Chapter 13 bankruptcy is sometimes considered “famous” for helping people avoid or delay foreclosure. But it’s important to understand that filing for Chapter 13 (or even Chapter 7 bankruptcy) does not guarantee that you will avoid foreclosure.
Here’s a look at foreclosure laws and how foreclosure after bankruptcy works.
Preventing Foreclosure During Bankruptcy
Filing for bankruptcy temporarily stops foreclosure in most cases. Here’s why:
- A legal protection called the automatic stay takes effect as soon as the bankruptcy case is filed. The automatic stay halts all collection actions, including creditor calls, repossession and foreclosure.
- This protection typically stays in effect for the duration of the bankruptcy case. That could be as little as four to six months for a Chapter 7 case and as long as three to five years for a Chapter 13 case.
But the protection of the automatic stay only lasts as long as a filer sticks to the terms outlined by the bankruptcy agreement. In Chapter 13, that means making regular monthly payments according to the repayment plan.
If the filer can’t catch up on mortgage payments even with the help of bankruptcy, foreclosure might still be an option after the bankruptcy case ends.
Liens, Second Mortgages & Foreclosure after Bankruptcy
Things can get tricky, too, when filers have second mortgages or home equity lines of credit (HELOCs) when they file for bankruptcy. And thanks to the housing market that collapsed in 2007, many Americans currently do have multiple mortgages or loans attached to their homes.
Here’s how they’re treated by the bankruptcy court:
- A HELOC in Chapter 13 bankruptcy: In Chapter 13, filers are required to make payments to their primary mortgage lender and to the bankruptcy trustee. The trustee distributes these payments among priority debtors. After the case concludes, the HELOC may be eliminated (discharged). The lender will have gotten a percentage of trustee payments during the case.
- A HELOC in Chapter 7 bankruptcy: Chapter 7 may cancel the debt on a home equity credit line, but it cannot cancel the lien that creditor has on the house. In fact, a HELOC lender may still be able to foreclose on a filer’s house after bankruptcy is over (though if there’s no equity in the house, this would be unlikely). One way to avoid post-Chapter 7 foreclosure is to reaffirm payments to a HELOC lender in during bankruptcy.
- Second mortgages in Chapter 13: Second mortgages that are no longer secured by a home’s value can be discharged in Chapter 13 bankruptcy. Underwater homes may have second or third mortgages that are not secured any longer by the house’s value (that is, the amount of the loans totals more than what the house is currently worth). However, discharging a second mortgage will not affect what a bankruptcy filer owes on a first mortgage.
Could You Face Foreclosure after Bankruptcy?
If you’re considering filing for bankruptcy as a way to escape foreclosure, it’s essential to speak with a bankruptcy lawyer to make sure you understand how your mortgage will likely be affected by a bankruptcy filing – and whether you might find yourself facing foreclosure after you get your discharge.