Filing bankruptcy can buy you a little time or a lot of time, enough time either to transition to a new home or else to save your present home.
The same bankruptcy power that stops a lawsuit or garnishment of your wages or bank account, also stops a home foreclosure. The practical question is: what happens to your home after the foreclosure is stopped?
Chapter 7: the Option that Buys You a Little Time
A Chapter 7 “straight bankruptcy,” is by far the most common type. It gives you protection against foreclosure for three months or so, or potentially for even less time if the mortgage lender is aggressive.
With such a short period of protection, a Chapter 7 would help you in two quite different situations:
1. if you have decided to surrender your home but need just a few weeks to move; or
2. if you want to keep the home, and can afford to catch up on the late payments within about a year of extra payments.
Filing a Chapter 7 is like hitting a pause button. If you’re letting your house go, it lets you catch your breath before you have to leave. If you’re hanging on to the house, a Chapter 7 gives us time to do a deal with the mortgage lender.
Chapter 13: the Option that Can Buy You Years of Time
Filing under Chapter 13 can potentially give you five years to pay off your back payments, and does so in a more flexible and powerful package.
Instead of negotiating with the mortgage lender and hoping that it will give you terms that you can live with, Chapter 13 generally gives you a set of rules to follow for catching up with that lender. It also gives you time to catch up on any back property taxes, can often get rid of a second mortgage or a judgment lien, and usually provides a practical way of dealing with other liens on your home, such as an income tax or child support lien.
A Chapter 13 case is flexible, so that if you have changes in your circumstances during your case your plan can be adjusted to account for the changes. That makes holding on to your real estate more feasible. It also means you can change your mind and decide to surrender it, months or even years after your case was filed.
The mortgage lender can always ask the bankruptcy court for permission to begin or restart a foreclosure. These kinds of creditors tend to do so either at the beginning of your case if they don’t like the Chapter 13 payment plan that you and your attorney are proposing, or later in the case if you’ve not made the payments that you said in your plan that you would make. The court balances your rights against those of the lender in deciding whether to give you the extra time you need.