For people who wish to maintain their primary homes, but who have fallen behind on their mortgage loan payments, bankruptcy is often a remedy utilized to stop the mortgage foreclosure process. Depending on the type of bankruptcy proceedings you choose, you may be able to retain possession of your home, delay or stop foreclosure proceedings, and still effectively deal with your other debts.
How Bankruptcy Can Stop Foreclosure
Federal bankruptcy law mandates that all debt collection efforts against you stop once you have filed bankruptcy. Debt collection efforts include lawsuits related to debts, including mortgage foreclosure actions. Therefore, where a mortgage foreclosure lawsuit is pending, a bankruptcy filing, whether it is pursuant to Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code, will cause the foreclosure action to come to a standstill until the bankruptcy proceedings are resolved.
Chapter 7
A Chapter 7 bankruptcy proceeding typically involves significant debts, but few or no assets. In order to qualify for a Chapter 7 bankruptcy discharge, you must demonstrate an inability to repay your debts due to insufficient income to do so; any assets that you do own are typically liquidated in order to repay at least a portion of your debts, subject to certain types and amounts of exempt property. Therefore, you typically cannot cure past due mortgage payments, or ultimately save your home, through Chapter 7 bankruptcy proceedings, unless you have remained current on your mortgage payments and choose to Reaffirm, or continue paying, that debt.
Chapter 13
On the other hand, a Chapter 13 bankruptcy action is the only type of bankruptcy that will allow you to cure your past-due mortgage payments and effectively prevent a mortgage foreclosure. A Chapter 13 bankruptcy requires you to enter into a payment plan regarding your debts over a three to five-year period, including current payments on your mortgage loan(s), as well as any past-due payments. Thus, by successfully completing a Chapter 13 bankruptcy, you can stop a mortgage foreclosure and save your home.
Automatic Stay and Delaying Foreclosure
Whichever type of bankruptcy proceedings you choose, however, filing the bankruptcy petition activates what is known as the “automatic stay”. The automatic stay prevents creditors from taking any further action against you to collect debts that you owe, including your mortgage loan. Therefore, even if you have filed Chapter 7 bankruptcy proceedings, and you do not intend to keep your home, the automatic stay will delay the foreclosure process and allow you to live in your home for an additional period of time.
Filing bankruptcy, particularly in the midst of a mortgage foreclosure, can be relatively complex and often necessitates certain timing. As a result, it is essential that you contact an experienced bankruptcy attorney to help you through this process.
