Bankruptcy allows debtors to get a fresh start when their bills become overwhelming, but debtors do not have to wait until the bank forecloses before filing for bankruptcy protection. You can file your bankruptcy case at any point in the foreclosure process, and your home mortgage and foreclosure can be handled like your other debts as part of the case.
Filing for bankruptcy automatically stays, or temporarily stops, most collection actions, including foreclosure. This stay goes into effect immediately after you file your bankruptcy case and you do not need to make a special request to the court to get the stay's protection. If your mortgage lender has already begun foreclosure proceedings by the time you file for bankruptcy, the foreclosure is immediately stopped by the automatic stay. If your lender has not yet begun the foreclosure process, he cannot start it while the stay is in place.
Chapter 7 bankruptcy, also called liquidation bankruptcy because of the possibility of having assets sold to satisfy debts, does not permanently stop a home foreclosure. Chapter 7 bankruptcy does not discharge, or erase, debts you owe to secured creditors, which are debts secured by collateral. Since your home mortgage is secured by the home itself, your lender is considered a secured creditor. If you are behind on your mortgage payments, your lender can ask the court to lift the automatic stay, allowing it to proceed with foreclosure during bankruptcy proceedings and the court can grant this request no matter where you were in the foreclosure process before you filed for bankruptcy.
Chapter 13 bankruptcy involves a restructuring of your debts over a three- or five-year repayment plan. Since this type of bankruptcy gives you the chance to pay past due debts, you can get caught up on your mortgage payments and avoid foreclosure altogether. While you are in your repayment plan period, your lender cannot foreclose unless the court lifts the automatic stay, and you must stay current on your payments while you are completing your repayment plan. You cannot simply pay the past due payments while continuing to fall behind with the payments that come due while you are in bankruptcy.
While your bankruptcy case can postpone or even completely halt foreclosure proceedings against you, your lender can foreclose on your home either before or after your bankruptcy case. Bankruptcy does not create permanent protection against foreclosure. Your lender can foreclose on your home if you fall behind on your payments after your bankruptcy is complete. For example, if you complete your five-year Chapter 13 repayment plan but fall behind on your mortgage payments a year later, your lender will likely be able to foreclose.