You can stop a foreclosure—including a “judicial” one—with a regular bankruptcy, but with this kind of foreclosure the timing is crucial.
In our last blog post we described why in the last couple of years mortgage lenders in Oregon shifted from non-judicial to judicial foreclosures, and then we laid out the procedure for judicial home foreclosures. As the two terms indicate, non-judicial foreclosures happen without a court being involved; judicial ones involve the filing of a lawsuit against you, the opportunity to respond and the possibility of a trial, but usually result in a judgment of foreclosure and a sheriff’s sale of the house.
Today we show how Chapter 7 is able to help you respond to a judicial foreclosure, focusing on the all-important timing issues.
The Power of the Chapter 7 “Automatic Stay”
One of the most important benefits of bankruptcy is the automatic stay—the federal law that stops creditors in their tracks the moment your bankruptcy case is filed. Besides stopping creditors’ phone calls and bills, garnishments of paychecks and bank accounts, and repossessions of vehicles, your bankruptcy filing also stops a home foreclosure. It does so whether the foreclosure is a non-judicial or judicial one.
The automatic stay is effective instantaneously upon the filing of your Chapter 7 case. So it can stop a foreclosure right on the brink of happening. For practical purposes the mortgage lender (usually actually its attorney) needs to be informed about your bankruptcy filing so that it is aware of the automatic stay and can comply with it by stopping the foreclosure process. Because of penalties for not complying, almost always lenders and their attorneys do act to stop the foreclosure process. Even if someone fails to stop—either because they genuinely did not find out in time or they disregarded the automatic stay—actions taken in violation of the stay must usually be quickly undone by the lender.
The Limits of the Chapter 7 “Automatic Stay”
Chapter 7 is the simpler and usually much shorter type of consumer bankruptcy, in contrast to the multi-year Chapter 13 “adjustment of debts.” The primary purpose of a Chapter 7 case is to discharge (legally write off) all or most of your debts, while protecting all or most of your property. It usually does not take much longer than three months from start to finish.
The automatic stay in a Chapter 7 case is in effect only those three months or so—more precisely, from the moment your Chapter 7 case is filed at the bankruptcy court until your discharge is granted. Your discharge is usually granted about 61 days after your “Meeting of Creditors,” which itself usually happens about a month after your case is filed, usually totaling a bit more than three months.
So in the best of circumstances a foreclosure is stopped for that length of time (unless a lender is really not on the ball and does not resume the foreclosure after your discharge).
Lender’s “Relief from the Automatic Stay”
The protection from the automatic stay can last much less than that three months or so. That’s because the lender can file a motion—a request—in the bankruptcy court asking for permission to proceed with its foreclosure. It can ask for “relief from the automatic stay.”
The first issue is whether a lender will bother to file such a motion; the second is whether the court will grant that “relief.”
There is probably a greater likelihood that the lender would file such a motion when it is doing a judicial foreclosure than a non-judicial one for some practical reasons. Its attorney is already directly involved, the procedure is already in court (although in state court not in bankruptcy court), and the state court may be pushier about moving the foreclosure case along than if there was no court involved.
If the lender does file a motion for “relief,” whether or not it would prevail depends on the circumstances. If you want to keep the house and have a viable plan for bringing the mortgage current, the judge may not give the lender permission to resume the foreclosure. Same thing if you are on the brink of a sale of the house. However, if you will be surrendering the house because you either aren’t able to or choose not to bring it current within a reasonable time (usually about a year), the court likely will grant “relief from stay.” If so, the amount of time the Chapter 7 case will have gained you could be as short as two or three weeks if the lender acts very aggressively, although usually you gain about a month, sometimes more.
When to File the Chapter 7 Case
Usually when people file a Chapter 7 case to address a foreclosure, they do not intend to keep the home but rather just need some extra time to find and pay for another place to live. In these circumstances gaining as much time as possible is often important. To do so, it’s important to time the filing of your Chapter 7 case strategically. You need to do this with the help of your bankruptcy attorney, making it crucial that you find and meet with him or her as soon as possible after the foreclosure is started (if not earlier).
Generally, if you file Chapter 7 too early in the process, the lender may well be able to get “relief from stay” without delaying that process at all. If you file too late, the automatic stay may longer be effective at stopping the foreclosure.
Chapter 7 stops a home foreclosure, but does so for only a limited time in the best of circumstances, and a very short time in the worst of circumstances. If you just need to buy a little time before moving, or before gathering the funds needed to pay the mortgage arrearage, OR to close a pending sale of your house, the limited help provided by Chapter 7 may be just what you need.
Otherwise, consider Chapter 13, which provides you a toolbox full of powerful tools for keeping your house when faced with a judicial foreclosure. We’ll tell you about these tools in our next blog post.