In Foreclosure with Too Much Debt? How Chapter 7 Bankruptcy Can Help

Whether or not you plan to give up your house, you can buy some time just by filing for bankruptcy. As soon as you do, foreclosure proceedings must stop—at least for a while. When you file for bankruptcy, the federal bankruptcy court automatically issues a court order called a stay. It bars creditors, including mortgage lenders, from taking any measures to collect a debt you owe unless the creditor seeks permission from the bankruptcy court to proceed, and the court grants permission after notice and a hearing.

The automatic stay immediately stops foreclosures as well as other creditor actions. If, for example, your home is due to be sold at auction on December 5 at 10 a.m., and you file for bankruptcy at 9:59 a.m. that day, the sale is “stayed” and has no effect even if it goes ahead after you file. But if you file at 10:01 a.m., just one minute after the sale, the sale would go through.

Chapter 7 bankruptcy is what most people think about when they think about bankruptcy. It’s called “liquidation” bankruptcy because it cancels your debts, but you might have to let the bankruptcy court liquidate (sell) some of your property for the benefit of your creditors.

You may have to give up other (“nonexempt”) property to be sold to help pay off your debts. Many people don’t have any nonexempt property. But if you own luxury items such as a boat, an RV, a valuable coin collection, corporate securities, an ownership interest in a business, or an expensive car in which you have considerable equity, they’ll likely be sold by the bankruptcy trustee to repay some of your debts.

Once the bankruptcy trustee (the person employed by the court to supervise your assets and pay creditors) has paid creditors whatever money is available, your remaining debt is canceled (discharged). There are certain kinds of debts, though, which can’t be discharged in bankruptcy (see below).

It takes only about three months for a Chapter 7 bankruptcy case to go through court. After the court grants a Chapter 7 discharge, the party seeking to foreclose on your home is free to take the next step under your state’s foreclosure laws.

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