It is very important you understand how bankruptcy affects the foreclosure process before you file.
One very important thing to know right away is that even if you do file, you could still end up losing your house in a
foreclosure.
And the only thing worse than a foreclosure on your credit report is a bankruptcy.
Read as much as you can about Chapter 7 and Chapter 13 (here and elsewhere) to thoroughly understand what you're
getting yourself into. Then get proper advice from an attorney if you're giving bankruptcy any sort of consideration as an
alternative to stop your foreclosure.
The two most common "chapters" or types are Chapter 7 and Chapter 13. Chapter 7 is the "wipe out" and Chapter 13 is
the "work out".
When you file you sort of put up a "bullet-proof" barrier around your house. No one can touch you! When you work with
an attorney, the creditors no longer call to harass you - now they harass your attorney. That's pretty cool. But seriously.
You are not free of all responsibility and most people don't get that. In 2005 when the new bankruptcy laws took effect it
radically changed the filing requirements - making it much more difficult to qualify and prove hardship.
Chapter 13 bankruptcies are designed to reorganize your debts in an effort to repay all debt. Chapter 7 bankruptcies are
geared more towards liquidation of assets - selling everything and wiping out all debts in one stroke.
Both Chapter 7 and Chapter 13 immediately stop the foreclosure process and any creditors from taking further action
against you. A bit of good news.
Ok, here is how Chapter 7 works:
When you (or preferably your attorney) file a Chapter 7 bankruptcy, all of your assets are frozen.
The attorney will create what is called an "automatic stay". This means everything (and everyone) "stays" put. You can't
buy anything, you can't sell anything...you can't even give away anything. If you try to sell your home, you can't. If you try
to give away money in savings, you can't.
Any unsecured debt like credit cards, unsecured loans, etc. are eliminated or wiped out. They do not exist anymore. Then
the trustee or attorney who represents the court and the creditors will look at all the assets (house, car, furniture,
equipment) anything of value and decide what must be liquidated to pay back the debt that was wiped out.
Chapter 13 is a little different:
When you file for Chapter 13, they don't take all the assets and sell them.
Instead they take all the monthly payments on the debts and discount them for penny's on the dollar.
It's like a debt consolidation plan.
Whatever amount is agreed upon has to be paid to the bankruptcy court every month for the next 3-5 years.
So, you get to keep your house, your cars, and any other assets you had before.
As long as you stay current with the mortgage payments and pay the amount agreed upon in court, you're fine. However,
if you miss any payments, the trustee will dismiss the bankruptcy and the foreclosure process will begin again.
If you are in the middle of foreclosure (meaning you've had a Notice of Default sent to you), a Chapter 7 will stop the
foreclosure process. Usually your lender or bank will ask the trustee to release the property from the automatic stay so
they can continue with the foreclosure process.
That's not good news for you. Once the property has been released from the bankruptcy, the foreclosure process starts
right where it left off. Typically you have anywhere from 3-5 weeks until the foreclosure process begins again.