If you’re home is in foreclosure, and you’ve exhausted other avenues for avoiding foreclosure, such as a short sale, deed in lieu of foreclosure, or loan modification (for more on such alternatives, see our article on Foreclosures), bankruptcy may help you delay a foreclosure sale or avoid it altogether.
How Bankruptcy Can Delay Your Foreclosure
Once you file for bankruptcy, something called an automatic stay goes into effect immediately. An automatic stay is an order from the bankruptcy court directing your creditors to stop all collection activities. Even if your home is scheduled to be sold at a foreclosure auction the next day, your lender must postpone the foreclosure sale for the duration of your bankruptcy. The automatic stay remains in effect until your bankruptcy concludes, three months or more later.
Your lender can try to get around the automatic stay by filing a motion to lift the stay. In the motion, the lender explains to the court why the foreclosure should be allowed to proceed. If the court agrees and lifts the stay, the foreclosure will be allowed to go forward.
How Bankruptcy Can Help You Avoid Foreclosure
Chapter 7 bankruptcy won’t help you keep your home if you’re already in foreclosure. (For more on what happens to your home in Chapter 7 bankruptcy, see Nolo’s article Your Home in Chapter 7 Bankruptcy.) If your goal is to keep your home, and you’re already behind on your mortgage payments, Chapter 13 bankruptcy may be your only hope.
In a Chapter 13 bankruptcy, you propose a repayment plan to make up your missed mortgage payments over a certain length of time, typically three to five years. You’ll also have to continue making your current monthly mortgage payment during the repayment plan period. If you make all of the payments required under your repayment plan, you’ll avoid foreclosure and your home will continue to be yours.
If you’ve already missed some mortgage payments, you may be wondering how you’ll be able to afford your current mortgage payment in addition to the payment under your Chapter 13 repayment plan. Chapter 13 bankruptcy will help make your mortgage payment more affordable by reducing or even eliminating your unsecured debts, such as credit card debt. And if you have a second or third mortgage on your home, and your home has gone down in value below the amount of your first mortgage, the bankruptcy court can strip off the second and third mortgages and reclassify them as unsecured debts. This will reduce the overall amount you will have to pay out to your lenders each month, thus freeing up your income to pay off your first mortgage.
