I'm Behind on My Mortgage. Can Chapter 7 Help?
Chapter 7 bankruptcy can temporarily delay foreclosure. If you want to permanently save your home, however, you'll have to consider other options.
If you are behind in mortgage payments, filing for Chapter 7 bankruptcy can delay foreclosure -- this might give you time to catch up on your payments or negotiate with your lender. However, if you are not able to cure your default or work things out with your lender, Chapter 7 will only provide you temporary relief.
Read on to learn more about how Chapter 7 bankruptcy provides you with more time to deal with mortgage arrears, as well as other options to save your home. (For other topics related to your mortgage in bankruptcy, see Your Home in Chapter 7 Bankruptcy.)
The Chapter 7 Automatic Stay Can Temporarily Stop Foreclosure
If you are facing an imminent foreclosure, filing for Chapter 7 bankruptcy can temporarily stop or delay it. When you file for Chapter 7, an automatic stay immediately goes into effect that prohibits your mortgage lender from foreclosing on your home or otherwise trying to collect its debt.
However, the automatic stay terminates when your case is closed. Most Chapter 7 bankruptcies only last a few months so this does not provide you with much time to avoid foreclosure. Further, your lender can ask for court permission to lift the stay and foreclose on your house during your bankruptcy by filing a motion for relief from the automatic stay. (To learn more, see The Automatic Stay and Foreclosure.)
Chapter 7 Can Allow You More Time to Save Your Home
As we discussed, the Chapter 7 automatic stay prohibits your lender from foreclosing on your home without court permission as long as your case is still active. While you are protected by the automatic stay, you may be able to cure your default or negotiate with your lender to come up with a different solution. In some cases, the temporary relief provided by Chapter 7 can allow you to save your home.
Alternatives to Chapter 7 If You Are Behind on Your Mortgage
Since Chapter 7 bankruptcy can only provide you with temporary relief, you may wish to consider the following alternative options. (To learn more about these options, see the articles in Nolo's Foreclosure area.)
Communicate With Your Lender Prior to Bankruptcy
If you fall behind on your mortgage payments, consider communicating with your lender to come up with a way to cure your default. Your lender wants you to keep your home and continue making mortgage payments because it makes money by charging interest on your loan. If you missed some payments, your lender may be willing to work with you and offer you options such as temporarily reducing the amount of your payment or interest rate.
Apply for a Loan Modification
In addition to negotiating with your lender, you can formally apply for a loan modification. If approved, a loan modification may permanently reduce the amount of your mortgage payment, interest rate, or even principal balance. Also, a loan modification usually adds any arrears (payments you are behind on) to the new principal balance so you will no longer be considered in default. However, you may have to provide extensive financial documentation and satisfy certain requirements in order to qualify for a loan modification.
File for Chapter 13 Bankruptcy
If you need more time to catch up on your mortgage payments, consider filing for Chapter 13 bankruptcy instead of Chapter 7. In Chapter 13 bankruptcy, you can pay back all of your mortgage arrears through a repayment plan over a three to five year period.
Similar to Chapter 7, you are protected by the automatic stay while your case is active as long as your lender does not obtain court permission to lift the stay. If you make timely plan payments to catch up on your arrears and continue to pay your ongoing mortgage payments as they come due, the lender cannot foreclose on your house during your Chapter 13.
(Learn more about saving your home from foreclosure in Chapter 13 bankrutpcy.)