Making Sense of Bankruptcy: Does Filing a Chapter 7 “Straight Bankruptcy” Stop a Home Foreclosure or is a Chapter 13 Needed?
A Chapter 7 case can stop a foreclosure just as well as a usually more complicated Chapter 13 one, but then what?
The sentence that we’re explaining today, phrase by phrase, is the following:
Filing Chapter 7 bankruptcy will stop a pending foreclosure sale and will buy you only a limited amount of time, but that may be enough time to make a deal with your lender to cure the mortgage arrearage, to get a modification to your mortgage, or to leave when it’s convenient for you.
Chapter 7 vs. Chapter 13
To overly simplify, because a Chapter 13 case lasts much longer than a Chapter 7 case but gives you many powerful tools for saving your home, you should file a Chapter 7 case if it will do enough to meet your home-related (and other financial) goals and only file a Chapter 13 one if you need its more powerful tools.
Chapter 13 “adjustment of debts” lasts 3 to 5 years, and to a large degree protects you from all your creditors, including your mortgage lender, during that span of time. It gives you that much time to catch up on your mortgage, which you are pretty much allowed to do based on your own actual budget, not based on your lender’s demands. Chapter 13 may also be able to “strip” a second or third mortgage off your home’s title, so you would no longer need to make that monthly payment, and any remaining mortgage balance would be written off at the end of your case. If you’re behind on your property taxes, you’d have 3 to 5 years to catch up on that. And if you have other liens on your home’s title—judgment, income tax, child/spousal support, contractor’s, or homeowner association liens—Chapter 13 provides great ways to deal with them.
If you need these benefits, looks closely at the Chapter 13 option.
Stop a Pending Foreclosure Sale
The “automatic stay”—the stopping of virtually all creditor collection actions against you and your property—is imposed the moment a Chapter 7 case is filed the same as when a Chapter 13 is filed. That “stay” is just as effective in stopping a pending foreclosure whether filed under either Chapter.
The question is what happens after that foreclosure is stopped. Whether Chapter 7 or 13 is better for you depends on your intentions regarding the house, your resources for accomplishing that, and how much time you are trying to buy.
Buys Only a Few Months
Again perhaps overly simplifying, while Chapter 13 is designed to present its own solution to your home debt situation, Chapter 7 only buys you a pause so that you can work out your home debt situation yourself.
The “automatic stay” expires in almost all consumer Chapter 7 cases only about 3 or 4 months after the case is filed. Furthermore, an aggressive mortgage lender (or any other lienholder on your home) can ask the bankruptcy court for “relief from the automatic stay” in order to start or restart its foreclosure (or other collection activity) even earlier. That 3-4 months (or shorter) is designed to give you and the lender (and perhaps other lienholders) the opportunity to work something out—it doesn’t provide protection DURING the time you are catching up on the mortgage arrearage (and/or doing whatever else is agreed upon) as Chapter 13 does.
Negotiate Payments to Catch up on the Mortgage Arrearage
If you are not terribly far behind on your mortgage payments, and if after writing off all or most of the rest of your debts you have the means to catch up in a reasonable time (for example, within a year or so of monthly catch-up payments), you may be eligible for a forbearance agreement with the lender. It may agree to “forbear” (hold off) from foreclosing as long as you make the extra payments that would bring you current on the mortgage according to an agreed schedule. You’d make all or most of the payments after your Chapter 7 case would be done, so you would not be protected then by the “automatic stay” but rather by the legally binding forbearance agreement.
Get a Mortgage Modification
Most mortgage lenders have mortgage modification programs for lowering the monthly mortgage payment. Applying for a mortgage modification can be time-consuming and requires persistence. Your application may be in process while the date of a scheduled foreclosure sale approaches. So filing a Chapter 7 case may be a good way to buy the additional time needed for the lender to finish processing the modification.
Or you may not have become aware of the mortgage modification possibility until shortly before the foreclosure sale, and may not have sent in your application until right before filing bankruptcy, or even right after filing. You may know that you can only hang onto the house if the modification is accepted, and only if it is accepted on certain terms. So filing a Chapter 7 case could well buy you enough time for the modification application process to run its course, and then agree to the modification or else leave.
Leave at a Negotiated Time
At the time you file your Chapter 7 case you may have already decided to let your house go. Or else soon after you file you hear back from your mortgage lender that you don’t qualify for a mortgage modification or that you do qualify but you decide you can’t or chose not to accept its terms, so you decide to leave.
In any of these situations, filing a Chapter 7 case often buys you leverage so that you may be able to enter into an agreement with your mortgage lender to leave at an agreed point in time. The lender saves the time and cost of litigation and you get some extra time (beyond the foreclosure date) and the convenience of doing so in a cooperative and peaceful way. Under some circumstances lenders even help pay some of your moving costs.