October 17, 2023

Using Bankruptcy to Prevent Home Foreclosure

Can I Use Bankruptcy To Stop A Foreclosure?

Yes!  Chapter 13 Bankruptcy can be a very powerful tool to solve a fairly wide variety of financial problems.  One of the most common uses of Chapter 13 is to save a home from foreclosure.

Does It Matter What Kind Of Foreclosure It Is?

Not really.  There are two types of foreclosure:  “judicial” and “non-judicial”.  In a judicial foreclosure, the lender files a lawsuit against you seeking court authorization to sell the home at a foreclosure sale.  Once a sale has been completed, you have a six-month right after the sale to redeem the property by paying the amount of the mortgage loan in full. In a non-judicial foreclosure, the lender serves you with a notice indicating that a foreclosure sale will take place at least 120 days after the service of the notice.  You must then cure any delinquency in full at least five days prior the sale in order to keep the home as there is no right of redemption.  After curing any delinquency, you must keep current with continuing monthly mortgage payments.  

Under federal law, either type of foreclosure proceeding must stop once you file a Chapter 13 bankruptcy case as the “automatic stay” prevents the continuation of the foreclosure.  Note, however, that the bankruptcy case must be filed before the home is sold by the foreclosure trustee or county sheriff.  Anyone contemplating saving a home by using Chapter 13 should consult with an experienced attorney well before the date of the foreclosure sale so that all of the paperwork can be prepared and filed with the Bankruptcy Court in a timely manner.

More importantly, Chapter 13 allows you to catch up on the missed payments over a three-to-five-year time period.  In a Chapter 13, you must continue with regular monthly mortgage payments after the case is filed, and the delinquency as of the time of filing is paid over time by the Chapter 13 Trustee from the payments that you make to the Trustee.  If successful, you are then current on your mortgage payments at the end of the case.

Please note the following cautions and warnings about using Chapter 13 to save a home:

  • ✔  You must continue with regular monthly payments as required in your mortgage loan documents beginning in the month after you file of the Chapter 13 case.  Otherwise, the lender will be entitled to continue with the foreclosure process.  Although the Bankruptcy Code in most circumstances does not allow for the modification of the regular payment amount, you are free to attempt a loan modification with your lender to reduce the regular payment.  Similarly, if you miss payments to the Chapter 13 Trustee, it is likely that the Court will permit the lender to resume foreclosure proceedings.
  • ✔  You must consider whether it makes economic sense to try to save the home.  If you are “under water” (the value of your home is less than the mortgage debt you owe against it), it may make little sense to try to save the home as it may be years before the value of the home appreciates enough to be “above water”.
  • ✔  You must have enough income to be able to make the regular monthly mortgage payment, cover your basic household living expenses, and make a payment to the Chapter 13 Trustee.  The amount needed will depend on how large the delinquency is and any other debts being paid.  Without sufficient income, the Bankruptcy Court will not approve your Chapter 13 plan.
Article written by
Bankruptcy Law Center

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