Some people file for bankruptcy in an effort to save their home from foreclosure. But does this strategy work? In some cases it will, but in others it won’t. Although bankruptcy’s automatic stay will temporarily stop the foreclosure, whether you keep your home in the end depends on whether you are behind in your payments, how much equity you have in your home, your state’s exemption laws, and whether you are filing for Chapter 7 or Chapter 13 bankruptcy.
The Automatic Stay and Foreclosure
The minute you file for bankruptcy, the court issues an "automatic stay" (the automatic stay is part of the court’s larger Order for Relief ). Under the automatic stay, your creditors must stop all collection efforts. Any scheduled foreclosure sale will be legally postponed while the bankruptcy is pending.
However, your mortgage lender may bring a “motion to lift the stay.” This is a request that the court permit the lender to proceed with the foreclosure. The court is likely to lift the stay if it’s clear that you won’t be able to save your home through bankruptcy (that is, it won’t sanction further delay if you’re just going to lose your home anyway).
Learn more about bankruptcy's automatic stay.
Chapter 13 Bankruptcy and Foreclosure
If you are behind in your mortgage payments, Chapter 13 is often a good way to save your home. In the Chapter 13 repayment plan, you can pay back any arrears. You will also be required to continue making your regular mortgage payments. If you make all required payments, you will avoid foreclosure. To learn more, see Using Chapter 13 Bankruptcy to Avoid Foreclosure.
Chapter 7 Bankruptcy and Foreclosure
If you are behind in your mortgage payments, Chapter 7 bankruptcy does not provide a way for you to get back on track. In order to save your home, you’ll have to pay the outstanding amounts or work out some other deal with your mortgage lender.
Even if you are not behind in your payments, you still could lose your home in Chapter 7. That’s because the bankruptcy trustee is entitled to take your nonexempt property and sell it to pay your unsecured creditors. Whether the trustee will sell your home depends on (1) how much equity you have in the home, and (2) how much, if any, of your home’s value is exempted. To learn more, see Chapter 7 Homestead Exemption.
Chapter 7 bankruptcy can provide debt relief in other ways, however. For example, by canceling other debt, it may free up more of your income to pay your mortgage. Or, if you are resigned to losing your home, it could delay foreclosure for several months during which time you can save money to move.
If you are in danger of losing your home, consider all of your options before filing for bankruptcy and make sure you understand what will happen to your home in bankruptcy. The New Bankruptcy: Will it Work For You? by Stephen Elias (Nolo), provides a good overview of both Chapter 7 and Chapter 13 bankruptcy, and explains how your home and other property will be treated in each. Or, consider consulting with a local bankruptcy or debt relief attorney.
For more articles on this topic, see Bankruptcy & Foreclosure.