However, every case is different. And, if the homeowner can’t prevent foreclosure or has determined that he or she can’t afford to keep the home anyway, it may be more beneficial to hold off on filing bankruptcy until after the foreclosure. The best way to find out whether bankruptcy can help you avoid foreclosure is to consult with an experienced local bankruptcy attorney.
A Bankruptcy Filing Can Pause a Foreclosure Action
Because foreclosure involves secured debt, you cannot simply eliminate the debt as you would unsecured debt in Chapter 7 bankruptcy and keep the house that serves as collateral. However, bankruptcy can often stop foreclosure temporarily, which may provide the homeowner with an opportunity to stop the process permanently.
This slowing down of the process can be especially helpful in states like Alabama, which allow for non-judicial foreclosure, since non-judicial foreclosures can move forward very quickly and with little opportunity for the homeowner to fight the sale.
The Automatic Stay Halts Foreclosure
When you file a bankruptcy petition in either a Chapter 7 or Chapter 13 case, the court will–with limited exceptions–enter an immediate stay preventing creditors from pursuing any further collection action while the stay is in effect. In most Chapter 7 cases, the automatic stay remains in effect until the case is dismissed or discharged. In a Chapter 13 case, it may remain in effect for the duration of the three to five year repayment plan.
However, that doesn’t mean that the mortgage holder will necessarily be prevented from pursuing foreclosure while the case is pending. A secured credit can file a Motion for Relief from Stay, which is a request to the bankruptcy court to lift the stay as to that creditor and allow collection action such as foreclosure to go forward. The likelihood that a creditor will request relief from the automatic stay and be granted leave to move forward with foreclosure or other collection action depends on the specifics of your case. Your bankruptcy attorney can provide more information about the likelihood that your mortgage holder will be granted relief from the automatic stay and how you can effectively use the time available.
Stopping Foreclosure Through Chapter 7 Bankruptcy
The Chapter 7 bankruptcy process was designed to discharge unsecured debt, and so doesn’t provide a solution for most people facing foreclosure. Occasionally, the Chapter 7 process may provide breathing room for the bankruptcy trustee to sell the house prior to foreclosure. This obviously doesn’t save the home, but can be beneficial to the homeowner if there is equity in the house.
Generally, however, the key benefit a Chapter 7 debtor facing foreclosure receives is additional time. Depending on the circumstances, this time may be used to gather resources to attempt to catch up on mortgage debt, to attempt to negotiate a loan modification or other concessions from the lender that will forestall foreclosure, or to make alternative living arrangements. For those who have been juggling mortgage payments with large unsecured debts, eliminating those other debts through Chapter 7 may free up the funds necessary to keep mortgage payments current moving forward.
Paying Delinquent Mortgage Debt through a Chapter 13 Plan
For some homeowners facing foreclosure, the Chapter 13 bankruptcy process offers a real solution. Depending on the debtor’s income and the past-due mortgage balance, it may be possible to include that delinquent debt in the Chapter 13 plan, spreading out repayment of the past-due amount across a three to five year repayment plan.
This isn’t workable for everyone, since the debtor would have to keep current mortgage payments up to date at the same time he or she was making monthly payments to the bankruptcy trustee to pay toward the past-due mortgage balance and any other debts included in the plan. However, for homeowners who have adequate income but fell behind on mortgage debt and can’t pay the delinquent balance quickly enough to prevent foreclosure, Chapter 13 bankruptcy may be the answer.
Managing Deficiency Judgments through Bankruptcy
After foreclosure, some former homeowners face more unpleasant news: they may still owe the mortgage holder money. This situation arises when the foreclosure sale doesn’t net enough money to cover the outstanding balance on the loan and any costs of foreclosure.
While some states have laws protecting those who have lost their homes to foreclosure from further liability, deficiency judgments are permitted in Alabama, Mississippi, and Tennessee. Obviously, facing a large judgment and collection action can create real obstacles to rebuilding after foreclosure.
Since any debt remaining after a foreclosure is unsecured, a deficiency judgment can typically be discharged in Chapter 7 bankruptcy. This is generally true whether you file for bankruptcy before or during foreclosure and surrender or lose the house during the process or you file for bankruptcy after foreclosure. However, the timing of your bankruptcy petition may be important for other reasons, so it is in your best interests to consult with an experienced bankruptcy attorney before taking any action.
Here’s what Brad Botes had to say on the matter:
Brad Botes is a principal of each of the Bond & Botes Law Offices throughout Alabama, Mississippi, and Tennessee. He holds a Bachelor of Science from the University of North Alabama, and a Juris Doctorate from Cumberland School of Law at Samford University. He and his team of bankruptcy lawyers have spent over 30 years guiding people through financial challenges. Read his full bio here.