When you file for bankruptcy, the automatic stay prohibits your mortgage lender from moving forward with the foreclosure process. However, how long this protection lasts depends on whether you file for Chapter 7 bankruptcy or Chapter 13 bankruptcy. Generally, Chapter 7 only provides temporary relief from foreclosure. But a Chapter 13 can stop foreclosure, allow you to cure your default, and save your home.
Read on to learn more about how bankruptcy can help you if your home is being foreclosed on.
Bankruptcy Does Not Eliminate Your Lender’s Right to Foreclose
When you take out a mortgage, you normally pledge your house as collateral for the loan. If you don’t pay your mortgage, the bank can sell the house because it has a lien on it. Unfortunately, a bankruptcy discharge does not remove the bank’s lien from your house. However, bankruptcy can still stop or delay the foreclosure process and allow you time to save your home.
The Automatic Stay Protects You Against Foreclosure
The instant you file for bankruptcy relief, an automatic stay is created. The automatic stay prohibits almost all creditors from continuing their collection activities against you. This means that your mortgage lender can’t sell your home or continue the foreclosure process until the stay is no longer in effect. (To learn more, see Bankruptcy's Automatic Stay.)
Your Lender Can Resume Foreclosure If the Automatic Stay Is Terminated
You are only protected against foreclosure as long as the automatic stay is in effect. Normally, the automatic stay terminates when your case is closed. However, under certain circumstances, the court may also lift the stay upon request by a creditor while your case is still pending. (To learn more, see Getting Relief From the Automatic Stay.)
If your lender wants to foreclose during your bankruptcy, it can ask the court to lift the stay by filing a motion for relief from the automatic stay. Most courts will usually grant the motion and lift the stay in Chapter 7 cases or if you fail to make your ongoing mortgage payments during your Chapter 13 (discussed below).
Chapter 7 Bankruptcy Provides Temporary Relief From Foreclosure
Chapter 7 bankruptcy is designed to provide a relatively quick way to wipe out your unsecured debts. In fact, most Chapter 7 bankruptcies are completed within a few months. Since the automatic stay terminates when your case is closed, Chapter 7 only delays foreclosure for a short period of time. Further, most courts will typically lift the stay upon request by your mortgage lender unless you can catch up on your missed payments right away.
As a result, Chapter 7 bankruptcy normally can’t help you avoid foreclosure permanently. However, Chapter 7 can still be helpful because it delays foreclosure and provides you more time to negotiate with the bank or come up with the money to cure your default.
Learn more about your options in our section on Your Home in Chapter 7 Bankruptcy.
Chapter 13 Bankruptcy Can Stop Foreclosure and Save Your Home
If you want to stop foreclosure and save your home, filing for Chapter 13 bankruptcy is usually a better option than Chapter 7. This is because Chapter 13 not only stops foreclosure, but allows you to cure your mortgage default through a repayment plan. Here’s how it works.
How to Catch Up On Your Mortgage Payments Through Your Chapter 13 Plan
When you file for Chapter 13 bankruptcy, the automatic stay stops the bank from selling your house at foreclosure. In Chapter 13, you propose a repayment plan to pay back some or all of your debts including your mortgage arrears (missed payments). While you catch up on your arrears through the Chapter 13 plan, you also continue to make your ongoing mortgage payments as they come due. As a result, when you complete your Chapter 13, you are current on your mortgage. (To learn more, see The Chapter 13 Repayment Plan.)
As long as you make your plan payments and continue to pay your mortgage during your Chapter 13, the stay remains in effect and the bank can’t foreclose on your house. However, if you fall behind on your plan payments, the court may dismiss your case and terminate the stay. Similarly, if you fail to make your regular mortgage payments during the case, your lender can ask the court to lift the automatic stay to resume foreclosure.
Learn more about your options in our section on Your Home in Chapter 13 Bankruptcy.