There is nothing easy about the prospect of facing foreclosure as a homeowner who has invested a great deal of money, time and energy into a property. However, the fact that this situation is inherently challenging does not mean that it can’t end in a favorable resolution.
For example, filing for bankruptcy can potentially halt the risk of – or active process of – foreclosure under certain circumstances. Whether a homeowner is interested in filing for protection under Chapter 7 or Chapter 13, bankruptcy can temporarily halt the foreclosure process. Especially in Chapter 13 cases, bankruptcy can also offer homeowners the opportunity the time to catch up on past-due mortgage payments and/or negotiate more favorable terms with their lenders.
The automatic stay offers immediate but temporary relief
As soon as a homeowner’s bankruptcy petition is filed, the automatic stay goes into effect. The automatic stay serves as an instruction from the court to a filer’s creditors. This instruction – with very few exceptions – halts collection actions until a filer’s petition has been withdrawn, dismissed or favorably resolved. This stay generally provides homeowners with temporary relief from the threat of losing their homes.
Chapter 7 and Chapter 13 offer varying relief from foreclosure
Chapter 7 bankruptcy can temporarily halt foreclosure through the automatic stay, but it does not provide a long-term solution for homeowners who wish to keep their property. In a Chapter 7 scenario, if you are a homeowner who is struggling, and if you cannot catch up on your mortgage payments quickly, your lender may request that the court to lift the automatic stay, allowing the foreclosure process to resume. Unlike Chapter 13 bankruptcy cases, which evolve over several years, Chapter 7 cases usually resolve so quickly that they don’t provide much time for homeowners to “get square” when it comes to their mortgage obligations.
By contrast, Chapter 13 bankruptcy offers a more effective means of potentially halting foreclosure and retaining ownership of your home. During a Chapter 13 process, you can work with your legal team to propose a repayment plan to catch up on missed mortgage payments over three to five years while continuing to make your regular mortgage payments. As long as you comply with the terms of your repayment plan and keep up with your ongoing mortgage obligations, it would be very unlikely that your lender would be permitted to proceed with foreclosure action.
While filing for bankruptcy is not the best option for every homeowner who is facing foreclosure, it can serve as a meaningful way to gain the time necessary to catch up on missed payments for many people who are at risk of losing their property.