Many people in foreclosure often hear recommendations that filing bankruptcy can “stop” their foreclosure. Bankruptcy can help stop your foreclosure, in some, but not all cases. Here, we decipher how bankruptcy can assist with your foreclosure and how it will not.
Bankruptcy can sometimes help your foreclosure case.
- Bankruptcy can help your foreclosure case by temporarily freezing your foreclosure case.
Bankruptcy temporarily “freezes” your foreclosure case through a legal concept called the “automatic stay”. After a Debtor has filed a bankruptcy case, creditors must stop all collection efforts against the Debtor for a period of time, unless the creditor get permission from the bankruptcy court to continue their collection efforts. This protection from collection efforts is referred to as the “automatic stay.” The automatic stay applies in Chapter 7 and 13 cases.
The automatic stay may only be temporary, depending on the creditor’s collection efforts. In a foreclosure case, the bank is the creditor who is taking collection efforts by filing a foreclosure lawsuit and putting the house up for a foreclosure sale. In many bankruptcy cases, a creditor will file a Motion for Relief from the Automatic Stay. This Motion asks the court to let the creditor out of bankruptcy and head back to state court to continue and finish their foreclosure case. The strength of your bankruptcy case will determine whether the creditor’s Motion will be successful. If you can show the court that your success in the bankruptcy will allow you to keep your house, the Motion will most likely be denied. However, the strongest proof you have to show you will be successful in your bankruptcy to keep your home is in your finances. You must show on your bankruptcy documents that you have enough money to pay for and keep your home.
- Bankruptcy can help your foreclosure case by allowing you to apply for a modification in your bankruptcy case.
Bankruptcy is an excellent tool to apply for a modification. In a bankruptcy case, a modification of your mortgage is handled in a secure portal where everyone uploads documents. This removes a lot of the games homeowners run into when applying for a modification. Because of the portal, you will not hear the bank say “they never got the documents” or “they didn’t receive a fax”. All parties using the portal can see when the documents were uploaded. This keeps all parties honest.
A successful modification will be where you have the income to support your mortgage payment. In modifications, a good mortgage payment is approximately 31% of your gross income. This means if your gross household income (before taxes are taken out) is $5,000, then your mortgage payment should be approximately $1,550.00 per month including taxes and insurance.
On the other hand, if your gross household income is only $1,200, then it is unlikely that your bank is going to accept a mortgage payment of $372.00 per month. This is because your taxes and insurance will most likely be higher than this amount. If you received a large cut to your income and you will be unable to recover from that, your chances of success in a modification are not good.
A modification can be filed in Chapter 7 and 13 cases. However, you or your attorney must file a Motion for Mortgage Modification Mediation with the Court. A modification does not automatically happen.
- Bankruptcy can help your foreclosure case by seeing if you can repay past due amounts on your mortgage in your bankruptcy case.
In some cases, the amount that you are behind on your mortgage is low and a bankruptcy may help you catch up on those amounts in a larger time frame than the bank will give you. If you are less than 2 years behind on your mortgage, your chances of catching up on your payments are good. If your mortgage payment is $900 a month and you are 18 months behind on your mortgage, your past due amounts (also known as “arrears”) approximately $16,000. A bank wants the lump sum of $16,000 in order to reinstate your mortgage payment. On the other hand, in a Chapter 13 bankruptcy, you can pay the $16,000 off in 36 to 60 months. This payment option makes it much more feasible for homeowners to get caught up on their mortgage.
In calculating what your catch up payment will be, you will still need to pay your regular mortgage payment PLUS an amount to catch up on the payments. If your arrears are $16,000, that would amount to a catch up payment of $267.00 per month ($16,000 divided by 60 months to pay back and catch up). Your monthly payment to keep your house through a Chapter 13 case would be the regular payment $900 and the catch up payment of $267, for a total monthly payment of $1,167 for 60 months. It is important to be sure that you can really pay the $1,167 before spending the time, energy, and money to file a Chapter 13 case.
- Bankruptcy can help your foreclosure case by allowing you to surrender your home if your modification is unsuccessful.
Bankruptcy cases also allow you to surrender your home if your mortgage modification is not successful. Your mortgage modification could be unsuccessful for a variety of reasons – loss of income, illness, a lack of income coming into the home, etc. In many cases, a bankruptcy mortgage modification is your last resort to saving your home. The bankruptcy case provides protection from bank “games” and the bankruptcy court requires a good faith mediation between the parties. Even if the parties mediate in good faith, your mortgage modification may be unsuccessful. If your mortgage modification is unsuccessful, you other last option is a catch up in a Chapter 13 case (see #3 above). If you are unable to catch up due to insufficient income or too high of arrears, you may need to surrender your home.
If you are going to surrender home because you cannot keep or save it, you want to make sure your debt is also wiped out. In a foreclosure case, when the bank sells and gains possession of your home, you still owe the debt on the mortgage. In a bankruptcy case, you can surrender the home and request that the debt on the mortgage is wiped out. This is an opportunity for you to get a fresh start.
Bankruptcy cannot always help your foreclosure case.
- Bankruptcy cannot help your foreclosure case if you filed bankruptcy before and recently.
Bankruptcy courts are wary of homeowners who file bankruptcy often and frequently. A common scenario that Courts see is that a homeowner files bankruptcy on the day before or morning of a foreclosure sale in an attempt to delay the bank from selling the home pursuant to a foreclosure sale. Many times, homeowners try to repeat this process over and over to keep the bank from selling the home. If you filed a bankruptcy case which was dismissed and you plan on filing another case, you need to consider if the new case will be considered in good faith or bad faith.
You can be considered a “serial” bankruptcy filer if you have filed more than 1 case in a 12 month period. If your first case was dismissed, the new bankruptcy case will not have the same automatic protection as earlier cases. In this second, new bankruptcy case, your automatic stay will end automatically 30 days after the filing, unless you file a Motion for Automatic Stay and you can show good cause why your first bankruptcy case failed and why this one will not.
If this is your third bankruptcy case filed within one 12 month period, the automatic stay will not go into effect at all. It is important to understand that this is not calculated on calendar years, but rather a 12 month period. The 12 month period runs from the date of dismissal of the first case.
- Bankruptcy cannot help you re-litigate your issues if a foreclosure judgment was already entered.
It is important to understand where you are in your foreclosure case proceedings before filing for bankruptcy. If a foreclosure judgment was entered on your case, you will not be able to re-litigate or re-argue some of the issues when you are in your bankruptcy case. A judgment in your foreclosure case can sometimes be called Default Judgment, Summary Judgment, or a Final Judgment. The issues that cannot be re-litigated include standing (whether the right party/bank/plaintiff sued you) or how much is owed to the bank. If you believe there are issues regarding standing and/or the amounts owed in the foreclosure, the way to have those issues reviewed is through an appeal and not through the bankruptcy courts. It is important to understand there is a strict timeline for you to appeal a judgment. Make sure you understand when your deadline is.
- Bankruptcy cannot help your foreclosure case if you house was already sold through foreclosure.
If your home already went through a foreclosure sale, it is no longer your property. Because it is no longer your property, your bankruptcy filing will not allow you to save or keep the home.
The only exception is if the foreclosure sale and the bankruptcy filing were completed on the same day. Then, the bankruptcy court will look to the time stamp on your bankruptcy filing (the Courts actually mark the day, hour, and minute you file) to determine which took place first. If the bankruptcy filing took place first, you may be able to save your home. If the foreclosure sale took place first, it is no longer your property and the bankruptcy filing will not allow you to save or keep the home.