The Effect of Filing for Bankruptcy on a Home Foreclosure
In the years leading up the recent financial crisis, the housing bubble spurred a dramatic rise in new home ownership. At the same time, many of the nonconventional mortgage schemes (also known as “subprime” loans) precipitated many of the financial woes currently being felt by millions of Americans. Burdened with rising debt, adjusting mortgage payments, and sharply falling home values, many homes are falling into foreclosure. This article discusses how filing for bankruptcy can affect a home foreclosure.
Foreclosure the legal proceedings initiated by a creditor to repossess the collateral for loan that is in default. In the case of a home mortgage, mortgage lenders will start foreclosure processes about three to six months after the first missed mortgage payment. In Oregon, a legal proceeding is required, in which the home owner is required to appear in court. If the borrower does not appear, the lender obtains a judgment assigning the title of the property back to the lender. The lender can then obtain an order requiring the home owner to vacate the property. After the lender takes possession of the property, they can try to sell the house at fair market value. The difference between the sale price and the balance of the loan is called a deficiency, and the lender can sue the home owner for the deficiency.
When you file either a petition for bankruptcy under either Chapter 7 (also known as “liquidation” or “total discharge”) or Chapter 13 bankruptcy (also called “wage earner repayment plan”), the court automatically issues an order, called the Order for Relief. Under the order for relief, and the Bankruptcy Code, the debtor is protected by the “automatic stay.” The automatic stay requires your creditors to cease their collection activities immediately. If you are currently engaged in a foreclosure proceeding, the proceeding will be stayed or suspended. If your home is scheduled for a foreclosure sale, the sale will be legally postponed while the bankruptcy is pending. However, the lender may come into court and request that the Bankruptcy Judge lift the automatic stay to permit the foreclosure to go forward. A bankruptcy attorney can advise you on what to do if this happens.
Foreclosures under Chapter 13 Bankruptcy
In a Chapter 13 bankruptcy, the court enters an order creating a repayment program. The Plan lets the debtor pay off the arrearage, including late payments over the length of a repayment plan, usually three to five years in some cases. The benefit of filing for Chapter 13 bankruptcy is that the home owner gets to keep their home and get current on the mortgage over time.
A Chapter 13 bankruptcy may also help you eliminate the payments on your second or third mortgage altogether. Unlike your first mortgage, which is secured by the property and the value of the property, you may no longer have any equity with which to secure the subordinate mortgages. Under those circumstances, the court may “strip off” the second and third mortgages and recategorize them as unsecured debt. Under Chapter 13 of the bankruptcy code, unsecuritized debt takes last priority and often does not have to be paid back at all.
Foreclosures under Chapter 7 Bankruptcy
If you do not have sufficient income after your bankruptcy to qualify for a repayment plan, it may be necessary to petition for a total liquidation under Chapter 7. If you are not able to afford your mortgage payment after your bankruptcy (for example in the case of death, divorce, or long-term unemployment), the debtor can surrender the property back to the lender. If you are filing for Chapter 7 bankruptcy, the final discharge order will at least discharge the debt, including the deficiency. In some cases, it is possible to reaffirm a mortgage, but at the close of the bankruptcy case, the debtor must immediately get current on the arrearage, including late payments and charges; otherwise the lender can start a new foreclosure proceeding.