“Understanding the Impact of Bankruptcy on Foreclosure”

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Can Bankruptcy Stop Foreclosure?

Yes, bankruptcy can halt foreclosure, at least temporarily. When you file for bankruptcy protection, mortgage lenders are prohibited from initiating foreclosure proceedings until your bankruptcy case is resolved. Additionally, any ongoing foreclosure processes will be paused.

In the long term, whether you file for Chapter 7 (liquidation) or Chapter 13 (wage-earner’s plan) bankruptcy will determine if you can avoid foreclosure entirely or if it will only be delayed.

Can Chapter 7 Bankruptcy Stop Foreclosure?

Chapter 7 bankruptcy can prevent mortgage lenders from starting foreclosure and pause ongoing foreclosures, but it often cannot stop foreclosure permanently. This type of bankruptcy is for individuals whose income is below the median for their area. Debtors must forfeit non-exempt assets, which are sold to pay creditors.

Once this process is complete, the mortgage lender can resume foreclosure unless you can make up the missed payments and continue regular mortgage payments. This delay can be used to arrange new housing.

Can Chapter 13 Bankruptcy Stop Foreclosure?

Yes, Chapter 13 bankruptcy can halt foreclosure proceedings and potentially help you avoid foreclosure altogether. If you have sufficient income, a court-appointed trustee will work with you and your creditors on a repayment plan lasting three to five years. If you can resume regular mortgage payments and make monthly contributions to the repayment plan, you may catch up on missed payments and restore your home loan to good standing.

However, failure to keep up with bankruptcy payments could put your house at risk again.

What Is an Automatic Stay?

An automatic stay is a ban triggered by a bankruptcy filing that prevents creditors from collecting debts, including through foreclosure. This stay gives you time to plan for making delinquent payments and resuming mortgage payments or arranging alternative housing.

How Long Does the Automatic Stay Last?

The duration of an automatic stay varies by state and local law but typically lasts as long as your Chapter 7 case is pending or until the repayment plan in a Chapter 13 case is finalized. For Chapter 7, the stay could last four to six months, while for Chapter 13, it could last three to five years.

Can Lenders Remove the Automatic Stay?

In some jurisdictions, lenders can petition the bankruptcy court to lift an automatic stay. This might happen if the creditor can show that the debtor has no equity in the home, making its sale unbeneficial to other creditors. An automatic stay might also expire after 30 days if the debtor had a prior bankruptcy case dismissed within the past year.

Which Is Worse for Your Credit, Bankruptcy or Foreclosure?

Both bankruptcy and foreclosure are serious negative events for your credit history, but bankruptcy generally has more severe repercussions. Chapter 7 bankruptcy remains on your credit reports for 10 years, while Chapter 13 bankruptcy and foreclosure stay for up to seven years. Both have a negative impact on your credit scores, but their effects lessen over time.

Alternative Ways to Stop Foreclosure

While bankruptcy can prevent foreclosure, it should be a last resort due to its severe consequences. Consider these alternatives:

• Mortgage forbearance: If you face a temporary financial setback, mortgage forbearance can buy you time to get back on track. You’ll need to show you can resume regular payments after the forbearance period and make up missed payments within a short time.
• Sell the house: If you can’t keep up with your mortgage, selling your house before foreclosure may help you settle your mortgage and secure new living arrangements. If the house’s value is less than the mortgage balance, you’ll need the lender’s permission for a short sale.
• Deed in lieu of foreclosure: In this arrangement, you vacate your house by an agreed date, avoiding the expense and stress of foreclosure or bankruptcy. The lender may even provide a “cash for keys” stipend to help you relocate.

The Bottom Line

While bankruptcy can halt foreclosure temporarily, its severe credit consequences make it a last-resort option. If overwhelmed with debt, Chapter 7 can pause foreclosure long enough to find new housing. If you qualify for Chapter 13, a repayment plan could help you get back on track with your mortgage and avoid foreclosure altogether.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your options and find the best solution for your situation.

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