Bankruptcy Filing: Can Bankruptcy Stop Foreclosure?
The immediate power of bankruptcy protection comes from the automatic stay. This provision in bankruptcy law instantly stops most collection actions by creditors, including your mortgage lender. As soon as you file for bankruptcy, the automatic stay kicks in (Investopedia), acting as a temporary injunction that legally prohibits creditors from continuing to collect debts, pursue lawsuits, or move forward with foreclosure actions and the foreclosure sale.
While the automatic stay provides immediate relief, it’s important to understand that the bankruptcy court can lift it, allowing creditors to resume foreclosure actions. However, this temporary pause gives you valuable time to strategize with your bankruptcy lawyer and determine the best path forward, including addressing potential wage garnishments or other unsecured debt.
Prevent Foreclosure with Chapter 7
- Chapter 7 bankruptcy involves liquidating certain assets to pay other creditors and may stop foreclosure proceedings. While it can provide a “fresh start” by discharging many unsecured debts, it generally offers only a temporary pause in foreclosure proceedings. It can pause foreclosure for about four months, but it usually cannot prevent it from ultimately occurring.
- This type of bankruptcy typically does not provide a long-term plan to keep your home. While the bankruptcy court appoints a trustee to oversee the bankruptcy case and ensure creditors are paid, including the mortgage lender, you may still be responsible for paying a mortgage deficiency balance if the sale of your home doesn’t cover the entire debt.
- Chapter 7 is often a viable option for individuals with limited income and assets who are ready to let go of certain property. It’s crucial to understand its potential impact on credit scores and home equity.
Chapter 13 Bankruptcy to Stop Foreclosure
- Chapter 13 bankruptcy is often the preferred option if your goal is to keep your home and catch up on missed mortgage payments.
- This type of bankruptcy involves creating a court-approved repayment plan to pay creditors, including mortgage lenders, over 3 to 5 years.
- Chapter 13 bankruptcy allows you to make up for delinquent payments over time, preventing the foreclosure process from moving forward.
- The repayment plan is structured to ensure that your regular mortgage payments are made, and any missed payments are caught up. Filing for Chapter 13 bankruptcy can also help eliminate payments on junior mortgages, such as second or third mortgages, which can significantly reduce your overall debt burden.
- This option is generally suitable for individuals who have a steady income and want to retain ownership of their home.
- Your bankruptcy lawyer will help you propose a wage earner’s plan that the bankruptcy judge must approve, ensuring you have enough money to make plan payments and cover essential living expenses
The Chapter 13 Confirmation Hearing Process
The Chapter 13 bankruptcy process begins with filing a petition with the bankruptcy court and proposing your repayment plan. This plan must provide for the payment of priority debts, such as mortgage payments, and a portion of unsecured debts, like credit card debt.
The confirmation hearing is a critical step where the court reviews and approves your repayment plan. During this hearing, creditors will have the opportunity to object to the plan. The court will also assess the feasibility of your plan, ensuring you can make the required payments, including your mortgage payments.
Your bankruptcy lawyer will represent you at the confirmation hearing, advocating for your plan and addressing any concerns raised by creditors or the bankruptcy judge. Once the plan is confirmed, you must make regular payments to the trustee, who will then distribute the funds to creditors according to the plan, including your mortgage lender.
Understanding Bankruptcy Discharge
A bankruptcy discharge is a court order that releases you from personal liability for certain debts, including a mortgage deficiency balance that might remain after a foreclosure sale if the property’s value is less than the remaining balance of the mortgage. The discharge can provide a fresh start and allow you to begin rebuilding your credit.
However, it’s essential to understand that not all debts are dischargeable. For example, the debt secured by your first mortgage typically isn’t discharged if you keep the property through a Chapter 13 plan. Your bankruptcy attorney can help you understand the bankruptcy discharge process and identify which debts will be eliminated, ensuring you receive the maximum benefit.
A Simpler Alternative: A Fast Cash Sale
While bankruptcy is a powerful legal tool, it’s a long, complex, and often costly process with significant long-term consequences, including a negative impact on your credit scores for 7-10 years. Before committing to such a demanding legal path, consider another option that can also stop foreclosure: selling your home for cash.
A fast cash sale, like those offered by iBuyHomes, provides a straightforward way to pay off your mortgage debt in full, which completely halts the foreclosure process. This approach offers several compelling benefits compared to filing for bankruptcy:
Avoids Long-Term Credit Damage
You can prevent the significant and lasting credit damage associated with a completed foreclosure and bankruptcy.
No Lengthy Repayment Plan
There’s no need for a 3-5 year court-supervised repayment plan and the strict budget it demands.
True Financial Fresh Start
You can often walk away with your remaining home equity in cash, providing immediate funds to relocate and begin rebuilding your financial stability without the shadow of a bankruptcy case dismissed or ongoing legal obligations.
Simplicity and Speed
A cash sale eliminates the legal complexities, court appearances, and ongoing costs associated with bankruptcy, providing a much faster resolution.
This alternative allows you to take control of your situation, resolve your debt, and move forward with a genuine, fresh start, often with cash in hand.
Powerful Legal Tool for a Bankruptcy Estate
Bankruptcy can be a powerful legal tool (United States Courts) for stopping foreclosure and addressing overwhelming debt, including a mortgage deficiency balance. Understanding the differences between Chapter 7 and Chapter 13 bankruptcy is essential for making an informed decision about your financial future and protecting your home equity.
However, it’s equally important to recognize that bankruptcy may delay foreclosure, but it’s not your only option. For many homeowners, a fast cash sale provides a simpler, quicker, and less damaging path to resolving foreclosure proceedings, paying off your mortgage balance, and getting a genuine fresh start without the lengthy legal process and credit implications of bankruptcy.
If you’d like to see how you can stop foreclosure, pay off your mortgage, and potentially walk away with cash without a lengthy court process, get a free, no-obligation cash offer from iBuyHomes.
