How Bankruptcy Can Stop Foreclosure and Allow You to Keep Your Home[yoast-breadcrumb]
How Bankruptcy Can Stop Foreclosure and Allow You to Keep Your Home
Losing your home to forclosure is scary! It can feel overwhelming when you get behind on your mortgage payments. But their are options to stop the bank from taking your house. One option many homeowners don’t consider is filing for bankruptcy. Bankruptcy can actually stop a foreclosure and let you keep living in your home!
This article explains how bankruptcy works to stop foreclosure. We’ll look at the two main types of bankruptcy – Chapter 7 and Chapter 13. Each has different benefits for saving your home from foreclosure. We’ll also cover what protections bankruptcy provides, and how the automatic stay stops the bank from foreclosing while your case is pending.
How Bankruptcy Stops Foreclosure
When you file for bankruptcy, an “automatic stay” immediately goes into effect. This is a court order that requires all creditors to stop trying to collect debts from you. That includes your mortgage lender and any foreclosure proceedings. So bankruptcy presses pause on the foreclosure process.
The automatic stay is one of the main benefits of filing bankruptcy when your facing foreclosure. It gives you breathing room and stops the foreclosure auction. This pause usually lasts a few months while your bankruptcy case is pending. Some key things to know:
- If the bank has already scheduled an auction to sell your home, bankruptcy will legally postpone it.
- If the lender has filed a foreclosure lawsuit, bankruptcy forces them to stop.
- The stay prevents any new foreclosure action if you file before the bank starts foreclosure.
The automatic stay is immediate protection. As soon as your bankruptcy paperwork is filed, the stay goes into effect and stops foreclosure. This gives you time to sort out your options.
How Chapter 7 Bankruptcy Works
Filing a Chapter 7 bankruptcy case can delay foreclosure for a few months. It triggers the automatic stay, which stops any foreclosure auction or lawsuit. This can buy you valuable time.
But Chapter 7 has limits for saving your home long-term. That’s because Chapter 7 bankruptcy eliminates debts through liquidation, not through a repayment plan. With Chapter 7:
- You aren’t required to repay mortgage arrears or other debts.
- Most unsecured debts like credit cards are wiped out, but mortgages and car loans usually aren’t.
- You can only keep assets that are exempt under state law.
Since mortgages and other property liens aren’t usually eliminated, Chapter 7 alone won’t stop foreclosure forever. The lender can restart foreclosure after the bankruptcy case ends. Still, Chapter 7 gives you a few months to explore options like loan modifications, repayment plans, or selling the home.
How Chapter 13 Bankruptcy Works
Chapter 13 bankruptcy is the best option if you want to keep your home long-term. It allows you to repay arrears on your mortgage over 3 to 5 years. This catches up any missed payments through an affordable repayment plan.
Chapter 13 offers more flexibility than Chapter 7:
- You can include mortgage arrears in your repayment plan and get caught up.
- The plan lasts 3-5 years, giving you time to pay the arrears.
- After completing the plan, any remaining mortgage debt is discharged.
To receive a discharge of mortgage arrears, you must make all payments in your Chapter 13 plan on time. As long as you do this, the bank can’t foreclose. Your repayment plan lets you get caught up on payments you missed before filing.
Chapter 13 also allows you to modify your ongoing monthly mortgage payment through the bankruptcy court. This can make payments more affordable going forward.
Secured vs. Unsecured Debt in Bankruptcy
An important thing to understand is how bankruptcy treats different types of debts you owe. This determines whether bankruptcy can eliminate the debt or simply restructure repayment terms.
Secured debt is tied to an asset that acts as collateral. Common examples are mortgages and auto loans. The lender can seize that asset if you default on payments. Bankruptcy can’t eliminate secured debts, but can restructure how you repay them.
Unsecured debts don’t have collateral tied to them. Examples are credit cards, medical bills, personal loans, etc. Bankruptcy can eliminate most unsecured debts, discharging you from any obligation to repay them.
Knowing how each debt is treated in bankruptcy helps determine if it can help save your home. Talk to a bankruptcy attorney to understand all your options.
The Foreclosure Process
Before looking at how bankruptcy can help, it’s important to understand how foreclosure works. This gives you a better idea of when bankruptcy can help stop the process.
If you fall behind on mortgage payments, the foreclosure process usually goes like this:
- Notice of Default – The lender sends you an initial notice saying you’ve defaulted on the loan.
- Foreclosure Notice – If you don’t become current on payments, the lender files a foreclosure notice and schedules an auction date to sell the home.
- Auction Sale – The home is sold at auction on the scheduled date. You have to move out if not redeemed.
The notice of default just warns you that you risk foreclosure if payments aren’t made. You have time to remedy this. Once the lender files a foreclosure notice and sets an auction date, that’s a bigger problem.
Bankruptcy is most effective at stopping foreclosure if filed after the notice of default, but before a foreclosure notice. It’s harder to stop once the auction is scheduled. Still, bankruptcy can postpone the sale date.
Pros of Bankruptcy for Preventing Foreclosure
There are some clear benefits to filing bankruptcy if you’re facing foreclosure:
- The automatic stay immediately halts the foreclosure process.
- Chapter 13 allows you to repay mortgage arrears over time.
- Bankruptcy can eliminate other unsecured debts so you can focus on the mortgage.
- Mortgage payments can potentially be reduced through the bankruptcy court.
For many homeowners struggling with foreclosure, bankruptcy provides needed breathing room. The stay stops any foreclosure action dead in it’s tracks. This gives you time to sort out the situation.
Bankruptcy also shifts power back in your favor. Outside of bankruptcy, the lender has all the leverage to proceed with foreclosure. But bankruptcy brings the court into play as a neutral party to ensure the process is fair.
Cons of Bankruptcy for Preventing Foreclosure
There are also some potential downsides of bankruptcy to consider:
- Bankruptcy appears on your credit report for 7-10 years, harming your credit score.
- You may still lose the home if unable to make payments in a Chapter 13 plan.
- Bankruptcy has expenses including attorney fees and filing costs.
- The lender may be able to restart foreclosure after bankruptcy.
While bankruptcy stops the immediate foreclosure threat, it doesn’t guarantee you can keep the home long-term. You have to be able to afford mortgage payments going forward. Bankruptcy also hurts your credit, making it harder to get loans.
Still, for most homeowners bankruptcy is worth considering to halt foreclosure. But talk to a bankruptcy lawyer about your specific situation.
Alternatives to Bankruptcy
Bankruptcy isn’t the only option to stop foreclosure. Some other alternatives include:
- Loan modification – Getting your mortgage terms modified to lower payments.
- Repayment plan – A deal with the lender to repay missed payments over time.
- Forbearance – The lender agrees to temporarily reduce or suspend payments.
- Refinancing – Getting a new mortgage to pay off the existing one.
- Selling the home – Selling the property to avoid foreclosure.
These options are worth exploring first before considering bankruptcy. Bankruptcy should really be a last resort if you’ve exhausted other alternatives. While it can be effective, bankruptcy also negatively impacts your finances and credit.
Should I File Bankruptcy to Stop Foreclosure?
Here are some signs bankruptcy may be your best course of action:
- You’ve already tried other options but couldn’t reach an agreement.
- You can afford mortgage payments but have high arrears.
- You have other debts making it hard to catch up on the mortgage.
- You need immediate protection from foreclosure.
Consult with a bankruptcy attorney to determine if filing a case is right for you. Be wary of “foreclosure rescue” scams – talk only to a licensed attorney.
Bankruptcy provides powerful protections that can pause an imminent foreclosure. For homeowners who have fallen behind, it offers a way to catch up on payments over time and keep their house. But you need to weigh the pros and cons carefully for your situation.
Don’t wait until the last minute if foreclosure is looming. Act quickly and explore all options, including bankruptcy, that may allow you to stay in your home.