The 411 on Bankruptcy

If your debt level has affected your health, quality of life, and ability to cope with financial stress it's time to consider the life change that filing bankruptcy can bring. Bankruptcy is a serious action. A bankruptcy will usually remain in your credit report for 7-10 years. The following is information regarding bankruptcy and mortgage foreclosures and is not legal advice.

You might avoid or delay foreclosure of your home by seeking bankruptcy protection. If you are facing foreclosure and cannot come to an alternate solution with your lender, bankruptcy may help.

If you get behind on your mortgage payments, a lender may take steps to foreclose--that is, enforce the terms of the loan by selling the house at a public auction and taking payment of your loan out of the auction. The foreclosure process typically starts after you fall 60 or 90 days behind on your monthly mortgage payments. During this time, you may seek an alternative measure, such as loan forbearance, a short sale, deed in lieu of foreclosure, or the restructuring of your mortgage loan.

If you have already tried and failed with these measures, you may be considering bankruptcy as a possibility for avoiding or stalling foreclosure. There are some ways that filing for bankruptcy can help you:

    • Delaying Foreclosure
    • The Automatic Stay

When you file either a Chapter 13 or Chapter 7 bankruptcy, the court automatically issues an Order for Relief that includes something called an "automatic stay." The automatic stay directs your creditors to cease their collection activities immediately--no excuses. If your home is scheduled for a foreclosure sale, the sale will be legally postponed while the bankruptcy is pending--typically for three to four months.

The Two Exceptions to This General Rule

Motion to Lift the Automatic Stay
If the lender obtains the bankruptcy court's permission to proceed with the sale by filing a "motion to lift the stay", you may not stall the foreclosure for the full three to four months. But even then, the bankruptcy will typically postpone the sale by at least two months, or even more if the lender is slow in pursuing the motion to lift the automatic stay.

Foreclosure notice already filed
Unfortunately, bankruptcy's automatic stay won't stop the clock on the advance notice that most states require before a foreclosure sale can be held (or a motion to lift the stay can be filed). For example, before selling a home in California , a lender has to give the owner at least three months' notice. If you receive a three-month notice of default, and then file for bankruptcy after two months have passed, the three-month period would elapse after you'd been in bankruptcy for only one month. At that time, the lender could file a motion to lift the stay and ask the court for permission to schedule the foreclosure sale.

A Chapter 7 bankruptcy filing is known as a 'liquidation'. In a Chapter 7 filing, a court-appointed Trustee sells your non-exempt assets, as defined by bankruptcy laws, and distributes the proceeds to your creditors. Generally, a Chapter 7 bankruptcy filing only temporarily blocks a mortgage lender's right to foreclose on a debtor's home.

Chapter 7 Cannot Cancel Foreclosure

When you bought your home, you signed two specific documents--a promissory note to repay the mortgage loan, and a security agreement that could be recorded as a lien to enforce performance on the promissory note. Chapter 7 bankruptcy eliminates your personal liability under the promissory note, but it doesn't remove the lien. That's the way Chapter 7 works. It eliminates debt, but not liens--you'll still probably have to give up the house under the lien since that's what provided collateral for the loan.

In a Chapter 13 bankruptcy, the debtor files a Plan that obligates him/her to pay some or all of his/her debts over a period of several years (usually three to five years). A Chapter 13 Plan may permit the debtor to keep his/her home as a part of the Plan by making monthly payments including the payoff of the delinquent mortgage amounts over the Plan term.

As bankruptcy is a legal process, consumers should contact appropriate legal counsel for any questions or legal interpretations regarding bankruptcy, especially as such matters may relate to a specific set of circumstances.