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How Bankruptcy Can Help Stop Foreclosure

Jun 10, 2024

Are you trying to figure out if you can file bankruptcy to stop foreclosure? If you’re having trouble making your mortgage payments and you’re facing possible foreclosure, then you may have options including filing bankruptcy.

Woman's hand protecting toy home next to a bankruptcy chapter 13 form - Bankruptcy Can Help Stop Foreclosure
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This guide will walk you through the process of how bankruptcy can help you to stop foreclosure, explaining the steps in a friendly and easy-to-understand manner.

Understanding Foreclosure

What Is Foreclosure?

Foreclosure is a legal process that allows a mortgage lender to take back your home when you’ve fallen behind on monthly mortgage payments. The lender then sells the property to recover the outstanding mortgage balance.

Judicial vs. Non Judicial Foreclosure 

The foreclosure process can vary depending on whether you live in a judicial or nonjudicial foreclosure state.

  • Judicial Foreclosure: In states that require judicial foreclosure, the lender must file a lawsuit in state court to get permission to foreclose. This process involves court hearings and can take several months to complete.
  • Nonjudicial Foreclosure: In states that allow nonjudicial foreclosure, the lender can foreclose without going to court, provided the mortgage agreement includes a power of sale clause. This process is typically faster and less expensive for the lender.

The Role of Bankruptcy in Foreclosure

Can Bankruptcy Help With Foreclosure?

Yes, bankruptcy can help stop the foreclosure process.

When you file for bankruptcy, an automatic stay goes into effect. This bankruptcy’s automatic stay is a court order that temporarily halts most collection activities, including foreclosure proceedings.

However, the lender can request the court to lift the stay if you’ve filed for bankruptcy multiple times or if they can show that the stay is not serving its intended purpose. Bankruptcy can provide significant debt relief, allowing you to address your financial obligations while keeping your home.

How the Automatic Stay Works

The automatic stay is a powerful tool that can provide immediate relief from foreclosure.

As soon as you file for bankruptcy, the stay stops the foreclosure process, giving you time to explore your options and potentially save your home. However, it’s important to act quickly, as the stay is only temporary.

Bankruptcy Options for Foreclosure

There are two main types of bankruptcy that can help you with foreclosure: Chapter 7 and Chapter 13. Each has its own benefits and limitations.

Bankruptcy courts play a crucial role in overseeing the process and ensuring that the terms of the bankruptcy are followed.

Chapter 7 Bankruptcy and Foreclosure

Chapter 7 bankruptcy, also known as liquidation bankruptcy, can provide temporary relief from foreclosure. Here’s how it works:

Man with hand on forehead thinking with paperwork in front of him - Bankruptcy Chapter 7 and Foreclosure - Bankruptcy Can Stop Foreclosure
  • Automatic Stay: Filing for Chapter 7 bankruptcy triggers an automatic stay that pauses foreclosure proceedings for three to four months.
  • Debt Discharge: Chapter 7 can discharge unsecured debts like credit card bills and medical expenses, potentially freeing up money to catch up on mortgage debt.
  • Limitations: Chapter 7 does not provide a way to make up missed mortgage payments. Once the bankruptcy case is closed, the lender can resume foreclosure proceedings if you’re still behind on payments.

Chapter 13 Bankruptcy and Foreclosure

Chapter 13 bankruptcy, also known as reorganization bankruptcy, is often a better option for homeowners who want to keep their homes. Here’s how it works:

  • Repayment Plan: Chapter 13 allows you to create a repayment plan to pay off overdue mortgage payments (arrearage) over three to five years while continuing to make your current mortgage payments.
  • Automatic Stay: Like Chapter 7, filing for Chapter 13 triggers an automatic stay that halts foreclosure proceedings.
  • Income Requirements: To qualify for Chapter 13, you must have enough income to cover your current mortgage payments, living expenses, and the payments required under the repayment plan.
Sticky note on book - Bankruptcy Chapter 11 - Bankruptcy Can Stop Foreclosure

Chapter 13 can also help eliminate payments on a second or third mortgage by recategorizing them as unsecured debt.

Eliminating a Deficiency Balance After Foreclosure

What Is a Deficiency Balance?

A deficiency balance is the remaining amount owed on a loan after the collateral, such as a vehicle or home, has been repossessed or foreclosed and sold at auction. 

Golden house with grey roof near coins on a table - Deficiency Balance After Foreclosure - What are your options

The deficiency balance is calculated by taking the original loan balance plus any associated costs, such as late payments, foreclosure expenses, or auction fees, and subtracting the amount the collateral was sold for.

For example, if you owe $200,000 on your mortgage and your home sells for $150,000 at a foreclosure sale, the deficiency balance is $50,000.

Lenders may pursue legal action to collect deficiency balances through deficiency judgments, which are court orders stating that the borrower owes the remaining debt. 

State laws regulate how and when lenders can pursue deficiency balances, with some states placing limits on deficiency judgments or prohibiting them altogether in certain circumstances.

Filing for Bankruptcy After a Foreclosure Judgment

If your home has already been foreclosed and you’re left with a deficient balance, filing for bankruptcy can help eliminate this debt. Here’s how:

  • Chapter 7 Bankruptcy: In Chapter 7, the deficiency balance is treated as an unsecured debt, similar to credit card debt. Once you receive a discharge, you are no longer liable for the deficiency balance.
  • Chapter 13 Bankruptcy: In Chapter 13, the deficiency balance is included in your repayment plan. After completing the plan, any remaining deficiency balance is discharged. Chapter 13 can also help eliminate payments on second and third mortgages by recategorizing them as unsecured debt.

How bankruptcy can help stop foreclosure?

Filing for bankruptcy can help stop foreclosure in several ways:

Automatic stay:When you file for bankruptcy, an automatic stay goes into effect, which immediately halts all collection activities, including foreclosure proceedings. This gives you time to explore your options and potentially save your home.
Chapter 13 repayment plan:Filing for Chapter 13 bankruptcy allows you to create a repayment plan to pay off your overdue mortgage payments over a period of 3-5 years. As long as you make your current mortgage payments and the payments required under the repayment plan, you can keep your home and avoid foreclosure.
Eliminating unsecured debts:Bankruptcy can help discharge unsecured debts like credit card bills and medical expenses, freeing up funds that can be used to catch up on your mortgage payments.
Lien stripping:In some cases, Chapter 13 bankruptcy may allow you to “strip off” junior mortgages (second or third mortgages) if your home’s value is less than the amount owed on your first mortgage. This can make your mortgage payments more manageable and help you avoid foreclosure.

While Chapter 7 bankruptcy provides only temporary relief from foreclosure through the automatic stay, Chapter 13 offers a more comprehensive solution for homeowners looking to save their homes.

Steps to Filing for Bankruptcy to Stop Foreclosure

Step 1: Consult a Qualified Bankruptcy Attorney

Consulting with a qualified bankruptcy attorney is essential when considering filing for bankruptcy to stop foreclosure.

A knowledgeable attorney can provide valuable guidance and help you understand your options based on your unique financial situation. During a free initial consultation, the attorney will ask questions about your assets, debts, and income to determine if bankruptcy is the best solution for you and which chapter (7 or 13) would be most beneficial.

It’s important to prepare for the consultation by gathering relevant financial documents, such as recent bills, legal notices, and a list of your debts and assets. This information will help the attorney provide a more accurate assessment of your situation.

Lady justice statue - Qualified bankruptcy attorney to stop foreclosure - what you need to know - Bankruptcy Can Stop Foreclosure

Additionally, write down any questions you have about the bankruptcy process or your specific circumstances to ensure you get the most out of the consultation.

Remember that meeting with a bankruptcy lawyer does not obligate you to file for bankruptcy. The goal is to explore your options and make an informed decision based on your individual needs. By consulting with a qualified attorney, you can gain a better understanding of how bankruptcy can help stop foreclosure and provide a path toward financial recovery.

Step 2: Gather Necessary Documents

Document filed in Manilla folders - essential documents for filing bankruptcy - Bankruptcy Can Stop Foreclosure

To file for bankruptcy, you’ll need to gather various personal and financial documents, including:

Personal Information

  1. Photo ID and Social Security Card: Proof of identity.
  2. Proof of Residency: Utility bills, mortgage statements, lease agreements, etc.

Financial Information

  1. Income Documentation:
    • Pay stubs or other proof of income for the past 6 months.
    • Tax returns for the past 2-4 years.
  2. Bank Statements: Last 3-6 months.
  3. Credit Reports: Recent copies from all three major credit bureaus (Equifax, Experian, and TransUnion).

Assets and Liabilities

  1. List of Assets: Detailed list of all personal and real property.
  2. List of Debts: Detailed list of all debts, including secured and unsecured debts.
  3. Statements for all Debts: Recent statements for all loans, credit cards, and other debts.

Expenses

  1. Monthly Living Expenses: Detailed list of monthly living expenses (utilities, groceries, transportation, etc.).
  2. Housing Information: Mortgage statements, rental agreements, or other proof of housing costs.

Legal Documents

  1. Court Filings: Any legal documents related to lawsuits, judgments, garnishments, or foreclosures.
  2. Previous Bankruptcies: If applicable, documentation from any previous bankruptcy filings.

Miscellaneous

  1. Vehicle Documentation: Titles, loan documents, and recent statements for all vehicles owned.
  2. Retirement and Investment Accounts: Statements from IRAs, 401(k)s, and other retirement or investment accounts.
  3. Insurance Policies: Life, health, home, and auto insurance policies.
  4. Educational Loans: Documentation of any student loans.
  5. Child Support/Alimony: Documentation of any child support or alimony obligations or receipts.

Step 3: Complete Credit Counseling

Before filing for bankruptcy, individuals are required to complete a credit counseling course from an approved provider within 180 days before filing their petition. 

Keyboard key - Bankruptcy Credit Counseling - Bankruptcy Can Stop Foreclosure

This mandatory course is designed to help debtors understand their financial situation and explore alternatives to bankruptcy.

When spouses file a joint bankruptcy case, both individuals must take the class and obtain their own separate Certificates of Completion. Failure to complete the credit counseling course before filing could result in the case being dismissed.

Credit counseling courses are available online, over the phone, or in person, and typically cost around $20-$50 per household. The course takes about 60 to 90 minutes to complete and can be taken 24/7 from any device. 

Upon completion, you will receive a certificate that must be submitted with your bankruptcy petition.

It’s important to ensure you choose a credit counseling provider approved by the U.S. Trustee Program for your state or territory. A list of approved providers can be found on the U.S. Trustee Program’s website. 

By completing this required course, you’ll be one step closer to filing your bankruptcy petition and obtaining relief from foreclosure proceedings.

Step 4: File the Bankruptcy Petition

Filing the bankruptcy petition is a crucial step in the bankruptcy process. The petition is an official form that initiates your bankruptcy case and must be filed with the appropriate bankruptcy court. 

When filing the petition, you’ll need to disclose key financial information, such as your name, address, the type of bankruptcy you’re filing (Chapter 7 or Chapter 13), estimated asset values, debt amounts, and the number of creditors.

It’s essential to be transparent and accurate when completing the petition, as you must sign it under penalty of perjury, acknowledging the consequences of lying to the court or concealing property. 

Once the petition is filed, an automatic stay is triggered, preventing creditors from pursuing payments or continuing with foreclosure proceedings. You’ll also be required to attend a meeting of creditors 21-40 days after filing, where the trustee and creditors can ask questions about your financial situation.

To ensure a smooth process, gather all necessary financial documents beforehand, complete the mandatory credit counseling course, and consult with a qualified bankruptcy attorney who can guide you through the petition preparation and filing process.

Step 5: Attend the Meeting of Creditors in Bankruptcy Court

After filing for bankruptcy, you must attend the meeting of creditors, also known as the 341 meeting. This meeting is typically scheduled 21-40 days after filing your petition and is presided over by the bankruptcy trustee assigned to your case.

The main purpose of the meeting is for the trustee to verify your identity and the accuracy of the information in your bankruptcy paperwork. You’ll need to bring a government-issued photo ID and proof of your Social Security number. The trustee will ask you a series of questions under oath about your financial situation, debts, assets, and the reasons for filing bankruptcy.

Although creditors are notified of the meeting and have the right to attend and ask questions, they rarely do so in Chapter 7 cases. The meeting is held in a meeting room, not a courtroom, and no judge is present. Most 341 meetings last less than 10 minutes.

Meeting of creditors on wooden block - The importance of 341 meeting after filing for bankruptcy - Bankruptcy Can Stop Foreclosure

It’s essential to review your bankruptcy petition carefully before the meeting and be prepared to answer the trustee’s questions honestly and accurately. Your bankruptcy attorney will be present to assist you if needed. By attending the meeting of creditors and providing the required information, you’ll be one step closer to obtaining relief from your debts and stopping the foreclosure process.

Step 6: Follow the Bankruptcy Plan

After filing for Chapter 13 bankruptcy, it’s important to adhere to the court-approved repayment plan to successfully complete the bankruptcy process and keep your home. 

Person completing a bankruptcy form - Bankruptcy Can Stop Foreclosure

The repayment plan typically lasts 3-5 years and requires you to make regular payments to the bankruptcy trustee, who then distributes the funds to your creditors according to the plan’s terms.

To ensure the success of your repayment plan, make your payments on time and in full each month. 

If you experience a change in financial circumstances that affects your ability to make payments, promptly notify your bankruptcy attorney and the trustee. In some cases, you may be able to modify your plan to accommodate these changes, but you must obtain court approval to do so.

Throughout the repayment period, maintain accurate records of your payments and any communications with the trustee or your creditors. 

Attend any required court hearings and cooperate with the trustee’s requests for information or documentation. By diligently following your Chapter 13 repayment plan and fulfilling your obligations under bankruptcy law, you can complete the bankruptcy process, discharge your remaining unsecured debts, and keep your home.

Frequently Asked Questions (FAQs)

Will filing for bankruptcy stop foreclosure?

Yes, filing for bankruptcy triggers an automatic stay that temporarily halts foreclosure proceedings and most other collection activities. This gives you time to explore your options for saving your home.

Can I keep my home if I file for bankruptcy?

It depends on the type of bankruptcy you file. Chapter 13 bankruptcy allows you to create a repayment plan to catch up on missed mortgage payments over 3-5 years while continuing to make your current payments. This can help you avoid foreclosure and keep your home. Chapter 7 bankruptcy only provides temporary relief from foreclosure.

Will I lose all my assets if I file for bankruptcy?

No, you will not lose everything you own. Bankruptcy exemptions protect certain assets like your primary residence, vehicle, retirement accounts, and personal property up to certain value limits. A qualified bankruptcy attorney can help you understand what assets you can keep.

How long does bankruptcy stay on my credit report?

Chapter 7 bankruptcy stays on your credit report for 10 years, while Chapter 13 bankruptcy remains for 7 years. However, you can start rebuilding your credit immediately after filing by making on-time payments on your remaining debts and secured loans.

Can I file for bankruptcy without an attorney?

While it is possible to file “pro se” without an attorney, bankruptcy law is very complex. Working with an experienced bankruptcy lawyer can help you maximize debt relief, protect your assets, and navigate any issues that arise during your case. Many offer free initial consultations to review your situation.

Conclusion

Filing for bankruptcy protection can be a powerful tool to stop foreclosure and give you the time you need to get back on track with your mortgage payments. Whether you choose Chapter 7 or Chapter 13 bankruptcy, it’s essential to work with a qualified bankruptcy attorney to navigate the process and make the best decisions for your financial future.

Remember, the sooner you take action, the more options you’ll have to save your home and achieve financial stability.

The Budget Academy
Fab Kellum author of the Girl, Get Out of Debt! blog

Hey you! Welcome to The Budget Academy. I am Fab, a mom, and an entrepreneur at heart. Like many, I have overcome financial struggles, and now I get to share with you how I became debt-free and what I learned on my own personal journey.  I have a Finance and Real Estate background and am passionate about helping others succeed and achieve financial freedom.  So, please don’t be shy, let’s connect and start this journey together! Learn more about me here.