Using Personal Bankruptcy’s Automatic Stay to Stall Foreclosure
Most people in Rockland County probably view bankruptcy as a pain-filled process, second only to a trip to the dentist in that respect. However, when debts pile up and when mortgage payments are late, bankruptcy can be a significant pain-reliever. When dark financial clouds begin to gather, the beneficial effects of a consumer bankruptcy must be carefully weighed against the opprobrium that seems to automatically attach itself to any effort to use the bankruptcy laws to reduce debt and reorganize personal finances. In at least one case — foreclosure of the mortgage on a residence — bankruptcy provides a potential remedy for the debtor.
The remedy is called the “automatic stay.” When a person files a petition under either Chapter 7 or Chapter 13, the court automatically issues an order to all of the debtor’s creditors to a halt all collection actions on debts that were incurred prior to the filing of the petition. The automatic stay will stop any foreclosure proceeding, with a couple exceptions. Mortgage foreclosures are legal proceedings that invoke the power of the court to enforce the terms of the loan and the mortgage that secures the loan. Therefore, foreclosure proceedings are subject to the automatic stay. The automatic stay will not last forever, but it may provide breathing space to the debtor to renegotiate the terms of the mortgage loan or negotiate a short sale of the house.
In a Chapter 13 filing, the automatic stay buys time, but it does not affect the debt itself. If the debtor cannot negotiate more favorable terms for repayment, the bank may still pursue foreclosure if the mortgage loan is still delinquent after the bankruptcy proceeding comes to a close. In a Chapter 7 filing, the underlying debt may be discharged, but the lender will retain the right to institute foreclosure proceedings because the loan has not been repaid.
The relationship between bankruptcy and restructuring a mortgage loan is complex. The advice of a capable bankruptcy attorney can be an enormous aid in working through these complexities and achieving a fair outcome.