How Bankruptcy Affects Foreclosure Proceedings

If your mortgage loan is in arrears, your lender may pursue foreclosure options against you. If the lender is successful in its foreclosure attempt, the lender will be able to retain the property and remove the homeowners who have been foreclosed on. Bankruptcy is a tool that can be used to prevent foreclosure.

If your home is involved in a foreclosure action, bankruptcy can temporarily hold off your creditors. As long as your bank has not yet obtained a court-ordered judgment enabling the mortgage holder to take your home, the process of bankruptcy will stall the sale.

When you file a bankruptcy petition, an automatic stay, which prevents creditors from pursuing action against your property, will immediately go into effect. Not all debtors will be able to save their home from foreclosure and bank sale. But while your bankruptcy petition is before the courts, you may remain in your home and the automatic stay will remain in effect.

How does an automatic stay work?

The automatic stay stops all creditors from proceeding against a debtor to recover claims that arose before the bankruptcy filing. During the stay (usually for the length of the bankruptcy proceeding), creditors are prohibited from any attempt to possess or exercise control over property of the debtor’s estate. Creditors may not create, perfect, or enforce any lien against the property, nor may they act to collect, assess or recover a claim that arose before the case. The stay also stops creditors from harassing you for payments and/or making additional claims during that time.

During the stay, the bank holding your mortgage will not be able to finalize the foreclosure process or sell your house from under you. The bankruptcy stay period will give you time to make other living arrangements. During that time, you and your attorney may apply for a loan modification that can lower your monthly payments, making it easier for you to remain in your home and protect the investment you made in it over the years.

When can foreclosure proceed?

Generally, a foreclosure cannot go forward until your bankruptcy is completed, unless the creditor files a motion to lift the automatic stay. If a motion to lift the automatic stay is filed, both sides will be allowed to argue why the stay should or should not be lifted. In cases where no motion is filed, the automatic stay will last until the case is closed. During Chapter 7 bankruptcies, however, most banks will wait out the process rather than expend resources to challenge the court-ordered freeze (automatic stay against creditor action). Under foreclosure, petitioners who file a Chapter 13 proceeding have a better chance of retaining their homes than those in Chapter 7. They will have a better chance of catching up on their arrears and might even get their monthly payment lowered if they participate in the Mortgage Modification Mediation Program.