Filing Bankruptcy Will Immediately Stop a Foreclosure
If you file bankruptcy, there is an “automatic stay” put in place, which immediately prohibits most creditors from trying to collect debts from you. The automatic stay outlaws collection calls and letters, and also makes it illegal for a creditor to continue with a repossession or foreclosure auction.
You must notify the bank that you’ve filed for bankruptcy, but once they know they must stop a foreclosure sale.
This rule applies to anybody in their first bankruptcy case. If this is your second or third case, your rights may be more limited.
What Will Happen to My Mortgage?
The impact of a bankruptcy case on your mortgage depends on what type of bankruptcy you’ve filed.
Most cases involving foreclosure issues are filed under Chapter 13 of the U.S. Bankruptcy Code, which is structured as a payment plan over several years. This is because a Chapter 13 case allows you the ability to catch up on past due payments, so that your mortgage will be fully current at the end of the case.
In fact, this is a requirement. Your plan must: (1) offer to catch up on all past due payments, and (2) confirm that you will also make all regular monthly mortgage payments after the bankruptcy case has been filed.
On the other hand, a Chapter 7 bankruptcy won’t provide you the opportunity to catch up on past due payments. Instead, if only offers you the ability to discharge your personal liability on any post-foreclosure deficiency. In other words, if the property is sold at a foreclosure auction for less than you owe on it, the bank would be prohibited from trying to collect the remaining balance from you.
Can the Bank Foreclose After/During the Bankruptcy Case?
While a bankruptcy filing will immediately stop a foreclosure auction, there are some important limitations. If the bank wants to continue with foreclosure efforts, it must obtain permission from the Bankruptcy Court.
To do this, the bank will usually file a “Motion for Relief from Stay” for one of two reasons:
If you file a Chapter 7 case, as mentioned above, you will be indicating to the Court that you don’t intend to catch up on the past due payments. Because you don’t intend to catch up on those payments, the bank will argue that it should be given permission to resume foreclosure efforts. This makes sense, and will typically be granted by the Court.
If you file a Chapter 13 case, you are required to make your regular monthly mortgage payments in addition to the monthly Chapter 13 payment. If you don’t make these payments, the bank will also argue that it should be given permission to resume foreclosure efforts. This also makes sense, and will typically be granted by the Court. Banks will often try to negotiate a reasonable repayment plan to avoid this consequence in a Chapter 13 case, but there’s no requirement to do so.
If a Motion for Relief from Stay is granted, then the bank will be permitted to resume foreclosure efforts in accordance with Massachusetts state law. If it violates state foreclosure law, you should still have the ability to file a lawsuit for it, but you would no longer be protected under the automatic stay of the Bankruptcy Court.
You Need an Attorney
Foreclosure issues can be quite complicated, and one mistake can jeopardize your home. You need an experienced attorney that you can have full confidence in. To learn more, contact Brine Consumer Law to schedule a free, no-obligation consultation.