Can Bankruptcy Prevent Foreclosure?


Can Bankruptcy Prevent ForeclosureCan bankruptcy prevent foreclosure? The answer is yes, however it depends largely on the details of your case. Generally, a foreclosure proceeding begins with once a homeowner is unable to keep up with mortgage payments and falls behind. The home is then sold off at an auction by the lender in order to get payment for the loan. Then foreclosure process involves several steps, one of which is notification to the homeowner.

The foreclosure process does not begin until you have missed several payments – generally three or four. This way, your lender will give you an opportunity to try alternate measures such as a short sale, loan forbearance, or a deed in lieu of foreclosure.

If you are unable to succeed in any of the alternatives, bankruptcy may help you stall foreclosure in the following ways:

Can Bankruptcy Prevent Foreclosure: The Automatic Stay

Whether you file a Chapter 7 or Chapter 13 bankruptcy, the automatic stay provision in bankruptcy law prohibits creditors from engaging in any collection activities including foreclosures. This means that even if your home is scheduled for a foreclosure sale, it will be postponed for about three to four months pending the bankruptcy filing. It is important to keep in mind that there is an exception to this general rule:

Motion to lift the stay: the lender can file a motion to lift stay. As a result, you may not get the entire three to four months. However, filing bankruptcy will postpone the foreclosure for about two months, and probably even longer if the lender is not quick in obtaining a motion to lift the automatic stay.

How Bankruptcy Can Prevent Foreclosure: Chapter 13

Many homeowners will go out of their way not to loose their homes. If you are behind on your mortgage payments with no possible way to stay current, filing a Chapter 13 bankruptcy may be your only option.

How Does A Chapter 13 Bankruptcy work?

The Chapter 13 bankruptcy payment plan involves proposing a payment plan with the Court. You may include the arrearage over the duration of the payment plan – typically over three to five years. However, your income level must be sufficient to pay both the arrearage and current payments due on the mortgage. Provided that you are able to fulfill these obligations, you will avoid foreclosure and be able to save your home.

Second and Third Mortgage Payments. Filing a Chapter 13 bankruptcy may also help you eliminate payments on your second or third mortgage. If your first mortgage is secured by the value of your home, you may no longer have any equity in the home. As a result, the court is able to “strip off” the second and third mortgages and deem them as unsecured debt. In a Chapter 13 bankruptcy, most unsecured debt takes last priority and may not have to be paid back.

Why You Should Hire a Lawyer

A Chapter 13 bankruptcy can be complicated especially if you are facing foreclosure. As such, it is recommended to hire an experienced Chapter 13 bankruptcy attorney.