If you have received a foreclosure notice from your mortgage holder, acting quickly and filing for bankruptcy may not save your home, but it can buy you time. How you ultimately benefit depends on whether you file for Chapter 7 or Chapter 13 bankruptcy.
An automatic stay
When you file a petition for either Chapter 7 or Chapter 13 bankruptcy, according to the provisions of the Bankruptcy Code, all collection action by both secured and unsecured creditors must immediately stop. This includes collection action by lenders who are foreclosing on home mortgages. Even if your home has already been scheduled for a foreclosure sale, the date of the sale will be postponed.
Chapter 7 bankruptcy
In most cases of Chapter 7 bankruptcy, you will not be able to save your home, but you can postpone the process and stay in your home for free during the bankruptcy proceedings. The bankruptcy trustee assigned to your case may order the home sold if there is equity that can be used to pay off other creditors.
During the time the automatic stay is in place, you may be able to raise enough money to make the payment necessary to reinstate the mortgage. At the very least, you will be living in your home for free, which should allow you to save enough money to secure different housing when debts are discharged at the end of the bankruptcy proceeding. At that time, the foreclosure process will be allowed to continue.
Chapter 13 bankruptcy
Under Chapter 13, you restructure your debts so that you pay some of them back over a three to five year period of time. The law allows you to include the past due mortgage payments (arrearages) in your repayment plan. One problem is that you must have enough income to keep the mortgage current as well as make the payments as required by the bankruptcy court pursuant to your repayment plan.
If you complete your court ordered repayment plan, at the end of the allotted time, you will be able to keep your home and it will be saved from the foreclosure.
Be aware
- A creditor can file a motion with the court asking for the stay to be lifted for that particular creditor. If the court grants the motion, that creditor can then pursue collection action.
- There are a couple of exceptions to the automatic stay if you filed for bankruptcy within the last year and the case was dismissed.
An experienced bankruptcy attorney can advise you if any exceptions apply to your case and oppose any creditor’s motion to lift the stay.
Stephen Burton has served as an attorney for bankruptcy trustees, taught bankruptcy at the National Business Institute and practiced before the bankruptcy courts. He regularly attends continuing education classes. As a consequence, virtually every case he files is successful.