If you’ve fallen behind on your mortgage payments and a foreclosure sale is looming, you may still be able to save your home. Read on to learn about how you can file bankruptcy, apply for a loan modification, or file suit against your lender to potentially stop the foreclosure entirely, or at least delay the foreclosure process.
(To learn the ins and outs of the foreclosure process, and foreclosure procedures in your state, visit our Foreclosure Center.)
If the foreclosure sale is scheduled to occur in the next few days, you can halt the sale immediately by filing for bankruptcy.
(If you are facing foreclosure and want to find out if bankruptcy may be a good way to save your home, see the articles in our Bankruptcy and Foreclosure topic area.)
The automatic stay will stop the foreclosure in its tracks. Once you file for bankruptcy, something called an automatic stay immediately goes into effect. 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 during the bankruptcy process.
The lender may file a motion for relief from the stay. The lender may attempt to have the stay lifted by filing a motion seeking permission from the court to continue with the foreclosure. Even if the bankruptcy court grants this motion and allows the foreclosure to proceed, the foreclosure will be delayed at least a month or two. This should provide you with time to explore alternatives to foreclosure with your lender. (To learn more about options to avoid foreclosure, see our section on Alternatives to Foreclosure.)
If you want to keep your home, a Chapter 13 bankruptcy may help you accomplish this goal. However, if you’re simply trying to buy some time by stalling the foreclosure, a Chapter 7 bankruptcy may be right for you.
Benefits of a Chapter 13 bankruptcy. A Chapter 13 bankruptcy can help you keep your home by restructuring your debts. You will repay debts (some in part and some in full) over a period of three to five years as part of a repayment plan. You may be able to avoid foreclosure and remain in your home with this type of bankruptcy since you can repay any delinquent mortgage payments through the plan.
Also, you will likely pay a fraction (or sometimes, none) of your unsecured debts during the plan period and possibly eliminate certain other debts (such as underwater second and third mortgages since they are considered unsecured loans) entirely when you complete your plan, freeing up money for your first mortgage. Even if you can’t complete the plan, filing for Chapter 13 bankruptcy will give you at least several months before a foreclosure can be completed.
(Learn more in our Your Home & Mortgage in Chapter 13 Bankruptcy topic area.)
Benefits of a Chapter 7 bankruptcy. If you’re already in foreclosure, filing Chapter 7 bankruptcy isn’t a good way to save your home, but it will delay the foreclosure proceedings and provide you with time to live in the home without making payments. (You can put this money towards saving up for a rental. You can also use this time to try to work with the lender to come up with a way to avoid foreclosure.) And, even if you still go through a foreclosure, the Chapter 7 bankruptcy will eliminate your personal liability for the mortgage debt, which means you won’t be liable for any deficiency remaining after the foreclosure. (To learn more about deficiency judgments, see our Deficiency Judgments After Foreclosure area.)
(Learn more in our Your Home in Chapter 7 Bankruptcy topic area.)
While you don’t want to wait until the very last minute with this option, you can delay a foreclosure by applying for a loan modification since the lender may be restricted from dual tracking. (Dual tracking is when the lender proceeds with the foreclosure while a loss mitigation application is pending).
Ultimately, if your modification application is approved, the foreclosure will be permanently stopped so long as you keep up with the modified payments.
California, Nevada, and Minnesota have each passed a Homeowner Bill of Rights that prohibits the dual tracking of foreclosures. This means loan servicers must make a decision to grant or deny a first-lien loss mitigation application before starting or continuing the foreclosure process. (Learn more about the California, Nevada, and Minnesota Homeowner Bill of Rights.)
As of January 10, 2014, under new rules promulgated by the Consumer Financial Protection Bureau (CFPB), if a complete loss mitigation application is received more than 37 days before a foreclosure sale, the servicer may not move for a foreclosure judgment or order of sale, or conduct a foreclosure sale, until:
(Learn more about the CFPB’s new mortgage servicing rules in Nolo’s article New Federal Rules Protecting Homeowners With Mortgages.)
Under this settlement (which applies to Ally/GMAC, Bank of America, Citi, JPMorgan Chase, and Wells Fargo), if the borrower submits a complete loan modification application more than 37 days before the scheduled foreclosure sale, the servicer cannot proceed to sale while the application is pending.
If the application is submitted at least 15 days before the scheduled sale date, the lender must review the package and, if the borrower is approved for a loan modification, cannot foreclose until the borrower declines or breaches the trial modification.
(For details on the specific time frames in which a borrower must apply for a loan modification in order to stop the foreclosure process under the settlement, see our article National Mortgage Settlement: New Rules Help Protect Homeowners in Foreclosure.)
If your lender is using a nonjudicial process to foreclose (where the foreclosure is completed outside of the court system), then you may be able to delay or stop the foreclosure by filing a lawsuit against the lender to challenge the foreclosure. (This won’t work if the foreclosure is judicial since by the time of a foreclosure sale, you’ve already had your opportunity to be heard in court.)
(To learn about the differences between judicial and nonjudicial foreclosures, see Nolo's Judicial v. Nonjudicial Foreclosure topic area. To find out if your state uses a judicial or nonjudicial foreclosure process, check our Summary of State Foreclosure Laws.)
To prevail in your lawsuit against your lender, you will need to prove to the satisfaction of the court that the foreclosure should not take place because, for example, the foreclosing lender:
The downside to suing your lender is that if you’re unable to prove your case, this will only delay the foreclosure process. Lawsuits can be expensive and, if you have no reasonable basis for your claims, you could get stuck paying the lender’s court costs and attorney’s fees.
Learn more in our Fighting Foreclosure in Court area.