Does Bankruptcy Stop Foreclosure?
Home. What does your home mean to you? Maybe it is where your son took his first steps on the day you moved into that huge house, after three years living in a tiny cramped Brooklyn apartment. Maybe it is where you wake up and look out your back window to see a scene resembling a Bob Ross painting every single day. Home is where your family congregates, where holidays are celebrated, and where the land beneath your feet belongs to you, and you alone.
Home is your rock – your security. It’s no wonder that for many people, one of the biggest concerns with filing bankruptcy is about foreclosure and saving their home. Many have received threatening letters and phone calls from their mortgage lender and are terrified of the prospect of losing home.
If you are facing foreclosure, you may have wondered (or others may have suggested) using bankruptcy as a means to stop foreclosure in its tracks. Does it work? Does filing bankruptcy stop a foreclosure?
Foreclosure Basics
We won’t dive too deep into the intricacies of foreclosure, mostly because they vary so much by state, but the basic idea of foreclosure is that when you get far enough behind on your monthly mortgage payments, the bank will institute legal proceedings (in some states they have nonjudicial administrative paperwork, rather than court proceedings) to force the sale of your home in order to pay off the debt that you owe them.
Once the home is sold, the bank will pay off the amount that you owe on the loan plus any past due payments, interest, penalties, and fees. If there is anything remaining after those are paid off, you get whatever was left of your home equity from the sale. Conversely, if you owe more than your home sells for, you may owe a deficiency judgment (though in some states or under some deals with lenders, the lender either cannot or voluntarily will not collect this amount).
In most states, you have a right of redemption which would allow you to clear up your past due mortgage payments and “redeem” your mortgage – it basically puts you back in good standing on the loan. But if you do not have the funds to redeem your mortgage, you may be in need of another solution. There are some mortgage modification programs that became popular after the 2008 housing crisis, but depending on how far along you are in the foreclosure process, it may be too late to start negotiations with your lender over modification. That is, unless you can buy some time.
Will a Bankruptcy Stop a Foreclosure?
To keep it short and sweet: yes, bankruptcy can stop a foreclosure, at least temporarily. Immediately upon the filing of bankruptcy, an automatic foreclosure stay is instituted, along with the stay on the collection of all other debts. This means all calls, letters, and debt collection efforts with regards to the foreclosure must halt.
Where you go from there depends on what type of filing you have instituted.
Most individuals, when they file bankruptcy, file a Chapter 7. This is the type of filing that eliminates most of your debt. When it comes to foreclosure, Chapter 7 is all about buying time. Chapter 7 is about eliminating debt, so it won’t help you with a court-instituted payment plan that gets the lender off your back and keeps you in your home. But it will buy you time to move, negotiate a short sale (where your home is sold for an amount less than the outstanding balance of the mortgage but the bank accepts that, rather than pursuing you for a deficiency judgment), or to negotiate further with your lender regarding a mortgage modification program or redemption of your mortgage.
The other major type of bankruptcy filings for individuals are Chapter 13 bankruptcies. These bankruptcies where the court helps you establish a payment plan. Rather than try to eliminate all of your debt, a Chapter 13 is more about getting you on track and up-to-date on payments. With regards to your home, a Chapter 13 filing is very well-equipped to help save your home: junior liens, such as a home equity line of credit, may be stripped out as part of the bankruptcy and eliminated, while your mortgage may be restructured, and you may even be allowed to repay your past due debt over the term of your court instituted payment plan. As a bonus: any deficiencies in terms of owing more than the property is worth may also be eliminated.
Timing Your Bankruptcy Filing Around a Foreclosure
As mentioned, when you file for bankruptcy, a stay on debt collection activities takes effect immediately. This means the foreclosure is halted in its tracks, at least temporarily.
For most people, if their goal is to save their home, you would want to file your bankruptcy before the foreclosure sale happens. Doing so gives you time to negotiate to avoid the foreclosure entirely, such as by negotiating a loan modification or entering into a payment plan as part of your Chapter 13 filing.
On the other hand, there are some situations where you might want to wait until the house is already foreclosed upon before you make your filing. If you do not wish to save your home, it can be advantageous to wait until the home is already foreclosed upon before filing as it will allow you to escape extras like homeowners association dues or condo assessments that may accrue while the foreclosure proceedings are pending.
A bankruptcy filing also allows you to escape a deficiency judgment, though in many states, banks cannot collect a deficiency judgment regardless of whether you file for bankruptcy. Plus, many banks will negotiate with a borrower and allow them to pursue an option such as a short sale or a waiver of deficiency that ensures that there is no deficiency judgment – while these options may mean that a bank eats the loss from selling the house for less than is owed, the bank also gets their remedy of foreclosure or a partial satisfaction of the judgment sooner, rather than fighting with a borrower who is going through bankruptcy.
Is Bankruptcy a Last Minute Savior?
If foreclosure is imminent, you may wonder if bankruptcy is your last hope for saving your home. Before jumping to filing, you may want to take a few minutes to research the alternatives (or discuss them with an attorney). A loan modification program may be a less drastic step to saving your home, assuming you qualify and your lender is willing to work with you. There may be other legal strategies or lawsuits that can be filed to stall a foreclosure and give you time to catch up on your mortgage as well.
But if you are out of other options, bankruptcy filing certainly gives you options. And while it may sound like a bankruptcy filing is going to take longer than you have, emergency bankruptcy filings are possible in many cases — essentially, you prepare a skeleton filing with much of the data required by the court left blank, then amend the filing a short time later. This option is complicated and is best pursued with the assistance of an attorney, but it is immediate and with that immediate filing comes an immediate stay on the foreclosure.
Mortgage Rescue Scams
While bankruptcy filings are an effective tool in delaying or avoiding a foreclosure, they have also become a tool of scammers preying on people who are struggling to stay in their home, according to the Department of Justice. Many of the scammers will call themselves a “mortgage consultant” offering a mortgage rescue program. In the end, they will pocket whatever money they charge you and file a bankruptcy filing without your notice. By doing so, they have kicked off that temporary emergency stay on the foreclosure, buying you time in your home. But, many of them will not tell you about the filing, which means when you fail to show up in court for the bankruptcy proceedings, the judge dismisses the case and your foreclosure is back on. Meanwhile, you’ve lost whatever money you paid to that “consultant” (scammer), you are surprised with a reinstatement of foreclosure proceedings, and you’ve probably lost your home. You may have even lost your chance at filing a bankruptcy due to the scam filing.
The important thing to remember here is that there is a huge difference between a “consultant” and an experienced, licensed attorney. We connect consumers with licensed attorneys exclusively to ensure that you are receiving advice from a qualified professional backed by a state bar license.
Evaluate Your Options With Professional Assistance
There are few things more important than your family’s sanctuary — your home. If you are facing foreclosure and need time to get your loan in order, to save your home, or just to find time to locate a place for your family to live, a bankruptcy filing may be your best shot at buying that invaluable time. However, there are other alternatives to bankruptcy. Before filing bankruptcy, you should discuss your options with an experienced attorney, including alternatives to bankruptcy, types of bankruptcy, and the timing of a potential filing to minimize your debt owed and maximize your chances of saving your home. Schedule a consultation today.
But wait: before you rush to file, are there any considerations that may make this the wrong time to file for bankruptcy and clear your debt?
A Few Words on Types of Bankruptcy Filings
Before we can discuss timing, it is important that you understand the different types of bankruptcy filings. The most common for individuals is a Chapter 7 filing – a legal proceeding that seeks to eliminate nearly all unsecured debt by liquidating your assets (other than exempt necessary assets, such as a car to get to work) to pay off some your debt. Once the assets are gone, the court will typically discharge the remainder of your debt entirely (with the exception of a few non-dischargeable or hard-to-discharge debts, such as student loans or alimony arrears).
The other major type of filings for individuals are Chapter 13 filings, where the court institutes a repayment plan to allow you to get back into the good graces of your lenders by paying back most of what you owe, while eliminating some of your lesser unsecured debt.
Wait Until Your Major Debts Are Known
Both of these types of filings seek to address debt that was incurred before you file — if you expect a major debt, tax, or real estate assessment to hit the books soon, unless you want to pay that bill, you may want to delay your filing until after the bill shows up. Make sure you’ve combed through your files and credit report to find every debt owed – anything not listed in the bankruptcy filing is not discharged.
What Happens When You Declare Bankruptcy? (Use the Automatic Stay to Your Advantage)
When a person files bankruptcy, an automatic stay is issued by the bankruptcy court that halts all debt collection proceedings, including foreclosure proceedings on one’s house and all of those annoying pesky letters about past-due utility bills and parking tickets that you get in the mail.
This is a very big benefit, far beyond the benefit of just silencing those annoying calls and letters. For example, if you are facing foreclosure on your house, filing a bankruptcy case buys you time to work with the lender on a modification or a short sale. It may also buy you time to negotiate your other debts – many lenders would rather take pennies on the dollar than have the debt discharged entirely through bankruptcy. Once they receive that notice of an automatic stay, much of the power in the negotiations falls into your hands.
Think of bankruptcy sort of like you holding them hostage with your finger on the button of a nuclear missile – while you may damage your credit severely by filing bankruptcy, you eliminate their ability to collect on the debt, and so long as you handle your post-bankruptcy financial life responsibly, your credit will recover in a few years’ time. With so much to lose for them, lenders would much rather negotiate for less payment than have a court decide that they get no payment at all.
How Do I Declare Bankruptcy?
While there are many free legal forms out there, and a few legal aid agencies that may be able to help, most people use the services of an attorney to make sure the bankruptcy is done correctly. The reasons for this may seem obvious, but they are worth highlighting: bankruptcy only discharges the debts that are included in the filing. If debts happen after the filing, or are not included on petition, or the paperwork is simply filled out incorrectly, you can miss your chance to discharge some significant debts and may end up in almost as bad of a position as you were before the filing – except this time you do not have the option of filing bankruptcy again to eliminate that debt.
An experienced attorney can also discuss with you alternatives to bankruptcy, such as negotiating down your debt with your lenders.
Whether you hire an attorney or prepare the paperwork yourself, bankruptcy starts with the petition filing. You will also have to complete significant additional paperwork, such as a list of all of your assets and debts. You will likely have to undergo credit counseling as part of your bankruptcy filing as well.
An important thing to remember is that all of this doesn’t have to be done before the automatic stay on debt collection proceedings kicks in. If it is an emergency, such as an imminent foreclosure, you are also able to file a “skeleton filing” where you have only the most basic information included in your petition in order to get that automatic stay to kick in immediately upon filing – and then follow up with an amended petition shortly thereafter. This strategy really needs the assistance of an experienced attorney to make sure you do not blow your entire filing by mishandling the skeleton filing and the follow-up, leaving you with no bankruptcy case or with significant debts omitted from the case.
When is a Bankruptcy Filing Appropriate?
It is hard, if not impossible, to recite every circumstance that might justify a bankruptcy filing. The point of bankruptcy is to eliminate debts that are so severe that you no longer have a chance at paying them back – where the amounts you owe are so substantial that there’s not a reasonable way for you to cover your daily expenses while making minimum payments or any payments whatsoever.
Some signs that bankruptcy filing might be appropriate include an abundance of debt that is already in collections for lack of payment, a pending foreclosure, or a history of barely getting by on minimum monthly payments on credit cards. (Exorbitant interest rates on credit cards mean that a monthly payment barely addresses the principal that you owe, while the interest will exponentially increase the amount that you end up paying by the time those “minimum payments” finally get your credit card bill back to zero).
Only you can make the call about whether filing for bankruptcy is appropriate – there are immediate financial costs, such as a lawyer, the bankruptcy filing fees, plus lots of opportunity costs such as lost credit, mortgage, and other financial opportunities that will be hard to secure for a couple of years after a bankruptcy goes on your record. Discuss these costs, along with alternatives to bankruptcy, with an experienced attorney before making a rash decision or before continuing to suffer the harassment and embarrassment of debt collection activities.
Alternatives to Bankruptcy
At a certain point, after looking at your credit report and all that you owe, it may seem like bankruptcy is your only way out. However, there may be alternatives to bankruptcy that will do less damage to your credit and that allow you to keep more of your assets.
One option is simple negotiation. Past-due mortgages can often be redeemed by paying the due balance or through a loan modification program. Some lenders will allow you to do a short sale that wipes out whatever you owe beyond what the house sells for. Consumer debt, such as credit cards, may be worth negotiating and fighting as well. There are many requirements for lenders and third-party debt collection agencies when it comes to collecting on these debts, and if the debt is old enough, they may not even legally be able to collect. Many of these debt collectors would rather collect something – especially if they know bankruptcy is on the table — rather than write off the entire debt.
On the other hand, if you had enough money to pay off these debts and handle the constant harassment of debt collectors via negotiation and payoffs,, wouldn’t you have already done so? Most people don’t rush into a bankruptcy filing — they do it because they have no choice, even if it does damage their credit in the near term and even if they are required to liquidate some of their assets.
Tips for Timing Your Bankruptcy Filing
There are times when you may not have any choice but to file bankruptcy: when you are facing an imminent foreclosure and need to save your home, for example.
For others, bankruptcy is part of an overall debt reduction and repayment strategy, and if they know when those debts are coming due, or when income is coming in, it may make sense to postpone or push up a bankruptcy petition filing to include a major bill.
For example: bankruptcy can only address debts that are known at the time of filing. If you know that you are going to have new expenses or assessments coming down the road, such as a large bill from a homeowners association, it may make sense to wait until that bill arrives to file.
Similarly, you may need to look at your income and any plan windfalls before picking a filing date. If you make too much right now to file, but you have recently lost your job or had some other reduction in income, you may have to wait to file until you are eligible — the means test usually includes an average of your last six months’ income. Conversely, if you expect a windfall, know that the bankruptcy trustee will be watching your finances for up to six months after the bankruptcy case and may require you to turn over a sudden influx in funds.
One more tip: don’t try to outsmart the bankruptcy court. Many people will think of ideas such as “paying a debt to a loved one” and transfer a few thousand dollars to their mother or a sibling before filing. The bankruptcy court will chase that money down or require you, the filer, to cover the cost.
Is a Lawyer Necessary?
Technically speaking, no. It is entirely possible that you are smart enough and can research enough to handle your bankruptcy on your own. However, considering everything you have to factor in when it comes to the timing of your filing (income requirements, expected windfalls, expected expenses, etc.) and even whether you file at all (after considering alternatives to filing), the advice of a seasoned professional who deals with consumer debt and bankruptcy issues that will factor in heavily to your decision of whether and when to file is invaluable when compared to the blank forms you may find online.
Before you make the decision to file on your own, consider setting up a consultation with an experienced attorney to hear more about how their experience may help you in your particular situation.