Both Chapter 7 and Chapter 13 can help you save your home. Which one is better for YOU?

You’ve probably heard that filing a bankruptcy stops a foreclosure. You may have also heard that Chapter 13—the repayment version of bankruptcy—can be a good tool for saving your home in the long run. Both statements are true, but they are only the beginning of the story. This post is about immediately stopping a foreclosure. My next one will get into longer-term solutions.

The “automatic stay” under the federal bankruptcy law immediately blocks a foreclosure from happening. The very act of filing your bankruptcy case “operates as a stay,” as a court order stopping “any act to… enforce [any lien] against any property of the debtor…  .”

But what happens if your bankruptcy case is filed right before the public trustee sale and the mortgage lender isn’t reached in time so that the foreclosure sale goes through?

Or if there’s some miscommunication between the lender and its agent or attorney, with the same result?

Or if the lender just goes ahead and forecloses anyway?

As long as your bankruptcy is in fact filed at the bankruptcy court BEFORE the public trustee sale, then that foreclosure is not legally valid, whether it occurred by mistake or intentionally. (This filing “at the bankruptcy court” is actually done electronically from my office, with a date and time-stamped record proving when the court filing took place.)

IF the sale happens by mistake after the filing of your bankruptcy, lenders are usually very cooperative in legally undoing the foreclosure and its documentation. If the lender failed to undo the foreclosure after becoming aware of your bankruptcy filing, that would be a violation of the automatic stay, exposing the lender to significant financial penalties.

Does it matter whether your bankruptcy case is a Chapter 7 or Chapter 13 for purposes of the automatic stay?

No, the automatic stay is the same under both Chapters, and has the same immediate effect.

On the other hand, how long the protection of the automatic stay lasts can definitely depend on which Chapter you file under. That’s because even though you get the same automatic stay, the other tools each Chapter gives you for protecting your home are very different. So your mortgage lender may very well react quite differently depending on the Chapter you file, as well as on what you propose to do about your home and your mortgage within that Chapter. I’ll write about those options  in my next post.