Does Filing 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 of 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 a 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 the foreclosure in its tracks. Does it work? Does filing bankruptcy stop a foreclosure?
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 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 regard 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 filing for individuals is Chapter 13 bankruptcy. These bankruptcies where the court helps you establish a payment plan. Rather than try to eliminate all of your debt, 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, they would want to file for 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 when you file. 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 foreclosure, they have also become a tool of scammers preying on people who are struggling to stay in their homes, 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.