How Chapter 7 Bankruptcy Can Delay or Stop Foreclosure
Chapter 7 bankruptcy will delay a foreclosure rather than block it permanently. You’re more likely to be able to keep your house if you file for Chapter 13 bankruptcy (see our section on Foreclosure & Chapter 13 Bankruptcy). But even if you think you’ll need to give up your house sooner or later, Chapter 7 bankruptcy can still be very valuable when you’re facing foreclosure.
Filing for Chapter 7 bankruptcy offers different benefits, depending on your situation.
If You Want to Keep Your House
If you want to keep your house and are current on your first mortgage, you can get other debt canceled in a Chapter 7 bankruptcy. This would free up money to put toward payments on your first mortgage.
If your home’s value is less than the amount of your first mortgage, a Chapter 7 bankruptcy can have the practical effect of eliminating (at least temporarily) the need to make payments on a second or third mortgage. This is because bankruptcy eliminates the debt owed under a second or third mortgage (which means the owners of these debts can’t sue you for money), and the holder of the second or third mortgage won't foreclose because the proceeds of the foreclosure sale would go entirely to the first mortgage holder. Of course, if your home later appreciates in value to substantially exceed the amount you owe on your first mortgage, a second or third mortgage lien would have to be dealt with if you wished to sell or refinance your home. For more on the effect of Chapter 7 bankruptcy on second or third mortgages, see our article Eliminate Payments on a Second Mortgage with Chapter 7 Bankruptcy.
If You Decide to Give Up Your House
If you decide to give up your house, by filing for Chapter 7 bankruptcy you can:
- delay foreclosure proceedings for two to four months, and
- get all or most of your debts permanently canceled so that you can have a fresh start after foreclosure.
Bankruptcy is a wonderful way to deal with the various liabilities that you might incur fighting or going through foreclosure. Simply put, with a few exceptions, these debts all go away. And that’s not all. Credit card debts, medical bills, and most money judgments arising from lawsuits over breach of contract or negligence claims go away as well. So if you are up to your neck in these types of debt, bankruptcy is something to seriously consider, whether you want to free up income to pay your mortgage (by decreasing your debt load) or you are headed towards a foreclosure and want to get a fresh start.
Of course, bankruptcy is not for everyone. There are the obvious psychological barriers; no one likes to admit that bankruptcy is really necessary. And if you’re concerned about rebuilding your credit as soon as possible, bankruptcy might best be avoided entirely. In these turbulent times, it’s impossible to tell what kind of a hit bankruptcy will have on your credit or for how long.
Whether or Not You Plan to Give Up Your House
Whether or not you plan to give up your house, you can buy some time just by filing for bankruptcy. As soon as you do, foreclosure proceedings must stop—at least for a while. When you file for bankruptcy, the federal bankruptcy court automatically issues a court order called a stay. It bars creditors, including mortgage lenders, from taking any measures to collect a debt you owe unless the creditor seeks permission from the bankruptcy court to proceed, and the court grants permission after notice and a hearing.
The automatic stay immediately stops foreclosures as well as other creditor actions. If, for example, your home is due to be sold at auction on December 5 at 10 a.m., and you file for bankruptcy at 9:59 a.m. that day, the sale is “stayed” and has no effect even if it goes ahead after you file. But if you file at 10:01 a.m., just one minute after the foreclosure sale, the sale would be valid.
If You Want to Modify Your Mortgage
If you’re interested in modifying your mortgage, see a HUD-approved counselor before you file for bankruptcy. If you are seeking a modification of your mortgage principal or payments, or are attempting to refinance your current mortgage either in or out of the government's Making Home Affordable programs, talk to a HUD-approved housing counselor before filing bankruptcy.
If you’re negotiating a HAMP modification, the bank will suspend the process until after you receive your bankruptcy discharge. Under regulations applicable to HAMP modifications, any new mortgage will contain language stating that you cannot be required to reaffirm the old mortgage debt as a condition of obtaining a modification. Also, the servicer cannot deny you a modification just because you were able to discharge the underlying debt in a Chapter 7 bankruptcy. If, however, you don’t qualify for a HAMP modification (or a modification under any of the other Making Home Affordable programs; see our section on The Making Home Affordable Program), your servicer may reject your modification request due to your bankruptcy under its own non-HAMP policies.
Excerpted from The Foreclosure Survival Guide, by Stephen Elias (Nolo).