Can Bankruptcy Stop Foreclosure? What California Homeowners Need to Know

If you're behind on mortgage payments and worried about losing your home, you're not alone. There’s good news: Filing for bankruptcy can stop foreclosure and give you a chance to save your home.

Let's break down exactly how bankruptcy works to protect homeowners and what your options are.

How Does Bankruptcy Stop Foreclosure?

When you file for bankruptcy, something powerful happens immediately. It's called an automatic stay, and it's a legal protection that stops creditors in their tracks.

The automatic stay goes into effect the moment your bankruptcy petition is filed. This means your mortgage lender must immediately stop all foreclosure proceedings, including scheduled sales. They can't contact you about the debt or continue with the foreclosure sale.  At a minimum, they are required to move the date of the foreclosure sale and continue to move the date to a future date while you are protected by the bankruptcy stay.

This protection gives you breathing room to figure out your next steps without the constant pressure of losing your home.

What Happens to Your Home in Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is often called "liquidation bankruptcy" because it wipes out most unsecured debts like credit cards and medical bills. But what about your house?

Here's the reality: Chapter 7 stops foreclosure temporarily, but it doesn't help you catch up on missed mortgage payments. If you're current on your mortgage or only slightly behind, Chapter 7 can be helpful because it eliminates other debts and frees up money to pay your mortgage going forward.

However, if you're several months behind on payments, Chapter 7 alone won't solve your foreclosure problem. Once the bankruptcy case is complete (usually 3-4 months), the lender can resume foreclosure proceedings if you haven't caught up on the missed payments.

Many homeowners use Chapter 7 strategically. By wiping out credit card debt, certain bills, and personal loans, they suddenly have enough monthly income to stay current on their mortgage.

How Chapter 13 Bankruptcy Can Save Your Home

If your main goal is keeping your home, Chapter 13 bankruptcy is usually your best option. Unlike Chapter 7, Chapter 13 is specifically designed to help you catch up on missed mortgage payments over time.

Here's how it works: You create a repayment plan (typically lasting 3-5 years) that allows you to pay back your mortgage arrears in manageable monthly installments. Meanwhile, you continue making your regular monthly mortgage payments.

Chapter 13 offers several advantages when you're trying to save your home. The automatic stay remains in place throughout your entire repayment plan. As long as you make your plan payments and stay current on your regular mortgage, your lender cannot foreclose.

Instead of needing thousands of dollars upfront to reinstate your loan, you spread the overdue amount over several years. If you owe $12,000 in back payments, you might pay just $200-300 per month through your plan. Outside of bankruptcy, the lender can demand the entire amount you are behind before re-instating your loan and cancelling the foreclosure.  With the Chapter 13 bankruptcy, you can keep your home, your car, and other valuable assets while reorganizing your debts.

What Is the Automatic Stay and How Long Does It Last?

The automatic stay is your immediate protection when you file bankruptcy. Think of it as a court order that tells all your creditors to stop collection activities instantly.

For foreclosure, the automatic stay stops scheduled sales, notices of default, phone calls from your lender about overdue payments, and any legal proceedings related to taking your home.

In Chapter 7, the automatic stay typically lasts until your case is closed (usually 3-4 months). In Chapter 13, it lasts throughout your entire 3-5 year repayment plan, as long as you comply with the requirements.

The automatic stay is powerful, but it's not unlimited. Your lender can ask the court to "lift the stay" and continue with foreclosure if you've filed multiple bankruptcies recently, you're not making current mortgage payments during bankruptcy, or you're not keeping up with your Chapter 13 plan payments.

Can You File Bankruptcy After a Foreclosure Sale?

This is a critical timing question. Once the foreclosure sale is complete and ownership has transferred, bankruptcy can't reverse that sale and get your home back.

However, you can still file bankruptcy after foreclosure to eliminate a deficiency balance (the amount you still owe after the home is sold) or wipe out other debts.

Timing matters enormously. If you're considering bankruptcy as a way to save your home, you need to file before the foreclosure sale is finalized.  Note that in Calfornia, lenders are often prohibited from collecting a deficiency balance owed under residential loan anti-deficiency laws even if a bankruptcy is not filed.

How Much Time Does Bankruptcy Give You?

The answer depends on which type of bankruptcy you file. Chapter 7 typically gives you 3-4 months of protection from foreclosure. Chapter 13 can give you 3-5 years to reorganize your finances and catch up on missed payments.

Remember, you'll need to stay current on your ongoing mortgage payments during bankruptcy. The protection only works if you're making progress on your financial situation.

Is Bankruptcy Right for Your Situation?

Deciding whether to file bankruptcy depends on several factors. If you're only one or two months behind, you might be able to work out an agreement with your lender without bankruptcy. If you're six months or more behind, bankruptcy (particularly Chapter 13) might be your best path forward.

Consider whether you have other debts weighing you down. If credit cards, medical bills, or personal loans are making it impossible to afford your mortgage, bankruptcy can eliminate those debts and free up cash for your house payment.

Ask yourself if you want to keep your home long-term and whether you can afford your mortgage going forward. Bankruptcy can help you catch up on missed payments, but you'll still need enough income to afford your regular monthly payment after you file.

Frequently Asked Questions

Can I file bankruptcy the day before my foreclosure sale?

Yes, technically you can file bankruptcy up until the sale is finalized. However, last-minute filings can lead to mistakes, and you'll have less time to prepare a solid case. It's always better to file with enough time to do it right.

Will I lose my home if I file Chapter 7 bankruptcy?

Not necessarily. If you're current on your mortgage and the equity in your home is protected by California's homestead exemption, you can keep your home in Chapter 7. However, Chapter 7 won't help you catch up on missed payments.

What happens to my mortgage in Chapter 13 bankruptcy?

Your mortgage is treated as a secured debt. You'll continue making your regular monthly payments, and you'll pay back the overdue amount through your Chapter 13 repayment plan over 3-5 years.

Can bankruptcy remove a second mortgage on my home?

Sometimes. If your home's value is less than what you owe on your first mortgage, you may be able to "strip off" a second mortgage in Chapter 13, treating it as unsecured debt that can be discharged.

How to Get Started

If you're facing foreclosure and considering bankruptcy, time is critical. Here's what you should do:

Gather your financial documents including recent pay stubs, mortgage statements, and a list of all your debts. Consult with our bankruptcy attorney W. Derek May, Esq who can evaluate your specific situation and explain your options.

Find out exactly when your foreclosure sale is scheduled and be honest about whether keeping your home is financially realistic or whether you might be better off starting fresh.

Filing for bankruptcy isn't giving up. For many California homeowners, it's the smartest financial move they can make to protect their families.

Facing foreclosure and need guidance? The Law Office of W. Derek May can help you understand your options and determine whether bankruptcy is the right solution for protecting your home. As a certified specialist in Bankruptcy Law, Attorney May provides honest expert advice and personalized support throughout the entire process. Contact us today for a consultation.