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. This article will review the foreclosure process and explain the following:
If you've already lost your home to foreclosure and the lender wants you to pay a "deficiency judgment," you can also use bankruptcy to eliminate the debt. Learn more about the two bankruptcy types by reading Should I File for Chapter 7 or Chapter 13 If I Want to Keep My Home?
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.
Learn about the differences between judicial and nonjudicial foreclosure.
Bankruptcy can stop the foreclosure process in its tracks. As long as the foreclosure sale hasn't already occurred, you'll likely be able to stop the foreclosure immediately. 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 "The Foreclosure Process" section toward the end of the article or brush up on foreclosure basics.
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.
As soon as you file for bankruptcy, the court issues an "automatic stay" order stopping the foreclosure process.
The automatic stay directs your creditors to stop most collection activities immediately, including foreclosure proceedings. 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. 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.
Typically, the automatic stay would stop creditors during the Chapter 7 case, pausing the foreclosure action for three to four months. The Chapter 7 case wouldn't help you keep your house because it lacks a way to make up missed payments (that option is available in Chapter 13).
Once the case closed and the automatic stay was no longer in place, the lender could proceed with the action. Find out what you'd need to do to keep a house in Chapter 7 bankruptcy.
The lender can ask the bankruptcy court for permission to proceed with the sale by filing a "motion to lift the automatic stay." 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.
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.
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 five years in most cases. 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.
For more information, see Your Home and Mortgage in Chapter 13 Bankruptcy.
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. Assuming you make all the required payments up to the end of the repayment plan, you'll avoid foreclosure and keep your home.
Filers can only protect the amount of home equity their state allows, which a filer will find in the state's homestead exemption. If the homestead exemption isn't sufficient to cover all of a filer's equity, the filer must pay creditors an amount equal to the "nonexempt" portion not protected 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.
Chapter 13 bankruptcy might also help you eliminate the payments on a junior mortgage, such as a second or third mortgage. 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. 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.
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 apply 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. Learn more about your options in Foreclosure: The Basics.
Yes, you can file for bankruptcy after losing a home to foreclosure. But it might not be necessary unless you still owe the lender money.
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.
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.
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.
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. 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 does not automatically get rid of liens on your property. If your lender used the judgment to place a lien on other assets, you must file a motion with the court to remove it.
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.
Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to ensure 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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