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Bankruptcy by Example: Buy Time to Move by Delaying the Foreclosure of Your Home

July 3, 2014

Even once you’ve decided you can’t or don’t want to stay in your home, Chapter 7 provides more time there to save money for your move.

First, Know Your Options Before You Give Up Your Home

Chapter 13 “adjustment of debts” gives you a number of amazingly strong tools for dealing with your mortgage lender(s) and other lienholders on your home. Through Chapter 13 you may be able to “strip” off a second mortgage by paying little or nothing on it; it can give you years to catch up on your first mortgage; and it can deal very well with tax, support and judgment liens. All this may be possible even if you are facing a foreclosure. So it would be wise not to make a decision to surrender your home before you find out your legal options, under both Chapter 7 and Chapter 13, among others.

Then, IF You Decide to Leave, Chapter 7 Can Make the Move Much Smoother

After looking at all the options you may still decide to give up your house. If so, the following example shows how good timing of a Chapter 7 bankruptcy can benefit you.

An Example

Mike and Lisa are a married couple who bought their first home in early 2007, unfortunately at the peak of the housing bubble. They’d been married for 6 years, had been working for the same employers throughout that time, had saved $20,000 for a down payment, and their family was growing so they decided to buy a home. They bought one that they were sure was within their means, costing $240,000, leaving them with a mortgage of $220,000.

But soon after, the Great Recession arrived, dragging their home’s value down and down until within a couple of years it was worth only $175,000. At the time, Mike lost his previously consistent overtime, losing 20% of his income. The couple kept the mortgage current by cutting back on everything else. Then in mid-2013, Lisa lost her long-time job when her company closed down its local division. After being unemployed for a very frustrating year, she found a new job but it paid significantly less and involved a very long and expensive commute.

In the meantime, Mike and Lisa simply could not make their full mortgage payments so they sent partial ones, which their mortgage company accepted for many months. But then it stopped accepting any more partial payments and threatened to foreclose. Once it did foreclose a few months later, the couple had not made any mortgage payments for a year, and were in arrears $17,000, plus a year of property taxes. Their foreclosure sale was scheduled for 45 days later.

Property values in their neighborhood had stabilized a couple years ago and since then had been slightly going up, but Mike and Lisa figured it was not worth trying to keep their house. Including the mortgage arrearage, late fees, foreclosure costs, and the unpaid property taxes, they owed close to $240,000 on a house still worth only about $180,000. They could rent for much less than their mortgage payment plus what it would take to catch up on their arrearage. Plus they wanted to live closer to Lisa’s new job to save the commuting costs and wear and tear on their older vehicle.

Buy More Time to Move, Save More for Moving Expenses

After learning from their bankruptcy attorney about their options for keeping their house vs. surrendering it, particularly about how much Chapter 13 could and could not help them, Mike and Lisa decide not to keep it. They also decide that they needed the relief from all their other debts that a Chapter 7 case would provide them. They also learned that if they timed their Chapter 7 filing well, it would help them prepare financially for their move.

So Mike and Lisa’s case was filed a short time before their scheduled foreclosure date, so that the “automatic stay” of their bankruptcy filing stopped the foreclosure sale. In the meantime they saved the money they had been paying their other creditors to pay for their upcoming moving costs, first and last months’ rent payments and such. AND crucially, they have done so with detailed advice from their attorney about how to protect that money from their Chapter 7 trustee and their creditors.

How Much Longer They Can Stay

Mike and Lisa’s attorney also advised them that the amount of extra time they would be able to stay in their house would depend on their state’s laws about how quickly foreclosures can be re-started after being interrupted by bankruptcy.

They also learned that how much more time they would have depends a lot on how aggressive their mortgage lender choses to be. If in a big hurry to foreclose, their lender can file a “motion for relief from stay” with the bankruptcy court asking for permission to reschedule the foreclosure sale. If so, that motion would likely be granted, and the new foreclosure would be scheduled as soon as state law allows it. In this situation, the amount of time gained may be as short as a month or two—but that can still make an important difference.

In fact it’s not uncommon for a mortgage lender not to file for “relief from stay” but instead just wait for the Chapter 7 case to be over. If so, Mike and Lisa could well stay in their house for three or four extra months, sometimes even more. This would give them that much more time to save money for their rental costs.

In Mike and Lisa’s case, their mortgage lender filed a “motion for relief” about a month after they filed their Chapter 7 bankruptcy, so the lender got permission to re-start the foreclosure about a month later, so that the new foreclosure sale happened (under their state’s laws) another month later. As a result, besides discharging (legally writing off) all their debts so that they could have the relief they needed, they were able to stay in their home about three months longer than they otherwise would have. During those three months of not paying their mortgage or any rent and not paying any creditors, they were able to pull together the money they needed to move to their new place.