If you're a homeowner who is struggling with your personal budget and are behind in your mortgage payments, bankruptcy may seem to be an appealing last-ditch effort to save your home. Although the strategy works for some debtors, it's also no guarantee that you'll stall foreclosure for more than a few months. Depending upon your financial situation and obligations, bankruptcy may stall foreclosure only briefly, or it might help save your home from foreclosure altogether.
Chapter 7 personal bankruptcy is the most cut-and-dried approach to bankruptcy. Under Chapter 7 proceedings, a debtor's holdings are liquidated and the proceeds are divided among creditors. Debtors almost always end up losing their home in the proceedings, according to CNN Money.
Debtors who still have income-earning potential may qualify for Chapter 13 protection from the courts. This mode of bankruptcy doesn't require a debtor to liquidate assets and instead focuses on restructuring debt. Bankruptcy court draws up a repayment plan that the creditor or debtor agree upon, and both are bound to its terms. Chapter 13 bankruptcy is useful for homeowners who fell behind in their mortgage payments, but now have the ability to resume them on a regular basis. Many who file Chapter 13 protection may keep their home.
When a debtor files either type of bankruptcy, the court issues an immediate automatic stay on debt. This order forces creditors to halt claims against the debtor while bankruptcy proceedings transpire. This automatic stay frequently freezes creditors for two to four months depending upon the court's caseload, and during this period, homes may not be foreclosed upon.
In Advance of Foreclosure
Homeowners must receive orders for an automatic stay before their bank files foreclosure papers on their home. If a home is already in foreclosure at the time the automatic stay is issued, the motion doesn't stop the bank from repossessing the home.
Debtors who file Chapter 13 protections may be able permanently to forestall foreclosure. If bankruptcy court and the debtor's lawyers can reach an agreement, payments may resume on the home and, in many cases missed payments are negotiated to the tail end of a freshly redrawn mortgage agreement.