Many debtors facing foreclosure turn to bankruptcy. One of the primary reasons why debtors file bankruptcy is to take advantage of a statutory protection known as the automatic stay. The stay acts as an injunction, or bar, against any attempts by creditors to collect debts or enforce liens. In most cases, foreclosures are included within the scope of actions prohibited by the automatic stay.
Read on for more information about how the automatic stay can help you to deal with a pending foreclosure.
When the Automatic Stay Applies
The automatic stay is triggered as soon as you file bankruptcy. No action besides filing a bankruptcy petition is required for the automatic stay to go into effect. The automatic stay applies in both Chapter 7 and Chapter 13 bankruptcy cases. (To learn more about the automatic stay, see the articles in our Bankruptcy's Automatic Stay area.)
In many states, foreclosure is a judicial process that requires court approval. In other states, foreclosure can be completed nonjudicially, or in other words, without any court involvement. Once you file bankruptcy, the automatic stay bars any attempts to begin, continue, or complete a foreclosure, either in or out of state court.
Exceptions to the Automatic Stay
There are two exceptions to the automatic stay for "serial" or "repeat" bankruptcy debtors. The automatic stay goes into effect for only 30 days after you file bankruptcy if you previously filed for bankruptcy and your case was dismissed within the past year. The automatic stay does not go into effect at all if you have filed bankruptcy and had two or more previous cases dismissed within the past year.
The exceptions to the automatic stay for repeat or serial filers do not apply if it has been more than a year since any prior bankruptcy proceedings were dismissed or closed. The exceptions also do not apply if:
- you initially file under Chapter 7
- the court rules that your income is too high and you do not qualify under the "means test" to be a Chapter 7 debtor, and
- you refile under Chapter 13.
Debtors who fall within the exceptions to the automatic stay can ask the bankruptcy court to impose the automatic stay anyway in order to stop the foreclosure. In order to prevail, you must prove by clear and convincing evidence (a relatively high standard) that you did not act in bad faith by filing multiple bankruptcy cases.
How the Automatic Stay Can Help You With Foreclosure
The automatic stay provides additional time to try to deal with a pending foreclosure. The options for dealing with a pending foreclosure depend in large part on whether you file for bankruptcy under Chapter 7 or 13.
Chapter 7. When you file Chapter 7, your assets become part of the bankruptcy estate. A Chapter 7 trustee is appointed to liquidate your assets and pay off your creditors to the extent possible. The automatic stay gives the trustee time to try to sell property that would otherwise be foreclosed where there is potential benefit for the estate.
In Chapter 7, the stay can benefit the estate by providing money for payment of claims when the property that is being foreclosed is worth more than any mortgages and liens against it. Depending on the circumstances, the stay may benefit you as well:
- The stay can provide you additional time to arrange other housing, or to raise funds to reinstate your mortgage, if the property being foreclosed is your home.
- If the trustee sells the property for enough money, you may be entitled to a portion of the proceeds. You are entitled to the value of your homestead exemption after any mortgages or other valid liens are paid. You also are entitled to excess proceeds if the property sells for enough to pay all of your creditors in full. (To learn more about the homestead exemption, see the articles in our Homestead Exemption area.)
Chapter 13. In Chapter 13, the automatic stay can give you a window to restructure your debts and keep your property from being foreclosed. In Chapter 13 bankruptcy you repay debts (some in part and some in full) over a period of three to five years. Among the debts that you can repay through a Chapter 13 plan are arrearages (that is, delinquent payments) on a home mortgage.
For the Chapter 13 restructuring process to be effective, you must have enough income so you can keep up with current mortgage installments as well as make payments on arrearages that accrued before you filed bankruptcy. A Chapter 13 plan can provide for the curing of arrearages on any mortgages or liens against your home.
For more information on Chapter 13 bankruptcy and the repayment plan, see our Chapter 13 Bankruptcy area.
Terminating or Modifying the Automatic Stay
A lender can file a motion with the bankruptcy court to lift or terminate the automatic stay so it can proceed with foreclosure. You are entitled to file a response, and if you oppose the motion, the bankruptcy court will hold a hearing before it rules on whether or not to lift the stay. If the stay is lifted, the lender can proceed with foreclosure efforts except as otherwise ordered by the bankruptcy court.
In some cases, the bankruptcy court grants stay relief before confirming your pending Chapter 13 plan. However, once the court approves a Chapter 13 repayment plan that provides for repayment of mortgage arrears, the lender cannot foreclose, even if the court previously lifted the stay. But if you fail to keep up on mortgage or arrearage payments after your plan is approved, the lender will be able to foreclose.
It is common for debtors and lenders to enter into agreements (usually referred to as stipulations) to modify (change) the terms of the automatic stay. Stipulations allow both debtors and lenders to avoid the time and expense of litigating stay relief motions and other matters in bankruptcy court. Typically in Chapter 13 cases, stipulations allow debtors to keep their homes and avoid foreclosure as long as they make mortgage and arrearage payments on a timely basis. Bankruptcy court approval is required for any stipulation that deals with automatic stay issues.