Chapter 7 Bankruptcy and Foreclosure
It is a common misconception that if you file for Chapter 7 bankruptcy, your foreclosure goes away forever. While it does temporarily halt all foreclosure proceedings, it is not a permanent solution. Your lender will eventually be able to foreclose on your property.
What Happens To My Mortgage When I File Chapter 7 Bankruptcy?
When you file for bankruptcy, under most circumstances you will be granted an “Automatic Stay.” In those circumstances, all foreclosure proceedings must immediately stop. Your lender cannot schedule or conduct a sheriff sale or take other action to try to foreclose or collect the debt while the stay is in effect. The stay will usually last as long as the bankruptcy case does, which for a Chapter 7 bankruptcy is about 2 to 4 months. If you receive a bankruptcy discharge, this court order will make your debt permanently unenforceable. In other words, your lender will never be able to collect this debt. However, this does not prevent the lender from completing the foreclosure and selling the house at Sheriff Sale.
So How Can My Lender Foreclose After Bankruptcy?
When you took the loan, you signed two (2) important documents. One was the Note which sets forth the terms for repayment, and the other is the mortgage, which is the document that is recorded with the County Clerk to put the world on notice that there is a lien against the property.
It is important not to mistake the Note for the Mortgage. The debt is extinguished by the Chapter 7 Bankruptcy Discharge. This means that the Note is gone. However, the Mortgage still remains a lien recorded against the property. When you signed the Mortgage you agreed that your lender can take your home if you don’t make the payments. This means that once the bankruptcy is over or the Automatic stay is lifted, the lender can foreclose.
Chapter 7 Bankruptcy Benefits
A Chapter 7 Bankruptcy can wipe out debts and delay a foreclosure. However, it is not a permanent solution. If you want to keep your home, you need to apply for a modification. Even though you have wiped out the debt for the loan, the lender can still offer a modification.
In order to fully understand your options concerning bankruptcy, you should seek a consultation with an experienced bankruptcy attorney to discuss whether it is the right decision for you, and explore all of your existing options for stopping the Sheriff Sale.