Bankruptcy stops collection activity, including foreclosure, but whether it will permanently stop it will depend on the type of bankruptcy you file and your ability to catch up on arrearages and make ongoing mortgage payments. If you’re facing foreclosure, it’s important to act quickly, and in most cases, you’ll want to contact a knowledgeable bankruptcy attorney who can help you evaluate your options.
What Is Foreclosure?
Foreclosure occurs when you fall behind on your mortgage payment (or you break some other contractual provision), and the lender takes steps to sell your house at auction so it can use the proceeds to pay the loan.
Federal law imposes a 120-day waiting period before the bank can begin foreclosing under state law (however, be aware that this might change under the Trump administration). The 120-day period allows a homeowner time to apply for a workout that will let the owner stay in the home. Once the bank is free to begin foreclosure proceedings, the foreclosure could move as quickly as a few weeks or stretch out over the course of a year, depending on the law of your state.
(Learn the basics by reading Foreclosure and Your Home: Understanding the Process, Your Rights, and Your Options.)
Stopping Foreclosure: The Automatic Stay
Filing a bankruptcy stops the foreclosure process because an order called the automatic stay prohibits the foreclosure proceeding from going forward as long as you file before the auction takes place. What will happen next will depend on the particular bankruptcy chapter that you file.
Foreclosure and Chapter 7 Bankruptcy
A Chapter 7 bankruptcy doesn’t have a mechanism that allows you to catch up on late payments, so, while it might buy you some time, it won’t help you save the house. Even then, the stay might not protect you for the duration of the bankruptcy. The lender can ask the court for permission to proceed with the sale by filing a motion to lift the automatic stay. If the court grants the motion, the foreclosure proceeding, including the sale, can go forward.
If you aren’t planning to keep the house, but just need more time to get moved, this chapter can buy you an extra 2-4 months to do that. Most importantly, if you file Chapter 7 bankruptcy, you won’t owe the mortgage debt once you get your discharge, and the bank won’t be able to come after you for a deficiency balance (the amount left owing on the note after the auction).
Also, by filing Chapter 7 bankruptcy before the sale, you’ll be able to sidestep any potential tax liability you might incur if the bank forgives the deficiency balance (such forgiven amounts get taxed as income).
How Chapter 13 Bankruptcy Can Help
A Chapter 13 bankruptcy filing will also put the automatic stay in place and you’ll have the added benefit of being able to make up missed payments (arrearages) over the course of your three to five-year repayment plan. If you have enough income to pay your regular mortgage payment, plus the arrearage (spread out over three to five years), then you’ll be able to bring your loan current and keep the house.
If your house is worth less than the balance of your first mortgage, you might be able to strip off any junior mortgages (such as a second or third). If you have more than one mortgage, it is a good idea to find a knowledgeable attorney to help you because stripping off a mortgage requires you to take extra steps.
Questions for Your Attorney
- Should I file for bankruptcy to stop the foreclosure or do I have another option?
- Does it make sense for me to try to keep my house?
- Can I afford to pay into a Chapter 13 bankruptcy repayment plan?