Putting a Stop, at Least Temporarily, to Your Home’s Foreclosure

Both Chapter 7 and Chapter 13 will stop a foreclosure.

 

The Bankruptcy Code says that a bankruptcy “petition filed… operates as a stay, applicable to all entities, of—…  any act to… enforce [any lien] against any property of the debtor…  .” See Section 362(a)(4). This means that the mere filing of your bankruptcy case will immediately stop a foreclosure from happening.

But What if the Foreclosure Still Occurs?

But what if your bankruptcy case is filed just hours or even minutes before the foreclosure sale, but the foreclosing mortgage lender or its attorney can’t be contacted in time for them to be informed? Or what the lender is contacted in time but messes up on its instructions to its foreclosing attorney so that the foreclosure sale mistakenly still takes place? Or what if the lender refuses to acknowledge the effect of the bankruptcy filing and deliberately forecloses anyway?

As long as the bankruptcy is in fact filed at the bankruptcy court BEFORE the foreclosure is conducted, the foreclosure would not be legal. Or at least would very, very likely be immediately undone. It does not matter whether the foreclosure happened mistakenly or intentionally.

A Foreclosure by Mistake

If a foreclosure happens by mistake after a bankruptcy is filed, or because the lender didn’t find out in time, lenders are usually very cooperative in quickly undoing the effect of the foreclosure. It is usually not difficult to establish that the foreclosure occurred after the bankruptcy was filed, and that usually quickly resolves the issue. If a lender fails to undo such a foreclosure after being presented evidence that the bankruptcy was filed first, the lender would be in ongoing violation of the automatic stay. This would make the lender liable for significant financial penalties, so they usually undo the foreclosure right away.

A Foreclosure Purposely Conducted after Your Bankruptcy is Filed

This almost never happens. If you are harmed by a foreclosure intentionally done after your bankruptcy filing, you can “recover actual damages, including costs and attorneys’ fees, and in appropriate circumstances, may recover punitive damages.” See Section 362(k). Bankruptcy judges are not happy with creditors who purposely violate the law. Enough of them have been slapped that most creditors know better.

Chapter 7 vs. Chapter 13

For purposes of stopping a foreclosure that is about to happen, it does not matter whether you file a Chapter 7 or Chapter 13 case. The automatic stay is the same under both.

But how long the protection of the automatic stay lasts can most certainly depend on whether you file a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” That’s because even though you get the same automatic stay, each Chapter gives you very different tools for dealing with your mortgage. That’s why your mortgage lender will likely react differently depending on which Chapter you file under and how you propose to deal with the mortgage within each.

That’s the topic for our next blog. 

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Chapter 7 Bankruptcy Only Buys You Limited Extra Time for Your Home, But It May Be Enough for What You Need

Are you facing a foreclosure sale, aren’t fighting it, but just need more time to move? Or you are on the brink of a sale and need just another month or two to close?

 

Chapter 13 is Often the Better Option for Holding onto Your Home

If you are seriously behind on your mortgage, and you want to keep the home, Chapter 13 is often the way to go. Or if you have a second mortgage, or a tax lien, or child/spousal support lien against your home, Chapter 13 can also be very helpful. It comes with a variety of legal tools that can make it possible to keep your home when it would otherwise be impossible or extremely difficult.

When Chapter 7 is Enough

But you may not need those extra legal tools of Chapter 13, either because you are surrendering the house soon anyway, or because you only need a modest amount of help to be able to keep the house. Chapter 13 can be great, but there’s no point to entering into a three-to-five year payment plan if a Chapter 7 “straight” bankruptcy would give you just the amount of help with your house that you need.

When You Are Surrendering Your House

If you are on the brink of a foreclosure sale, the filing of a Chapter 7 case stops that foreclosure just as quickly as would a Chapter 13 filing. If you just need to buy a relatively short amount of time—a matter of a few weeks or a couple months—Chapter 7 case could be enough.

This can be a sensible solution if you’ve decided to leave the house behind, but need a little more time to pull together the money to make the move. Or you may need a couple more months before your kids’ school year is over, or are waiting for your next housing to become available. In these situations, Chapter 7 could well be the ticket.

When You Are Selling Your House

If you are on the brink of closing a sale of your house, including a short sale, you can file a Chapter 7 case to stop an approaching foreclosure. This can buy some time, but be aware it can complicate things as well. Your bankruptcy trustee will then have some say about what happens to your property, although that should not be a problem if you have no equity or what you have is protected by the homestead exemption. A bankruptcy filing can spook your buyer, so you or your attorney should likely communicate what you are doing and give the appropriate reassurances.

Stopping Other Kinds of Foreclosures

A Chapter 7 filing stops not only foreclosures by your mortgage lender, but also by the county tax assessor for unpaid property taxes, by the IRS on tax liens, by ex-spouses on support liens, or creditors who sued you and got a judgment lien attached to your house. But remember again that this protection only lasts a few months, or even shorter if the creditor is aggressive. But in the right situation it may be enough time either to discharge (write off) the underlying debt—such as with a credit card debt resulting in a judgment lien—or to make payment arrangements with creditors on debts that do not get discharged—such as with the IRS or support enforcement.

Stopping Liens from Attaching to Your Home

Filing a Chapter 7 can also prevent—again at least temporarily—most kinds of liens from attaching to your home. If it is a debt that is going to be discharged in your Chapter 7 case, stopping the lien could make a difference of tens of thousands of dollars.

For example, if you had equity in your home and owed the IRS a substantial amount of income taxes from a number of years ago, the IRS could record a tax lien against your home. If you filed a Chapter 7 case before that were to happen, you may be able to discharge the tax debt (if it meets certain conditions) and be allowed to keep the equity in your home through the homestead exemption. But if you delayed filing the Chapter 7 case until after the IRS filed a tax lien, you would likely have to pay that debt out of the equity in the house (because the homestead exemption does not protect against tax liens).

How Much Time Does a Chapter 7 Buy?

The answer to this question is unfortunately unclear, mostly because it depends on how aggressively your mortgage lender reacts. If it is very aggressive, you may not gain more than a month or so. If it is not, you may gain the three or so months that it takes a simple Chapter 7 case to complete, or even more time. Your attorney may be able to give you a better idea based on the behavior of your creditor in previous cases. 

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