Can Filing for Bankruptcy Stop a Foreclosure?
Sept. 26, 2023
A home is often the biggest investment people will make in their lifetime. It is often also a security blanket against the winds of economic change. In the wake of the pandemic and resulting inflation, most homeowners enjoyed almost meteoric rises in their home valuations. The result is that today, the average home price across the 50 states is nearly $400,000.
The recent rise in interest rates, engineered by the Federal Reserve to combat inflation, has slowed home sales and moderated home prices in many regions of the country, but valuations are still high. A home is thus a great investment, and as the saying goes, home is where your heart is. You don’t want to lose it.
People’s fortunes change, and jobs can be lost, medical expenses and health issues can cause financial disruptions, and you may face difficult choices. Perhaps you fall behind in your mortgage payments, and your lender is on you to get current—or your home may be subject to foreclosure, being sold out from under you. Can bankruptcy help avoid foreclosure, or even solve it?
At the very least, filing for bankruptcy can help a homeowner by giving you extra time to work out an arrangement, say a loan modification, with the lender. Under a Chapter 13 filing, it can even give you extra years to make up for any missed payments while retaining possession of your home.
If you face a possible foreclosure sale of your home in or around Colorado Springs, Colorado, contact Kinnaird Law Firm. We will review your finances with you and advise you of your best options going forward, including the possibility of a bankruptcy filing. If bankruptcy is the best option, we will help you navigate the system and seek a resolution to your foreclosure issue. We also proudly serve clients throughout Douglas County and El Paso County.
The Foreclosure Process in Colorado
Lenders are governed by both federal and state statutes and regulations that help protect the homeowner in terms of giving them time to work out a loan modification or otherwise making the payments current so they can remain in their homes.
In Colorado, a homebuyer seeking a mortgage must sign both a promissory note and a deed of trust. The note spells out the terms of the loan—how much is due each month and on what day.
The deed gives the lender the right to foreclose if the buyer can’t meet his or her obligations.
Lenders generally allow borrowers a 10- to 15-day window past the due date to make a payment without any penalty. If the loan is later than that, a late fee can be assessed. If a payment is missed altogether, by law, the lender must attempt to contact you within 36 days after each payment delinquency to advise you of loss mitigation options, for instance, a loan modification.
No later than 45 days after a missed payment, the lender must inform the homebuyer in writing of these loss mitigation options and appoint someone to work with the mortgage holder on avoiding foreclosure. Also by law, the lender cannot begin foreclosure proceedings until 120 days have passed with no payments made. If the lender chooses to foreclose, there are two options: judicial and nonjudicial.
A judicial foreclosure is held before a judge, who will decide whether the home should be sold at auction to satisfy debts due. As the homeowner, you can appear to argue your case. If you don’t appear, the lender wins by default. A nonjudicial foreclosure, which is the most common, is an auction held by a public trustee to the buying public.
How Bankruptcy Can Affect a Foreclosure
There are two types of bankruptcy available to a homeowner: Chapter 13, or the wage-earner’s plan, and Chapter 7, the liquidation option. Filing for either one can buy a homeowner time to work out an arrangement, such as a loan modification, to stave off foreclosure and retain possession of their property.
This is because the bankruptcy court will, upon your filing, issue an automatic stay to all your creditors, preventing them from proceeding to contact you or try to collect what’s owed. This means foreclosure will also be put on hold. However, secured creditors can petition to have the stay waived and continue with their foreclosure proceedings. Nonetheless, the process takes time and opens an added window for negotiating or resolving the issue.
Chapter 7, in which non-exempt assets are sold to help pay creditors, offers little in the way of preventing foreclosure other than the extra time the automatic stay affords. Chapter 13, however, allows a homeowner to reorganize their overall finances and pay lenders off over a three- to five-year period at a reduced rate.
This cannot be done with the mortgage itself—you can’t pay just part and expect to retain possession—but if you are behind on payments, you can include those arrears amounts in your reorganization plan. Then, if you continue to make your regular monthly mortgage payments—or you manage to get a loan modification—you can retain your home.
Get Answers and Legal Support
If you do fall behind on your mortgage payments and your home may be subject to foreclosure, you need to act quickly. The more you fall behind, and the longer it has been since you made a payment, the greater the likelihood of foreclosure becomes. Bankruptcy may be the key to helping you avoid foreclosure.
If you’re in the Colorado Springs area or in neighboring communities, reach out to us at Kinnaird Law Firm to discuss all your options about foreclosure and bankruptcy. We will answer all your questions and address all your concerns.