Bankruptcy and Foreclosure: The Consumer’s Overview
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Posted by: Walter Metzen
OK, here’s the deal with bankruptcy and foreclosure. Despite what you may have heard, filing for bankruptcy does not necessarily permanently stop a lender from foreclosing on your home. Filing for bankruptcy will always temporarily stop the bank foreclosing on your home. This is true regardless of which chapter you file under.
In some cases, filing for bankruptcy will put a permanent stop to foreclosure, but that will often hinge on your ability to pay the mortgage.
This post will give a basic consumer’s overview of bankruptcy and foreclosure. If you are thinking of filing for bankruptcy or dealing with foreclosure, you should always consult with an experienced bankruptcy attorney to see how bankruptcy may be able to help you get out of debt and back on your feet.
How long does bankruptcy stop foreclosure?
Bankruptcy and foreclosure are often linked because bankruptcy is somewhat famous as a foreclosure stopper.
How long does bankruptcy prevent foreclosure? That will depend on whether you file for Chapter 7 or Chapter 13 bankruptcy, whether you are able to maintain normal monthly mortgage payments, and how aggressive your lender chooses to be in pursuing the foreclosure sale.
Let’s begin with the difference between Chapter 7 and Chapter 13 bankruptcy when it comes to foreclosure.
Chapter 7 Bankruptcy and Foreclosure: How it Works
Chapter 7 bankruptcy is a faster process than Chapter 13 bankruptcy. Most Chapter 7 cases are open and shut within a six-month window. When you file bankruptcy (7 or 13), a court-ordered injunction, known as the automatic stay, prevents the bank from foreclosing on your home. This is true even if you file bankruptcy the day before the foreclosure sale is set to take place.
That’s the good news. Now, on to the not-so-good news. Even after a bankruptcy case has commenced and the almighty stay is in place, lenders can file what is known as a motion for relief from stay. The motion for relief allows them to continue with the foreclosure process even while your bankruptcy case is live.
Your Mortgage Lender May Gain the Right to Foreclose
If you enter bankruptcy behind on the mortgage, there’s a good chance that your lender will file a motion for relief from stay and will be given the right to continue with the foreclosure. However, even lenders who have successfully lifted the protection of the automatic stay are not always motivated to immediately resume with foreclosure. In fact, one of the biggest problems that consumers in bankruptcy are facing right now is lenders who are unwilling to foreclose on collateral.
Until your name is officially removed from the deed to your home, either through foreclosure or by surrendering it in bankruptcy, you are responsible for insurance, homeowners association dues, etc. There is a tremendous backlog of foreclosures in this country and, depending on your location, your lender may not have the resources to foreclose on your home for quite some time. It is possible that a Chapter 7 bankruptcy could disrupt the foreclosure process for a year or more. It is possible that it will only disrupt it for a couple months.
The point to take away is this: filing bankruptcy will temporarily stop foreclosure BUT lenders have a workaround. They can file the motion for relief from stay to get your home. Whether they choose to do this is entirely up to them.
Chapter 13 Bankruptcy and Foreclosure: How it Works
Unlike its faster cousin Chapter 7, Chapter 13 bankruptcy lasts for a period of between three to five years. During this time, you pay back a percentage of the debts you owe to your unsecured creditors.
If you file Chapter 13 bankruptcy with income that is below the median for a family of your size in your state, your Chapter 13 payment plan will be for three years. If you are like most debtors and file with income that is above the median in their state, your Chapter 13 payment plan will be for a period of five years. The automatic stay will prevent foreclosure for the length of the payment plan, either three or five years, as long as you maintain normal monthly mortgage payments during the life of the plan.
A little background: Many debtors enter Chapter 13 bankruptcy because they are hopelessly behind on their mortgage. The bank is demanding a lump-sum payment, or series of lump-sum payments to get caught up on a past-due mortgage. Many families simply do not have the means to comply. In order to stop foreclosure, they file for Chapter 13 because it allows for them to pay back the past-due mortgage balance over the life of the Chapter 13 plan. The amounts that are past due are broken up into small increments and added to the normal monthly mortgage payment, making the process of getting caught up far more manageable.
While this is a significant benefit for consumers, it is crucially important to understand that whether you file Chapter 7 or Chapter 13 bankruptcy, you do not get a free house. If you fall behind on your mortgage payments, the bank will have the right to foreclose on your home once they are successful in gaining relief from the automatic stay. If you can afford payments in a timely fashion, the bank can’t foreclose for the entire three- to five-year period or any other time in the future.
By handling your past-due payments through a Chapter 13 plan, you have the opportunity to permanently stop the foreclosure.
Do I need to file bankruptcy because of foreclosure?
Foreclosure is a scary process. Most people are not used to receiving official documents in the mail from scary authority figures. When they do, they tend to panic, and understandably so. However, before you go rushing off and file for bankruptcy to prevent foreclosure, take a hard look at the condition of your finances as well as your state’s deficiency laws. Many states, such as Arizona, have anti-deficiency laws on the books, which prevent lenders from suing borrowers on the note after a foreclosure sale.
You may have an emotional attachment to your home and instinctually want to keep it, but if you can’t afford to maintain it, filing for bankruptcy won’t make things all that much better. Sure, it may buy you some time, and depending on your circumstances this could be valuable, but make absolutely sure it is before you throw yourself into the federal court system head-first.
If you feel that your attorney is pressuring you into filing for bankruptcy, politely wait for the consultation to end and seek out a different firm.
- How is a Short Sale Different from a Foreclosure?
- How Long Does Foreclosure Take?
- Deficiency Judgment: After Foreclosure, Do I Owe Money?
Walter Metzen is a Board Certified Specialist in Consumer Bankruptcy with over 28 years of experience. He’s represented more than 20,000 bankruptcy clients in and around Detroit where his firm is located. View his profile here.
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