It has become common for Americans to fall behind on paying their mortgage. In some cases, lenders may be open to working out a deal with the borrowers – but more often than not, the lender will choose to pursue foreclosure. A foreclosure includes the lender regaining the rights to the property and selling the home at an auction.
The process of foreclosure is not quick. Usually, creditors don’t go down this path until the homeowner has missed a few mortgage payments. This gives borrowers time to consider potential alternatives to foreclosure. One last-case scenario is filing for bankruptcy, which we will take a closer look at in this guide. We’ll give you information on Chapter 7 and 13 bankruptcies and tell you if filing bankruptcy will stop foreclosure.
How to Delay Foreclosure with an Automatic Stay
An automatic stay is a court-ordered injunction that prohibits the lending bank from foreclosing on the borrower’s home. This takes place when the borrower files for Chapter 7 of 13 bankruptcy. Even if you file for bankruptcy the day before the scheduled foreclosure sale, you will still be able to delay the foreclosure proceedings.
However, all foreclosures are currently on hold in New York, due to the ongoing eviction moratorium. Because of the huge impact that COVID-19 has had on the economy and the unemployment rate, many homeowners are unable to pay their bills. Thus, all foreclosure and eviction proceedings were paused in March 2020 and will remain so until further notice.
1. If the Lender Files a Motion to Lift the Stay
Filing for bankruptcy with the intent to be granted an automatic stay can be an advantageous move for the borrower. However, the lender can choose to file a motion to lift the stay, which allows them to carry forth with the foreclosure procedure even while your bankruptcy case is active. Yet, even lenders who lift the automatic stay’s protection may decide not to resume the foreclosure immediately.
The main point to keep in mind is that filing for bankruptcy during foreclosure will temporarily halt the foreclosure proceedings – but whether this is just for a couple of months or for a year or more is dependent on whether lenders take advantage of their workaround (the motion for relief from stay).
2. If the Foreclosure Notice has Already Been Filed
If the foreclosure notice has already been filed, this may reduce the stay’s total length. Typically, the automatic stay in bankruptcy is reduced by the total amount of time that advance notice of the foreclosure auction was given. So, if you received the foreclosure notice two months ago, the automatic stay would likely be reduced by four months.
3. Chapter 13 Bankruptcy and Foreclosure
Chapter 13 bankruptcy gives homeowners the chance to catch up on delinquent payments throughout the timespan of a repayment plan. In most cases, the court structures a three to five-year repayment plan – and in a significant percentage of cases, 2nd and 3rd mortgages are eliminated, with no need for the homeowner to go on a repayment plan from them. Chapter 13 bankruptcy is designed to be a path to let you keep your property by paying off your debts over the long-term.
4. Chapter 7 Bankruptcy and Foreclosure
Will Chapter 7 bankruptcy stop foreclosure? Not exactly. Pursuing this path will allow homeowners to delay foreclosure proceedings for a few months, but this is not a permanent fix. It can help to wait to file Chapter 7 bankruptcy until doing so will have the best possible results on delaying the foreclosure sale. In most cases, this means holding off on filing until immediately before the sale date.
Keep in mind that filing Chapter 7 and Chapter 13 bankruptcies will come with a filing fee. In New York, it costs $335 for Chapter 7 and $310 for Chapter 13.
Cautionary Notes about Chapter 7
There are several drawbacks that come along with filing for Chapter 7 bankruptcy in the middle of foreclosure – namely that you could still lose your house and other valuables, or that you might not qualify.
You Could Still Lose Your House
Chapter 7 bankruptcy causes your debt to be forgiven, but it will not prevent you from losing your home. The lien will still remain in place; therefore, Chapter 7 won’t lift the foreclosure. With Chapter 13, on the other hand, the lien is paused while you repay your debts over the court-ordained period of time.
You Could Lose Other Valuables
Courts will usually do what they can to help creditors recoup any deficiencies – so they may be awarded funds from the sale of your valuables. Some types of valuables are exempted, but this largely depends on the state you live in.
You May Not Be Eligible
Due to the 2005’s Bankruptcy Abuse Prevention and Consumer Protection Act, a filer would be ineligible for Chapter 7 if at least one of these conditions are met:
- The filer’s average gross income during the six-month time span before the filing exceeds the state of residence’s median income for a household of the same size.
- The filer’s income enables them to pay for a Chapter 13 repayment plan in addition to normal living expenses.
How Bankruptcy Will Affect Your Credit
Bankruptcy definitely has a devastating effect on credits scores – and the better your credit score is, the more it will plummet. If the filer had a score of 700+, it could plummet by 200 points or more. With a score of 680, the filer would likely experience a drop of 130-150 points.
Chapter 7 has a more significant negative impact on a filer’s credit score because they aren’t making any repayments. Because of this, banks would see the filer as a higher credit risk. What’s more, a Chapter 7 bankruptcy can be included on your credit report for a maximum of ten years. On the other hand, Chapter 13 bankruptcy can only be kept on your credit report for seven years. By sticking to your repayment plan, you are giving future lenders a better impression of your credit liability.
In order to improve your credit rating after bankruptcy, you should establish new credit within your means and pay your bills on time. Track your credit score on a regular basis.
Worst Case Scenario – Losing the House, but Also the Debt
If you are filing for bankruptcy, you’ll need to have a worst-case contingency plan in mind: that your debt will be forgiven, but that you will also lose your house. This is more likely to happen through Chapter 7 filing than with Chapter 13 filing. If you are losing your home, it is crucial that you hire a foreclosure defense attorney to protect your assets.
Depending on what state you live in, your car, jewelry, and other valuables could be sold. To get a solid understanding of what you stand to lose, and what you can do to improve your chances of keeping your home, submit a free consultation form. Bankruptcy is a complicated process, but we can help take some of the burdens off of your shoulders.