Can Bankruptcy Stop Foreclosure? Understanding Your Options

Filing for bankruptcy is a challenging decision that no one wants to face. However, if the alternative is losing your home to foreclosure, it may be a worthwhile consideration. Bankruptcy can offer a temporary or even permanent solution to foreclosure, depending on the type of bankruptcy filed. In this blog, we will explore how bankruptcy can impact foreclosure and discuss alternative ways to stop foreclosure. If you need personalized mortgage services, contact O1ne Mortgage at 213-732-3074.

Can Bankruptcy Stop Foreclosure?

The short answer is yes, bankruptcy can stop foreclosure, at least temporarily. When you file for bankruptcy protection, mortgage lenders are prohibited from initiating foreclosure proceedings against you until your bankruptcy case is resolved. Additionally, any foreclosure proceedings already in progress will be halted temporarily.

The long-term outcome depends on the type of bankruptcy you file. Whether you file Chapter 7 (liquidation) or Chapter 13 (wage-earner’s plan) bankruptcy will determine if you can avoid foreclosure altogether or if it is merely paused for a time.

Can Chapter 7 Bankruptcy Stop Foreclosure?

Chapter 7 bankruptcy can prevent mortgage lenders from initiating foreclosure and pause foreclosures that are already in progress. However, it often cannot prevent foreclosure altogether.

Chapter 7 bankruptcy, also known as liquidation bankruptcy, is an option for individuals whose earnings fall below the median income for their communities. Debtors who qualify typically must forfeit all assets that exceed an amount exempted by law, which are then sold so the proceeds can be distributed among creditors.

Once that process is complete, the mortgage lender can resume foreclosure unless you come up with sufficient funds to make up the missed payments that triggered foreclosure in the first place and then resume regular mortgage payments. Depending on your situation, this may not be possible, and foreclosure continues after a pause. You can take advantage of this delay to work out new housing arrangements.

Can Chapter 13 Bankruptcy Stop Foreclosure?

Yes, filing for Chapter 13 bankruptcy halts foreclosure proceedings in the same way Chapter 7 does, but it also can enable you to avoid foreclosure altogether.

If you have sufficient income to qualify for Chapter 13 bankruptcy, a court-appointed trustee will work with you and your creditors on a three- or five-year plan for making full or partial repayment of your debts. If you can afford to resume regular mortgage payments while making monthly contributions to the court repayment plan, you may be able to catch up on any missed mortgage payments and restore your home loan to good standing by the end of the bankruptcy repayment period, permanently avoiding foreclosure.

Failure to keep up with your bankruptcy payments, however, could put your house at risk once again.

What Is an Automatic Stay?

An automatic stay is a ban, triggered by a bankruptcy filing, that forbids creditors from attempting to collect debts, including through foreclosure. This stay allows you some time to come up with a plan to make delinquent payments and resume your mortgage payments (avoiding foreclosure) or arrange alternative housing (if you will not be able to avoid foreclosure).

How Long Does the Automatic Stay Last?

The duration of an automatic stay can vary with state and local law, but it is typically in force as long as your Chapter 7 bankruptcy case is pending, or until the repayment plan in a Chapter 13 case is finalized.

For a Chapter 7 case, the stay could last four to six months, the typical amount of time it takes to receive a discharge. In a Chapter 13 case, your stay could last three to five years, or however long your repayment plan is set to last.

Can Lenders Remove the Automatic Stay?

Under certain conditions in some jurisdictions, lenders can petition the bankruptcy court to lift an automatic stay.

Circumstances that might allow this include if the creditor can show that the debtor has no equity in a home subject to foreclosure, and that its sale therefore cannot benefit other creditors in the bankruptcy case.

An automatic stay might also expire on its own after 30 days if the debtor had a prior bankruptcy case dismissed within the past year. If the debtor had two or more bankruptcy cases dismissed within the past year, no automatic stay would apply at all.

Which Is Worse for Your Credit, Bankruptcy or Foreclosure?

Bankruptcy and foreclosure are both serious negative events in your credit history, but bankruptcy generally has more severe repercussions. Chapter 7 bankruptcy remains on your credit reports for 10 years from the date you file for protection with the court. Chapter 13 bankruptcy and foreclosure both remain on your credit reports up to seven years—with Chapter 13 dating from the bankruptcy filing date and foreclosure dating from the first missed payment that eventually prompted foreclosure. Bankruptcy and foreclosure have a negative impact on your credit scores as long as they remain on your credit reports, but their negative effects lessen over time.

Alternative Ways to Stop Foreclosure

Bankruptcy can prevent foreclosure, but, given its severe consequences, it’s probably best to view it as a last resort. Before seeking bankruptcy, consider these other alternatives to foreclosure.

Mortgage Forbearance

If you are unable to keep up with mortgage payments because of a temporary financial setback, such as a medical emergency or temporary loss of income, mortgage forbearance can buy you time to get back on track. You’ll be expected to show that you can resume regular mortgage payments once the forbearance period ends, and to make up any payments missed during forbearance (with interest) within a short time—typically within 12 months following the end of forbearance.

Sell the House

If you cannot keep up with your mortgage, putting your house on the market before your lender initiates foreclosure may be a way to get out from under your monthly payments. If your house’s market value is more than the balance on your mortgage, you can sell the house, use proceeds of the sale to settle your mortgage and put whatever funds may be left over toward securing new living arrangements. If your house’s market value is less than what you owe on the house, you’ll need the lender’s permission to conduct what’s known as a short sale, which could leave you owing the bank money (or owing taxes on any portion of your mortgage balance that the lender agrees to forgive).

Deed in Lieu of Foreclosure

In a deed in lieu transaction, you vacate your house, leaving it in good condition, by an agreed-upon date. You lose your home but avoid the expense and anguish of pursuing foreclosure (or bankruptcy) in court. Because this also saves the lender money, they may even provide you with a “cash for keys” stipend you can use to relocate.

The Bottom Line

While bankruptcy can halt foreclosure, at least temporarily, its severe consequences for your credit should make it a last-resort option. But if you’re overwhelmed with debt and bankruptcy is inevitable, Chapter 7 can pause foreclosure long enough to give you time to find new housing. If you have sufficient income to qualify for Chapter 13 bankruptcy, a repayment plan could enable you to get back on track with your mortgage and avoid foreclosure altogether.

If you need expert advice and personalized mortgage services, don’t hesitate to contact O1ne Mortgage at 213-732-3074. Our team is here to help you navigate through these challenging times and find the best solution for your needs.