Chapter 7 bankruptcy gives you serious advantages if you’re selling your home.
Chapter 7 bankruptcy can significantly help when you have entered into a forbearance agreement with your bank and need to sell your home. We will discuss below how Chapter 7 can remove the stress of other creditors knocking on your door, removing liens that already exist on your home through judgments, and slowing down the time requirements of selling your home.
The House-Selling Example
Suppose that you were forced to enter into a forbearance agreement with your mortgage lender based on a loss of job, reduction in wages, or extra expenses. Unfortunately, the forbearance agreement required you to pay all missed payments at a date certain in the future. As the due date approaches, you know that you won’t be able to afford the extra monthly obligation, so you decide that your only solution is to sell your home. Property values have gone up, and there are buyers with money, so it makes sense to take advantage of this now.
Or maybe you were unable to receive a forbearance agreement for whatever reason, and you haven’t been able to keep up on the payments so your lender is threatening foreclosure. Therefore, you have decided to sell to get what you can from the house and move on with your life.
How does Chapter 7 bankruptcy help in these situations?
Your Home without Bankruptcy Protection
Most likely, you have other financial challenges beyond the home mortgage itself. But let’s focus first on the mortgage itself. You are effectively at the mercy of your mortgage lender or servicer about how you’ll need to catch up. Nothing currently prevents the lender from foreclosing on your home when the forbearance agreement expires, and you fail to make the required payment.
So, what’s the practical effect if you are in the process of selling the home? A pending foreclosure signals to potential buyers that you’re a desperate seller. In most circumstances, that will bring down the dollar amount of the offers you receive. It will likely completely scare away some buyers—especially if creditor-related liens are against your home. Instead, you’ll have buyers trying to take advantage. In less desirable areas, you may have trouble getting any reasonable offers.
Most importantly, you may run out of time. Once the foreclosure is completed, your house is gone. You no longer have anything to sell. If that happens before you close your home sale, you will be prohibited from closing the sale. (This is one of the reasons buyers are scared off by a house in foreclosure. Why make an offer if there is no house to buy?)
Beyond the mortgage itself, you may have other debts that are causing you major headaches. Some debts may have already latched onto your home’s title or are in the process of doing so. These eat into your equity.
Chapter 7 Brings Financial Stability
Assume you are OK with your mortgage holder, at least for now. You’ve decided to sell your home. Maybe in part because you won’t be able to afford to pay for it once the forbearance agreement comes due. But you’re behind on other debts. Debt collectors are harassing you. You’ve either already been sued or expect to be any time. You know that those debts may turn into liens against your house. Plus, those debts can result in garnishment of your bank accounts and your paychecks.
If you see a bankruptcy lawyer and file a Chapter 7 case, most likely, you can legally get rid of most of your debts that are not attached to your house. That would give you peace of mind so you can focus on selling your home. Preparing a house for sale takes time and energy to get the best value. It takes more to hire a realtor and to work closely with him or her to do everything it takes. It’s extremely hard doing all that while dodging creditor calls and threats.
Filing a Chapter 7 case stops pending and future creditor lawsuits from hitting your home’s title. So you will get your hard-won equity from your sale proceeds instead of that money going to your creditor.
You might even be able to “avoid”—legally undo—an existing judgment lien with the same result. By avoiding a lien, you receive the money at the sale of your house instead of the creditor. (See our blog post about the judgment lien avoidance procedure.)
Chapter 7 Buys You Time
Besides immediate peace of mind, filing a Chapter 7 case buys you time in various ways.
Filing can reduce some pressure to sell immediately because you no longer need to deal with creditors unrelated to your home. If you have a large debt or debts that you are behind on, Chapter 7 immediately stops those creditors’ collection actions. Once Chapter 7 is filed, you can prepare and sell your house without that pressure. And, as we said above, you protect your equity from judgment liens (and maybe other forced liens).
Assume instead that you’re close to a home sale but have a foreclosure either imminent or already started. A Chapter 7 filing prevents or stops the foreclosure and keeps it on hold for at least a few weeks. It may even buy a few extra months. That may be all the time you need to get your house sold.
But what if you’re nowhere close to selling your home? Instead, you want to sell your home before your forbearance agreement expires. You want to be prepared to file a Chapter 7 case before you would lose the house to any subsequent foreclosure. It may be wise to focus your energy now on selling your home. Then, be ready to file Chapter 7 at a time strategically determined. You protect your house equity if it doesn’t sell fast enough.
Of course, life is complicated, and your situation likely includes pieces of more than one of the above scenarios. That’s when you especially need the advice and counsel of an experienced bankruptcy lawyer. There’s usually a lot to sort through to decide on the best course for you and your home.
Chapter 7 gives you peace of mind from your aggressive creditors. It protects your upcoming home sale proceeds so that money goes to you instead of your creditors. And it buys you time to maximize the money you get from your house sale.
Chapter 13 accomplishes these same goals but with quite a different process. It usually takes longer but can be more powerful and flexible.