Can You File for Bankruptcy If Your House Is in Foreclosure?

Learn how you can use a bankruptcy case to save your home from foreclosure.

Absolutely. In fact, a Chapter 13 bankruptcy case can help you save a house in foreclosure. The filing will stop the sale and give you a way to catch up on the past due payments, all while helping you manage your other debts, as well.

How Does Filing for Bankruptcy Stop a Foreclosure Sale?

A provision in bankruptcy law called the automatic stay prevents most forms of creditor collection activity, including collection calls, repossessions, foreclosures, evictions, and court cases. Except in rare circumstances (discussed below), the automatic stay goes into effect the moment you file the bankruptcy case.

Because borrowers tend to hold out hope until the last minute, foreclosures often take place shortly before the scheduled auction time. In days past, it was often a race to the courthouse: the bank representative would run to the county courthouse to hold the foreclosure sale while the borrower’s attorney would dart to the federal courthouse to stand in line to file a client’s bankruptcy petition.

Today, that race isn’t so hectic. Lenders still have to be present at the courthouse to conduct a sale, but the vast majority of bankruptcy petitions get filed online. Even if the auction went through, a bankruptcy filing would void any sale the bank holds as long as the debtor (bankruptcy filer) filed the bankruptcy case before the foreclosure sale took place (or in some states, before the bank recorded the foreclosure sale deed in the county land records).

Both a Chapter 7 bankruptcy and a Chapter 13 bankruptcy will trigger the automatic stay and stop a foreclosure. However, filing a Chapter 7 matter will only allow temporary relief because the stay will lift after the court closes the case—usually four to six months after filing. For a more permanent fix, you’ll need to file a Chapter 13 bankruptcy.

The Problem With Filing Multiple Bankruptcies

People have taken advantage of the automatic stay in the past by using it to prevent the lender from completing a foreclosure over and over again. The legislature tightened bankruptcy laws so that the automatic stay isn’t quite as automatic for borrowers who’ve had more than one case pending in a year’s time. Here’s how the current system works:

  • If you file a new bankruptcy case less than a year after a prior case, the automatic stay remains in place only 30 days unless the court agrees to extend it.
  • If you file a new bankruptcy case when you’ve had two prior cases pending during the previous year, the automatic stay doesn’t go into effect unless the court agrees to impose it.

How Can Chapter 13 Bankruptcy Save My House?

A Chapter 13 case allows you to bring your mortgage current by spreading out the arrearages over a three- to five-year repayment plan. You’ll also pay your monthly house payment. By the end of the payment plan, your mortgage will be up to date.

But Chapter 13 bankruptcy can do more than just save houses. Past due payments on other secured debts, like car loans, can be handled in much the same way as mortgage arrearages, or you can put the entire car loan into the plan and stretch out the balance over a longer period, if necessary. For old loans, you might be able to reduce what you owe to the value of the vehicle and lower the interest rate, too.

Some additional benefits include:

  • Depending on the amount of your family’s income and living expenses, you might pay your nonpriority, unsecured debts—such as credit card balances, medical bills, and personal loans—pennies on the dollar (or nothing at all).
  • You can pay your bankruptcy attorney’s fees through your plan, as well.

One aspect of this chapter that can cause some filers a problem is this: You must pay any recent income taxes or past due child support and alimony over the course of the plan. If you owe a significant amount and don’t have enough income to support the monthly payment, Chapter 13 bankruptcy might not be the right choice for you. You’ll likely want to meet with a knowledgeable bankruptcy attorney for more information.

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