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How does bankruptcy affect foreclosure?

On Behalf of | Jan 22, 2024 | BANKRUPTCY LAW - Foreclosure

Bankruptcy may offer a potential lifeline for homeowners facing foreclosure on their home. In the U.S., the two most common types of bankruptcy individuals file are Chapter 7 and Chapter 13. Each affects home foreclosure differently.

Filing for bankruptcy can provide a temporary reprieve or a long-term solution, depending on the circumstances and type of bankruptcy filed. Understanding these impacts is crucial for homeowners considering bankruptcy to address their financial struggles. 

Impact of Chapter 7 bankruptcy on home foreclosure 

Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, can temporarily stop foreclosure. When a homeowner files for Chapter 7, an automatic stay is immediately put in place. This stay prevents creditors, including mortgage lenders, from pursuing collection activities, including foreclosure. This relief is typically temporary.

If the homeowner can’t catch up on missed payments or reach an agreement with the lender, the lender may request the court to lift the stay, which allows the foreclosure to proceed. Also, since Chapter 7 involves liquidating assets to pay off debts, homeowners might risk losing their home if it’s not exempt from sale. 

Impact of Chapter 13 bankruptcy on home foreclosure 

Chapter 13 bankruptcy can offer a more direct way to prevent home foreclosure. This type of bankruptcy allows the homeowner to reorganize their debts and create a repayment plan to repay all or a portion of their debts over three to five years.

The key advantage for homeowners is that Chapter 13 can help them catch up on missed mortgage payments over time. As long as the homeowner complies with the repayment plan terms, they can avoid foreclosure.

A fresh financial start is often beneficial for someone who can’t get caught up on bills. Understanding how bankruptcy may impact a foreclosure and other aspects of their life can help them to make decisions they feel are in their best interest.