How Bankruptcy Can Help With Foreclosure

If you're facing foreclosure, bankruptcy might help. In many cases, filing for Chapter 7 bankruptcy can delay the foreclosure by a matter of months. Or, if you want to save your home, you can catch up on overdue payments over time using Chapter 13 bankruptcy. Learn more about keeping a home in Chapters 7 and 13 and eliminating a "deficiency judgment" in bankruptcy after losing a house.

How Bankruptcy Stops Foreclosure: Chapter 7 vs. Chapter 13 Explained

Foreclosure is a process used by your mortgage lender to take back your home when you've fallen behind on payments. Your lender might be able to foreclose without going to a court in a "nonjudicial foreclosure." If you live in a "judicial foreclosure" state, the lender must file a lawsuit in state court.

As long as the foreclosure sale hasn't already occurred, you'll likely be able to stop the foreclosure immediately by filing for bankruptcy. The only exception is if you've filed for bankruptcy multiple times during the previous year.

If you'd like more foreclosure information, including how bankruptcy can help eliminate debt after losing a home to foreclosure, scroll to the "Understanding the Foreclosure Process" section toward the end of the article or brush up on foreclosure basics.

What Is the Automatic Stay in Bankruptcy and How Does It Affect Foreclosure?

As soon as you file for bankruptcy, the court issues an "automatic stay" order stopping the foreclosure process. (11 U.S.C. § 362.) The automatic stay directs your creditors to stop most collection activities immediately, including foreclosure proceedings.

For instance, suppose your lender had scheduled your home for a foreclosure sale, and you filed for bankruptcy before the sale occurred. In that case, the bankruptcy filing would stop the foreclosure.

However, the automatic stay won't be available if you've previously abused the bankruptcy process by filing and dismissing bankruptcy cases to thwart creditor collection. (11 U.S.C. § 362(c)(3), (4).) If you'd like to try bankruptcy again, your bankruptcy lawyer can advise you about the chances of successfully asking the bankruptcy court to put the automatic stay in place.

Chapter 7 vs. Chapter 13: Stopping Foreclosure and Saving Your Home

Chapters 7 and 13 will stop a foreclosure and can be helpful depending on your needs. However, the benefits you'll receive will differ significantly.

• Chapter 7 can delay foreclosure temporarily, but nothing more. If you want to delay foreclosure by a few months but are willing to let go of your home, filing for Chapter 7 will be an option.
• Chapter 13 can save your home from foreclosure. If you want to keep your home, consider filing for Chapter 13. People who can afford a hefty monthly Chapter 13 payment can catch up on late payments and keep their homes.

Tip. Catching up on payments is only one factor to be concerned about when you want to keep a house in bankruptcy. The amount of equity you have also plays a role. If you have home equity, be sure to do your homework by learning about filing for bankruptcy when you have equity in your home.

Does Chapter 7 Bankruptcy Stop Foreclosure? What Homeowners Should Know

Typically, the automatic stay stops creditors during the Chapter 7 case, pausing the foreclosure action for about four months. Once the case closes and the automatic stay is no longer in place, the lender can proceed with the action. (11 U.S.C. § 727(a).)

Because being in foreclosure means you're behind on the mortgage payments, a Chapter 7 case wouldn't help you keep your house. It lacks a way to make up missed payments, an option available only in Chapter 13.

Also, the lender can ask the bankruptcy court for permission to proceed with the sale by filing a "motion to lift the automatic stay." (11 U.S.C. § 362(d).) If successful, you wouldn't get the full three to four months of protection from foreclosure. The lender could resume the foreclosure action after winning the motion.

Find out what you'd need to do to keep a house in Chapter 7 bankruptcy.

Chapter 13 Bankruptcy: Prevent Foreclosure and Save Your Home Permanently

Many people want to remain in their homes and will do whatever they can to stay put for the indefinite future. If that describes you, and you're behind on your mortgage payments with no feasible way to get current before foreclosure, filing for Chapter 13 bankruptcy might be an option.

How to Catch Up on Missed Mortgage Payments in Chapter 13

Chapter 13 bankruptcy lets you pay off the "arrearage" or late, unpaid payments over the length of a Chapter 13 repayment plan you propose, which is three to five years, depending on your income compared to your state's median income. (11 U.S.C. § 1322(d).) But, you'll need enough income to meet your current mortgage payment, monthly living expenses, and other required Chapter 13 payments in addition to paying off the arrearage.

Proposing a Chapter 13 Plan

You'll propose a Chapter 13 payment plan that the trustee, your creditors, and the bankruptcy judge will review. If the plan meets all criteria, the judge will "confirm" or approve it at the Chapter 13 confirmation hearing.

You'll begin making payments about 30 days after filing your case, even though this will be before the confirmation hearing. (11 U.S.C. § 1326(a)(1).) Assuming you make all the required payments up to the end of the repayment plan, you'll avoid foreclosure and keep your home.

Filers With Significant Home Equity Might Not Qualify for Chapter 13

Filers can only protect the amount of home equity their state allows, which a filer will find in the state's homestead exemption. (11 U.S.C. § 522.) If the homestead exemption (or possibly a wildcard exemption) isn't sufficient to protect all of a filer's equity, the filer must pay creditors an amount equal to the "nonexempt" portion not covered by an exemption.

Depending on the filer's debts, the filer might need to pay even more. The bankruptcy court won't confirm the plan if the filer can't afford the payment. Learn about your obligations under the Chapter 13 plan.

Some Filers Can Eliminate Home Mortgages

Chapter 13 bankruptcy might also help you eliminate the payments on a junior mortgage, such as a second or third mortgage, or a HELOC. Here's how it works.

Suppose you sold your home. If the sales proceeds wouldn't pay your entire first mortgage, you'd have nothing to pay toward the junior mortgages. This situation happens when a home's value drops below what you owe.

When junior mortgages become "wholly unsecured," the Chapter 13 court can "strip off" the liens and recategorize the mortgages as general unsecured debt. (11 U.S.C. § 506(a); § 1322(b)(2).) At the end of the Chapter 13 case, the bankruptcy court will "discharge" or eliminate any remaining balance of the recharacterized mortgages.

Learn more in Getting Rid of Second Mortgages in Chapter 13 Bankruptcy.

Understanding the Foreclosure Process: When to File Bankruptcy

Typically, a foreclosure begins after a homeowner falls behind on mortgage payments. The lender must follow the process outlined in state law before selling the home at auction and applying the sales proceeds toward the mortgage balance.

Usually, a lender won't begin the foreclosure process until you've missed several payments, often three or four. That gives you time to try alternate measures, such as loan forbearance, a short sale, or a deed in lieu of foreclosure.

But suppose you've already tried and failed with these measures. It makes sense to consider whether bankruptcy can help you avoid foreclosure or buy you a little time.

Filing Bankruptcy After Foreclosure: Deficiency Judgments and Debt Relief

You can file for bankruptcy after losing a home to foreclosure. But it might not be necessary unless you still owe the lender money.

Will You Owe a Mortgage Deficiency Balance After Losing Your Home to Foreclosure?

Suppose your mortgage lender forecloses on your house but can't sell it for enough money to pay off your mortgage balance. You might still be responsible for paying the remaining balance, called a "deficiency balance."

Just because your foreclosure sale didn't bring in enough money to pay off your mortgage doesn't mean that your lender can automatically come after you for the balance. For instance, some states don't permit deficiency judgments after foreclosure.

Can the Lender Collect a Deficiency After Foreclosure?

In some states, your lender can sue you to collect its deficiency balance. A lender who wins a deficiency lawsuit and receives a deficiency judgment can take collection actions to force you to pay the debt. For instance, the lender could use the judgment to garnish your wages, levy funds from your bank account, and seize property.

Eliminating a Deficiency in Bankruptcy After Foreclosure

Filing for bankruptcy can eliminate your liability for mortgage deficiencies if you find yourself on the hook for a deficiency balance after a foreclosure sale. Here's what will happen to a deficiency judgment in Chapter 7 and Chapter 13 bankruptcy.

Chapter 7 After Foreclosure

You can eliminate your lender's deficiency in Chapter 7 because it will be categorized as a dischargeable unsecured debt, much like a credit card obligation or medical bill. (11 U.S.C. § 727(b).) When you receive your discharge, your lender won't be able to collect the debt.

However, keep in mind that a discharge eliminates your liability to pay. It doesn't automatically get rid of liens on your property. (11 U.S.C. § 524(a)(2); § 522(c)(2).) If your lender used the judgment to place a lien on other assets, you must file a motion with the court to remove it.

Find out why the bankruptcy court will remove a lien that prevents you from protecting the amount of equity you're entitled to under bankruptcy exemptions and your state's exemption laws.

Chapter 13 After Foreclosure

Similarly, unless your lender placed a lien on assets you still own, its deficiency judgment will be categorized as an unsecured debt in Chapter 13 bankruptcy. Your lender will likely receive little or nothing through your Chapter 13 repayment plan. After completing your plan payments, the bankruptcy court will discharge the deficiency judgment and other dischargeable debts.

FAQs About Foreclosure and Bankruptcy

Below you'll find answers to questions commonly asked about bankruptcy and foreclosure.

How long does a foreclosure stay on my credit report?

Generally, you can expect a foreclosure to stay on your credit report for seven years from the date of your first missed mortgage payment. (15 U.S.C. § 1681c(a)(4).) As you rebuild credit, the impact will lessen. ​

How long does bankruptcy affect my credit?

If you file for Chapter 7 bankruptcy, the bankruptcy notation will remain on your credit report for up to 10 years from the filing date. (15 U.S.C. § 1681c(a)(1).) Typically, a Chapter 13 bankruptcy remains seven years after filing. (15 U.S.C. § 1681c(a)(1).) You can expect your credit score to drop significantly after filing for bankruptcy, but the impact lessens over time, especially if you take credit rebuilding steps.​

Does bankruptcy remove a foreclosure from my credit report?

No, filing for bankruptcy won't erase a foreclosure notation from your credit report. However, Bankruptcy will eliminate your responsibility to repay any deficiency balance you're responsible for after foreclosure. Both the bankruptcy and foreclosure will remain on your credit report for the time periods discussed above, but the impact will diminish with time as you rebuild your credit.

Can bankruptcy stop a foreclosure?

Bankruptcy can stop or delay foreclosure through the automatic stay, assuming you haven't filed for bankruptcy recently (in such cases, the automatic stay will be limited to 30 days or not go into effect at all). Chapter 13 bankruptcy is the chapter you'll file if you want to stop the foreclosure permanently, but you must be able to afford to make the monthly payments, catch up on arrears over time, and pay for any nonexempt home equity through the plan. Chapter 7 will only stop the foreclosure for a few months unless you can pay what's owed.

Tip. If you can bring payments current or qualify for a loan modification, you should do so before filing for Chapter 7 bankruptcy.​ However, make sure you can also protect all home equity with a bankruptcy exemption. Otherwise, you could lose the home to the Chapter 7 trustee. Remember, in Chapter 7, there are two requirements to meet. If you're behind on payments when you file, you lose the home to the lender. If you can't protect all the equity, you lose it to the trustee.

Will I owe my lender anything after a foreclosure if I file bankruptcy?

No, one of the benefits of filing for bankruptcy after foreclosure is that it allows you to erase a "deficiency balance" (the amount still owed after the sale of your home) with the discharge. Not all states allow deficiency judgments, but this benefit is helpful where allowed.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true—and we wholeheartedly encourage research and learning. You'll find many more helpful bankruptcy articles on Nolo's bankruptcy homepage. However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.