When you’re faced with foreclosure, Chapter 7 bankruptcy will give you three or four months’ breathing space, depending on how aggressively the lender pushes the foreclosure sale.
Should You File?
I don’t recommend filing for Chapter 7 bankruptcy solely to delay foreclosure. But if a foreclosure sale looms, you may need some time to complete negotiations with your mortgage servicer, try another tactic to keep your home (see our article on options for saving your home from foreclosure), or find an attorney to help you with a Chapter 13 bankruptcy (see our article on delaying or stopping foreclosure with Chapter 13 bankruptcy). And because you may have other significant liabilities—such as credit card debt and the full amount of any second or third mortgage you have on the house—bankruptcy may be crucial in getting a fresh start. (See our articles on how Chapter 7 bankruptcy can help with foreclosure and using Chapter 7 bankruptcy to keep your house.)
Don’t, however, file for bankruptcy if your main reason is to buy some time for a short sale. (A short sale is one that yields less than you owe on the house.) There is not much reason for the short sale if you have to file for bankruptcy to get it done, because a big reason to do a short sale is to come out of the situation with marginally better credit than with a bankruptcy. (See our article on selling your house in a short sale.)
How Much Time You’ll Get
A Chapter 7 bankruptcy takes about three months (sometimes a few weeks more) from the date of filing to the date of discharge (cancellation) of your debts. Unless the judge gives the lender permission, no foreclosure sale can take place during that time.
The lender can, however, file a formal request (motion) asking the bankruptcy court to lift the automatic stay and let the foreclosure sale proceed. Lenders usually must provide at least 25 days’ advance notice of the hearing on their motion unless they get the judge’s permission to shorten that time. Generally, the lender must hire a lawyer to file the motion, so it is a relatively expensive procedure. For this reason, some lenders skip the expense, let the bankruptcy proceed and simply reschedule the foreclosure sale once it’s complete. This leaves your three- to four-month delay intact.
A lender who does think it’s worthwhile to ask the court to let the foreclosure go ahead usually files a motion 30 to 45 days after you file. A court hearing on the request will be scheduled about 25 to 30 days later. The court will likely grant the motion to lift the stay unless you can show that:
- the proposed foreclosure is illegal in some way
- the lender hasn’t complied with state procedural requirements, or
- the party bringing the foreclosure hasn’t produced the necessary paperwork or evidence to show it has authority to seek the foreclosure.
If the court lifts the stay, the lender will then be free to reschedule the foreclosure sale, probably about 15 to 30 days later.
If you have been doing the math, you’ll see that even if the stay is lifted, it makes little difference. Instead of a three- to four-month delay, you’ll have a two-and-a-half- to three-month delay. From the lender’s standpoint, it’s rarely worth it.
After the discharge (or after the court lifts the stay), the foreclosure can proceed, and the lender will reschedule the sale. Unlike Chapter 13 bankruptcy, Chapter 7 doesn’t let you make up your missed payments over time or preserve your right to keep ownership of your house.
Timing Your Filing
Sometimes you don’t have the luxury of deciding when to file for Chapter 7 bankruptcy. If your wages are about to be garnished, you’ll most likely file as soon as possible. However, if there’s no emergency, it sometimes helps to wait until your filing has the best possible effect on delaying your foreclosure sale.
For example, if you are in California, which has a 90-day notice of default period before a foreclosure sale can be scheduled, you will get more delay out of filing after the 90-day period has expired than if you filed during that period. That’s because filing for bankruptcy doesn’t stop the 90-day notice period from running; it delays only the actual sale. So if you file after the sale has been scheduled, you can put off the sale for months. But if you file during the notice period, all or part of your bankruptcy will be pending while the notice period is running, and the bankruptcy will have little or no delaying effect during that period.
EXAMPLE: Fred receives a notice that his house will be sold in a foreclosure auction in 120 days. He files for Chapter 7 bankruptcy 15 days later and receives his discharge 90 days after that. Fifteen days later, the foreclosure auction proceeds on schedule. Fred is unhappy because his bankruptcy had no effect on the foreclosure timing; it didn’t prevent the 120-day notice period from winding down. Had Fred waited a bit and filed his bankruptcy shortly before the scheduled auction date, the auction would have been delayed until he received his discharge 90 days later, or the foreclosing party obtained permission from the judge to reschedule the auction.
Keeping the Money You Saved Before Filing for Bankruptcy
If you’re sure you’ll be giving up your house sooner or later, it makes excellent financial sense to keep living in it and give it up later. If you are current on your mortgage when you make this decision, you’ll likely be able to save at least three or four months worth of mortgage payments before foreclosure proceedings even begin. And depending on how long you have before the actual sale, you will probably be able to save at least several more months worth of mortgage payments.
If you would like to file for Chapter 7 bankruptcy and delay the foreclosure sale even further, you should first figure out whether you’ll be able to keep what you’ve saved before you file, or whether you’ll have to give it up to be used by the trustee to pay down your unsecured debt. This issue doesn’t arise for any money you save after you file your Chapter 7 bankruptcy; it applies only to what you have in the piggy bank on the day you file.
You can keep your savings through the bankruptcy process if you can claim it as exempt. Every state has its own rules about how much money is exempt from creditors—in other words, how much you are allowed to keep when you go through bankruptcy. And there is a separate set of federal exemption rules; in states that allow it, you may pick whichever system works best for you.
For example, in California, under the exemption system that just about everybody uses when there is no home equity to protect, you can protect roughly $23,000 worth of any type of property, including cash in a bank account. You can also keep such commonly owned items as household furnishings, motor vehicles, tools of the trade and personal effects. So, if you have $10,000 in the bank, you could keep that $10,000 and still have an additional $12,000 worth of protection for other property that isn’t already specifically exempted.
To find out how much money you are allowed to keep when filing for Chapter 7 bankruptcy, check the law in your state in our Summary of State Foreclosure Laws.
It may be that the exemptions available to you in your state won’t let you keep the cash you’ve saved as well as all your other property. In that case, you’ll have to pick and choose what property you keep and what you give up. For example, if you have $50,000 worth of home equity, and your state makes you choose between the home equity and your savings account, you may have to give up the savings account. In the end, the only way to know for sure how much property (and cash in the bank) you can keep in a Chapter 7 bankruptcy is to apply the exemptions that are available to you and see how it comes out. You can do this by looking up the exemptions for your state in Nolo's Bankruptcy Exemptions section.
EXAMPLE 1: Jon lives in California. He has no home equity. He has not been paying his $2,500 mortgage for seven months before he files for bankruptcy to stave off a scheduled foreclosure sale, and has put $2,000 a month in a bank account, giving him savings of $14,000. In addition to hand-me-down furniture and normal personal effects, Jon’s only other property is a classic 1967 Chevrolet Camaro Rally Sport, in perfect shape, easily worth $20,000.
In one of the two available exemption systems in California, Jon is entitled to exempt $3,300 worth of motor vehicle equity and roughly $23,000 of any other type of property (the wild card exemption). Jon wants to hold on to his Camaro but will have to use $16,700 of the wild card exemption to supplement the $3,300 motor vehicle exemption to fully exempt it. That leaves him $6,300 from the wild card exemption. Because there is no specific exemption for a bank saving account (as there is for a motor vehicle, for example), Jon will be able to exempt only $6,300 of his savings. He’ll have to give up the rest ($7,700) as nonexempt property, to be used by the bankruptcy trustee to pay down his unsecured debt.
EXAMPLE 2: Amy lives in Massachusetts in a house she inherited. She has home equity of $200,000, but she doesn’t have enough income to borrow against her equity and she has a lot of credit card debts to deal with. Bankruptcy seems like the best way out. Amy checks http://www.legalconsumer.com/ and learns that the Massachusetts homestead exemption fully protects her equity. Unfortunately, the Massachusetts exemption system provides very little protection for savings, so if Amy has saved money before filing for bankruptcy, she’ll have to give it up.
If Amy had no home equity she needed to protect, she could use the federal exemptions (an alternative system to the Massachusetts state exemptions) to protect her savings, because they provide close to $12,000 protection for any type of property (including a bank account) for single filers and $23,000 for joint filers.