No one wants to lose their house, but when you fall behind on your mortgage payments, and therefore default on your loan, the lender has the right to foreclose the mortgaged property to recover their money.
Filing bankruptcy is one option that stops foreclosure at the last minute, but it’s not necessarily the best option. Bankruptcy is a grueling, tedious process that costs money and has its own set of consequences, and if it does not pan out well, you can still find yourself facing foreclosure. BUT if all goes well, you’ll find some debt relief and (hopefully) bring your loan balance current, and thus keep your house.
So, can bankruptcy stop foreclosure? Yes, if it’s done right, and the house isn’t sold yet, filing for bankruptcy can stop (or at least delay) foreclosure and help you save your home.
What is Bankruptcy?
Bankruptcy is a legal process through which people who cannot repay their debts seek debt relief. Relief does not necessarily mean those debts are canceled. Instead, the debtor’s assets are measured and sold to repay a portion of the outstanding debts, OR a repayment plan is put in place, so the debtor can pay back what they owe overtime.
The bankruptcy process starts when you file a petition. Depending on what type of bankruptcy you file – Chapter 7 or Chapter 13 bankruptcy being the most common to prevent foreclosure, an “automatic stay” is granted, so creditors cannot pursue collection efforts against you. The automatic stay also puts a stop to foreclosure proceedings.
You’re assigned a bankruptcy case number and then a bankruptcy trustee. The trustee represents your estate and is responsible for ensuring that all collectors get paid, whether it’s with cash from selling off your assets or via a repayment plan.
What is Chapter 7 Bankruptcy?
Chapter 7 (or liquidation bankruptcy) liquidates nonexempt assets to pay past due payments over a course of 3 to 4 months. Assets that are not exempt from the bankruptcy process include the following:
- Stocks and bonds
- Second properties
- Second vehicles
- Heirlooms and antiques
- Jewelry (beyond a specified value)
Property or assets that are exempt from the process include:
- Social Security
- Unemployment Benefits
- A portion of unpaid earned wages
Is my House Exempt from Chapter 7 Bankruptcy?
Depending on how much equity you have in it, your primary residence could be exempt from the Chapter 7 bankruptcy filing. You’ll have to discuss it over with the trustee.
What is Chapter 13 Bankruptcy?
Chapter 13 (or reorganization bankruptcy) is also called a wage earner’s plan because you follow a 3 to 5 year plan to repay collectors. You provide the trustee a list of creditors, total debt owed, and total monthly income, and monthly expenses. The trustee then creates a plan, so you can pay off arrearages, including missed mortgage payments and late fees, and thus (hopefully) bring your mortgage balance current.
First and Second Mortgages
The goal of Chapter 13 bankruptcy is to help you play catch up with a first mortgage. Should you, however, have a second (or even a third) mortgage, but your house is worth less than what you owe on the first, the second and third can be “stripped.” The junior mortgages become unsecured dues, and thus can be eliminated with a discharge.
What is Secured Debt vs Unsecured Debt?
These terms are common when discussing bankruptcy, and they’re easy to confuse.
Secured: a line of credit that’s secured by an asset. The best example is your mortgage because you put up the house as collateral, and in the event you default, the lender can foreclose and sell the property to recover their money. Additional examples include car loans or secured credit cards.
Unsecured: a line of credit that has no collateral backing, like credit card charges, student loans, child support, and personal loans.
Between Chapter 7 and Chapter 13, which is Going to Stop the Foreclosure Sale?
Both types of bankruptcy will stop the foreclosure sale dead in its tracks, BUT Chapter 13 bankruptcy is the better of the two if you want to save your house.
Chapter 7 temporarily stops foreclosure (for 3 to 4 months), and that’s only if the lender does not file a motion to lift the automatic stay with the bankruptcy court. It discharges other debts (e.g., credit cards, medical bills, and personal loans) but not a lien on the property, and that’s just what a mortgage is – another type of lien.
Chapter 13, on the other hand, creates a 3-to-5-year repayment plan, which you, the trustee, and lender will hammer out and agree upon. So long as you do not miss a monthly payment, you’ll clear your debt, including past dues, interest, and penalties, and catch up on missed payments.
You can consult a bankruptcy attorney to evaluate your situation and guide you in choosing a solution for your financial problems.
How long will Bankruptcy Delay the Foreclosure Process?
Bankruptcy can delay the foreclosure process by a few months or, if you establish a plan, a few years. However, as we alighted to before, the mortgage lender can file a motion with bankruptcy courts to lift the automatic stay to proceed with the foreclosure sale. A motion to lift the stay is more common with Chapter 13 than Chapter 7, because a lender may not want to wait 60 months to recover their money.
You can fight the lender’s motion, but you’ll have to prove the equity is sufficient to repay the loan, so the lender is protected from financial loss, and also that you can bring the loan balance current, if given time, and a plan is approved.
Pros and Cons of Filing for Bankruptcy
The truth is, when you file bankruptcy, there are serious consequences, and it’s up to you to decide if it’s worth it in the long run.
Pros of Filing for Bankruptcy
- Stop the foreclosure process, preventing a foreclosure sale
- Potential bankruptcy discharge
- Delay other debt collection efforts and eviction
Cons of Filing for Bankruptcy
- Need enough income to make monthly payment and pay arrearages
- It’s expensive – filing fee and court fees included
- Not all debts can be discharged
- Severe impact to credit score
Yes, if you file for bankruptcy relief, your credit takes a big hit, as much as 200 points (if you had a good score to begin with). This derogatory mark will stay with you for 7 to 10 years, making it difficult or even impossible to apply for new lines of credit, refinancing, or jobs that ask for credit reports, and new utility contracts will be higher and ask for a safety deposit.
The Basics of Foreclosure
What is Foreclosure?
When you fail to make mortgage payments, and therefore default on the loan, and you make no arrangements to pay what you owe, foreclosure is the legal process by which the mortgage lender seizes the property to sell it to recover their money.
State laws vary on how foreclosure is done. All states allow for judicial foreclosure which goes through a court process. Other states permit nonjudicial foreclosure, but it only applies to deeds with power of sale clauses, in which case the lender can foreclose the property without a court order. The state court is not involved.
If the bank does not recover all their money at the foreclosure sale, they might move against you to collect the deficiency balance.
Foreclosure is a serious mark against your credit. Your score will drop 100 to 160 points, and foreclosure will stay on your record for up to 7 years. Bad credit, as a result of foreclosure, makes it difficult to apply for new forms of credit, or to secure new housing or renting options, and can even hinder new job opportunities.
How Else Can I Avoid Foreclosure?
You can research other options to stop foreclosure – loan modification, reinstatement, refinance, etc. However, the easiest, fastest way to remove yourself from this situation is to sell the property before the foreclosure sale date.
We know selling is probably the last thing you want to hear, but unless you can come up with the money to make a lump sum payment to bring your loan current, it is the best option and saves your chances of buying another house.
Sell a House in Pre-Foreclosure to a Cash Buyer
Your best option, if you need to sell fast, is to sell to a real estate investor for cash, because:
- No buyer lender mortgage approval is needed
- No buyer lender appraisal approval is needed
- No repairs or clean-ups are necessary
- No fees or commissions
- Many investors pay the closing costs
- Guaranteed fast closing
Most investors buy a house “as-is,” so it doesn’t matter if the house is old and outdated, damaged, or mid-renovation. An investor is happy to buy it. You can close in a few short days, return proceeds to the lender, and walk away from your problem property. Even better, some of our expert investors are able to take care of everything with the lender, and all you have to do is sign the title papers and move on.
Depending on the market, your equity and due mortgage amount, a short sale may be the only option left to you to get it sold in a timely manner to avoid foreclosure.
What is a Short Sale?
A short sale is the sale of real estate at a price that is less than the amount owed on a mortgage. The lender must agree to take less money and approve the buyer’s offer before you accept. You also want the lender to agree to forgive the deficient amount after sale.
This type of sale takes longer, but it has lender approval, so it stops the foreclosure process and turns it into a short sale process.
A short sale still impacts your credit, but far less than a foreclosure or if you file bankruptcy. You’ll still lose points (up to 160), and the mark will be in your report for about 2 years, BUT it’ll be easier to recover your credit, with consistent payments.
What has been stated in this article does not constitute legal advice. Real estate law and bankruptcy law differs between states, and we recommend you get advice from a foreclosure attorney or bankruptcy lawyer or seek professional help to determine your best option to avoid foreclosure.