If you’re behind on mortgage payments and facing foreclosure, bankruptcy can feel like the only option to protect your home. One of the benefits of filing for bankruptcy is the automatic stay, which prevents creditors from taking collection actions and pauses any foreclosure proceedings.
While an automatic stay in bankruptcy can temporarily stop foreclosure, it is not a long-term solution on its own. There are also long-term consequences of filing for bankruptcy that you should consider before filing. Understanding what an automatic stay in bankruptcy is and how bankruptcy and automatic stay impact your home will help you know if filing for bankruptcy is the right step for you.
Bankruptcy is just one way to stop foreclosure, and depending on your situation, it may not be the best option for you. Contact Denbeaux Law today for a free consultation to learn about the different options available to save your home.
What Is An Automatic Stay In Bankruptcy & How Does It Work?
When you file for Chapter 7 or Chapter 13 bankruptcy, the court immediately creates a bankruptcy estate. This estate includes property tied to your debts, like your home with a mortgage or your car with a loan. As soon as your bankruptcy case is filed, your estate is protected by an automatic stay.
A bankruptcy automatic stay, under bankruptcy code section 362, is a legal protection that prevents creditors from taking or continuing collection actions against you, including:
- Wage garnishments and bank levies
- Foreclosure proceedings
- Repossessions
- Collection calls and notices
It’s important to understand that an automatic bankruptcy stay is temporary. It does not wipe out all of your debt or guarantee that your home won’t be foreclosed on. However, it does provide time for you to catch up on payments or work out a long-term solution to save your home.
How Does an Automatic Bankruptcy Stay Apply to Homes?
One of the main advantages of an automatic stay in bankruptcy is how it applies to your home. As soon as you file, the stay goes into effect, and creditors are legally required to stop collection efforts tied to your property. The automatic stay protection affects things like:
- Foreclosure: Immediately stops any foreclosure proceedings, regardless of where you are in the foreclosure process, including a sheriff’s sale.
- Collection Activity: Prohibits lenders from calling you about missed payments, sending collection notices, or filing new lawsuits related to missed mortgage payments.
- Eviction: If you are already in the foreclosure process, the stay can temporarily pause eviction proceedings.
- Utility Shutoffs: Prevents companies from cutting off essential utility services that make your home livable.
While these protections can give you some breathing room, it’s important to remember that the automatic stay is not a permanent solution and is only in effect temporarily.
How Long is a Bankruptcy Stay in Effect?
When a bankruptcy automatic stay ends depends on your bankruptcy filing and whether you have filed for bankruptcy before.
First Time Filings:
- Chapter 7: The bankruptcy stay typically lasts 3 to 5 months, until the case is closed or the property is abandoned.
- Chapter 13: The Chapter 13 bankruptcy automatic stay will be in effect through your repayment plan, which typically lasts 3 to 5 years.
Repeat Filings:
- If you had one bankruptcy case dismissed within the last year, the bankruptcy stay only lasts 30 days after your new filing date.
- If you have had two or more dismissals within the past year, you will not be eligible for an automatic stay.
Even in first-time filings, lenders can request that the court remove the automatic stay. This means that regardless of your filing history, there is no guaranteed length of stay.
Can an Automatic Stay in Bankruptcy Stop Foreclosure?
What happens to your home if you file for bankruptcy will vary depending on whether you file under Chapter 13 or Chapter 7.
Chapter 13 Bankruptcy
A Chapter 13 automatic stay not only pauses foreclosure, but also provides a long-term opportunity to keep your home. This is because an automatic stay in Chapter 13 gives you the right to come up with a court-approved repayment plan to catch up on your missed mortgage payments. As long as you stick to your repayment plan over the 3-5 year period, you can stop foreclosure. However, there are alternatives that are often better suited to saving your home.
Chapter 7 Bankruptcy
Unlike the automatic stay in Chapter 13 bankruptcy, a stay in Chapter 7 bankruptcy does not provide a direct opportunity to stop foreclosure altogether. Instead, it helps you protect your home indirectly by giving you time to catch up on payments and allowing you to discharge unsecured debt (medical bills, credit card balances, personal loans), which could free up money for mortgage payments.
While both Chapter 7 and Chapter 13 can temporarily prevent foreclosure and may provide a path to saving your home, bankruptcy has its drawbacks. There are long-term implications of bankruptcy you’ll need to consider to understand whether filing is the right choice for you.
The Long-Term Consequences of Filing for Bankruptcy
While bankruptcy can provide short-term relief through the automatic stay, it also comes with serious long-term consequences. Below are examples of what happens after an automatic stay is lifted that you should be aware of before filing.
Bankruptcy Requirements
If you file for bankruptcy, there are requirements you must meet, including going through credit counseling and debt education courses.
For Chapter 13 bankruptcy, the court will also supervise your finances throughout your repayment plan. Under supervision, the court will require you to provide proof of income and tax returns and will put limits on your discretionary spending.
Credit Impact
Filing for bankruptcy can hurt your credit score for years to come. A Chapter 7 bankruptcy will stay on your record for 10 years, while a Chapter 13 bankruptcy will stay for 7 years. During that time, your credit score will likely be lower, which affects whether you can borrow money, the interest rates you’re offered, and the overall cost of financing.
Borrowing Eligibility
After you’ve filed for bankruptcy, lenders may be less willing to work with you in the future, and it may be harder to get approved for a mortgage or other forms of credit.
Risk of the Stay Being Lifted
You are not guaranteed an automatic stay regardless of how you file. Lenders can ask the court to remove the automatic stay, and if granted, you’re left with all the downsides of bankruptcy without the benefits of the stay protection.
Risk of Foreclosure
Filing for bankruptcy does not erase your mortgage debt. While the stay temporarily pauses foreclosure proceedings, it does not stop foreclosure altogether. Unless you catch up on payments or determine a repayment plan during the stay, your lender can still foreclose on your home once the stay is over.
Public Record
Bankruptcy filings are public and can appear in background checks. This may affect things like rental applications, job opportunities, or other situations where your financial history is reviewed.
Because of these risks, bankruptcy is not typically recommended as your first defense against foreclosure.
Alternatives to An Automatic Stay to Stop Foreclosure
While an automatic stay can potentially stop foreclosure, it is not always the best option. Filing for bankruptcy to get an automatic stay can cause other issues for you down the road. If your concern is foreclosure, there are other alternatives to filing for bankruptcy that may be a better option. Below are some examples of alternatives to bankruptcy to stop foreclosure:
- Loan Modifications: With a loan modification, you’ll work with your lender to update your payment terms to make your mortgage more affordable. This can be a great solution because it allows you to work with your lender to help you avoid foreclosure.
- Mortgage Refinance: If you choose to pursue a mortgage refinance, you’ll pay off your current mortgage with a new mortgage. When refinancing, you can shop around with different lenders to find the best mortgage terms for you.
- Mortgage Forbearance: A mortgage forbearance provides short-term relief by lowering or pausing mortgage payments for a specified period of time. Depending on your lender’s rules, a mortgage forbearance could be a good option to help you avoid a foreclosure.
- Short Sales: Short sales can help you avoid foreclosure by selling your home before foreclosure and paying off your mortgage. When you enter into a short sale, you have to follow specific guidelines set out by your lender, and you will lose your home, but you avoid going through foreclosure.
If you are facing foreclosure, there are a lot of options available that can help you avoid foreclosure. A foreclosure attorney can help walk you through all of your options to avoid foreclosure and help you decide what’s the best choice for your situation.
Contact a Foreclosure Attorney
While an automatic stay can provide temporary relief, it also comes with serious and lasting consequences. If your main concern is stopping foreclosure, it’s important to understand that there are other options available to protect your home that don’t involve filing for bankruptcy. A bankruptcy stay should be your last resort.
An experienced foreclosure defense attorney can help you explore options that could protect your home without the consequences of filing for bankruptcy. Contact Denbeaux Law today for a free consultation to explore the options available to protect your home.
