When Does the Bank Take Possession of a Home in Bankruptcy?

By Shelly Morgan

Banks cannot take possession of a home without a foreclosure proceeding. Foreclosure is not part of the bankruptcy proceedings, although it often occurs immediately thereafter. How bankruptcy and foreclosure play out with regard to whether or not you lose your house is determined by the type of bankruptcy proceeding, the location of the property and whether you have sufficient income to pay future mortgage payments.

Bankruptcy

Bankruptcy is a legal proceeding that discharges or restructures debts. Most homeowners either go through Chapter 7 or Chapter 13 bankruptcy proceedings. If you file Chapter 7, the court appoints a trustee who gathers your assets and uses them to pay off your creditors. Many assets qualify as exempt and cannot be used to pay creditors. Whether or not an asset is exempt can vary from state to state. Chapter 13 bankruptcy works differently. If you file Chapter 13, your debt will be restructured so that you can pay it off over a 3- to 5-year period.

Temporarily Halting Foreclosure

Filing for bankruptcy temporarily halts any foreclosure action. After you file for bankruptcy, the judge issues an order for relief telling your creditors that they must stop collection efforts for the duration of the bankruptcy proceeding. This order for relief is known as an automatic stay. Although the lender can contest the stay, you still have bought yourself some time to remain in your home. The automatic stay provides no relief if the bank has already held the foreclosure sale. If the title has already passed to the new buyer, you must leave your home. The state of Oregon requires that you move out of your home within 10 days of a foreclosure sale. Other states impose different requirements.

Get a free, confidential bankruptcy evaluation. Learn More

Benefits of Chapter 13

The bank might never foreclose your home if you file Chapter 13 bankruptcy. This form of bankruptcy allows you to restructure the past-due mortgage payments and pay it over an extended period of time. However, you must still pay all future mortgage payments as they come due.

Foreclosure and Chapter 7

The likelihood of a positive outcome is less certain if you file Chapter 7. Depending upon where you live, it is possible to lose your home in a bankruptcy proceeding, even if the mortgage debt is forgiven. This outcome is possible because most mortgages include a promissory note and a lien. The promissory notice is your promise to the lender to pay the bank. The lien is your agreement to use the property as collateral if you default on your debt. While a Chapter 7 bankruptcy forgives your debt, it does not address the lien. If you file Chapter 7, foreclosure proceedings can run their usual course after you are declared bankrupt.

Homestead Exemption

Both states and federal law provide for homestead exemptions that protect at least some of the equity you have in your home. For example, the laws of Texas, Iowa and several other farm states protect all of your equity. Other states protect a lesser amount. Federal law provides weak protection: it exempts only $22,975 of the equity. Double-check with your state as these amounts often change.

Foreclosure Proceedings

Foreclosure may take place after the bankruptcy. Different states and lenders have different foreclosure proceedings that determine the timeline. All states allow judicial foreclosure. Since judicial foreclosure requires the involvement of the court, it tends to be a slower process. Many states also allow statutory foreclosure. If your mortgage contains a power of sale clause and you live in a state that allows non-judicial foreclosure, your lender can foreclose without the involvement of the court. Such a foreclosure takes approximately 120 days in California, 75 to 90 days in Massachusetts and 180 to 200 days in Florida.

Get a free, confidential bankruptcy evaluation. Learn More
What Happens if I Can't Make My House Payments in Chapter 13 Bankruptcy?

References

Resources

Related articles

Bankruptcy Treatment of Default Judgments

If you've filed for bankruptcy protection, you benefit from an automatic stay of collections by your creditors. This stops any pending lawsuits against you; at the end of the case, the court will discharge (cancel) your debts. If a default judgment is in effect when you file the bankruptcy, the debt may be discharged -- but there are conditions and exceptions.

Can a Creditor Put a Lien on Property If Chapter 13 is Dismissed?

The primary reason you likely sought Chapter 13 bankruptcy protection is to protect your property from foreclosure or repossession by your lenders. Once your bankruptcy case was filed, you were given protection against your creditors from any collection activities. However, if your bankruptcy case is dismissed your lenders can take actions against you and your property, including placing a judicial lien against it.

What Assets Are Liquidated in a Chapter 7?

Two types of bankruptcy are popular among individual debtors: Chapter 13 and Chapter 7. In a Chapter 13 bankruptcy, you pay all or a portion of your debts over time, following an approved payment plan. Chapter 7 bankruptcy, by contrast, is the liquidation of your nonexempt assets -- if you have any -- to pay creditors. Nevertheless, you don't lose all your assets in a Chapter 7 bankruptcy -- and are granted a discharge of debts.

Related articles

Can a Bankruptcy Trustee Take Possession of a Home From a Lender?

Bankruptcy can give you a fresh financial start, but under Chapter 7 bankruptcy procedures, a court-appointed trustee ...

How to Reduce Your Mortgage in a Chapter 13

When people file for Chapter 13 bankruptcy, their debts typically exceed their monthly income and they can no longer ...

How Does Bankruptcy Affect Homebuying?

Bankruptcy can give you a fresh financial start by allowing you to restructure or erase your debts under a ...

Does a Bankruptcy Discharge Reverse an HOA Foreclosure for Unpaid Dues?

When you get behind on your dues, your homeowners association can begin foreclosure proceedings against your property ...

Browse by category
Ready to Begin? GET STARTED