For many Michigan families, your mortgage and home equity loans may be the biggest debts you have. When you fall behind on those payments, you risk losing your home to the bank through foreclosure proceedings. Can a Chapter 7 bankruptcy stop foreclosure? Is there anything you can do to buy time to catch up on what you owe?
In this blog post, I will explain how bankruptcy and foreclosure proceedings interact. I will explain whether bankruptcy can discharge mortgage or home equity loan debts, and if bankruptcy can stop foreclosure.
A Chapter 7 bankruptcy discharges (forgives) most debts owed by the person filing it. Once a debt has been discharged, the person is legally free from having to pay for it and the creditor can’t sue him or her for the amount owed. In theory, the same is true for mortgages and home equity loans. A Chapter 7 bankruptcy strips a person’s name off the mortgage loan, releasing them from the legal duty to pay those debts.
But theory and practice don’t always agree. A mortgage is a “secured” debt. That means it comes with a promise that if you don’t pay as you agree, you will give the mortgage lender something in exchange: your house. The legal device used to make that promise is a lien. While a Chapter 7 bankruptcy forgives the mortgage loan, it doesn’t do anything about the lien. If you stop making mortgage payments after your bankruptcy is discharged, the bank may not be able to sue you, but it can take possession of your home through foreclosure.
The same can generally be said for second mortgages and home equity loans. After a Chapter 7 bankruptcy, the loan is forgiven but the lien remains. However, second mortgages are by definition secondary. A lender’s right to foreclose on a property securing a second mortgage or HELOC debt comes after the rights of the first mortgage holder. If the bank controlling your home equity loan wants to take possession of your home and sell it to settle its debt, it must first pay off the lender with the first-priority interest.
What this means for you is that, generally speaking, you won’t have to worry about losing your home to a second mortgage lien-holder unless the value of your home is more than you owe on your first mortgage. Because the secondary lender only gets what is left over after the first debt is satisfied, as long as you owe more on your mortgage than your home’s fair market value, the lender has no reason to foreclose on your home.
Filing for Chapter 7 bankruptcy may not free you from making your mortgage payments, but it can buy you time to get back on your feet. That is because the minute you file your petition for bankruptcy, the court will enter an automatic stay on all debt collection proceedings. As long as the foreclosure sale hasn’t actually happened yet, your home cannot be sold until after the bankruptcy is completed. Mortgage companies may file a motion to lift that automatic stay and sell your home in a Sheriff sale, but most will simply wait until the bankruptcy process is complete.
That is because filing for bankruptcy puts the brakes on a foreclosure sale, but it doesn’t stop it entirely. Unless you make good use of your time, you should expect for the Sheriff’s sale to be rescheduled after the bankruptcy process is complete.
With collections efforts on hold, it may be tempting to just stop writing the check to your mortgage company. Sometimes, that is the right thing to do. A Chapter 7 bankruptcy itself could force you to sell your home. Federal and Michigan law allows you to protect up to $38,225 of net equity in your primary home (or $57,000 if you are over age 65 or receiving social security). If your home is worth more than that, your bankruptcy trustee will sell it, pay back your mortgage lenders, and distribute the excess equity among your other creditors.
That’s why many homeowners will opt for a Chapter 13 bankruptcy if they qualify. It may take longer to complete, but a Chapter 13 bankruptcy can save your home and give you a structure for paying off your mortgage. If you don’t qualify for a Chapter 13 bankruptcy, and you have too much equity in your home to qualify for protections, it doesn’t make sense to throw good money after bad. In that case, it may be best for you to stop paying your mortgage and simply walk away from your home when the bankruptcy is over. In that situation, it is best to review some tips for buying a house after bankruptcy.
However, most people who file for Chapter 7 bankruptcy fall below that equity threshold, and are able to keep their homes. Chapter 7 bankruptcies take 3 to 4 months to complete. As the bankruptcy draws to a close, banks and mortgage lenders may seem like sports cars revving their engines at the starting line, just waiting for the red light to turn green so they can start their foreclosures.
That is, unless you make good use of your time. If you are not going to walk away from your home, you have 90 - 120 days to get the money together and pay off what you owe. At the same time, the bankruptcy has halted collections and payments on other dischargeable debts, freeing up more of your money to put toward the obligations that will remain after the case is closed. By timing your bankruptcy to just precede the foreclosure sale, and making strategic use of your income while it is pending, you can buy yourself as much time as possible to catch up on what you owe and save your home.
At John A. Steinberger & Associates, P.C., we know how important your home can be. We will work with you to make the most of your budget before and during the Chapter 7 bankruptcy, so that foreclosure isn’t waiting for you on the other side. We are a full-service bankruptcy law firm in Southeast MI. We serve debtors and families in Southfield, throughout Metro Detroit, and in the surrounding communities. Call us toll-free at (866) 690-2140 or contact us online to schedule a free initial consultation.