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Should I File for Bankruptcy after a Foreclosure?

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In a Nutshell

Many people consider filing for bankruptcy after their homes are foreclosed. Bankruptcy can get rid of any remaining debt once you sell your home.

Written by Attorney Jonathan Petts.  
Updated August 28, 2020

Unfortunately, it is easy to get behind on our mortgage payments. Once you miss one or two mortgage payments, it can be very difficult to catch up on the payments to prevent foreclosure. The mortgage company makes it more difficult by adding late fees and other costs. In addition, most mortgage companies demand you catch up the payments in one lump sum.

For some individuals, signing over the property to the bank or allowing the bank to foreclose is the only alternative they have because they cannot afford to pay the mortgage payments. However, should you file for bankruptcy after a foreclosure?

What is Foreclosure?

Foreclosure is the legal way a lender takes to obtain title to real estate when the borrower falls behind on the mortgage payments. In other words, it is when your house is seized because you haven’t paid. The real estate can be sold to pay the debt.

A mortgage is a secured debt. Secured creditors have a lien on property that “secures” the debt owed by the borrower. A lien allows the creditor to take your property if you do not pay the loan payments. Examples of secured debts include mortgages and car loans.

There are two different types of foreclosure: Judicial and non-judicial. Judicial foreclosure is a court process for taking a home when the homeowner does not pay the payments. Nonjudicial foreclosure is does not involve a lawsuit to take a home when payments are not being paid.

In many instances, the sale of a home helps to repay some, but not all, of the debt that is owed. When this happens, many people consider filing for bankruptcy to erase the remaining debt and get a fresh start.

You Need to Check Your State’s Foreclosure Laws

Because states set foreclosures laws, you need to check the foreclosure laws for your state to determine the exact steps the mortgage company must take to foreclose the mortgage. State foreclosure laws can vary greatly from state to state.

If you are unsure of your state’s foreclosure laws, you may want to consult with an attorney. Some states allow property owners a short time to catch up the mortgage payments to reinstate the loan. Other states have a redemption period after the foreclosure sale.

It is important to understand the foreclosure laws in your state. You may also have one or more defenses to a foreclosure action that could stop the foreclosure.

What is a Judicial Foreclosure?

Notice of Default

The foreclosure laws varies by state. In most cases, the first step in a foreclosure is for the lender to notify the property owner that he or she is in default of the mortgage. Defaulting on a mortgage means that you do not pay the mortgage payment on or before the day the payment is due.

There are several ways an owner can default on the terms of the mortgage. For example, if you fail to keep insurance on the property, you are typically in default of the terms of your mortgage. Not paying the mortgage payments on time is another type of default on a mortgage loan.

Many homeowners do not realize that if they are one day late in making their mortgage payments that they are technically in default. They believe that if they make the payment before the date a late fee is added that they are not in default.

The time between the due date and a late fee being added is a grace period. A grace period is simply a number of days that the mortgage company gives the homeowner before it assesses a late fee.

If your payment is due on the first day of each month, you are in default of the mortgage terms even though you make the payment on the second day of the month. You may not be charged a late fee for payment on the second day of the month, but you are in default if the payment was due on the first day of the month.

Most mortgage companies do not begin sending notices of default for several months after you begin missing mortgage payments. However, various state laws and the policies of the mortgage company decide when the lender may issue a notice of default. Most lenders call the homeowner or send letters requesting payment before issues a notice of default. Once the lender sends you a notice of default demanding payment, the lender typically retains an attorney and begins the foreclosure.

Steps In a Judicial Foreclosure

  • Complaint Filed. A judicial foreclosure begins with the filing of a foreclosure complaint with the clerk of court in the county in which the property is located.

  • Homeowner Responds. The homeowner has a specific number of days to respond to the foreclosure complaint. Most states require responses to be filed with the court within 20 to 30 days after the complaint is served on the homeowner.

    If the homeowner fails to respond to the foreclosure complaint, the mortgage lender files a notice of default and request for hearing. A foreclosure hearing is scheduled. The homeowner is provided notice of the hearing.

  • Foreclosure Hearing. At the foreclosure hearing, a representative for the mortgage company testifies about the terms of the mortgage and the homeowner’s default of the mortgage terms. The judge typically enters a judgment in favor of the mortgage company provided the company has filed all the necessary documents and provided evidence of the mortgage lien and the default.

  • Foreclosure Sale. The court schedules a date for the property to be sold at an auction. Typically, foreclosure sales are held once a month. Most states require that the mortgage company advertise the foreclosure sale in the paper for one to three weeks.

    At the foreclosure sale, the court offers the property to the highest bidder. The mortgage company may bid on the property, or a third party may purchase the property. The winning bidder receives a deed signed by the judge transferring title to the real estate to the bidder.

  • Homeowner Vacates. If the homeowner has not vacated the premises, the new owner can request the judge to issue an order requiring the person to leave the premises immediately. The new owner may immediately change the locks on the home as well.

What is a Non-Judicial Foreclosure?

In some states, the mortgage lender may acquire the property through a non-judicial foreclosure. A non-judicial foreclosure action does not go through the courts. Each state that allows non-judicial foreclosures have specific laws that dictate the way the home to be sold at an auction.

Steps in a Non-Judicial Foreclosure

  • Notice of Default. In most cases, you receive a notice of default from the mortgage company. Some states allow the company to combine the notice of default with the intent to foreclose. In a few states, the notice to the homeowner may be accomplished through publishing the notice and posting the notice on the property.

  • Auction. Once the mortgage company complies with state law for providing notice of default and notice of sale, the property is scheduled for an auction. As with a judicial sale, a third party may purchase the property at the auction or the lender may acquire title to the property.

  • Homeowner Vacates. You must vacate the home, or the new owner can evict you from the premises.

What is a Foreclosure Deficiency Judgment?

A mortgage company may request a deficiency judgment after a property is sold at a foreclosure auction. A deficiency is the difference between the amount owed to the mortgage company and the amount the mortgage company received from the foreclosure sale.

If the mortgage company does not receive full payment of the amount you owe on the mortgage loan, it can request a deficiency judgment. The deficiency judgment is a personal judgment that attaches to any other real estate that you might own. In addition, some states allow judgment holders to garnish wages or take other actions to collect a judgment debt.

For a homeowner who has just lost a home, a deficiency judgment is another debt that he or she cannot pay. If the mortgage company is allowed to garnish wages, the person can face a substantial hardship that can impair the person’s ability to pay for his or her basic living expenses.

Should I File a Chapter 7 Bankruptcy Case After Foreclosure?

You may wonder why you would want to file a Chapter 7 bankruptcy if you have already lost your home or you cannot afford to keep your home. A deficiency judgment is one of the most common reasons people file bankruptcy after foreclosure.

A Chapter 7 bankruptcy case eliminates the deficiency judgment. Deficiency judgments are dischargeable in bankruptcy. Therefore, filing a Chapter 7 bankruptcy case can stop wage garnishments and other collection efforts by the mortgage company.

Furthermore, if you have lost your home, you are likely struggling with other debts that you cannot pay. A Chapter 7 bankruptcy case discharges many unsecured debts including, but not limited to:

  • Medical bills

  • Credit card debts

  • Personal judgments

  • Some old tax debts

  • Old rent and lease payments

  • Old utility bills

  • Personal loans

A creditor is prohibited by law from taking any action to collect a debt when that debt is discharged in bankruptcy. The creditor is not permitted to call the debtor, send collection letters, garnish wages, or file collection actions for a discharged debt. If a creditor violates the discharge, the creditor could be fined by the bankruptcy court.

Can I Afford to File a Chapter 7 Bankruptcy Case After Foreclosure?

You may be unsure how you would file a bankruptcy case after foreclosure. It took the rest of the money you had to find a place to live and move out of your home. How are you supposed to pay for a Chapter 7 attorney?

Upsolve can help. Our no-cost bankruptcy program assists low-income individuals who cannot afford an attorney to file a Chapter 7 bankruptcy case to get out of debt. We do not require you to pay for our bankruptcy services because we are a non-profit company.

If you are still unsure, you can use our simple Chapter 7 Bankruptcy screener to determine if Upsolve and Chapter 7 is a good fit for you. Answering just 10 simple questions can help you decide if filing a Chapter 7 bankruptcy case is right for you.

You Can File Chapter 7 Without An Attorney

If you can afford to pay a bankruptcy attorney to help you get rid of debt, you may want to contact a bankruptcy lawyer. However, if you cannot afford the average attorney fees for a Chapter 7 bankruptcy attorney, what can you do to get out of debt?

The Bankruptcy Code does not require someone to hire an attorney to file bankruptcy. You can file for debt relief under Chapter 7 without an attorney. It may seem overwhelming if you try to file a bankruptcy case alone. However, Upsolve has created a system that helps individuals by providing a step-by-step method for filing bankruptcy without an attorney.

Are you ready to get rid of debts and get the fresh start you need to recover after a financial crisis? You could be debt-free within four to six months after filing your Chapter 7 bankruptcy petition. The cost of filing bankruptcy without an attorney is low. We can show you how to get out of debt even if you do not think you can afford to file Chapter 7.

Written By:

Attorney Jonathan Petts


Jonathan Petts has over 10 years of experience in bankruptcy and is co-founder and Board Chair of Upsolve. Attorney Petts has an LLM in Bankruptcy from St. John's University, clerked for two federal bankruptcy judges, and worked at two top New York City law firms specializing in... read more about Attorney Jonathan Petts

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