Stopping a Home Foreclosure Before It's Too Late

Can bankruptcy stop foreclosure?

Foreclosure is a challenge for millions of homeowners who are unable to make their mortgage payments per their loan contract. If you are facing home foreclosure the first step is to contact your lender. Do not wait until you are several months late.

In some cases, with your lenders approval, you may be able to take steps to prevent home foreclosure. Available options such as loan modifications, governmental loan modification programs, deed in lieu of foreclosure, reinstating the loan, and a short sale may be an option.

Lenders will not negotiate

Unfortunately, many lenders are not willing to take any actions to help homeowners stop foreclosure. Instead, the lender will initiate the foreclosure process. If successful, they will repossess the house and sell it at auction, using the proceeds from the sale to repay the original mortgage debt.

A homeowner may, however, have one final step they can take to stop a foreclosure- filing bankruptcy. Filing bankruptcy is a serious financial decision and should not be considered without first talking to a bankruptcy lawyer and understanding what bankruptcy can and cannot do for you.

With that in mind, let's take a closer look at both Chapter 7 bankruptcy and Chapter 13 bankruptcy and discuss how each option may save your home.

Chapter 7 bankruptcy and foreclosure

Filing Chapter 7 bankruptcy initiates an automatic stay to stop the foreclosure process, but in most cases, if you have defaulted on the loan and are unable to repay the back payments, the lender will simply prove to the court that they are the legal holder of the mortgage or deed of trust to your home, and the court will lift the automatic stay, allowing the lender to simply proceed with the foreclosure.

Other homeowners who are current on their mortgage and whose home is fully protected through their states bankruptcy exemptions may be able to file Chapter 7 bankruptcy and avoid a home foreclosure if their failure to pay their mortgage was due to other debt obligations, such as medical debt or high credit card bills. In this case, the qualifying unsecured debts could be discharged through bankruptcy, freeing up monthly income needed to pay the monthly mortgage debt.

Chapter 13 bankruptcy and home foreclosure

Chapter 13 bankruptcy allows debtors to avoid a liquidation or sale of their home, and it initiates an automatic stay, eliminating a creditor's rights to continue debt collection.

Most importantly, however, Chapter 13 bankruptcy allows home owners to repay mortgage debt in arrears by scheduling the mortgage payments over the duration of the Chapter 13 debt repayment plan, an option which is not available under Chapter 7 bankruptcy.

It's important to note, however, that Chapter 13 bankruptcy does not impact the ongoing mortgage payments for a home. In fact, if the homeowner fails to continue to make monthly mortgage payments, the lender has the legal right to reinitiate foreclosure proceedings.

Stripping a second mortgage with Chapter 13 bankruptcy

Another benefit of Chapter 13 bankruptcy is the ability to strip off or remove second or third mortgages or a home equity line of credit. This unsecured debt, which is no longer secured by the equity of the home, is included in the Chapter 13 three or five year debt repayment plan.

Although some of the unsecured debt within the plan may be repaid over the debt repayment period, it's likely the homeowner will not pay the entire balance of these loans in the Chapter 13 debt repayment period. If the loan or equity line remains at the end of the debt repayment period, the remaining loan amounts on the stripped off mortgages are discharged.

Bottom Line:

Filing Chapter 7 may temporarily stop a home foreclosure, but if you are behind on your mortgage payments and have mortgage in arrears, the lender will eventually be able to lift the automatic stay and continue the foreclosure process.

Filing Chapter 13 bankruptcy is generally the best option to save your house and repay mortgage debt in arrears over a 3 or 5 year period.