Foreclosure and bankruptcy seem like a lethal combination, but if
you've already exhausted all other options to stop foreclosure, it may
be time to consider bankruptcy.
You have the right to seek protection from your creditors, including
your mortgage lender, by filing bankruptcy. This will help
you avoid or delay foreclosure.
Here are some ways to work with foreclosure and bankruptcy.
Bankruptcy as a Way to
Delay or Stop Foreclosure:
Once you file either a Chapter 7 or
Chapter 13 bankruptcy, the court immediately issues an Order of Relief
Such an order includes an "automatic stay", which immediately
stops your creditors from commencing or continuing any and all
collection activities. Since your mortgage lender is
considered one of your creditors, a foreclosure is immediately stopped
and postponed while the bankruptcy is pending. The only way
for your lender to continue foreclosure proceedings is if they file a
motion for a "relief from stay".
the bankruptcy will also buy you some time if you need it to close a
refinance or a sale of your property that will either payoff your
existing mortgage loan or reinstate it by paying the delinquent amount
and bringing your loan current with a new 2nd mortgage. In
many homeowners use this strategy to buy at least 30-60 days.
In a Chapter 13, you can have the bankruptcy dismissed
right before a new loan or a sale of the property closes escrow ---thus
The bankruptcy will be reported on
your credit report even if it was quickly dismissed, but since your
credit is already tarnished by this point, it might be worth it to file
in order to avoid foreclosure and save whatever equity you may have.
for a Relief from Stay
This is a motion that
your lender may file to obtain permission
to "lift" the automatic stay
so that they can proceed with the foreclosure. If the
bankruptcy court grants your lender this request, the foreclosure will
unfortunately continue. The likelihood that the court will
grant your lender a relief from stay will depend on how strong their
argument is with regard to your inability to pay or your poor past
you are trying to refinance, reinstate, or sell your property, you must
try to close either transaction before a relief from stay is approved
by the bankruptcy court. With a relief from stay, your lender
will be able to resume the foreclosure and depending on how much time
you have left in the foreclosure process, your lender may be able to
foreclose before you can close on a refinance or a sale of your
property. It would be extremely helpful to consult with an
experienced bankruptcy attorney to help you with this situation.
If you are behind on your payments and have no way of bringing your
loan current , filing a BK Chapter 13 will allow you to repay your late
payments over a scheduled repayment plan that can span over 3-5 years.
The only catch is that you
will need to have enough monthly
income to pay your current mortgage payments plus the incremental
to pay off your arrearage (late payments).
to avoid foreclosure, you will have to make all the required payments
stipulated in your repayment plan. If you fail in making your
scheduled payments, the court has the ability to dismiss your
bankruptcy, allowing your creditors to resume collecting on your debts.
Junior liens (2nd and 3rd
- Your 2nd or 3rd mortage
loan payments may be eliminated in a BK Chapter 13. This is
possible only if the value of your property is only equal to or less
than your 1st mortgage loan. This is true in cases where
property values have dropped so much that there is zero or negative
equity left. This means the value of the property can only
secure the 1st mortgage, leaving any subsequent mortgages "unsecured".
The above situation allows the bankruptcy court to "strip off" any
that are behind the 1st mortgage and
recategorize them as
"unsecured debt". This is helpful to you because
unsecured debt is deemed last priority and will more than likely not
have to be paid.
Learn more about Chapter 13 Bankruptcy
BK Chapter 7 is the most popular for eliminating debts. The
only drawback during a foreclosure and Bankruptcy Chapter 7 is that
Chapter 7 lasts for only
. Foreclosure can resume
right after the four months. Unfortunately, if your
lender is successful in convincing the bankruptcy court grant
permission to continue the foreclosure while your bankruptcy is
pending, you'll have much less time.
It is important to keep in mind that
Chapter 7 will only delay
. It will not stop it as an ultimate
On the bright side, you are able to live in your property,
for free, while your Chapter 7 is in process. You can save
enough money for your next living arrangements.
Another huge advantage of BK Chapter 7 is the elimination of unsecured
debt such as credit card debt and medical bills
It will also
get rid of your mortgage
debt with no tax liability
for your lender's
loss, which you would otherwise be liable to the IRS if you did not
file bankruptcy or cannot prove yourself to be insolvent at the time of
Although a Chapter 7 is a popular choice, it is now a bit tougher to
file since the changes in
Chapter 7 Bankruptcy Laws
Filers must now pass a Bankruptcy
Chapter 7 Means Test
If you are in foreclosure and bankruptcy is something you
are seriously considering, make sure you seek the advice of a qualified
and experienced attorney who can guide you in the right direction.
Return From Foreclosure and
Bankruptcy To Foreclosure Help Center