Can Bankruptcy Stop Foreclosure?

Can bankruptcy stop foreclosure? The short answer is that if at all possible, you should avoid declaring personal bankruptcy to stop foreclosure. It usually doesn't offer the kind of mortgage foreclosure help that you are looking for. It can offer some slight benefits, but in most cases those benefits are outweighed by the disadvantages of bankruptcy.

It often isn't a case of deciding between bankruptcy or foreclosure. You most likely will land up bankrupt and foreclosed. You probably don't realize that it is entirely legally possible for banks to continue the process of foreclosure after bankruptcy proceedings have been initiated.

Here is how it all works.

There are two types of bankruptcy, Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

Broadly speaking, Chapter 7 bankruptcy means that you are discharged of all your debts, and most of your assets are sold off to pay as much of the debt off after that.

Assets that are excluded are various pension schemes, personal possessions like cards, tools of the trade for your job, and sometimes some small part of the value in your house. Essentially you are left with the minimum assets to allow you to pick up the pieces and start from scratch.

So what is the benefit of this type of bankruptcy vs foreclosure?

The only benefit is that in theory the bank will have to stop foreclosure proceedings whilst the bankruptcy is being processed. This is called an "automatic stay" which is part of the Order for Relief that occurs at the start of the bankruptcy process. This means that you will have another two or three months to stay in your house.

But what can happen in practice, if the house was already under threat of foreclosure, then the bank or lender can request a lifting of this automatic stay and can proceed with the foreclosure anyway. This does not help you at all.

A bankruptcy can stay on your credit record for 10 years. The only benefit of a bankruptcy of this kind is that if you are deeply in debt with multitudes of debts (ie not only your mortgage), and you declare bankruptcy, then you can start from the beginning right away to clear your credit rating, as opposed to struggling on trying to meet impossible debts. Depending on your personal circumstances, Chapter 7 bankruptcy may be a quicker route to a clean credit record than any other route.

So the answer to "Can bankruptcy stop foreclosure?" is a resounding no for Chapter 7 bankruptcy.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy allows you to make arrangements with your creditors to pay off your arrears over a period of time, and can thus prevent foreclosure. This will only work if you will have enough money to pay your mortgage going forward as well as the new payment to catch up the arrears.

Another benefit is that the arrears on unsecured debt is interest free under Chapter 13 bankrupcty laws. In some cases you can even arrange to have your unsecured debt discharged completely (things like credit card debt or even second mortgages if there isn't enough equity in your house to provide collateral for these mortgages).

In order to succeed with Chapter 13 bankruptcy, you will need:

1. Stable and regular income.
2. Disposable income (money left over after all the necessities have been paid for each month).
3. Debt with collateral (secured loans such as mortgages).
4. Unsecured debt.

So the answer to the question "Can bankruptcy stop foreclosure?" is yes and no. Chapter 13 provides options. Chapter 7 does not.

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