When a bankruptcy case is filed in any Chapter, an Automatic Stay is created preventing creditors from taking certain actions. While the Stay is in effect, creditors cannot demand payment on debts, file lawsuits, attempt to collect on judgments through wage garnishment or otherwise, and they cannot continue foreclosure or repossession actions.
The length of the Automatic Stay varies based on the bankruptcy chapter. In Chapter 7, the Stay will usually only last about four months because that is how long the case lasts. In some cases, secured creditors such as mortgage lenders or car lenders will try to remove the Stay before the case ends by filing a motion to ask the Judge’s permission to continue with their foreclosure or repossession. If the debtor has no equity in the home or car, and is in default, the Judge will usually grant the motion and allow the lender to proceed to take back the house or car.
Thus, in a Chapter 7 case, the effect on a foreclosure may only be to delay the process for about 45 days if the lender is aggressive and seeks to remove the Automatic Stay right away.
In Chapter 13 cases, the debtors have the opportunity to present a plan (called a reorganization plan) to show the Judge, Trustee and creditors how they plan to cure any defaults on loans they want to retain, and how much they will be able to pay to the unsecured creditors (credit cards, medical bills) during the plan period (usually between three and five years).
Thus, in a Chapter 13 case, if the debtor can maintain regular mortgage payments that come due after the case is filed, and propose a plan to the Court that shows that the debtor has enough income to cure any default on the mortgage during the plan period, the foreclosure can be stopped completely until eventually the loan is current again. If the Judge approves the reorganization plan, and payments are being made, the lender should not be able to remove the Automatic Stay. By the time the Stay disappears on its own at the end of the Chapter 13 case, the loan presumably will be current and there will be no basis for a foreclosure to continue.
When facing foreclosure, it is often best to discuss your bankruptcy options with an attorney to make sure that filing a case will have the intended effect.
For more information or a consultation, please call 661-210-5657, or e-mail mjf4bk@ca.rr.com.