Nobody wants to lose their home after years of working hard. Unfortunately, life circumstances could get in the way, and you may find yourself in the middle of financial hardship.
Filing for bankruptcy won’t totally stop the foreclosure proceedings but just delay them. How you deal with the situation will depend on the kind of bankruptcy you file. You can choose between a Chapter 7 or a Chapter 13 bankruptcy.
A Chapter 7 bankruptcy will temporarily stop the foreclosure proceedings for a certain period through an automatic stay order from the court. During that period, your assets will be used to settle your debt. If you’re not ready to give up your home, this type of bankruptcy allows you to seek out other measures like taking out another loan so that you can pay off your missed payments and bring your loan current for the lenders to vacate the foreclosure. But if you fail to do this, the foreclosure proceedings will continue once the automatic stay has been lifted.
Even though a Chapter 13 bankruptcy won’t permanently stop a foreclosure, it offers a more viable solution that will allow you to keep your home. Unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy involves negotiating a repayment plan with your lender, which you need to follow until you’ve paid off your arrears. Provided that you made the payments as expected, you will get to keep your home. But if you don’t, the lender reserves the right to trigger another foreclosure proceeding. More on foreclosure and bankruptcies below.
What is Foreclosure?
A foreclosure process begins when the lender tries to seize and sell your home in an effort to recoup their losses after you have defaulted on your loan. You need to miss a specific number of monthly payments, which depends on the lender, to trigger the foreclosure process. The foreclosure process may take an average of 673 days, depending on the state where you’re located. You can spend this time filing for bankruptcy. Please note that bankruptcy is just one of the many alternative measures, such as long negotiation, when you’re facing foreclosure. But this article will focus on bankruptcy.
What is Bankruptcy?
Bankruptcy is a legal process that offers debt relief for individuals or businesses. It doesn’t only help people eliminate part or all of their debt but also stop foreclosure if your home was used as collateral. There are two types of bankruptcy proceedings, Chapter 7 and Chapter 13 bankruptcy.
When you file for bankruptcy, the court will order an automatic stay, which means creditors have to stop collecting debts and cease foreclosure activities. If you’re thinking of using bankruptcy to keep your home and cease the foreclosure process, you need to understand that you’re getting into before filing.
Can a Chapter 7 Bankruptcy Stop a Foreclosure?
Yes. A Chapter 7 bankruptcy can stop a foreclosure process temporarily. Do you also want to know how to stop a foreclosure auction immediately? File a Chapter 7 bankruptcy. The court will order an automatic stay, which will only delay the foreclosure proceedings, for about 3 to 4 months, from the date you filed for bankruptcy to the date your debt is discharged. During this period, all collection activities and foreclosure proceedings are suspended.
However, lenders can file a motion asking the court to lift the automatic stay and allow the resumption of the foreclosure sale. Unless the judge grants the lender permission, the foreclosure sale can’t take place during that period. Filing such a request requires lenders to hire a lawyer, which could be a costly option and that’s why most of them just let the time pass for the automatic stay and resume the foreclosure sale afterward.
Keep in mind that a Chapter 7 bankruptcy offers debt relief by selling your assets and using the proceeds to pay off the loan. It does not involve negotiating a repayment plan with the creditors. It may discharge your debt but it won’t get rid of the lien on the property that’s used as collateral.
You may no longer be legally obliged to pay back the loan but the lender can still enforce the lien and foreclose the house so they can sell it and recover the monetary losses you’ve caused them, even if they don’t get the full amount back. The other commonly discharged debts on a Chapter 7 bankruptcy include credit card charges, medical bills, utility bills, and personal loans from employers, friends, and family.
Is it a Good Idea to File for a Chapter 7 Bankruptcy?
Filing for a Chapter 7 bankruptcy is not recommended if you have little to no debt and you’re only filing to stop your home’s foreclosure. It will not stop the proceedings permanently because the foreclosure process will resume once the automatic stay has been lifted. Aside from that, filing for Chapter 7 bankruptcy now means you’ll have to wait for 8 years before you can file bankruptcy again. Not only that, a Chapter 7 bankruptcy stays in your credit report as a negative mark for up to 10 years.
You’re better off negotiating a more affordable repayment plan with your lender since the foreclosure process takes a while anyway. Once you bring the loan current by paying off all your past dues, interests, and penalties, the lender may vacate the foreclosure proceedings.
How to File for Chapter 7 Bankruptcy?
- Determine if you’re eligible to file a Chapter 7 bankruptcy
- You must attend an individual or group credit counseling course from a credit counseling agency within 181 days before filing for a Chapter 7 bankruptcy
- Fill out and file the Chapter 7 bankruptcy forms.
- Send the verification documents to the bankruptcy trustee after your Chapter 7 bankruptcy filing is accepted.
- Meet with the creditors and discuss your current situation
- Attend budget counseling
- Wait for the court to discharge your debts.
Can a Chapter 13 Bankruptcy Stop a Foreclosure?
As previously mentioned, Chapter 7 bankruptcy can help you get out of debt by selling your assets. It can only delay a foreclosure process but it cannot stop it for the long term. A Chapter 13 bankruptcy, on the other hand, offers a more permanent solution in the form of a repayment plan.
When you file for Chapter 13 bankruptcy, the court will issue an automatic stay order, which stops all collection and foreclosure efforts, just like with a Chapter 7 bankruptcy.
Chapter 13 bankruptcy is a good option if you have a steady source of income despite having a lot of debt. How long will chapter 13 delay foreclosure? Unlike Chapter 7 bankruptcy where you need to sell your assets to repay your debt, Chapter 13 bankruptcy involves creating a repayment plan, which usually lasts from 3 to 5 years, depending on how much you’re earning. As long as you keep your end of the bargain, your debts will be discharged and your house will not be foreclosed. If you don’t, then you can expect to face another foreclosure process to take place.
Aside from saving your house by bringing your loan payments current, a Chapter 13 bankruptcy can also help repay your other secured debts in a more manageable way. You and your lender may come up with a better repayment plan that will allow you to pay off your debts without putting you in any undue financial hardship.
How Does a Chapter 13 Bankruptcy Affect Your Credit?
A Chapter 13 bankruptcy will leave a derogatory mark on your credit report and it will remain there for up to 7 years. You will be identified as a high-risk borrower. It will affect your ability to get approved for a new credit card or loan, and may even make it difficult for you to find a job or a new apartment.
What to Consider Before Filing a Chapter 13 Bankruptcy?
If you’re filing for Chapter 13 bankruptcy to save your house from getting foreclosed, it’s better to consider other options first. As previously mentioned, bankruptcy will leave a bad mark on your credit score for several years.
Instead of choosing that as your first option, why don’t you consider non-bankruptcy solutions instead? Try negotiating with the lender and ask if you could come up with a repayment plan or seek out government programs such as FHA loans that may help.
Plus, filing for bankruptcy is expensive especially if you’re already short of funds. You’re probably wondering how much does it costs to file bankruptcy. You will pay a $338 filing fee for Chapter 7 bankruptcy and a $313 filing fee for Chapter 13 bankruptcy.
How to File for Chapter 13 Bankruptcy?
- Create a budget and determine how much you can afford for your repayments.
- You must take a credit counseling course from a credit counseling agency
- Fill out and file the Chapter 13 bankruptcy forms.
- Send the verification documents to the bankruptcy trustee
- Meet with the creditors and come up with a repayment plan.
- Pay your dues as agreed upon.
- Take your second counseling course
- Wait for the court to discharge your debts.
Can You Contest a Foreclosure?
Yes, you may fight a home foreclosure if you believe that the basis of the proposed foreclosure is incorrect such as when loan payments were not recorded properly. When you file for bankruptcy, you can ask the judge to decide whether the grounds for foreclosure stands. If not, the court may rule that the foreclosure process has no legal grounds when you decide to drop your Chapter 13 bankruptcy application or if you want to switch it to Chapter 7 bankruptcy.
If your house is in danger of getting foreclosed, you may be thinking of filing for bankruptcy. Filing for Chapter 7 or Chapter 13 bankruptcy will halt the foreclosure proceedings temporarily. A Chapter 7 bankruptcy will delay the process and give you enough time to either move out or find another way to settle your arrears such as taking out a new loan. If you’re unable to bring your loan current during the automatic stay period, the foreclosure process will resume.
Meanwhile, a Chapter 13 bankruptcy will delay the foreclosure process and allow you to negotiate a repayment plan that will help you bring your loan current without putting too much strain on your finances, and help you keep your home. But before you file for bankruptcy, it’s best to seek out other non-bankruptcy options first such as negotiating with the lender, loan modification, or applying for a government program that offers debt relief. Remember, a bankruptcy will leave a negative mark on your credit report between 7-10 years. During that time, you’ll find it hard to secure approval for new loans or even struggle to find a new apartment. So, weigh your options first before filing for bankruptcy.