How Bankruptcy Stops Foreclosure

Filing foreclosure bankruptcy as a foreclosure alternative is often the only way to stop impending foreclosure sales, but one that should only be used when other Foreclosure Options don’t work . Although foreclosure bankruptcy might be the best option for homeowners with significant credit card debt, it’s generally a last ditch effort for most.

The short term benefit of declaring bankruptcy is the “automatic stay” which basically freezes your Foreclosure Lawsuit and cancels any pending foreclosure sale. The automatic stay will remain in effect thereby stopping the Foreclosure Process until the lender asks for “relief from stay”, although in some situations the stay can be permanent as discussed below.

Determining if the stay will be temporary or permanent depends in large part on whether you file Chapter 7 or Chapter 13 bankruptcy proceedings. However, due to the complexities of the bankruptcy process, deciding how and when to file are decisions best left to a bankruptcy attorney with specialized knowledge of the law in this area. As such, its essential to at least consult with a lawyer before proceeding and remember to always hire professionals based on a referral or recommendation from a source you trust.  Don’t Just Walk Away

The Difference Between Chapter 7 and Chapter 13 Bankruptcy

In general, a Chapter 7 foreclosure bankruptcy proceeding is a liquidation of both your assets and debts with the final result discharging most if not all of your financial obligations. The automatic stay in a Chapter 7 case is temporary, and in most circumstances the court will give the lender “relief from stay” at which time the foreclosure process will resume from the point it was frozen. Florida Foreclosure Process

The benefits of a Chapter 7 filing include the elimination of your credit card bills and other similar unsecured debt as well as a temporary delay in your foreclosure case letting you stay “rent” free during that time. The automatic stay can last anywhere from 1-6 months or longer depending on how busy the courts are and how aggressive your lender is in requesting relief from the automatic stay.  Overall, because your “escape” from the foreclosure case is temporary, filing for Chapter 7 bankruptcy protection is not a good long term foreclosure solution.   Learn why a Deed in Lieu of Foreclosure or Foreclosure Renting may be a better option for many homeowners.

Unlike Chapter 7, Chapter 13 foreclosure bankruptcy allows you to save your home under the right circumstances but doesn’t eliminate your debts entirely. Instead, your bills are consolidated into a single monthly payment that lasts anywhere from 3-5 years with most of your debts reduced to pennies on the dollar. At the end of the court structured repayment plan, those debts are then discharged in full.  Avoiding Deficiency Judgments

With Chapter 13 reorganization, the bankruptcy court will let you include past due amounts from your mortgage in the repayment plan which will then be spread over the duration of your 3-5 year program. What this means is that you can save your home and continue to live in the property as long as you remain current with both bankruptcy payments and your regular monthly mortgage payment.  Read about the Deed for Lease program that lets you rent your home for up to 3 years following the foreclosure sale.

Many homeowners file under Chapter 13 while simultaneously trying for a Loan Modification or Short Sale approval. The advantage of filing under Chapter 13 is that you can literally have the foreclosure bankruptcy dismissed right before getting the loan or short sale approval thereby avoiding both bankruptcy and foreclosure.  Although the voluntary dismissal of your case will negatively impact your credit scores, the benefits likely outweigh the downside as your credit was likely damaged already.

Related Content:

Tips to Get Your Short Sale Approved

10 Ways to Stop Foreclosure

Control Foreclosure Stress

Who Owns Your Mortgage and Why Care?

 

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