Foreclosure Legal Issues Related to Bankruptcy

If you’re like many people, your home is one of the most valuable assets you own. Not only does it provide shelter, but it is also an important investment that grows in value over time. If you are in danger of losing your home through foreclosure, you should do everything possible to hold onto it, which may include filing for bankruptcy. Here’s what you need to know about protecting your home from bankruptcy and some legal issues you might encounter with foreclosure. 

What Happens During the Foreclosure Process?

If you miss several of your home mortgage payments, you’ll likely receive a notice from your lender that lets you know your loan is in default. The bank will tell you what you need to do to catch up before they take additional action.

If you fail to fix the fault within the bank’s timeframe, the lender will initiate the foreclosure process by sending you an official notice. It’s usually called a “Sheriff’s Sale Notice,” which notes an auction date a specified period from the notice date.

The lender usually “wins” the auction and takes the title to the home. This starts a six-month redemption period, during which the homeowner can purchase the home back from the lender at the price they paid at the auction. Once this period ends and the bank still owns the home, the lender can evict the borrower from the premises. 

How Bankruptcy Can Stop Foreclosure

If you own a home and are facing foreclosure, you’re probably looking for a way to avoid this complex and stressful process. Bankruptcy can certainly stop foreclosure of your home, at least temporarily. 

Chapter 7 Bankruptcy and Foreclosure

Chapter 7 bankruptcy is also known as liquidation bankruptcy because the bankruptcy court will liquidate your non-exempt assets to satisfy  your eligible debts. If you are facing foreclosure and want to keep your home, Chapter 7 may not be the best option unless you can come up with sufficient funds to bring your loan current. However, Chapter 7 bankruptcy would possibly be able to delay foreclosure long enough for you to find a new place to live. 

Chapter 13 Bankruptcy and Foreclosure

Chapter 13 bankruptcy is generally the best choice for people who want to stop or avoid foreclosure and hold onto their homes. It’s also referred to as re-organization bankruptcy because it gives you the opportunity to re-organize and re-pay a portion of your eligible debts. 

A court-appointed trustee will help create a three- to five-year repayment plan, which can include restoring your mortgage to good standing. However, failure to maintain the agreed-upon payments could place you in jeopardy of foreclosure once again. 

The Automatic Stay to Stop Foreclosure

When you file either Chapter 7 or Chapter 13 bankruptcy, you get an automatic stay, which directs creditors to immediately cease all collection activities, including foreclosure proceedings. As long as the foreclosure sale hasn’t happened yet, you can get an automatic stay when you file for bankruptcy. 

Typically, an automatic stay will only delay the foreclosure in a Chapter 7 case. If you don’t come up with the funds to bring your loan current, the stay will be lifted, and the lender can proceed with foreclosure. In a Chapter 13 case, the automatic stay will remain in place until you create a repayment plan or decide to surrender your home to the bank. 

Potential Legal Issues Related to Bankruptcy and Foreclosure

While filing for bankruptcy creates an automatic stay, which pauses any bankruptcy proceedings, the stay isn’t permanent. In certain circumstances, a lender can ask the bankruptcy court to lift the stay. 

If the creditor can show that the borrower has no equity in the home and the home’s sale won’t benefit other creditors, the court might lift the stay. Also, the stay might expire on its own if the borrower had a prior bankruptcy case dismissed in the past year. 

Another thing to consider if filing for Chapter 13 bankruptcy is if your home equity is greater than what the state allows. Each state has something called a “homestead exemption” that specifies the amount that can be covered under Chapter 13. Some states have low caps, while others have no limits for a primary residence. 

When You Decide Bankruptcy is the Right Choice

Bankruptcy may not be the right choice for everyone. Before deciding if it’s the best option for you, it’s a good idea to consult with a financial professional or experienced bankruptcy attorney so you can learn more about the process. 

If you are trying to save your home from foreclosure, it makes sense to explore bankruptcy as one of your options. Gulf Coast Bankruptcy is dedicated to providing those seeking help with financial difficulties with the information they need to make informed decisions about their financial future.