Does a Bankruptcy Really Stop a Foreclosure?

The filing of a Bankruptcy is a serious action to take to stop or more correctly, stall a foreclosure which will have long lasting ramifications. The myth that filing bankruptcy stops a foreclosure must be closely examined to look at the benefits and ramifications of this court action. We will only discuss a Chapter 13 Bankruptcy here as it is the best type for 99% of all personal filings with the intent of stopping a foreclosure. Consult your attorney for more specifics on Chapter 11 and Chapter 7 filings.

Carefully looking at how a bankruptcy filing (petition) and proceeding work will help resolve whether filing a bankruptcy will actually stop a foreclosure. Chapter 13 bankruptcy allows the person filing to work out a repayment plan that extends over a 36 to 60 month period. The amount of the repayment is based on the income of the "petitioner" and can substantially eliminate certain debt. But this debt is only non-exempt items which are not fully collateralized by an asset. Such collateralized assets include autos and homes.

What happens is the petitioner petitions the court to accept his Chapter 13 filing. It does not have to be accepted by the court, but if it is accepted, the court appoints a trustee who determines a repayment schedule. The petition does not have to be accepted if the petitioner filed too recently or if his assets don't qualify. If accepted, the trustee begins his work of determining how the monies from the homeowner will be distributed to his creditors. As soon as the filing is accepted, the petitioner (homeowner) no longer has the ability to sell any of his assets without the trustee's authorization. Assuming you want to stop your foreclosure by filing bankruptcy, you will temporarily lose your ability to sell your home without the trustee's approval.

If you find a buyer, the trustee will allow the sale, but only if he can be convinced the price is at fair market value (FMV). He usually needs an appraisal, because homeowners could sell their assets below market value prior to or during their proceeding. It is the trustee's responsibility to make sure this doesn't happen by checking bank statements and the public records back six months and sometimes longer. If such a sale took place, the trustee could have the deed voided and the sale reversed. This would be very inconvenient and costly for the new homeowner (buyer) and the petitioner (seller).

Lenders know that many homeowners will file bankruptcy because attorneys advertise so heavily and the homeowners do not understand the legal process. When the lender gets notice that a bankruptcy has been filed by the homeowner, they immediately instruct their attorney to petition the court for its release from the bankruptcy filing. A special hearing will be scheduled so there may be a few days delay in your having to leave your home. However, when the court hears the lender's petition to release the home, the court will approve it. Now the homeowner has a bankruptcy to contend with, and his home will be back on track to be foreclosed on and later sold by the lender.

If the lender, trustee and the petitioner (homeowner) agree, the "reinstatement amount" to bring the loan current can be added into the bankruptcy payoff schedule. However, if the homeowner misses a scheduled payment to the trustee, or misses his mortgage payment, his home will be released from the bankruptcy and the lender will continue the foreclosure. The homeowner has effectively delayed the sale of his home for a few months but the bankruptcy did not stop the foreclosure, it only postponed it.

The larger consequence of the home being released is that the homeowner will have a bankruptcy on his credit report for ten years instead of seven years for a foreclosure. Actually, the bankruptcy is a matter of public record for 20 years and will stay on the individual's credit report under "Public Records" for up to 20 years. These public records can easily be accessed by future employers, so don't omit this information if asked on a job application. So bankruptcy is a very short-term fix to delay foreclosure, but it has very long-term consequences. Consult an attorney for more complete information if you have any reason to believe bankruptcy may be an option to resolve your financial issues.