Banks cannot take possession of a home after a mortgage default unless they first foreclose. Foreclosure is not part of the bankruptcy proceedings, although people often file bankruptcy to stop foreclosure, and sometimes foreclosure follows bankruptcy. How bankruptcy and foreclosure play out with regard to whether or not the debtor loses his house is determined by the type of bankruptcy proceeding, the location of the property and whether the debtor has sufficient income to pay future mortgage payments.
What is Bankruptcy?
Bankruptcy is a legal proceeding that discharges or restructures debts. Most homeowners either go through Chapter 7 or Chapter 13 bankruptcy proceedings. If a homeowner files Chapter 7, the court appoints a trustee who gathers her non-exempt assets and uses them to pay off your creditors. Most Chapter 7 cases are no-asset cases, and the debtor gets to keep her things, although whether or not an asset is exempt can vary from state to state.
Chapter 13 bankruptcy works differently. A debtor in Chapter 13 gets to keep all assets, even if they are non-exempt, and instead pays the equity into a Chapter 13 plan, which is a repayment arrangement. Chapter 13 can also be used to stop foreclosure and catch up on mortgage arrears.
Read More: How to Get a Bankruptcy Reversed
Temporarily Halting Foreclosure with Bankruptcy
Filing for bankruptcy temporarily halts any foreclosure action. The filing of a bankruptcy petition automatically stays any actions to collect against the debtor, including foreclosure proceedings. This benefit of bankruptcy is known as the automatic stay. Although the lender can try to get relief from the stay, it must do so through motion practice, giving the debtor a safe harbor timeframe for staying in her home.
The automatic stay provides no relief if the bank has already sold the property at sheriff sale; if a bankruptcy is filed after the sheriff sale has already occurred, the only thing the debtor has left is her right of redemption, if her state's law provides it. If she can't afford to redeem the property, however, the bankruptcy will not get the house back.
Benefits of Chapter 13 for Foreclosure
Chapter 13 bankruptcy allows the debtor to restructure the past-due mortgage payments and pay them over an extended period of time while maintaining ongoing mortgage payments. If the Chapter 13 plan proposes to pay all the arrears, and the debtor makes all the payments on time, the lender will be forced to play ball and accept the terms, as long as the property is insured and the debtor can afford the plan.
Foreclosure and Chapter 7
The likelihood of a positive outcome is less certain if the debtor files Chapter 7. Depending upon where he lives, it is possible to lose the home in a bankruptcy proceeding, even if the mortgage debt is forgiven. Chapter 7 discharges the debtor's liability on the loan itself, but it does not get rid of the lender's mortgage, which is the lien on the house. In Chapter 7, foreclosure proceedings can run their usual course after the discharge is entered. The debtor won't be liable for any money still owed after the foreclosure, but the lender can still take the house.
- Law Offices of Curtiss Walker: How does Bankruptcy Work with a Foreclosure?
- The Law Dictionary: Can a Foreclosure Happen After Bankruptcy Discharged the Debt?
- U.S. Courts: Liquidation Under the Bankruptcy Code
- U.S. Courts: Individual Debt Adjustment
- LegalConsumer.com: Massachusetts Bankruptcy Exemption Laws
- U.S. Department of Housing and Urban Development: Foreclosure Process
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