Bankruptcy's Automatic Stay and Foreclosure

The automatic stay in bankruptcy temporarily stops a pending foreclosure.

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Many debtors turn to bankruptcy when facing foreclosure—and with good reason. Filing for bankruptcy allows a debtor to take advantage of a protection known as the automatic stay. The stay acts as an injunction, or bar, which stops creditors' attempts to collect debts or enforce liens during the bankruptcy case.

In some cases, the automatic stay isn't available to a debtor, or the lender successfully asks the court to lift the automatic stay. Whether the foreclosure process stops temporarily or permanently will depend on whether you file for Chapter 7 or 13.

The Foreclosure Process

When you buy a home, the mortgage contract states that you agree that if you fall behind on your monthly payment (default on the loan), the lender can sell the home at auction and apply the proceeds to your loan balance. Before the house goes to auction, the lender must follow the procedures found in federal and state law in a process called foreclosure.

After the expiration of federal and state waiting periods given to allow the homeowner time to catch up on arrearages or apply for a loss mitigation program (such as a mortgage modification), the lender can move forward with foreclosure by complying with state foreclosure laws.

A lender can use one of two types of foreclosure, depending on state law:

  • 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. The matter will proceed through the litigation process, and 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 that consists of following steps outlined in state law. In many cases, the bank must give the homeowner time to bring the account current. Additionally, the lender must 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. After completing the steps, the lender is free to sell the home at auction without first receiving the court's approval.

Filing for bankruptcy will stop either type of foreclosure process as long as the foreclosure sale hasn't occurred. You can find out more about the foreclosure process in your state in State Foreclosure Laws.

When the Automatic Stay Doesn't Apply

Filing for Chapter 7 or 13 bankruptcy automatically triggers the stay. No additional action is required for the automatic stay to go into effect. (Learn more in Bankruptcy's Automatic Stay.)

However, two exceptions to the automatic stay exist to prevent debtors from interfering with a creditor's right to foreclose by filing and dismissing successive bankruptcy cases. Here are the rules.

  • One previous bankruptcy case dismissed within the past year. The automatic stay goes into effect for only 30 days after you file bankruptcy.
  • Two or more previous bankruptcy cases dismissed within the past year. The automatic stay doesn't go into effect at all.

Debtors who fall within the exceptions to the automatic stay can file a motion asking the bankruptcy court to impose the automatic stay and stop the foreclosure. To prevail, the debtor would need to prove by clear and convincing evidence (a relatively high standard) that the previous bankruptcy cases weren't filed in bad faith.

The exceptions to the automatic stay for repeat or serial filers won't apply if you initially filed under Chapter 7 bankruptcy but then moved to a Chapter 13 because the means test showed that your income was too high to qualify for Chapter 7.

How the Automatic Stay Can Help With Foreclosure

The automatic stay provides additional time to try to deal with a pending foreclosure. The options for dealing with a pending foreclosure depend largely on whether you file for bankruptcy under Chapter 7 or 13.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy doesn't have a mechanism that will help you catch up on payments 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. However, other benefits exist.

When you file Chapter 7, your assets become part of the bankruptcy estate. The Chapter 7 trustee appointed to the case will liquidate (sell) your assets and pay off your creditors to the extent possible. The automatic stay gives the trustee time to sell property that would otherwise be foreclosed on if there is a potential benefit for the estate (there'd have to be sufficient equity in the property).

Depending on the circumstances, the stay might benefit you as well:

  • The stay can provide you additional time to arrange other housing or enter into a loan workout with the lender if the property is your home.
  • If the trustee sells the property for enough money, you might be entitled to a portion of the proceeds. After paying off any mortgages or other valid liens, the trustee must reimburse you your homestead exemption amount before paying off any other creditors. You also are entitled to excess proceeds if the property sells for enough to pay all of your creditors in full.

Learn more in The Homestead Exemption in Bankruptcy.

Chapter 13 Bankruptcy

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 debts (some in part and some in full) over a period of three to five years—including delinquent payments on a home mortgage.

For the Chapter 13 restructuring process to be effective, you must have enough income to keep up with current mortgage installments and make payments on arrearages that accrued before you filed bankruptcy. Once the court approves a Chapter 13 repayment plan that provides for repayment of mortgage arrears, the lender cannot foreclose. But if you fail to keep up on mortgage or arrearage payments after your plan is approved, the lender will be able to move forward with the foreclosure.

For more information on this chapter and the repayment plan, go to Chapter 13 Bankruptcy.

Lifting the Automatic Stay

A lender can file a motion asking the bankruptcy court to lift the automatic stay (terminate it) and allow it to proceed with foreclosure. You are entitled to file a response, and if you oppose the motion, the bankruptcy court will hold a hearing before it rules on whether or not 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.

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