Can You File for Bankruptcy if Your House Is in Foreclosure?

Can You File for Bankruptcy if Your House Is in Foreclosure?

August 28, 2020

The bills are piling up and there’s no way you can pay them all—and your mortgage company just sent you a notice that they’re foreclosing on your home. You don’t want to lose your home and the memories associated with it. What can you do?

In some cases, filing for bankruptcy can help you hang onto your home. Petitioners often hang onto their bankruptcy filing until the last possible minute, hoping that somehow they’ll be able to pay the bills. By then, it can be too late. If your home is in foreclosure, it would behoove you to file sooner rather than later. Here’s how to use bankruptcy to avoid foreclosure in The Woodlands, TX.

How bankruptcy stalls foreclosure

When you file for bankruptcy, the court will issue an automatic stay. An automatic stay is a legal order that prevents one party from doing something—in this case, it prevents your creditors from calling you and trying to collect on your debts until the case is over. With limited exceptions, it goes into effect as soon as you file.

If you want to permanently halt the foreclosure, you’ll need to file for Chapter 13 bankruptcy. However, you can get some relief with Chapter 7 bankruptcy in The Woodlands, TX. Be aware that the stay will lift four to six months after the case ends.

Chapter 7 and foreclosure

Generally, when you sell a home at a foreclosure auction, it sells for much less than is left on the mortgage. The difference between the fair market value of the home versus what’s left on the mortgage, or the sale price versus the remaining mortgage, is called a deficiency. The lender can sue you to get a deficiency judgment, meaning you are required to pay that difference.

Filing for Chapter 7 bankruptcy can either preemptively discharge your mortgage debt (if you file before foreclosure) or prevent the lender from coming after you for a deficiency judgment if you file later. It also prevents you from paying taxes on the forgiven amount, which is counted as “income” for that year.

Chapter 13 and foreclosure

Chapter 13 bankruptcy can actually allow you to keep your home. Your monthly payment plan will spread the amount in arrears over a three- to five-year period, which allows you to pay your monthly mortgage payment in addition to the payment plan. As long as you’re able to keep your house payments current, you will be able to hang onto your home. However, if you default on those payments, you will be back to square one (or worse). If all goes according to the payment plan, your mortgage will be considered current at the end of the case.

If you’re considering filing bankruptcy, and your house is in or about to be in foreclosure, make sure you consult with an attorney right away.

James R. Jones, Attorney at Law is happy to answer your bankruptcy and foreclosure questions in The Woodlands, TX. Get in touch today to get started.

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