficiency balance. Of course, that only works if the mortgage lender forgives the balance still owing on the mortgage loan after the short sale has closed.
If you have home equity because the mortgage loan balance is less than the value of your home, you don’t have to worry about a deficiency balance. But, you’ll want to make sure that you’re able to protect the full amount of your home equity with an exemption. Otherwise, filing bankruptcy may not be the best course of action.
Bankruptcy and the Automatic Stay
The automatic stay is the part of the bankruptcy law that bans creditors from taking any kind of collection action once a bankruptcy case has been filed. That’s not just limited to wage garnishments and phone calls; it stops a foreclosure proceeding dead in its tracks. Someone can file bankruptcy today to stop a foreclosure sale scheduled for tomorrow morning.
But, that’s not the entire story. Real estate loans are secured debts and the type of bankruptcy you file determines what you can do from there.
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Stopping a Foreclosure with Chapter 7 Bankruptcy
Chapter 7 bankruptcy is the most common type of bankruptcy filed in the United States. It provides the fastest path to debt relief and doesn’t require a repayment plan. The person filing bankruptcy typically gets their fresh start in the form of a discharge order within 3 - 4 months of filing their petition. A bankruptcy trustee reviews the filer’s assets and - assuming the person doesn’t own any non-exempt property - the case is closed.
Since Chapter 7 bankruptcy doesn’t involve a repayment plan, it can’t prevent the foreclosure from happening eventually. The lender can either file a motion for relief from the automatic stay, so they can move forward with the foreclosure proceeding or wait until the bankruptcy discharge is granted.
The only way around that is generally to either bring the mortgage arrears current by paying all missed payments, or by negotiating a loan modification. Filing Chapter 7 bankruptcy may buy you the extra time you need to make this happen, but once the stay is lifted, the lender can simply start the state foreclosure proceeding where it left off.
Some people file Chapter 7 bankruptcy just to get a little extra time to move, but not fight the foreclosure. Assuming it’s their first case, this will buy them at least 3 weeks to get their ducks in a row, possibly more. Since the bankruptcy will cover the mortgage debt, they can move on without having to worry about a deficiency judgment. That’ll be discharged.
A Quick Note About Homeowners’ Associations (HOAs)
If you live in a property that has a homeowners’ association, make sure you stay on top of any HOA assessments that come due after your bankruptcy case is filed. Those are considered post-petition debts and won’t be eliminated by the bankruptcy court’s discharge order.
Preventing a Foreclosure With Chapter 13 bankruptcy
Chapter 13 bankruptcy is the second most common type of personal bankruptcy. Unlike Chapter 7, it includes a 3 - 5 year payment plan. And, you can use the Chapter 13 bankruptcy process to catch up your arrearage. You’ll also have to start making the current mortgage payments. But, you’ll have up to 5 years to do this. You can also use Chapter 13 to lower the interest rate on your car loans, if needed. When done, your unsecured debt (like credit cards and medical bills) will be eliminated and your past due payments a thing of the past!
Some bankruptcy courts even offer Mortgage Modification Mediation Programs as part of a Chapter 13 case. These programs are designed to streamline the mortgage modification process. It connects lenders with their borrowers and gets around the nightmare of having to submit and resubmit seemingly hundreds of documents by using a specifically designed portal. And the bankruptcy court monitors all of it.
Filing Chapter 13 Bankruptcy To Deal With Real Estate Loans
As you can imagine, the bankruptcy process for a Chapter 13 is quite a bit more involved than for a Chapter 7 bankruptcy. If you’re planning on filing Chapter 13 to catch up or modify a real estate loan, it’s best to have a bankruptcy attorney by your side. It’ll be money well spent, especially if you have a second mortgage.
Chapter 13 and Your Second Mortgage
You can use the Chapter 13 bankruptcy process for more than catching up on your first mortgage. If you have a second mortgage (or even a third mortgage) and your home is worth less than what you owe on the first mortgage, you can remove (or “strip”) the junior mortgage(s). That will turn them into an unsecured debt that’s eliminated by the discharge after you make your last monthly payment.
If you’re behind on your mortgage, you’re not alone. Especially once the coronavirus related forbearance period ends, you’ll be one of thousands facing a possible foreclosure. Filing Chapter 7 bankruptcy can stop a scheduled foreclosure and buy you a little time to move out. If you’re hoping to save your home you can use Chapter 13 bankruptcy to catch up on the missed mortgage payments.
There are a number of different ways that you can prevent foreclosure, even if you ultimately need to give up your home. Don’t be afraid to explore different options to figure out what’s the right option for your family and personal financial situation.
- U.S. Courts. (2020, July). 2019-2020 Bankruptcy Filings. Bankruptcy Filings Fall 11.8% for Year Ending June 30, 2020. Retrieved August 11, 2020, from https://www.uscourts.gov/news/2020/07/29/bankruptcy-filings-fall-118-percent-year-ending-june-30