Foreclosure is one of the primary reasons clients file chapter 13 bankruptcy. In chapter 13 bankruptcy clients save their home by forcing their lender to accept a 3 to 5 year repayment plan. Once late mortgage payments have been repaid over the course of 3 to 5 years the lender cannot reinitiate foreclosure proceedings since the client will no longer be in default.
How Chapter 13 Bankruptcy Stops Foreclosure
When a client files chapter 13 bankruptcy federal law prohibits creditors from engaging in certain collection actions such as the continuation of foreclosure proceedings. Therefore, if a client files bankruptcy on Tuesday the scheduled Trustee’s sale in foreclosure cannot occur on Wednesday. This immediate cessation of collection activities is codified in Section 362 of the U.S. Bankruptcy Code.
How Chapter 13 Bankruptcy Can Save Your Home
There is a common misconception that clients lose their home in bankruptcy. To be fair, if clients have defaulted on their mortgage and file chapter 7 bankruptcy the lender will eventually be able to continue foreclosure since chapter 7 bankruptcy does not allow clients to cure (repay) their long-term debts. After chapter 7 bankruptcy is concluded the client will continue to be in default and the lender will be able foreclose on the home. In contrast, chapter 13 bankruptcy allows clients to cure (repay) long-term debts through a chapter 13 plan. After repaying late mortgage payments through a 3 to 5 year chapter 13 plan the client will no longer be in default, thereby preventing the lender from continuing foreclosure proceedings. Accordingly, clients can save their home through chapter 13 bankruptcy.
Emergency Chapter 13 Bankruptcy
Bankruptcy attorneys can file an emergency bankruptcy petition to stop the foreclosure process. As long as the bankruptcy petition is filed before the Trustee’s sale the automatic stay will prevent the effective sale of the home; however, in practice the bankruptcy petition should be filed well in advance of the scheduled Trustee’s sale so parties can receive notice of the automatic stay.