Chapter 7 Bankruptcy and Foreclosure

Foreclosures are still occurring on a regular basis in the Sacramento area. Bankruptcy can be an effective way to stop a foreclosure. But only certain types of bankruptcy can help. Chapter 7 will not necessarily save your home. Read on for more information about Chapter 7 Bankruptcy and Foreclosure.

The Automatic Stay Halts Foreclosure

The “automatic stay” in bankruptcy stops most legal proceedings pending against the bankruptcy filer. This includes non-judicial foreclosure, the type of foreclosure that is common here in California. When a person files for bankruptcy, the automatic stay takes effect and prevents foreclosure from moving forward.

If a foreclosure sale still happens after the bankruptcy has been filed, the foreclosure is “void.” This means that the sale has no legal effect whatsoever. And the foreclosing creditor has an affirmative duty to unwind its post-bankruptcy actions.

As you can see, bankruptcy can be very powerful tool.

The Automatic Stay in Chapter 7 Can Be Challenged

The goal of a Chapter 7 bankruptcy is to liquidate debts and assets. The filing of a Chapter 7 will result in the stay of legal proceedings as discussed above. However, a creditor can challenge the automatic stay. This is known as asking for “relief from the automatic stay.”

If a creditor can demonstrate that the bankruptcy filer has defaulted on their mortgage by not making payments, the court will likely order that the stay be “lifted.” This means that the property is no longer protected by the bankruptcy. And the creditor can proceed with their foreclosure.

For this reason alone, I advise clients not to file Chapter 7 bankruptcy if they are trying to prevent foreclosure and stay in the home. The Chapter 7 bankruptcy will only provide a few months of protection, at most. This might not be enough time to reorganize finances and bring the mortgage current.

Chapter 13 Might be a Better Option

If your goal is to not only stop a foreclosure, but to stay in your home, Chapter 13 is the much better option. Chapter 13 will allow you to reorganize your finances over three-to-five years. As long as you stay current on your mortgage payments and pay back your mortgage arrears, you can stay in your home.

Bankruptcy is a very important decision. Please contact my office to discuss which type of bankruptcy would be right for your situation. You can reach my law firm at (916) 333-2222.

Attorney Rick Morin