How to Stop Foreclosure With Bankruptcy: An Overview

Losing your home to forclosure is one of the scariest things that can happen. When you fall behind on your mortgage, the bank can take legal action to seize your house and sell it to recoup their losses. This is obviously devastating both financially and emotionally.

Fortunately, filing for bankruptcy may help you avoid foreclosure by stopping the process in its tracks. This article provides an overview of how bankruptcy works to halt foreclosure and help homeowners keep their houses.

The Automatic Stay

The main way bankruptcy prevents foreclosure is through something called an “automatic stay.” This is a legal order issued by the bankruptcy court when you file your case that requires all collection actions against you to stop. This includes foreclosure proceedings.

So if the bank has already started the foreclosure process by sending notices or scheduling an auction date, they have to immediately halt those efforts once you file bankruptcy. The stay provides you with breathing room to sort out your finances.

The stay goes into effect as soon as your bankruptcy petition is filed. It prevents creditors from repossessing property, garnishing wages, continuing foreclosure sales, evicting you, shutting off utilities, or taking any other action to collect debts. [1] [2]

Chapter 7 vs. Chapter 13 Bankruptcy

There are two main types of consumer bankruptcy – Chapter 7 and Chapter 13. Both can stop foreclosure through the automatic stay. But they work differently:

• Chapter 7 bankruptcy liquidates your assets to pay creditors. Any property not exempt under state law can be seized and sold by the bankruptcy trustee. You are then discharged from eligible debts.
• Chapter 13 bankruptcy sets up a 3-5 year repayment plan to catch up on missed payments. You get to keep all your property but must make monthly payments to creditors.

For foreclosure protection, Chapter 13 bankruptcy is usually the better option. It allows you to get caught up on missed mortgage payments over time and potentially keep your home. Chapter 7 just delays the foreclosure while liquidating your assets – it does not save your house.[4]

The Chapter 13 Process

Here is an overview of how Chapter 13 bankruptcy works to stop foreclosure:

1. Filing the Petition: You submit paperwork to the bankruptcy court requesting Chapter 13 protection. This immediately triggers the automatic stay.
2. Meeting of Creditors: You attend a short meeting where the trustee questions you about your finances. Creditors can attend but cannot take action against you.
3. Submitting the Plan: With your lawyer’s help, you propose a repayment plan based on income to catch up on mortgage payments. Creditors can object to the plan.
4. Plan Confirmation: The judge approves your repayment plan, now binding on creditors. As long as you make payments, the stay remains in effect.
5. Making Payments: You stick to the 3-5 year repayment plan until all missed mortgage payments are caught up and paid off.
6. Discharge: After completing your repayment plan, any remaining mortgage debt is discharged. Foreclosure is now fully prevented.

This allows you to get back on track with payments and avoid foreclosure. Your lawyer will help craft a repayment plan you can afford based on income, expenses, and debts. Creditors may negotiate for higher payments if the proposed plan does not sufficiently repay them.[3]

Other Benefits

On top of stopping foreclosure, Chapter 13 bankruptcy offers other benefits:

• All other collection actions halt due to the stay, providing complete relief from creditors harassing you.
• Most remaining unsecured debt like credit cards can be discharged, eliminating balances you can’t repay.
• Your credit score will eventually improve as on-time payments are made through the plan.
• Interest rates may be reduced on some debts, lowering required payments.
• Liens or judgments against property can sometimes be avoided or eliminated.

This allows you to not only save your home from foreclosure, but also resolve other financial issues so you can regain your financial footing. It’s a powerful tool for consumers in distress.

Eligibility

To qualify for Chapter 13 bankruptcy and receive foreclosure protection, you must:

• Have regular income from employment, benefits, pensions, social security, or other sources.
• Pass a “means test” showing income low enough to qualify.
• Must not have more than $419,275 of unsecured debt or $1,257,850 of secured debt.
• Have filed taxes for the past 4 years.
• Have completed credit counseling within 180 days of filing.

These requirements ensure you have enough income to make plan payments but aren’t too wealthy to qualify for bankruptcy. Your lawyer will review eligibility before filing.

The Foreclosure Process

To understand how bankruptcy stops foreclosure, you need to know how foreclosure works. The general foreclosure process goes as follows:

1. Missed Payments: You start falling behind on your mortgage, resulting in default.
2. Notice of Default: The lender sends a notice you are in default and at risk of foreclosure.
3. Sale Notice: After 90 days in default, a notice of sale goes out setting an auction date.
4. Auction Sale: Your home is sold at auction to the highest bidder, usually the lender.
5. Eviction: The new owner can have you evicted following the sale.

This process can rapidly result in you losing the home. But filing bankruptcy stops the foreclosure sale from going forward by imposing the automatic stay.[5]

Alternatives to Bankruptcy

Bankruptcy is the most powerful option for stopping foreclosure. But there are alternatives to consider first:

• Loan Modification: Renegotiate the mortgage terms to get payments lowered or reduced.
• Forbearance: Get a temporary pause on making payments while you get back on your feet.
• Repayment Plan: Set up affordable monthly payments to become current on the loan.
• Short Sale: Sell the home and pay off a portion of the mortgage debt.
• Deed in Lieu: Voluntarily transfer ownership of the property to the lender.

If the lender won’t agree to any out-of-court solutions, however, bankruptcy may be your last resort to save the home.[6]

Getting Legal Help

Trying to navigate bankruptcy and foreclosure on your own is usually not advisable. These are complicated legal processes with forms, procedures, and court hearings.

An experienced bankruptcy attorney can help with tasks like:

• Determining if you qualify for Chapter 13 bankruptcy.
• Preparing and filing the voluntary petition paperwork.
• Submitting required documents to the court.
• Attending the meeting of creditors with you.
• Crafting an affordable repayment plan for approval.
• Negotiating with creditors and the trustee.
• Ensuring proper completion of the plan.

Having a lawyer represent your interests can help ensure bankruptcy goes smoothly and you keep your home. Try to consult with one as soon as possible after receiving a foreclosure notice from your lender.

The Bottom Line

Losing your home to foreclosure can be devastating. But Chapter 13 bankruptcy provides a powerful tool to halt the process and get caught up on payments through a court-supervised repayment plan.

If you act quickly after falling behind on your mortgage, you may be able to save your home and avoid foreclosure through bankruptcy. Seek out an experienced bankruptcy attorney for assistance.