All You Need to Know About Bankruptcy and Foreclosure

Foreclosures and bankruptcies typically take place independently. While the former refers to the mechanism that lenders use to recover their dues upon default, the latter gives debtors means to eliminate their debts. In some instances, filing for bankruptcy can help debtors hang on to their homes. The use of both mechanisms usually takes place together after a debtor chooses to commence bankruptcy proceedings when a foreclosure is already underway.

If you risk losing your home to foreclosure, you might benefit by filing for bankruptcy before the foreclosure process is complete. However, this largely depends on your ability to keep making your mortgage payments in the future.

Delaying Foreclosure Through an Automatic Stay

Filing for Chapter 7 or Chapter 13 bankruptcy puts a temporary stay on foreclosure proceedings. However, doing so does not lead to a permanent stop in all cases. The permanent stop happens only if you demonstrate the ability to repay the mortgage. The temporary relief comes through a court order that imposes an automatic stay on foreclosure.

Consider this scenario – your mortgage provider has put your home up for sale. You then file for Chapter 7 bankruptcy. This leads to a legal postponement of the sale until the bankruptcy case is complete, which usually takes three to four months. Unfortunately for borrowers, mortgage providers have the option of filing a motion in court, requesting it to lift the automatic stay. If accepted, you lose out on the additional time you get. What helps is that even this process can take a month or two.

Bankruptcy or Foreclosure?

If you’re wondering whether you might be better off in filing for bankruptcy or going through foreclosure, you need to pay attention to aspects such as your existing debt, income, and expenses. If you choose to file for bankruptcy, you need to contact an attorney who will initiate the process on your behalf. With foreclosure, your lender initiates the process.

What Happens to Your Home After Bankruptcy?

If you don’t have money to repay your mortgage after your bankruptcy ruling, you still stand to lose your home. However, if the money the lender gets through the sale of the home does not cover your debt, you don’t have to worry about paying the remainder, as your bankruptcy ruling discharges your debts. If you are able to continue making repayments toward the mortgage, you may get to keep your home.

How Can Filing for Chapter 13 Help?

When you file for Chapter 13 bankruptcy, you get the ability to repay your arrearage or unpaid payments through a repayment plan, typically over the course of five years. However, you need to have enough income to cover for your arrearage as well as your existing mortgage. If you can manage to keep up with the repayment plan, you get to keep your home.

If you have taken second and third mortgages on your home, Chapter 13 might help you eliminate those debts. This happens in case the value of a house drops and its entire value works in securing the first mortgage. Since you may no longer have any equity in the house to secure the additional mortgages, a bankruptcy court might reclassify the later mortgages as unsecured debt. This type of debt takes least priority, so you might avoid paying it back.


If you feel you’re in financial trouble, start by determining if you can avoid bankruptcy and foreclosure in the first place. However, don’t wait for long to seek professional assistance because relief might be harder to come by at a later stage. If you’re unsure about which way to proceed, consider contacting an attorney who specializes in handling debt-related cases at the earliest.