Using Chapter 7 Bankruptcy to Delay Your Foreclosure Sale

The instant you file for bankruptcy, all foreclosure proceedings must stop. This means that if you file for bankruptcy at 11:59 a.m., a foreclosure sale that happens at 12:00 p.m. is void. Because of this instant relief, many people turn to bankruptcy as a last resort when their efforts to work something out with their lender, like a modification, have failed to materialize. A Chapter 7 bankruptcy will give you a few months of relief before the foreclosure can go forward, but it's definitely not a permanent fix.

When to File, When Not to File

As a general rule, filing for Chapter 7 bankruptcy is a bad idea if you have little or no debt that would be discharged and your only reason for filing is to buy some extra time in your house. You won't be able to get another Chapter 7 discharge for eight years, so why waste it just to get a little extra time? Also, the courts frown on filers using bankruptcy for tactical purposes.

However, if you are facing foreclosure, you also probably have some serious debt issues. If your Chapter 7 would eliminate that debt as well as buy you some more time in your home, the equation changes and Chapter 7 bankruptcy becomes a valid option you could file in "good faith."

How Much Time You’ll Get

A Chapter 7 bankruptcy takes about three to four months (sometimes longer) from the date of filing to the date of discharge (cancellation) of your debts. Unless the judge gives the lender permission, no foreclosure sale can take place during that time.

The lender can, however, file a formal request (motion) asking the bankruptcy court to lift the automatic stay and let the foreclosure sale proceed. Lenders usually must provide at least 25 days’ advance notice of the hearing on their motion unless they get the judge’s permission to shorten that time. Generally, the lender must hire a lawyer to file the motion, so it is a relatively expensive procedure. For this reason, some lenders skip the expense, let the bankruptcy proceed and simply reschedule the foreclosure sale once it’s complete. This leaves your three- to four-month delay intact.

A lender who thinks it’s worthwhile to ask the court to let the foreclosure go ahead usually files a motion 30 to 45 days after you file. A court hearing on the request will be scheduled about 25 to 30 days later. The court will likely grant the motion to lift the stay unless you can show that:

• The proposed foreclosure is illegal in some way.
• The lender hasn’t complied with state procedural requirements.
• The party bringing the foreclosure hasn’t produced the necessary paperwork or evidence to show it has authority to seek the foreclosure.
• There is substantial equity in the property that you cannot protect with an exemption. In this case, the trustee would likely sell the property.

If the court lifts the stay, the lender will then be free to resume the foreclosure process. If the court refuses to lift the stay, then the foreclosure will be stalled until you receive your bankruptcy discharge.

After the discharge—or after the court lifts the stay—the lender can proceed with the foreclosure. Unlike Chapter 13 bankruptcy, Chapter 7 doesn’t force the lender to let you make up your missed payments over time or preserve your right to keep ownership of your house.

Timing Your Filing

Sometimes you don’t have the luxury of deciding when to file for Chapter 7 bankruptcy. If your wages are about to be garnished, you’ll most likely file as soon as possible. However, if there’s no emergency, it sometimes helps to wait until your filing has the best possible effect on delaying your foreclosure sale. In most cases, this means waiting to file until just before the sale date.

Keeping the Money You Saved Before Filing for Bankruptcy

If you’re sure you’ll be giving up your house sooner or later, it makes excellent financial sense to keep living in it and give it up later. If you are current on your mortgage when you make this decision, you’ll likely be able to save at least three or four months’ worth of mortgage payments before foreclosure proceedings even begin. And depending on how long you have before the actual sale, you will probably be able to save at least several more months’ worth of mortgage payments.

If you would like to file for Chapter 7 bankruptcy and delay the foreclosure sale even further, you should first figure out whether you’ll be able to keep what you’ve saved before you file, or whether you’ll have to give it up to be used by the trustee to pay down your unsecured debt. This issue doesn’t arise for any money you save after you file your Chapter 7 bankruptcy; it applies only to what you have in the piggy bank on the day you file.

You can keep your savings through the bankruptcy process if you can claim it as exempt. Every state has its own rules about how much money is exempt from creditors—in other words, how much you are allowed to keep when you go through bankruptcy. And there is a separate set of federal exemption rules; in states that allow it, you may pick whichever system works best for you. However, most states don’t allow you to keep much—if any—savings. But that’s not always the case.

It may be that the exemptions available to you in your state won’t let you keep the cash you’ve saved as well as all your other property. In that case, you’ll have to pick and choose what property you keep and what you give up. For example, if you have $50,000 worth of home equity, and your state makes you choose between the home equity and your saving account, you may have to give up the savings account. In the end, the only way to know for sure how much property (and cash in the bank) you can keep in a Chapter 7 bankruptcy is to review the exemptions.