Filing bankruptcy buys you a little time or years of time, either to move to a new home or else to save your present home.
When you file a bankruptcy case, whether a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts,” you get immediate protection from your creditors’ actions against you and all that you own. This protection is called the “automatic stay.” In the same way that the “automatic stay” stops a lawsuit or a wage garnishment, it also stops a home foreclosure. One big distinction between Chapter 7 and 13 is how the “automatic stay” helps with your home after the foreclosure is stopped.
Chapter 7: the Tool that Buys You a Little Time
A Chapter 7 case gives you protection against home foreclosure for three months or so, and potentially even less time if your mortgage lender forces the issue.
Given this short period of protection, a Chapter 7 most often helps in these two situations:
1. if you have decided to surrender your home but need just an additional month or two beyond your foreclosure before you can move to a new place; or
2. if you want to keep your home, and, after discharging (legally writing off) all or most of the rest of your debts, could afford to catch up on the late payments within about a year of paying extra, or within however much time your lender would allow.
Filing a Chapter 7 case prevents an immediate foreclosure from happening. It either lets you catch your breath so that you can prepare for a new home or else gives you time to make a deal with the mortgage lender for payments to bring you current.
Chapter 13: the Tool that Buys You Years of Time
Filing under Chapter 13 is entirely different. It potentially gives you five years to pay off your back payments, and does so through a more flexible and powerful package.
Instead of negotiating with the mortgage lender and hoping that it will give you catch-up terms that you can live with, Chapter 13 gives you a set of rules for doing so, over a much longer period that a lender would allow in a Chapter 7 case. It also gives you protected time to catch up on any back property taxes, can often get rid of a second mortgage or a judgment lien, and usually provides a practical way of dealing favorably with other liens on your home, such as an income tax lien.
A Chapter 13 case is very flexible in various ways. For example, if your circumstances change during your case, your payment plan can usually be adjusted to deal with the changes. That can make more likely that you’d end up holding on to your real estate long-term. Similarly, you can change your mind and surrender your home, months or even years after your case is filed, if you no longer need or want to keep it.
As under Chapter 7, a mortgage lender can always cause problems at any point during a Chapter 13 case by asking the bankruptcy court for permission to begin or restart a foreclosure. These lender requests for “relief from the automatic stay” tend to happen either soon after the beginning of your case if the lender doesn’t like the Chapter 13 payment plan that you and your attorney are proposing, or later in the case if you’ve not made the payments that your plan provided that you would make. The court decides whether to keep protecting your home from the lender depending on all the circumstances, including how much equity you have in the home (to cushion the lender from potential future loss).