Many debtors turn to bankruptcy when facing foreclosure, and with good reason. Filing for bankruptcy allows a debtor to take advantage of protection known as the automatic stay. The stay stops a creditors' attempt to collect debts or enforce liens during the bankruptcy case.
In this article, you'll learn:
You'll also learn that whether the foreclosure process stops temporarily or permanently depends on whether you file for Chapter 7 or Chapter 13.
When you buy a home, you agree if you fall behind on your monthly payment or "default on the loan," the lender can sell the house at auction and apply the proceeds to your loan balance in a process known as foreclosure.
However, the lender must follow foreclosure laws before selling your home. For instance, state and federal foreclosure laws often require a waiting period so the homeowner can catch up on arrearages or apply for a loss mitigation program.
In most instances, the automatic stay will stop the foreclosure as soon as you file for bankruptcy. But whether bankruptcy will be a temporary or permanent fix will depend on whether you file under Chapter 7 or 13.
Chapter 7 bankruptcy doesn't offer a payment plan you can use to catch up on your mortgage and keep your house. So if you're behind and want to stay in your home, this probably isn't the best chapter for you.
Although it's possible to enter into a loan workout with the lender during bankruptcy, it isn't common. Most people use Chapter 7 to buy additional time to arrange other housing.
Even so, it's possible to benefit in other ways.
If the trustee didn't sell the home, the lender would recover it, possibly during bankruptcy. You'll find more about this in the "Can the Lender Ask to Remove the Automatic Stay" section below. Otherwise, the lender would continue with foreclosure after the bankruptcy court removed the automatic stay at the end of the case
In Chapter 13 bankruptcy, the automatic stay can give you time to catch up on any mortgage arrears and stay in the home. You'll repay what you can afford on many bills over three to five years. But you'll pay your monthly mortgage and delinquent payments in full.
Once the court approves a Chapter 13 plan, the lender can't foreclose unless you stop paying the mortgage or arrearage payments. Learn more about your obligations in Chapter 13.
Filing for bankruptcy will stop any foreclosure action if the foreclosure sale hasn't occurred. Here's how to identify the two types of foreclosure available to lenders:
Judicial foreclosure. All states allow the lender to use a "judicial" foreclosure process that begins when the bank files a court lawsuit. The homeowner can respond to and defend the suit. If the bank wins, the court will order the home sold at auction.
Nonjudicial foreclosure. Some states allow a lender to use a streamlined "nonjudicial" foreclosure procedure consisting of steps outlined in state law. Usually, the bank must give the homeowner time to pay back payments. The lender must also notify the owner of the sale date and, in some cases, publish the sale date by advertising it in a newspaper or posting it in a public place. The lender can sell the home at auction without the court's approval after completing the state-required steps.
You can learn more about the foreclosure process in your state in State Foreclosure Laws.
No, the automatic stay isn't always available. If you're filing for Chapter 7 or 13 for the first time, you can rely on the bankruptcy court to put the stay in place without requiring you to take any additional action. However, you'll want to be aware of two exceptions if you've filed before.
The exceptions won't apply if you initially filed under Chapter 7 bankruptcy but converted to Chapter 13 because your income was too high to qualify for Chapter 7.
Yes. Suppose you fall within the automatic stay exceptions. You could file a motion asking the bankruptcy court to put the stay in place and stop the foreclosure. But you'd need to prove that you didn't file the previous bankruptcy cases in bad faith by clear and convincing evidence, which is a relatively high standard.
A lender can file a motion asking the bankruptcy court to "lift the automatic stay" or terminate it so the bank can proceed with foreclosure. If you opposed the motion, the bankruptcy court would hold a hearing before deciding whether to lift the stay. If the court lifts the stay, the lender can proceed with foreclosure efforts except as otherwise ordered by the bankruptcy court.
Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!
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