If you fall behind on your mortgage payment for a month or two, you and the mortgage company may be able to work something out. When missing mortgage payments becomes a trend, you’ve got a problem. The consequence of not being consistent with mortgage payments is foreclosure. Filing for bankruptcy is an option that gives you more time to stay or fight.
Foreclosure is the forced forfeiture of your home for failure to pay your mortgage. If the mortgage company or bank wins a foreclosure case against you, your property is put up for auction.
When some people see the bank coming, they’ll quickly hand over the keys to their home in defeat. Others will fight. They may hire a lawyer or go pro se. If you’re a competent pro se litigant, you could add months to the time you’ll have to start packing. Bankruptcy, the process of forgiving debts that can’t be paid, may tack on additional months of delay.
Let’s take a look at bankruptcy in the context of foreclosure.
Things to Consider Before Filing for Bankruptcy
Foreclosure defendants know their situation better than anyone else. They know months in advance that a foreclosure action may be filed against them. They know whether or not they’re able to hire a lawyer, whether they can afford to pay late fees, and how much time they need to move out. During these months, they know so much that they can even prepare to get a lawyer or represent themselves.
When you feel foreclosure pressure and want to save your home, communicate your situation to your lender and see if you can work out a plan to avoid foreclosure. Can you negotiate the debt, modify the payments, refinance? Some lenders will work with you, others won’t, but it’s worth a try. If that doesn’t work, and the foreclosure case proceeds, consider fighting in court until you cannot fight anymore. Use bankruptcy as part of your strategy.
The foreclosure process can be halted by filing for Chapter 7, Chapter 11, or Chapter 13 bankruptcy. “The instant you file for bankruptcy, all foreclosure proceedings must stop. This means that if you file for bankruptcy at 11:59 a.m., a foreclosure sale that happens at 12:00 p.m. is void. Because of this instant relief, many people turn to bankruptcy as a last resort when their efforts to work something out with their lender, like a modification, have failed to materialize.” Nolo
Let’s take a look at ways to stop your foreclosure with the filing of a bankruptcy claim.
Chapter 7 Bankruptcy
If you don’t have enough financial assets to pay your mortgage, a Chapter 7 bankruptcy might be the way to go. This isn’t the best choice when you want to keep your property, but it can buy you time. Here’s how it works roughly.
- You file a petition for Chapter 7 bankruptcy.
- This triggers an automatic stay on foreclosure proceedings in the state court, and grants temporary relief from creditors.
- Rather than negotiate a repayment plan with the lender, terms regarding the liquidation of your assets are agreed upon by all parties.
- Unless the judge gives the lender permission, no foreclosure sale can take place during this time.
- You get three to four months to seek a solution to your financial problems and retain your right to your property.
- Barring payment from the debtor or other solution, your debts are discharged, wiped out.
- After a week or so, the stay in the lower court is lifted. Typically, the lender proceeds with the foreclosure.
Chapter 11 Bankruptcy
A Chapter 11 bankruptcy is appropriate if your assets are too large to qualify for Chapter 13. It involves developing a repayment plan to retain ownership of the property. Unlike Chapter 7, filing for Chapter 11 bankruptcy also gives borrowers the chance to sell their own assets instead of having them liquidated to make payments. Here’s roughly how it works.
- You file a petition for Chapter 11 bankruptcy.
- This implements an automatic stay on foreclosure proceedings.
- You have 120 days to file a “plan of reorganization”.
- You must provide the mortgage company and other creditors with a disclosure statement and a copy of the plan.
- Each creditor must accept the plan.
- If you haven’t filed the plan within 120 days, your mortgage company or other creditor have an additional 180 days to file a plan.
- For good cause, the court may reduce or increase the 120-day or 180-day period.
- The court will confirm the plan if it meets all the requirements of the statute, including that it was proposed in good faith.
- The court does not have to confirm the plan. The judge can dismiss a case or convert it to chapter 7 if he or she feels the case was filed in bad faith. Typically, bad faith arises when a judge feels that a property owner filed a case to save his home knowing that there was no chance of reorganization.
- If the court dismisses the case, the stay is lifted. Foreclosure proceedings will go forward.
- The creditor can move to lift the stay. This is unlikely because they don’t want to pay the costs involved.
Chapter 13 Bankruptcy
Filing for Chapter 13 bankruptcy is not for everyone, but if you’re having financial woes and have enough financial assets to disqualify for Chapter 7 bankruptcy, a Chapter 13 might be for you. Much like Chapters 7 and 11 bankruptcies, Chapter 13 is the magic wand for automatic stays. Chapter 13 does not require creditor acceptance of a plan. It also allows you to cure any defaults under the mortgage and to maintain current payments while the case is pending. Here’s roughly how it works.
- File a bankruptcy petition.
- Filing of the petition triggers an automatic stay of your foreclosure case.
- You have 15 days to file a 3-5 year plan. You can consolidate some debts and re-organize others.
- A court, rather than creditors, confirm the plan based on things like good faith.
- The court has the discretion to dismiss chapter 13 cases or convert them to chapter 7, and the foreclosure proceedings will go forward.
- The creditor can move to lift the stay.
There are options for delaying or avoiding foreclosure, including fighting in court to the bitter end, working with the bank or mortgage company to modify a loan or get a deed in lieu, or filing for bankruptcy. Of these, bankruptcy is the only really sure bet. You file a federal bankruptcy suit and the state foreclosure process comes to a screeching halt. The halt may be temporary, but still it buys you time, which is often all you need. Before filing though, make sure it’s what you want.