Foreclosure proceedings usually begin because homeowners have fallen behind on their mortgage payments. Usually, a homeowner misses multiple mortgage payments before the mortgage holder starts the legal proceedings to get the house sold at a foreclosure auction in order to get paid. The lender must notify the homeowner, and the foreclosure process can take some time, which allows the homeowner to use alternate measures like renegotiating the loan, organizing a short sale, or crafting a deed in lieu of foreclosure. In some cases, filing for bankruptcy can delay a foreclosure or save a debtor’s home.
When you file for bankruptcy, the court will issue an automatic stay. This order requires creditors to stop trying to collect debts. The order includes a requirement that a mortgage holder cease foreclosure activities. If the lender has already scheduled your home to be sold at auction, the sale will be legally postponed for 3-4 months, unless the creditor successfully brings a motion to lift the stay. Even if a motion to lift the stay is brought successfully, the sale will likely be postponed, which can give you time to make other plans.
The automatic stay does not stop the clock on the notice mandated in many states before the lender can conduct the foreclosure sale. Once the calendar months have passed for notice, the lender can file a motion to lift the stay even if you are already in bankruptcy.
Effect of Chapter 13 Bankruptcy on Foreclosure
In many cases, exemptions will not protect your home from being liquidated to repay creditors in Chapter 7 bankruptcy. However, if you want to stall the sale and try to negotiate with the lender, filing for bankruptcy can buy you that time. The Chapter 7 bankruptcy will also cancel any debt secured by your home, including the debt of junior mortgages or home equity loans. Filing for Chapter 7 is not a good choice for those who do not want to give up certain property, including in many cases their homes.
For most homeowners who want to keep their homes, Chapter 13 is a better choice because it affords more options. In a Chapter 13 bankruptcy, you can pay off the late payments over the length of the repayment plan, as long as you continue to meet your current mortgage payments as well. If you make timely payments under your Chapter 13 debt repayment plan, you can avoid foreclosure.
Sometimes the reason homeowners are late on mortgage payments is because they have multiple mortgages. For some homeowners, the value of their houses has dropped since the most recent economic crisis, and their second or third mortgages are no longer fully secured by the value of the house. If there is not enough equity to secure one or more junior mortgages, you can use lien stripping to save your home. This means that you can ask the Chapter 13 bankruptcy court to strip the junior mortgages that are not secured and re-categorize them as unsecured debt. Unsecured debts are the lowest priority debts in bankruptcy and may not be paid back fully or at all.
Some debtors may be legitimately concerned about the effect of bankruptcy on their credit scores. However, foreclosure not only damages your credit score for years, but it also does not get rid of other debt and can be harmful in future efforts to buy a house. If you receive a bankruptcy discharge, you may also suffer harm to your credit score, but because you are left with a fresh slate after the discharge, you do have a chance to rebuild better credit.