Chapter 7 bankruptcy can slow down foreclosure, but it’s not the best way to stop foreclosure.
Chapter 7 bankruptcy is the most common kind of consumer bankruptcy. It’s called “liquidation bankruptcy.” However, 99% of Chapter 7 bankruptcies are “no asset” cases, meaning no property is sold for the benefit of creditors. Only a few debtors have “non-exempt” property–property over and above the moderate amounts exemption statutes allow the debtors to keep.
One of my clients recently asked–via the Skribit widget on my home page– “how does Chapter 7 affect mortgage loans and foreclosure.” (I know it was a client because he told me about his question during a meeting in my office this week.) I promised I’d answer the question, so here goes.
The Automatic Stay Applies to Any Chapter–7, 11, 12, 13, You Name It
I have a corny way of explaining the Bankruptcy Code’s automatic stay: I call it the “force field.” No doubt this term comes from watching too many episodes of “Lost in Space” during my misspent youth. When I was about 11 or 12, it was my favorite show, and the re-runs ran freely, especially on WKBD out of Detroit, UHF Channel 50 owned by Kaiser Broadcasting. I grew up in Flint, Michigan about an hour away from Detroit. And with my dad’s monster TV antenna–rumored to be the tallest within miles–we could pick up channel 50 with no problems on most days, provided we dialed the antenna in the right direction! (Some of you remember what I’m talking about.)
You know what happens, the good guys are under attack by the aliens, and here comes the force field. Bam! It’s activated, and whatever the aliens fire at the ship just bounces off. It was pretty cool to a twelve-year-old boy. And that’s essentially how the automatic stay works. When you file your bankruptcy, it’s–bam–activated. You file, and you’re protected.
But It Doesn’t Last Long in Chapter 7
But there’s a problem with the force field–err, automatic stay–in Chapter 7. It doesn’t last long. Because the automatic stay lifts (stops working) at discharge (when the court issues the order saying you don’t owe your debts), it’s only in effect for 3-4 months. And Chapter 7 isn’t a payment plan bankruptcy like Chapter 13. So there’s no mechanism allowing you to “cure” (catch up) on past-due mortgage payments. This is why Chapter 13 is the better choice for foreclosure problems.
Of course, this doesn’t mean you should stop watching old sci-fi episodes, nor does it mean Chapter 7 can’t help. Perhaps you don’t want to save your home. Maybe you can’t afford it and just want a few more months to find some place else to live. If your foreclosure sale is scheduled soon, and the aliens–I mean creditors–are at the door, Chapter 7 can buy you some time. In fact, I just filed a case this past week for this particular purpose–to buy the client some time to find somewhere else to live. (My apologies to the aliens.)
I think of it like this: Chapter 7 slows down foreclosure, but Chapter 13 stops it. Chapter 13 allows you to cure the mortgage arrearage during the life of the plan. And the automatic stay doesn’t lift until after the plan is completed–usually years, not months, later.
P.S. Dad, did I ever tell you how I liked to climb to the top of that antenna?