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Using bankruptcy to stop foreclosure

One of the main reasons a family in Tallahassee might start to think about filing for personal bankruptcy is that they have begun to fall behind on their house payments. After all, no one wants to be scrambling to find a place to live, particularly if they have children to provide for.

Filing for bankruptcy can help a family deal with foreclosure, but it is important for Floridians to know exactly what bankruptcy can and cannot do in this respect.

Like any other creditor, a bank holding a mortgage has to stop its foreclosure efforts upon receiving a notice of bankruptcy, as it too is subject to the automatic stay which requires all creditors not to pursue a bankruptcy debtor while their case is pending. However, a bank may seek permission to continue with their foreclosure action despite the stay.

More importantly, a traditional Chapter 7 bankruptcy protects individuals from the consequences of their debts by discharging the debts; however, it does not thereby allow a person to keep their collateral on a loan, including a house in the case of a mortgage, if they have fallen behind in payments.

In other words, after a Chapter 7 bankruptcy is over, a bank is free to foreclose on a home provided the loan is still delinquent. The bankruptcy in this sense serves only to buy time for a debtor to prepare for this contingency. Moreover, the bankruptcy will prevent the bank from going after the debtor's other assets if it turns the foreclosure does not satisfy the balance of the bank's loan.

Those who want to try to catch up on payments and save their home long term may want to consider a Chapter 13 bankruptcy as an option, since that type of bankruptcy would allow a debtor to slowly make up delinquent payments as part of their overall monthly repayment plan. Otherwise, a debtor who wants to hang on to his or her house long term will have to negotiate directly with the bank.

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