Can filing bankruptcy stop my foreclosure?

Posted by kevin on October 11, 2010 under Foreclosure Blog | Comments are off for this article

You are behind on your mortgage 6 months.  Your monthly payment, including taxes and insurance, is $3,000 per month. Your lender has filed a foreclosure complaint.  What to do?  Can filing bankruptcy help?  The answer, like most answers involving legal issues, is that it depends.  First of all, the filing of any bankruptcy acts as an automatic stay on most efforts to collect a debt including foreclosure.  So, if you are facing a sheriff’s sale, the automatic stay will halt that sale.  But, for how long?

In a Chapter 7, the stay lasts until the Trustee abandons the property, a creditor obtains relief from the automatic stay from the court, or the earlier of the time that  the case is closed or a discharge is granted or denied.  A trustee will usually abandon property if he or she determines that there is no equity in the property.  That means that the mortgage is greater than the value of the property.  This will happen about the time of the first meeting of creditors which occurs about 4-6 weeks after the filing.  The trustee sends out a notice of abandonment.  If no one objects , then the abandonment is processed by the clerk and notice is sent out to creditors.  The whole process takes about 8 weeks and the foreclosure marches on.

A creditor can file a motion with the court for relief from the stay.  10 years ago, this rarely happened because the lenders usually waited until the case closed or a discharge was granted.  Now, because lenders are impatient or their attorneys want to exact another fee to add onto the foreclosure judgment, more and more lenders are filing motions for relief from stay within weeks of the filing.  If there is no equity in the property, the relief is generally granted.  In this scenario, the lender can proceed with the foreclosure within 6 weeks of the filing.

Finally, if the trustee and creditor do nothing, the stay will last until a discharge is granted or the case is closed whichever happens first.  If there are no lawsuits filed in the bankruptcy and the trustee does not engage in any detailed investigation of the debtor, a discharge is granted within 6 or 7 months from the time of filing.

Therefore, in a Chapter 7 case, you can stop a foreclosure for as little as six weeks and as long as 7 months.  However, in today’s bankruptcy world, the reality is that the stay will last 6 to 8 weeks.

In a Chapter 13 filing, a debtor can completely stop the foreclosure process if he or she can put together a plan that is approved by the court.  That plan would include paying the mortgage, at its current payment rate, going forward and paying arrearages over the term of the plan.  Sounds good, but the real question is, can you afford the payments.  Under our fact pattern, the debtor would be required to pay  $3,000 per month going forward and $300 per month toward the arrearages assuming a 60 month plan.  The practical reality is that if you are behind on your mortgage, it is because you could not afford to pay it.  The question becomes, how is the debtor going to pay going forward and come up with the extra $300 per month on arrearages plus the rest of the plan payments.  In most cases,  the debtor does not have that type of money.

So, you file Chapter 13 but cannot put together a confirmable plan.  Is the foreclosure stopped?  Yes, for a time.  As we said above, the filing of any bankruptcy acts as an automatic stay on foreclosures.  A lender is required to get relief from the stay to proceed with the foreclosure.  Usually, this means that the debtor will have to miss 3 payments before either the lender or the Chapter 13 trustee moves before the court to get relief from the stay.  In practical terms, under a Chapter 13 filing with no mortgage payments made, the stay will be effective for 4 months or so.

So, the bottomline is that filing bankruptcy stays the foreclosure.  The question is for how long?   The answer is not long enough.  Therefore, a debtor/borrower should not rely on a bankruptcy to solve their mortgage problem.  The bankruptcy process can be part of an overall strategy to fight the foreclosure.  More on that in a later blog.