Can Bankruptcy Stop A Foreclosure Sale?

The short answer is yes, so long as the sale has not occurred yet. Filing for bankruptcy protection will trigger the Automatic Stay of Bankruptcy, which is a powerful injunction that stops most collection actions, including foreclosure lawsuits. How long this is effective will be determined by which chapter of bankruptcy you file. Please note that if the foreclosure sale has occurred then bankruptcy generally cannot force that sale to be undone.

In Chapter 7, the filing will usually only buy you a couple of months of protection, and sometimes not even that much. The mortgage lender will usually wait until the bankruptcy trustee has reviewed the case, conducted the Section 341 Meeting of Creditors and reported that they are not going to try and sell the home. Then the mortgage lender will file a motion with the bankruptcy court to remove the protection of the Automatic Stay from the property. Once granted, the mortgage company will go back to state court to reinstate the foreclosure proceeding. During this time, you may be able to catch up the mortgage payments or negotiate a mortgage modification, however if you are unable to do so then the foreclosure will once again proceed. The bankruptcy discharge in Chapter 7 will remove your personal liability from the mortgage, so you cannot be made to pay any amount that the mortgage company does not recover in the foreclosure sale, but the property will be lost.

One of the principal purposes of Chapter 13 is to protect your home when you are behind on payments. The Automatic Stay will protect you and your home for the duration of the bankruptcy case, so long as you maintain you perform under the Chapter 13 plan. Your plan will require that the current, ongoing monthly mortgage payment be made timely and consistently going forward. The past due amount, the arrears, will be included in the Chapter 13 plan and paid by the trustee over time. At the end, you will again be current on the mortgage. While the Chapter 13 is pending you can seek a mortgage modification to reduce your monthly payment and reincorporate the arrears into a new mortgage structure, allowing them to be removed from your Chapter 13 plan and often reducing your payment or reducing the term of your plan. Keep in mind that if you fall behind on the mortgage payment or the trustee payment, the mortgage company will have the right to ask the court to remove the Automatic Stay from the property. If granted, they can go back to state court and reinstate the foreclosure action, even with the bankruptcy case still active.

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