Typically, a foreclosure begins after a homeowner falls behind on mortgage payments. The lender must follow the process outlined in state law before selling the home at auction. The lender applies the sales proceeds toward the mortgage balance. Whether the lender will be able to collect any remaining balance from the borrower called a deficiency balance will again depend on the laws of the state. The process involves numerous steps, including notification to the homeowner. Fortunately, the bankruptcy process won’t happen overnight. Usually, a lender won’t begin the foreclosure process until you’ve missed several payments, often three or four. That gives you time to try some alternate measures, such as loan forbearance, a short sale, or a deed in lieu of foreclosure. But if you’ve already tried and failed with these measures, it makes sense to consider whether bankruptcy can help you avoid foreclosure, or at least buy you a little time. Here are some ways that filing for bankruptcy can help you.
When you file either a Chapter 13 or Chapter 7 bankruptcy, the court automatically issues an order (called the order for relief) that includes a wonderful thing known as the “automatic stay.” The automatic stay directs your creditors to cease their collection activities immediately.
If your lender had scheduled your home for a foreclosure sale, and you file for Chapter 7 bankruptcy, the sale will be legally postponed while the bankruptcy is pending typically three to four months. However, the lender can ask the bankruptcy court for permission to proceed with the sale by filing a “motion to lift the automatic stay.”
If successful, you won’t get the full three to four months.
But, even so, it takes time for the motion to be filed and heard, so 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.
How Chapter 13 Bankruptcy Can Help
Many people want to remain in their home and will do whatever they can to stay in their home for the indefinite future. If that describes you, and you’re behind on your mortgage payments with no feasible way to get current before foreclosure, the only way to keep your home is to file a Chapter 13 bankruptcy.
How Chapter 13 works
Chapter 13 bankruptcy lets you pay off the “arrearage” (late unpaid payments) over the length of a Chapter 13 repayment plan you propose five years in most cases. But, you’ll need enough income to meet your current mortgage payment in addition to paying off the arrearage. Assuming you make all the required payments up to the end of the repayment plan, you’ll avoid foreclosure and keep your home.
2nd and 3rd mortgage payments. Chapter 13 bankruptcy might also help you eliminate the payments on your second or third mortgage. Here’s how it works. If your first mortgage is secured by the entire value of your home (which is possible if the home has dropped in value), you might no longer have any equity with which to secure the later mortgages. That allows the Chapter 13 court to “strip off” the second and third mortgages and recategorize them as unsecured debt which, under Chapter 13 bankruptcy, takes last priority and often does not have to be paid back at all. As home equity rises, this approach is used less frequently.
The great recession hit home equity hard, and it was unusual for a bankruptcy filer to have much, if any, equity in a home. Since that time, home values have continued to climb. Now a filer must carefully consider the ability to fully protect equity with the homestead exemption allowed by filer’s state. If the homestead exemption isn’t sufficient, to keep a house, a filer will have to pay the value of the nonexempt property in the repayment plan, too.
The Automatic Stay
If you file bankruptcy before the bank starts a foreclosure or before the foreclosure ends, an automatic stay will prevent creditors from initiating or continuing collection activities and will delay a pending foreclosure. The stay is effective as of the date the bankruptcy is filed.
But if you stop making your mortgage payments, or you’re already behind, the lender might choose to file a motion for relief from stay. If the bankruptcy court grants the motion, the lender will be allowed to proceed with the foreclosure. Alternatively, the lender might decide to wait to proceed with the foreclosure until after the bankruptcy case has been completed.
The Bankruptcy Discharge
Most debtors who file for bankruptcy do so to obtain a discharge, or release, from personal liability for certain types of debts. With a Chapter 7 bankruptcy, the discharge is normally given once the time for creditors to object to the discharge (or to file a motion to dismiss the case for substantial abuse) has expired, usually a couple of months after the bankruptcy is filed. With a Chapter 13 bankruptcy, the discharge will be granted after completion of the payment plan, which is generally three to five years in duration. A bankruptcy discharge regarding a mortgage loan eliminates the borrower’s personal liability for that debt.
After a mortgage debt is discharged, the borrower can’t later be held responsible for repaying the deficiency. (In some states, lenders are able to sue homeowners for the difference between the outstanding mortgage debt and the foreclosure sale price and get a deficiency judgment a personal judgment against the borrower, but not if the borrower’s mortgage debt was discharged in bankruptcy.)
Foreclosure of the Mortgage Lien
Even though the borrower is no longer personally liable for the mortgage debt after a discharge, the lender still has the right to foreclose if the borrower isn’t making payments. While the bankruptcy discharge eliminates the borrower’s personal liability for the mortgage debt, it doesn’t wipe out the lien that was recorded against the property.
A mortgage obligation consists of two parts: a promissory note and a mortgage (or deed of trust). The promissory note is the personal promise to pay back the money borrowed to purchase the property. This obligation is what’s eliminated by a bankruptcy discharge. The mortgage or deed of trust, on the other hand, establishes the lien on the property. Though the bankruptcy discharge will eliminate the personal obligation under the promissory note, it won’t wipe out the lien that encumbers the real estate. As a result, the lender may still foreclose its lien once the automatic stay is lifted or once the bankruptcy is complete if the borrower has defaulted on payments.
Filing for Chapter 7 or Chapter 13 Bankruptcy
If you file a Chapter 7 bankruptcy, you can probably keep the home if you’re current on the mortgage payments and you don’t have much equity. But you’ll likely lose the home in the bankruptcy (which happens when the bankruptcy trustee sells your home to pay off creditors) if there’s significant equity. If you’re behind on your mortgage payments, you’ll likely eventually lose your home to foreclosure, even if the bankruptcy trustee doesn’t sell the home. If you’re planning on letting the home go in foreclosure, filing for Chapter 7 bankruptcy can delay foreclosure for a short period.
In a Chapter 13 bankruptcy, the debtor pays all or a part of debts over time through a repayment plan. With this kind of bankruptcy, you can pay off a mortgage arrearage over the duration of the repayment plan, typically three or five years, depending on your income and the time it will take you to meet all the plan’s requirements. Filing for Chapter 13 bankruptcy is especially helpful if you’re behind in mortgage payments, want to keep your home, and need time to get current on payments.
When to Seek Counsel
There are many legal complexities involved with both bankruptcy and foreclosure. If you’re facing foreclosure and contemplating filing for bankruptcy, it’s a good idea to consult with a qualified attorney to help you through the process and ensure that you fully understand all of your rights and options under the law.
When You Should File for Bankruptcy After the Foreclosure
Below are some situations where you might want the foreclosure sale to go through, and then file for bankruptcy.
When You Don’t Want to or Can’t Pay Homeowner’s Association or Condominium Dues
You are not liable for payment of dues to a homeowner’s association or condominium association if those dues are assessed before your bankruptcy petition is filed. However, you are liable for dues assessed on property in your name after you file for bankruptcy.
If you file your bankruptcy after the foreclosure sale you avoid having to pay dues assessed after you file, because the property is no longer in your name. Any dues that you owe would be those assessed before your filing, and they would be wiped out in your discharge. The same is true for any code violations, fines, or other new charges related to the home.
If You Are Only Filing Bankruptcy to Avoid a Deficiency
If the only reason you are filing for bankruptcy is to avoid a mortgage deficiency balance, you could be jumping the gun by filing before your foreclosure sale because you may not be liable for a deficiency anyway.
If You Have Assets or Property of Value
Many states have laws that allow a debtor to keep more personal property if the debtor does not own a home. You may be able to keep property you otherwise would have lost by filing for bankruptcy after the foreclosure sale, when you no longer own a home.
When You Have No Choice
In many cases, you won’t have a choice regarding the timing of your bankruptcy. For example, perhaps you need to file for bankruptcy immediately because of other lawsuits, wage garnishments, or other immediate threats to your money or property. You should always consider your total financial picture when determining the best time to file for bankruptcy.
Effect of Chapter 13 Bankruptcy on Foreclosure
In many cases, exemptions will not protect your home from being liquidated to repay creditors in Chapter 7 bankruptcy. However, if you want to stall the sale and try to negotiate with the lender, filing for bankruptcy can buy you that time. The Chapter 7 bankruptcy will also cancel any debt secured by your home, including the debt of junior mortgages or home equity loans. Filing for Chapter 7 is not a good choice for those who do not want to give up certain property, including in many cases their homes.
For most homeowners who want to keep their homes, Chapter 13 is a better choice because it affords more options. In a Chapter 13 bankruptcy, you can pay off the late payments over the length of the repayment plan, as long as you continue to meet your current mortgage payments as well. If you make timely payments under your Chapter 13 debt repayment plan, you can avoid foreclosure.
Sometimes the reason homeowners are late on mortgage payments is because they have multiple mortgages. For some homeowners, the value of their houses has dropped since the most recent economic crisis, and their second or third mortgages are no longer fully secured by the value of the house. If there is not enough equity to secure one or more junior mortgages, you can use lien stripping to save your home. This means that you can ask the Chapter 13 bankruptcy court to strip the junior mortgages that are not secured and re-categorize them as unsecured debt. Unsecured debts are the lowest priority debts in bankruptcy and may not be paid back fully or at all.
Some debtors may be legitimately concerned about the effect of bankruptcy on their credit scores. However, foreclosure not only damages your credit score for years, but it also does not get rid of other debt and can be harmful in future efforts to buy a house. If you receive a bankruptcy discharge, you may also suffer harm to your credit score, but because you are left with a fresh slate after the discharge, you do have a chance to rebuild better credit.
What Is an Emergency Bankruptcy Petition?
When you don’t have time to complete all required bankruptcy forms, you can take advantage of the automatic stay by filing an emergency bankruptcy petition. An emergency petition lets you file for bankruptcy by filling out a few forms and taking a credit counseling course. You then have 14 days to complete the rest of the required paperwork and file it with the court.
An Emergency Petition Can Stop a Foreclosure Sale
Many people want to stop a foreclosure on the eve of bankruptcy. An emergency petition can do just that. If you have more time, it’s a good idea to find out when you’ll need to file your bankruptcy petition.
How quickly a lender can foreclose on your home depends on state law. If you received a foreclosure notice from the bank, you’d want to read it carefully to determine the date of your foreclosure (or trustee) sale. In most states, your lender must give you ample notice of your default and wait a certain statutory period before setting a foreclosure sale date.
The moment you file for bankruptcy relief (including an emergency petition) an automatic stay goes into effect that prohibits your lender from going forward with the foreclosure sale. Bankruptcy can delay or stop the foreclosure process as long as the home hasn’t been sold. But once the lender sells your home, you no longer own it, and bankruptcy can’t help you.
How to File an Emergency Bankruptcy Petition
In most cases, you can file an emergency bankruptcy petition by completing the following forms:
• Form 101 – Voluntary Petition for Individuals Filing for Bankruptcy
• Form 121 – Your Statement About Your Social Security Numbers
• the names and addresses of all of your creditors (the creditor mailing list or mailing matrix—check with your court for formatting requirements)
• a credit counseling certificate requirement or a waiver request, and
• a filing fee, a request for a fee waiver, or a request to pay the fee in installments.
Some courts might require additional forms. You’ll want to check with your local bankruptcy court to learn the requirements in your district. You can find it using the Federal Court Finder.
Again, after filing the emergency petition, you have 14 days to file the rest of the required bankruptcy forms and schedules. Failure to do so will typically result in the dismissal of your case without prejudice (you can file again right away).
Free Initial Consultation with Lawyer
It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
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