Bankruptcy and Foreclosure: What You Need to Know

Facing foreclosure can be one of the most distressing experiences for any homeowner. It’s not just the threat of losing your home but also the uncertainty and stress that accompany it. However, bankruptcy might offer a viable solution to halt foreclosure proceedings and give you a chance to catch up on missed payments. As a bankruptcy attorney in New Jersey, I guide clients through the intricacies of how bankruptcy can be used to prevent foreclosure and the specific steps involved in this process.

Understanding How Bankruptcy Halts Foreclosure

When you file for bankruptcy, an automatic stay immediately goes into effect. This stay is a legal injunction that stops creditors, including mortgage lenders, from continuing collection activities. Here’s what this means for your foreclosure:

1. Immediate Pause on Foreclosure Actions:

• Automatic Stay: Upon filing for bankruptcy, the court issues an automatic stay. It prevents your lender from proceeding with the foreclosure sale, giving you legal protection and time to assess your options.
• Duration of the Stay: The stay remains in effect until your bankruptcy case is resolved or unless the lender obtains court permission to continue with the foreclosure.

The Role of Different Bankruptcy Chapters

1. Chapter 13 Bankruptcy:

• Reorganization Plan: Chapter 13 allows you to reorganize your debts and propose a repayment plan to the court. You can include past-due mortgage payments in this plan, spreading them out over the term of the plan (typically three to five years).
• Continued Homeownership: By adhering to the repayment plan, you can keep your home and gradually eliminate the default status on your mortgage.

2. Chapter 7 Bankruptcy:

• Temporary Relief: While Chapter 7 offers a swift discharge of many unsecured debts, it’s less protective of your home in the long term. It can temporarily stop a foreclosure but does not allow you to catch up on missed payments through a repayment plan.
• Potential Sale of Assets: In Chapter 7, the bankruptcy trustee may sell non-exempt assets to pay creditors. If your home equity is not fully exempt, this might include your home, although many states have homestead exemptions that protect some or all of your equity.

Steps to Take When Considering Bankruptcy to Stop Foreclosure

1. Consult a Bankruptcy Attorney:

• Professional Guidance: Discuss your situation with a knowledgeable bankruptcy attorney to understand your options and the best chapter to file under based on your financial situation and goals.
• Strategic Planning: An attorney can help you plan the filing strategically, considering the timing of your foreclosure notice and any other pending collections.

2. Prepare Your Documentation:

• Financial Records: You will need detailed information about your income, debts, assets, and expenses. Gather financial documents like tax returns, pay stubs, mortgage statements, and notices from your lender about the foreclosure.
• Credit Counseling: Before filing for bankruptcy, you must complete a credit counseling course from an approved agency, which can provide insights into whether bankruptcy is the right choice for you.

3. Filing for Bankruptcy:

• Official Process: Your attorney will prepare and file the necessary bankruptcy forms with the court. This filing is what initiates the automatic stay and halts the foreclosure process.
• Meeting of Creditors: You’ll be required to attend a meeting of creditors (341 meeting) where the trustee and any creditors, including your mortgage lender, can ask questions about your finances and the filed documents.

4. Adhering to the Bankruptcy Plan:

• Chapter 13 Requirements: If you filed under Chapter 13, it’s crucial to make regular payments according to your reorganization plan to prevent the lender from resuming foreclosure actions.
• Chapter 7 Considerations: If you filed under Chapter 7, consider your options post-discharge, such as seeking a loan modification from your lender.

Move Forward with Confidence

Bankruptcy offers powerful tools for dealing with foreclosure, but it requires careful consideration and strategic planning. With the right approach and legal assistance, you can use bankruptcy not just to stop foreclosure but to set a path towards financial stability. If you’re facing foreclosure, consider consulting with a bankruptcy attorney to explore your options and decide on the best course of action to protect your home and your future.