Filing a Chapter 7 case stops foreclosure of your home temporarily, helping you gather funds for your transition to your next housing.
Last week we went through a list of ways Chapter 7 buys you time when dealing with a home foreclosure. Included was that filing a Chapter 7 case “can give you time to surrender your home while saving up for moving expenses.” This deserves a more thorough explanation.
Stopping a Foreclosure
The filing of a bankruptcy case, including a Chapter 7 “straight bankruptcy” one, stops a pending home foreclosure sale. This happens through the “automatic stay,” the law which freezes most creditor collection actions the moment you file bankruptcy. In particular, the automatic stay statute says that a bankruptcy filing stops “any act to… enforce any lien” against your property. (See Section 523(a)(4) and (5) of the U.S. Bankruptcy Code.) A mortgage lender’s foreclosure of your home is an act to enforce a lien. So your bankruptcy filing stops it from happening.
It’s crucial to time your bankruptcy filing strategically. Otherwise you will file it too soon or too late. You want to buy as much time as possible. And you don’t want to mess up and fail to stop the foreclosure.
You absolutely need to talk with your local bankruptcy lawyer to determine the best timing. This decision requires a thorough understanding of BOTH federal bankruptcy law and state property and foreclosure law. While bankruptcy law provides the ins and outs of the “automatic stay,” state law lays out crucial considerations like exactly when a foreclosure takes away your rights to your home. For example, filing too late would leave you with no rights to your home that your bankruptcy filing could protect.
After Your Bankruptcy Stops the Foreclosure Sale
What happens after you file the Chapter 7 case? In particular how much time will you have before you have to move away from your home?
A consumer Chapter 7 case usually takes about 3 or 4 months. The automatic stay is in effect that whole length of time, UNLESS the mortgage lender asks for “relief from stay.”
So if your lender does not file a motion asking for that “relief,” filing Chapter 7 can buy you 3 or 4 months. It could be even longer. That’s because there is usually some delay between when the foreclosure process is restarted and the new foreclosure takes place.
If your lender does file a motion for “relief from stay,” your Chapter 7 filing may only buy you an extra month or so. That’s because if you’re surrendering the home you’re presumably not making the mortgage payments. So you don’t have much defense against the lender’s motion, and it would almost certainly be granted.
However, if your mortgage lender does ask for “relief” to resume foreclosure, that often presents an opportunity for negotiation. You have something to offer in the way of surrendering the home peaceably at an appropriate time. The lender may well save attorney fees and foreclosure costs. Under some circumstances it may even pay you some money to move and sign the home to the lender.
Gathering Funds for Your Move
Usually the main benefit to delaying a foreclosure once you’ve decided to give up the home is for time to gather moving costs. By moving costs we mean everything needed for your transition, including rent, security deposit, moving truck rental—everything. Every month you are not paying your mortgage should give you the opportunity to save a chunk of money. In some states money you save for this purpose even before filing your Chapter 7 case can be protected under the homestead or some other exemption. Money saved after filing is virtually never a problem.
Filing Chapter 7 bankruptcy stops a foreclosure, although you have to time it right through the help of your lawyer. The point of buying time is to give you more time to cover your costs in transitioning to new housing. The amount of time you can buy depends in part on the aggressiveness of your mortgage lender. The extra time will usually be between one and four more months. You can often negotiate your leaving to make it less disruptive for you.