Using Chapter 7 Bankruptcy to Delay Your Foreclosure Sale

Filing for bankruptcy can be a strategic way to address financial challenges, including foreclosure. Chapter 7 bankruptcy provides temporary relief through the automatic stay, which halts foreclosure proceedings for a few months. It can also free up money so you can more easily make your mortgage payments by eliminating other debts. However, keeping your home under Chapter 7 is only possible if you are current on mortgage payments and can protect your equity using exemptions; it doesn't offer a mechanism to catch up on missed payments.

On the other hand, Chapter 13 bankruptcy provides a way for homeowners who have fallen behind on their mortgage to keep their property. Debtors spread the missed payments out in a repayment plan over three to five years. Choosing between Chapter 7 and Chapter 13 depends on your financial situation and long-term goals.

Introduction to Chapter 7 Bankruptcy and Foreclosure

The instant you file for bankruptcy, all foreclosure proceedings must stop—at least for a while. So, if you file for bankruptcy at 11:59 a.m., a foreclosure sale that happens at 12:00 p.m. is void. 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. If you're behind on mortgage payments, a foreclosing lender can file a motion asking the court for relief from the stay, which allows the lender to continue with foreclosure proceedings. Most motions for relief from stay are granted

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, maybe two or three months, in your home? Also, the courts frown on filers using bankruptcy for tactical purposes.

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

The Automatic Stay: Your Temporary Shield Against Foreclosure

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

However, as mentioned earlier, the lender can, however, file a formal request (motion) asking the bankruptcy court to lift the automatic stay and let the foreclosure 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.

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 the authority ("standing") to foreclose.
• You have substantial equity in the property that you can't protect with an exemption. In this case, the trustee would likely sell the property.

But the Chapter 7 bankruptcy process really isn't geared toward protecting consumer rights. It's designed to distribute assets to creditors. So, using a Chapter 7 bankruptcy to contest a foreclosure isn't advised. Consult with a foreclosure lawyer if you want to litigate a foreclosure in state court, especially if you have a solid case against the lender that would allow you to keep your home.

You could also defeat the motion by bringing your mortgage loan current, but most filers who can pay arrearages would do that before filing for Chapter 7 and avoid the lender's motion altogether.

What Happens When the Stay Is Lifted?

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 normally 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.

How Long Can Chapter 7 Bankruptcy Delay a Foreclosure Sale?

A Chapter 7 bankruptcy will delay a foreclosure sale until the lender gets relief from the stay (about two or three months) or you get a discharge (about four months).

Timing Your Bankruptcy Filing

Sometimes, you don't have the luxury of deciding when to file for Chapter 7 bankruptcy. If you're being sued or evicted, up against a foreclosure date, or your wages are about to be garnished, you'll likely need to file as soon as possible. However, you might want to file until just before the sale date if there's no emergency.

Chapter 7 Bankruptcy Probably Won't Save Your Home

Remember, you can file for Chapter 7 bankruptcy and keep your house only if:

• you're current on your mortgage payments when you file, and
• your equity in the house is protected by the exemption laws available to you in your state.

You need to be careful even if you think you meet this criteria. Once you file, you might not be able to change your mind. If you file for Chapter 7 and then find out that you won't be able to keep your house because it has too much equity, you probably won't be allowed to back out and dismiss your bankruptcy case. The ability to dismiss your bankruptcy case isn't based on what you'd like to do—the court will determine what would be best for your creditors. If the creditors would receive a distribution from your house's sale, the bankruptcy might go forward. You'd receive the amount you're entitled to exempt, and your creditors would be paid out of the remaining proceeds.

Keeping the Money You Saved Before Filing for Bankruptcy

If you're sure you'll be giving up your house sooner or later, it usually makes financial sense to keep living in it for as long as you can. You'll likely be able to save several months' worth of mortgage payments before foreclosure proceedings even begin. And you might be able to save at least several more months' worth of mortgage payments before a foreclosure sale happens.

If you want 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 on the day you file.

What Happens to Savings?

You can keep your savings through the bankruptcy process if you can claim them as exempt (meaning you get to keep it). 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. Additionally, some states' "wildcard" protections don't cover bank accounts, investments, and the like.

It might be that the exemptions available to you in your state won't let you keep the cash you've saved and 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 savings account, you might 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 find out what exemptions are available. If you're considering filing for Chapter 7 bankruptcy, meet with a local bankruptcy lawyer to determine how much money and property you can keep.

What About Your Other Belongings?

When you file Chapter 7, your property becomes part of your "bankruptcy estate" under the control of the bankruptcy court. The bankruptcy trustee will have the authority to sell property you can't protect in the bankruptcy estate and use the proceeds to pay your creditors.

But you won't lose everything you own. Every state lets you claim some or all of the property in your bankruptcy estate as exempt. As a general rule, exemption laws allow you to keep necessities, such as furniture, clothing, personal effects, tools of the trade, cars, books, TVs, and home computers.

Even though you might have to give up nonexempt property to help pay off your debts, many people don't have any nonexempt property.

Get More Information About Foreclosure and Bankruptcy

If you're having trouble making your mortgage payments or are in jeopardy of foreclosure, The Foreclosure Survival Guide by Attorneys Amy Loftsgordon and Cara O'Neill (Nolo) will give you the practical information you need. Nolo also offers books covering filing for bankruptcy, including How to File for Chapter 7 Bankruptcy and Chapter 13 Bankruptcy, both by Cara O'Neill (Nolo).

If you're considering filing for Chapter 7 bankruptcy, meet with a local bankruptcy lawyer. For more information about foreclosure, including how the process works in your state, talk to a foreclosure attorney.