If you’ve fallen behind on your mortgage payments and a foreclosure sale is looming in the very near future, you might still be able to save your home. You can potentially file bankruptcy, apply for a loan modification or other workout option, or file suit against the foreclosing party (the "lender") to possibly stop the foreclosure entirely, or at least delay the process. (To get tips on what to do, and what not to do, when facing a foreclosure, see Foreclosure Do's and Don'ts.)
If the foreclosure sale is scheduled to occur in the next few days, you can halt the sale immediately by filing for bankruptcy.
The automatic stay will stop the foreclosure in its tracks. Once you file for bankruptcy, something called an "automatic stay" immediately goes into effect. The stay functions as an injunction prohibiting the lender from foreclosing on your home or otherwise trying to collect its debt. This means that any foreclosure activity must be halted during the bankruptcy process.
The lender may file a motion for relief from the stay. The lender may attempt to have the stay lifted by filing a motion seeking permission from the court to continue with the foreclosure. Even if the bankruptcy court grants this motion and allows the foreclosure to proceed, the foreclosure will be delayed at least a month or two. This should provide you with time to explore alternatives to foreclosure with your lender. (Read more about how bankruptcy can help with foreclosure.)
If you want to keep your home, a Chapter 13 bankruptcy might help you accomplish this goal. But if you’re simply trying to buy some time by stalling the foreclosure, a Chapter 7 bankruptcy might be right for you.
Benefits of a Chapter 13 bankruptcy. A Chapter 13 bankruptcy can help you keep your home by restructuring your debts. You will repay debts—some in part and some in full—over a period of three to five years as part of a repayment plan. You might be able to avoid foreclosure and remain in your home with this type of bankruptcy because you can repay any delinquent mortgage payments through the plan.
Also, you will likely pay a fraction (or sometimes, none) of your unsecured debts during the plan period and possibly eliminate certain other debts—like underwater second and third mortgages because they're considered unsecured loans—entirely when you complete your plan, freeing up money for your first mortgage. Even if you can’t complete the plan, filing for Chapter 13 bankruptcy will give you at least several months before a foreclosure can be completed. (For more information, see Your Home in Chapter 13 Bankruptcy.)
Benefits of a Chapter 7 bankruptcy. If you’re already in foreclosure, filing Chapter 7 bankruptcy isn’t usually a good way to save your home, but it will delay the foreclosure proceedings and provide you with time to live in the home without making payments. You can put this money towards saving up for a rental. You can also use this time to try to work with the lender to come up with a way to avoid foreclosure. (Learn more in Your Home in Chapter 7 Bankruptcy.)
And, even if you still go through a foreclosure, the Chapter 7 bankruptcy will eliminate your personal liability for the mortgage debt, which means you won’t be liable for any deficiency remaining after the foreclosure. (To learn more about deficiency judgments, see Deficiency Judgments: Will You Still Owe Money After the Foreclosure?)
While you don’t want to wait until the last minute with this option, you might be able delay a foreclosure by applying for a loan modification (or other foreclosure avoidance option) because the lender could be restricted from dual tracking. Dual tracking is when the lender proceeds with the foreclosure while a loss mitigation application is pending. (Read about laws that restrict dual tracking.)
Ultimately, if your modification application is approved, the foreclosure will be permanently stopped so long as you keep up with the modified payments.
California, Colorado, Nevada, and Minnesota have each passed a Homeowner Bill of Rights that prohibits the dual tracking of foreclosures. This means servicers generally must make a decision to grant or deny a (typically) first-lien loss mitigation application before starting or continuing the foreclosure process. You must submit your application by a certain deadline to get protection from foreclosure under these laws.
Under federal law, if a complete loss mitigation application is received more than 37 days before a foreclosure sale, the servicer may not move for a foreclosure judgment or order of sale, or conduct a foreclosure sale, until:
Be aware that the servicer generally doesn't have to review more than one loss mitigation application from you. But if you bring the loan current after submitting an application, the servicer must consider it.
If your lender is using a nonjudicial process to foreclose—where the foreclosure is completed outside of the court system—then you might be able to delay or stop the foreclosure by filing a lawsuit against the lender to challenge the foreclosure. This tactic normally won’t work if the foreclosure is judicial because by the time of a foreclosure sale, you’ve already had your opportunity to be heard in court.
To prevail in your lawsuit against your lender, you will need to prove to the satisfaction of the court that the foreclosure should not take place because, for example, the foreclosing lender:
The downside to suing your lender is that if you’re unable to prove your case, this will only delay the foreclosure process. Lawsuits can be expensive and, if you have no reasonable basis for your claims, you could get stuck paying the lender’s court costs and attorneys' fees. (Learn more about Fighting Your Foreclosure in Court.)
If you're facing an imminent foreclosure sale and considering any of the options discussed in this article, it is strongly recommended that you consult with a local foreclosure attorney or bankruptcy attorney immediately. To get information about different loss mitigation options, you should also consider talking to a HUD-approved housing counselor.