If a foreclosure sale on your property has been scheduled to occur in the next few days, you can stop the sale immediately by filing for bankruptcy. As soon as you file for bankruptcy, a provision called the "automatic stay" immediately goes into effect. The automatic stay will stop the foreclosure.
Foreclosure and Bankruptcy
Foreclosure usually starts because a homeowner has missed multiple mortgage payments for some period of time. Eventually the mortgage holder takes legal action to sell the house using a foreclosure auction in order to get paid. First the lender has to notify the homeowner. After that the foreclosure process itself can take some time, during which the homeowner can try to renegotiate the loan, do a short sale on the house, or create a deed in lieu of foreclosure. On some situations, filing for bankruptcy can delay a foreclosure and/or save a debtor’s home.
Filing for bankruptcy will cause the bankruptcy court to issue an automatic stay. The stay order requires creditors to stop all attempts to collect debts, including stopping a mortgage holder from foreclosing. Even if the lender has already scheduled the auction, the sale must be postponed for 3-4 months, unless the creditor can get the court to lift the stay. Even if creditor succeeds at lifting the stay, usually the sale will still be postponed, buying you time to make other arrangements. This varies from place to place, so consult with your attorney to determine your best course of action. This can be complicated stuff.
Effect of Chapter 7 on Foreclosure
In a Chapter 7 bankruptcy, your exemptions will not protect your home against eventually being sold to repay the mortgage holder and/or other creditors. However, to delay the sale and try to negotiate with the lender, filing for Chapter 7 bankruptcy can delay the foreclosure. Your Chapter 7 will also wipe out any other debt secured by your home, like a second mortgage or home equity loan. But Chapter 7 is not a good choice if you want to hold onto your home or other real property.
Effect of Chapter 13 on Foreclosure
Chapter 13 bankruptcy is a better choice if you want to keep your home, because it provides more options. In a Chapter 13, you can catch your late payments up over 3 to 5 years), as long as you make all future mortgage payments on time. If you make all your payments on time under your Chapter 13 payment proposal, you can stop the foreclosure.
Sometimes people are late on their mortgage payments because they have too many mortgages on a property. Because the value of many properties dropped in recent years, 2nd and 3rd third mortgages may no longer be fully secured by any equity still in your house. If this is the case you can use "lien stripping" to save your home. In Chapter 13, you can ask the bankruptcy court to convert the junior mortgages and into unsecured debt. They become the lowest priority debts, and may be paid back partially, or possibly not at all.
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