Chapter 7 Bankruptcy & Foreclosure Law
Chapter 7 bankruptcy is a legal procedure available under federal law, while foreclosure is a mortgage lender's remedy available under state law. Because foreclosure is governed by state law, while federal law governs bankruptcy, bankruptcy law preempts foreclosure law. This is important because it allows bankruptcy law to stall state law foreclosures.
Other People Are Reading
-
Temporary Fix
-
Because of a concept called the automatic stay under Chapter 7 bankruptcy law, filing for bankruptcy can provide a temporary fix to a foreclosure situation. However, the permanent debt discharge available under Chapter 7 is limited and, as a result, Chapter 7 bankruptcy does not provide a permanent solution to avoiding foreclosure.
Timeframe
-
No matter what process of foreclosure your home is in at the time you file for bankruptcy, the foreclosure process is put on hold immediately upon filing the petition for bankruptcy. Bankruptcy law provides that filing a bankruptcy petition immediately imposes the automatic stay. Under the automatic stay, your mortgage lender is prohibited from continuing with the foreclosure process. The automatic stay will continue to restrict your mortgage lender for as long as your bankruptcy case is pending. The automatic stay ends only when your bankruptcy case ends.
-
Effects
-
The long-term effect of Chapter 7 bankruptcy is that your debts are permanently discharged, meaning you no longer have to repay them. The problem with a mortgage loan, however, is that a mortgage is more than just a simple promise to repay money. A mortgage also includes a lien on your house, and Chapter 7 bankruptcy does not eliminate the mortgage lien. What this means is that if you don't make your mortgage payments then your lender still has the right to foreclose on the lien.
Relief From Stay
-
Another limitation on Chapter 7 bankruptcy's effect on foreclosure is that a bankruptcy judge always has discretion to grant certain creditors relief from the automatic stay. A creditor granted relief can then pursue collection even while your bankruptcy case is pending. For example, your mortgage lender can ask the court to allow it to foreclose even though the automatic stay would generally prohibit this. If the court says yes then the lender can resume the foreclosure process. The bankruptcy court is likely to grant your lender relief from the automatic stay if you are in serious default on your mortgage loan. However, it takes time for the lender to apply for and receive relief from the automatic stay, so filing for Chapter 7 bankruptcy is guaranteed to buy you at least a little more time before foreclosure.
-
References
- Photo Credit for sale sign image by Attila Toro from Fotolia.com
