Foreclosure may be one of the scariest perspectives a homeowner can face. Does filing bankruptcy stop foreclosure?
Keeping your home bankrupt in Chapter 13
Bankruptcy can trigger visions of lost assets, including the word “SOLD” stuck on your beloved home. However, according to the provisions of Chapter 13 on bankruptcy, this fear does not have to come true.
Chapter 13, commonly known as the “earnings plan”, may be a wise choice for people who are under a mountain of debts but still have a steady income. Unlike Chapter 7’s bankruptcy, where eligible assets can be sold to settle debt, Chapter 13 allows debtors to propose a repayment plan – usually three to five years – depending on income levels. If the debtors follow the plan and all the conditions are met, they receive an exemption from the debts included in the plan.
What is exclusion?
Usually, foreclosure begins after the homeowner is in arrears with mortgage payments. The lender must follow the process described in state law before selling the house at auction. The lender applies proceeds from the sale to the mortgage balance. Whether the lender will be able to recover the remainder of the balance from the borrower – called the shortfall balance – will again depend on state law. The process involves many steps, including notifying the homeowner.
Fortunately, the bankruptcy process will not happen overnight. Usually the lender will not start the foreclosure process until you miss several payments, often three or four. This gives you time to try alternative measures, such as granting a loan, short sale or act instead of taking over the property.
How does filing bankruptcy stop a foreclosure sale?
The bankruptcy law called automatic stay prevents most forms of recovery, including summons, acquisitions, exclusions, evictions and lawsuits. Except for rare circumstances (discussed below), automatic stay will come into effect when you file for bankruptcy.
Because borrowers tend to keep their hopes up to the last minute, foreclosures often happen shortly before the scheduled auction date. In the old days it was often a race to court: a bank representative ran to the county court to organize sales, and the borrower’s lawyer rushed to the federal court to queue to file for bankruptcy.
Today this race is not so crazy. Lenders still need to be in court to make a sale, but the vast majority of bankruptcy petitions are filed online.
Bottom line
Both the consequences and the value of bankruptcy or exclusion depend largely on individual circumstances, so we recommend that you talk to a qualified financial advisor or lawyer before going into bankruptcy before making any decisions about the best path for you. These specialists should be able to assess your unique situation and give the most appropriate advice.
