If you are a homeowner who has fallen behind on your mortgage payments and are facing foreclosure, your plans should include figuring out whether filing bankruptcy might be a good way to save your home or at least temporarily stop the proceedings to buy you some time. Read on to learn how bankruptcy can temporarily or permanently stop a foreclosure and find out if filing bankruptcy might be right for your situation.
(If you are struggling to pay your mortgage or facing imminent foreclosure, visit our Foreclosure section for help. For more articles on how bankruptcy can help with foreclosure, visit our Bankruptcy & Foreclosure section.)
Filing Bankruptcy Temporarily Stops a Foreclosure
If your lender has already started the foreclosure process, you can file either a Chapter 7 or Chapter 13 bankruptcy to temporarily stop the foreclosure.
Once you file for bankruptcy, this triggers an automatic stay. The stay functions as an injunction prohibiting your mortgage lender from foreclosing on your home or otherwise trying to collect its debt. This means that any foreclosure activity must be halted for the time being. The automatic stay provides additional time to cure the default or otherwise deal with a pending foreclosure.
However, the automatic stay won’t last forever. Your lender or mortgage servicer can file a motion for relief from the stay, in which it asks the bankruptcy court for permission to proceed with the foreclosure process. If the stay is lifted, the foreclosure will continue.
(Learn more in Nolo’s article Bankruptcy's Automatic Stay and Foreclosure.)
Stopping Foreclosure With a Chapter 13 Bankruptcy
If right for your situation, a Chapter 13 bankruptcy can be a great option to avoid foreclosure and keep your home.
A Chapter 13 bankruptcy involves a restructuring of your debts where you repay debts (some in part and some in full) over a period of three to five years. With this type of bankruptcy, you may be able to avoid foreclosure and remain in your home since you can repay delinquent mortgage payments through a Chapter 13 plan. You may also be able to eliminate underwater second and third mortgages in a Chapter 13 bankruptcy since they are considered unsecured loans.
(For more information, see Nolo’s Chapter 13 Bankruptcy area.)
Preventing a Foreclosure With a Chapter 7 Bankruptcy
If you are behind on your mortgage payments, a Chapter 7 bankruptcy might not be the best option to save your home, though it will temporarily delay the foreclosure process. However, if you are current on your mortgage payments, most Chapter 7 bankruptcy filers can keep their homes so long as your home isn't worth enough to trigger a sale in the bankruptcy. (To learn more, see Your Home in Chapter 7.)
To see how a Chapter 7 bankruptcy could be useful even if you're current on your mortgage payments, let's consider one scenario. Say you’re current on your mortgage payments, but you think you might fall behind in the near future because you are paying off high credit card debt or medical bills. If your home isn't worth enough to trigger a sale in your bankruptcy, then the cancellation of other unsecured debt (like credit card debt and medical debt) in a Chapter 7 bankruptcy can help you prevent a foreclosure by freeing up money that you can then put towards your mortgage payments.
(For more information, see Nolo’s Chapter 7 Bankruptcy area.)
Loan Modifications and Bankruptcy
If you are thinking about declaring bankruptcy, but are also hoping to get a mortgage modification to make your monthly payments more affordable, it’s usually best to finalize the loan modification before you file. Otherwise, the bankruptcy could jeopardize the process because many lenders will halt the modification negotiations while the automatic stay is in effect.
(Learn more about loan modifications and other options to avoid foreclosure.)
When to Hire an Attorney
Consulting with a bankruptcy attorney can mean the difference between staying in your home and facing immediate foreclosure. However, if saving your home is your only goal in filing for bankruptcy, it is recommended that you first explore the many non-bankruptcy options for avoiding foreclosure because you may be able to keep your home without going through bankruptcy. (Learn more about Alternatives to Foreclosure.)
It is also recommended that you seek the advice of local counsel or a legal aid organization to explore all possible options that may be available in your particular situation.
For more articles on bankruptcy, including bankruptcy basics, bankruptcy procedures, and specific information about filing bankruptcy in your state, visit our Bankruptcy area.