Foreclosure and Chapter 7 Bankruptcy

With the current state of the economy, many people are considering bankruptcy.  One of the most important steps in deciding whether bankruptcy is the right option for you is getting a firm understanding of how bankruptcy works and whether it will help you achieve your immediate and long terms financial goals, including stopping repossession and foreclosure.  This article will deal specifically with how Chapter 7 bankruptcy impacts foreclosure.

Filing Chapter 7

When a debtor files bankruptcy, the automatic stay immediately goes into effect.  The automatic stay prevents creditors from pursuing any collection efforts against you, including repossession, foreclosure, garnishments, lawsuits, phone calls, and letters.  This means that if your mortgage company has already began foreclosure proceedings against you, those proceedings will stop, temporarily.

Generally, when a debtor who is facing foreclosure files a Chapter 7 case, the mortgage company will immediately file a Motion for Relief from Stay.  By filing this motion, the lender is asking the court to lift the stay with regard to the property which is the collateral for the mortgage loan so that it can move forward with the foreclosure.  In most instances, debtors in Chapter 7 cases have no defense to a Motion for Relief from Stay and, as a matter of course, courts will grant such motions.

Challenging Lender

            However, in the current climate, with lenders being placed under more and more scrutiny, it may be possible to challenge the lender's motion on the ground that the lender doesn't have the right to foreclose because it doesn't actually own the loan.  In other words, a debtor can demand that the lender produce the original promissory note signed by the debtor at the time he obtained the loan before it's allowed to foreclose.  If the lender is unable to produce the promissory note, its motion will probably not be granted and it will probably not be allowed to proceed with the foreclosure.

Motion for Relief

            Once the court grants a lender's Motion for Relief from Stay, depending upon your particular circumstances, several things can occur.  First, unless you are able to reinstate your loan by bringing your payments current and paying all late fees and attorney's fees which may be due, the lender will move forward with the foreclosure.  On the other hand, if you are able to reinstate the loan, you will be allowed to voluntarily continue making your regular monthly mortgage payments as they become due.  However, if at any point before you receive a discharge you default by failing to make your payments, the lender can proceed with foreclosure without further permission of the court.  If, after discharge, you default on a debt that you've been voluntarily paying, the lender can foreclose, but cannot pursue any other collection efforts against you.

Negotiating a Loan Modification

In some instances, you may be able to negotiate a modification of your mortgage and reaffirm the debt.  If you choose to reaffirm any debt, including a mortgage, you will be required to sign a reaffirmation agreement with the lender whereby you agree to pay the mortgage pursuant to the original terms or modified terms as negotiated with your lender.  Any debt that you reaffirm will not be discharged.  This means that if, at any point in the future, you default on the reaffirmed debt, your lender can pursue all collection efforts against you, including foreclosure and a deficiency judgment.

Financial Qualifications for Relief

            If your monthly expenses are greater than your monthly income, there is a presumption that reaffirming a debt will create an undue hardship.  Before you are allowed to reaffirm the debt, you will have to explain to the bankruptcy judge why you should be allowed to reaffirm the debt and how you intend to make the payments.  If you successfully demonstrate to the court that reaffirming the debt will not create an undue hardship for you, you will be allowed to reaffirm it.  On the other hand, if you are unsuccessful, you will not be allowed to reaffirm the debt.

Once you reaffirm a debt, you can rescind the reaffirmation agreement 60 days after it is filed with the court or 60 days after discharge, whichever is later.  If you rescind the reaffirmation agreement, the debt will be discharged and the lender can move forward with foreclosure, assuming, of course, that the court has already granted the lender's Motion for Relief from Stay.

• If you may be facing foreclosure or already in the process, Consult Your Case for Free with a local certified Foreclosure Attorney to see your best options you have available to avoid Foreclosure.