Using Chapter 7 Bankruptcy to Delay Your Foreclosure Sale

The instant you file for bankruptcy, all foreclosure proceedings must stop. So 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 loan 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. 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.

But if you're 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; Chapter 7 bankruptcy becomes a valid option you could file in "good faith."

How Much Time You’ll Get

A Chapter 7 bankruptcy usually takes about three to 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. The lender can, however, file a formal request (motion) asking the bankruptcy court to lift the automatic stay and let the foreclosure proceed.

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 to seek the foreclosure.
• 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.

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.

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. But if an emergency situation doesn't exist, it sometimes helps to wait until your filing has the best possible effect on delaying your foreclosure sale. Generally, you'll wait to file until just before the foreclosure 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. You’ll likely be able to save several months’ worth of mortgage payments before foreclosure proceedings even begin. And depending on how long you have before the actual sale, you might 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 on the day you file.

You can keep your savings through the bankruptcy process if you can claim them 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 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 saving 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.

Consult With a Lawyer

If you're facing a foreclosure and want to learn more about filing for bankruptcy and how it might help you, talk to a foreclosure lawyer or bankruptcy lawyer.