Does Bankruptcy Stop Foreclosure?

The following is a breakdown of what bankruptcy can and can’t do. The automatic stay pauses foreclosure the moment you file, but that protection is temporary and may only delay foreclosure rather than stop it. Chapter 13 may offer a longer-term solution by allowing you to catch up on your mortgage arrearage through a repayment plan or structured payment plan. It may also allow you to keep your home. Chapter 7 can wipe out your mortgage debt, but it doesn’t remove the lender’s lien on the property or prevent a foreclosure sale from proceeding once the stay lifts.

If you are looking to stop a foreclosure or are facing bankruptcy proceedings, contact a bankruptcy attorney near you. They can review your financial situation and explain which chapter gives you the best chance of keeping your home. 

How Foreclosure Works

Many Americans fall behind on their mortgage​ payments. Some lenders and mortgage companies may be willing to work out deals with homeowners through a short sale or a loan modification. Others may not be willing to offer these alternatives.

If you fall behind on mortgage payments, a lender may begin the foreclosure process that’s part of your mortgage contract. The foreclosure process involves the creditor repossessing the house and selling it at a public auction. The proceeds from that auction​ will repay the mortgage and any legal costs.

The foreclosure process takes time. Most creditors rarely act the moment after a single payment is missed. Most arrears need to reach several months past due before a lender takes formal steps toward repossession. If you’re a borrower, that gap gives you time to pursue other paths before foreclosure becomes inevitable. Common alternatives include:

• Loan forbearance
• Short sale
• Deed in lieu of foreclosure

If none of those options work out, bankruptcy becomes worth considering.

How Bankruptcy Temporarily Stops Foreclosure

Regardless of whether you file a Chapter 13 or a Chapter 7​ bankruptcy, the court automatically issues an Order for Relief. This is a federal court order that immediately halts most creditor actions, including a scheduled foreclosure sale. If a foreclosure sale has been scheduled for your home, it will be postponed by law until after the bankruptcy.

Chapter 7 cases typically conclude within four to five months. Chapter 13 cases take three to five years to complete. The stay remains in place throughout, as long as you keep up with your plan payments and the lender doesn’t successfully move to lift it.

Once a foreclosure proceeding begins, your creditor controls the process. In a bankruptcy, you may be able to retain control of the property until the bankruptcy case is finalized through the automatic stay order.

How Chapter 13 Can Stop Foreclosure Permanently

An automatic stay stops creditor collection activity the moment you file. Chapter 13 bankruptcy may let you keep your home by restructuring your debts. Although Chapter 7 may eliminate mortgage debt, it doesn’t prevent the lender from proceeding with the sale at some point.

You can propose a repayment schedule, but must also continue making your regular mortgage payments at the same time. As long as you complete the Chapter 13 plan, the foreclosure does not move forward.

Chapter 13 also allows you to eliminate second or third mortgages through a process called lien stripping. To qualify, your home’s value should be equal to or less than what you owe on your first mortgage, with no remaining equity for the second or third mortgage to attach to. If the condition is met, the court may treat the junior lien as unsecured debt, which often receives little or no repayment under the plan.

Does Chapter 7 Stop Foreclosure?

Chapter 7 can remove your personal liability on a mortgage debt, but it doesn’t remove the lender’s lien on the property. Once the automatic stay expires at the end of your case, the lender can resume foreclosure proceedings. Debt discharged through bankruptcy is generally not treated as taxable income by the IRS, unlike debt forgiven outside of bankruptcy.

In Chapter 7 bankruptcy proceedings, there’s no repayment plan. Instead, the trustee collects all the debtor’s non-exempt assets and sells them. The trustee then uses the proceeds of the sale to pay creditors in accordance with the provisions of the Bankruptcy Code.

Chapter 7 May Not Save Your Home

Chapter 7​ is not designed to keep you from losing your home. It forgives some or all of your debt, but that’s all it does. When you enter into a mortgage, you’re agreeing to use your home as collateral in case you default on your payments.

Chapter 13 keeps foreclosure proceedings on hold while you catch up on payments through your repayment plan, which may allow you to save your home. Chapter 7 forgives your debts​ but doesn’t eliminate the lender’s lien. Once the stay is lifted, the lender can proceed with foreclosure.

Other Considerations for Chapter 7

Since the court’s aim is to compensate creditors for their losses, the bankruptcy trustee may distribute funds from the sale of certain other valuable assets to the creditors. This can include your house. If you have a valuable wedding ring worth more than the dollar amount allowed under the jewelry exemption, the trustee can sell it.

Filing for Chapter 7 is not automatic. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 introduced a means test to determine who qualifies. If your average monthly income over the six months before filing exceeds the state median for a household of your size, your case goes through additional scrutiny to determine whether a Chapter 7 filing would be an abuse of the process. Your disposable income and allowable expenses factor into the analysis. If you don’t qualify for Chapter 7, you may need to file Chapter 13 instead.

Foreclosure vs. Bankruptcy: Key Differences

Depending on a few factors, you may decide to declare bankruptcy​ or go through foreclosure. These factors include your:

• Income
• Debts
• Living expenses

The main difference is that you may be able to experience debt relief​ and keep your home through bankruptcy. Here are some other differences to consider:

Who Initiates the Case

In bankruptcy cases, you start the process by filing a bankruptcy petition. In a foreclosure, the mortgage lender initiates the proceeding to repossess and sell the property.

What Happens After the Case

There is a chance you can keep your home after bankruptcy, but it’s not always possible. A Chapter 7 discharge does not restore your ability to make mortgage payments. Without sufficient income to cover the monthly payments, losing the property may be unavoidable regardless of the filing.

The main difference between bankruptcy and foreclosure is what happens if the property is sold. If the proceeds aren’t enough to cover the debt in a foreclosure sale, you’ll owe money to the creditor. In bankruptcy proceedings, all qualifying debts will be discharged at the end of the case. 

Important Timing Considerations

There are two exceptions to the automatic stay rule that can affect how long bankruptcy postpones foreclosure. It’s important to understand both.

If the Lender Files a Motion To Lift the Stay

The lender can file a motion to lift the stay, seeking permission from the bankruptcy court to proceed with the foreclosure sale. If granted, you won’t receive the extra three to four months. If they fail, the postponement may provide meaningful additional time before a sale can proceed.

If the Foreclosure Notice Has Already Been Filed

Most states​ have laws requiring lenders to give homeowners a certain amount of notice before selling their property. A bankruptcy’s automatic stay won’t stop the clock on this advance notice, but it stops the scheduled foreclosure sale unless the creditor is granted relief from the stay.

For instance, California law requires a lender to wait at least three months after recording a Notice of Default before issuing a Notice of Sale, followed by an additional minimum 20-day period before the sale itself can occur. If a California homeowner files for bankruptcy two months into that required notice period, only one month remains on the clock when they file. The lender may be able to seek permission from the court to proceed with the sale shortly after. As a result, the lender could file a motion to lift the stay and ask the court’s permission to schedule the foreclosure.

How Bankruptcy Will Affect Your Credit

Although bankruptcy and foreclosure both damage your credit, filing for bankruptcy can be a wise choice when trying to rebuild credit. Foreclosure will damage your credit score for years and may still leave you saddled with mortgage debt. Most mortgage creditors will not consider you for future mortgages if you have a foreclosure on your credit history.

In contrast, bankruptcy lets you start fresh. It still damages your credit, but allows you to begin rebuilding good credit sooner. It can also serve as proof that you have learned how to manage your money. Although bankruptcy has negative consequences and may not save you from losing your home, it can be the best option​ for starting fresh with no debt, getting back on your feet, and saving money.

Worst Case Scenario: Losing the House and Still in Debt

In some cases, bankruptcy can’t prevent the loss of your home. This doesn’t make a bankruptcy filing pointless. A discharge can eliminate the mortgage debt that would otherwise follow you after the sale, along with other unsecured obligations like credit card debt and medical bills. It won’t affect obligations like child support or alimony.

Even if you can’t keep your home, bankruptcy can help you dig out from under mortgage debts and tax liability, an important first step towards getting back on your feet. Bankruptcy can also help you save money for the tough times ahead.

Need To Stop Foreclosure? Seek Legal Advice From a Bankruptcy Lawyer

If you’re facing a foreclosure, bankruptcy may help you keep your home. You can learn more about your options by meeting with a bankruptcy attorney experienced in bankruptcy law. They understand the U.S. Bankruptcy Code and state laws. Find a local bankruptcy attorney​ for quality legal advice today.