Does Bankruptcy Affect Foreclosure?

Homeowners facing foreclosure can use bankruptcy as an option to temporarily delay or even prevent the foreclosure. Along with bankruptcy comes credit consequences, however. It is important to fully understand how bankruptcy will impact you. If you are considering filing bankruptcy, a mandatory pre-bankruptcy counseling course must be completed at least 180 days prior to filing the bankruptcy petition.

Automatic Stay

After filing the petition for either Chapter 7 or Chapter 13 bankruptcy, the court issues an automatic stay. The automatic stay prevents your lender from continuing the foreclosure procedure until the bankruptcy is final. In some cases, the lender can ask the court to lift the automatic stay. If the request is granted, the lender is free to continue the foreclosure process.

Chapter 7 Bankruptcy

While Chapter 7 bankruptcy will not permanently stop the foreclosure, it can provide homeowners the extra time needed to save money and make other living arrangements. During the automatic stay, you do not have to pay the mortgage. The mortgage debt is discharged, and you will not be responsible for it. Even though the loan account will be reported to the credit bureaus, it will show a zero balance. Chapter 7 bankruptcy gives homeowners overwhelmed with debt a fresh start, although credit will be affected for a minimum of 10 years.

Chapter 13 Bankruptcy

Homeowners who would like to prevent foreclosure can file Chapter 13 bankruptcy. Through this form of bankruptcy, homeowners are responsible for paying their current mortgage. You must continue to make your mortgage payment during the automatic stay. Within 60 days of filing your bankruptcy petition, a meeting of creditors is held. At this time, you present your proposed repayment plan to the court. You will be responsible for making monthly payments to the court to cover the delinquent account balances. Repayment plans are typically three or five years. Chapter 13 bankruptcy remains on a credit report for at least seven years.

Foreclosure After Bankruptcy

If a homeowner files Chapter 13 bankruptcy and fails to pay the mortgage or complete the repayment plan, the home will enter foreclosure. Because the home was not included in the bankruptcy petition, it will be reported as a foreclosure to the credit bureaus. You will suffer the effect of having a bankruptcy and a foreclosure on your credit report for at least seven years.

References

• Nolo's Bankruptcy and Foreclosure Blog: Bankruptcy and Foreclosure: Fighting a Motion to Lift the Automatic Stay; January 31, 2011
• United States Courts: Liquidation Under the Bankruptcy Code
• United States Counts: Individual Debt Adjustment
• The Federal Trade Commission: Before You File for Personal Bankruptcy; November 2006

Resources

• The Lectric Law Library: What is Bankruptcy?