Can Bankruptcy Stop Foreclosure and Repossession – Advice On How Bankruptcy Affects Foreclosure

Bankruptcy law in the US obviously differs in some respects from bankruptcy law in the UK, so I will cover both in order to provide useful information for residents in both countries. The UK legislation is slightly more straightforward, so I will look at this first.

Bankruptcy and Foreclosure - The UK Situation

If you are a UK resident and you file for bankruptcy, a Bankruptcy Trustee is appointed, who immediately takes over responsibility for all your assets. Any of these assets can then be sold off to pay back your creditors, and this includes your house, even if it is mortgaged or owned jointly with someone else. Whether your house gets sold or not will depend on various factors, including the size of your debts and what other assets you have.

The good news is that if you are the subject of repossession proceedings, your filing for bankruptcy will immediately stop the process of repossession. The process of repossession is not allowed to carry on until either the end of your bankruptcy or if the court gives your creditor clearance to continue the process. Filing Bankruptcy does not ssecure your home in the long term, but it does at least provide a breathing space.

In the UK there is an alternative to bankruptcy called an IVA (Individual Voluntary Arrangement) which has slightly less drastic consequences. However, an IVA does not legally stop repossession proceedings like bankruptcy. It may be possible to halt proceedings by getting an Interim Order to prevent further action until the IVA is in place, but this is not automatic.

The US Situation

The first thing to say is that there are different types of bankruptcy in the US. It is particularly relevant to this situation to understand the difference between Chapter 13 bankruptcy and Chapter 7 bankruptcy.

With Chapter 7 bankruptcy the responsibility for paying off your debts is taken on by the court, but in exchange for this, full control of your assets transfers to them, and as with UK bankruptcy, your property can be sold off to repay your creditors.

The alternative to this, however, is Chapter 13 bankruptcy, which is essentially an agreement you make through the court to gradually pay off your debts over an appropriate length of time. This is much more appropriate for the purposes of stopping foreclosure. How much of your debts you manage to pay off, and the size of the repayments you have to make, will depend on many factors. The more obvious of these include how much income you get and how much you owe.

If foreclosure proceedings have started against you, a very important point with regard to Chapter 13 bankruptcy is that the sale of your home will be stopped provided you can file for bankruptcy before the foreclosure sale date. Herein lies a problem, because changes to US bankruptcy law introduced in 2005 can sometimes make it impossible to file bankruptcy in time.

The change in legislation introduces the requirement that you cannot file for bankruptcy until after you have had credit counselling, and the counselling must be for not less than 180 days. The principle of undergoing counselling is not a bad idea, but if the foreclosure process results in a foreclosure sale of your home in less than 180 days, you will simply not have time to file for bankruptcy to stop it.

When foreclosure proceedings have begun, your options are fairly limited. The main choice you have is to either pay off what you owe in full (which seems unlikely) or file for Chapter 13 bankruptcy to halt the process. However, you must be aware that filing bankruptcy does not mean your home is then safe. It should be regarded more as a stay of execution! The problem will not go away and one way or another you will need to pay off your debts.

Declaring any type of bankruptcy should not be seen as any sort of easy option. It has serious and lasting consequences and should always be regarded as a last resort. Having your home about to be taken from you may very well be one of the few times that bankruptcy is a preferable option. So bankruptcy can indeed stop foreclosure, but only if you can do it in time, and only on a temporary basis. It is not a cure for mortgage arrears and is most definitely not a soft option.

K D Garrow has worked as a senior manager for the last twenty years, with responsibility for significant financial control. His website offers advice on ways to pay off debt, including how to file bankruptcy.
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