Bankruptcy - Does It Really Stop Foreclosure?

One of the most common actions taken in an attempt to stop a foreclosure is the filing of bankruptcy.  Many attorneys recommend bankruptcy when facing foreclosure.  And while it’s true that a bankruptcy filing will stop an impending foreclosure, the halting of the foreclosure is OFTEN ONLY TEMPORARY.  

The result is that bankruptcy ends up often ONLY DELAYING FORECLOSURE rather than actually stopping it.

The following overview regarding bankruptcy is only that – an overview.  There are some situations where bankruptcy may make sense – especially in cases where there is little or no income and little or no assets.  Our aim here is NOT TO GIVE ADVICE REGARDING BANKRUPTCY but rather explore the effects we have seen regarding how bankruptcy impacts foreclosure.  We remind you that we are not attorneys and if you want to explore bankruptcy for your personal situation, please consult with a qualified and licensed bankruptcy attorney.

There are two types of bankruptcies for individuals, Chapter 7 and Chapter 13.  Chapter 7 is a liquidation while Chapter 13 is a repayment plan.

In a Chapter 7 filing, the person(s) filing bankruptcy turn over all their non exempt assets to the bankruptcy trustee who distributes the proceeds according to bankruptcy law to the unsecured creditors.  Secured creditors, though, can still repossess their collateral for non payment with permission of the bankruptcy court.  In the state of Illinois, it appears that only $15,000 in equity can be protected.  Therefore, homeowners who have more $15,000 in equity will find themselves in trouble. 

Most attorneys, in filing a bankruptcy petition, declare the house as an asset secured by a mortgage.  In a Chapter 7 bankruptcy filing, the lender can petition the court for relief from the Automatic Stay generated by the bankruptcy filing which halted the immediate foreclosure.  Upon the lifting of the Automatic Stay, the lender may proceed with the foreclosure even though the homeowner is still in bankruptcy.  Or the lender may simply wait for the Chapter 7 bankruptcy to be discharged and then proceed with the foreclosure process against the homeowner.

In a Chapter 13 filing, the person filing bankruptcy is given a three to five time period in which to repay creditors.  Unsecured creditors are typically repaid at some sort of discount (although not a big discount in many cases) while secured creditors are typically paid in full.  A person who is behind on their mortgage payments WILL ALWAYS be put into a Chapter 13 bankruptcy if they want to keep their home.  The result is that their mortgage payments will NOW BE HIGHER, since now they must not only pay their existing mortgage payment but a portion of their previously unpaid payments as well. 

And if even ONE PAYMENT IS LATE OR MISSED, the lender can petition the court to be proceed with foreclosure upon the homeowner!

The vast majority (we’ve seen one not or profit organization that puts the percentage at 90%) of Chapter 13 bankruptcies FAIL because the payments the person is asked to make are beyond their ability to make.  THEY ARE SET UP FOR FAILURE!!

Do you see why we say that bankruptcy often simply delays foreclosure rather than actually preventing it?

What STOPS foreclosure? Click here for the answer.