When people think of bankruptcy and foreclosure they usually think about Chapter 13 bankruptcy. Chapter 13 bankruptcy will stop a foreclosure sale and allow the homeowner to cure their mortgage arrears in a reorganization plan. Chapter 13 bankruptcy is an excellent choice when a debtor wants to continue living in their house and is at risk of losing it to foreclosure. However, if the homeowner doesn’t want to keep the house but needs to buy some time Chapter 7 bankruptcy may be a better tool for stopping a foreclosure sale.
When you file bankruptcy an injunction is automatically put into place. This injunction is referred to as the automatic stay. The automatic stay prevents creditors from pursuing further collection activities. This includes vehicle repossession, garnishment, harassing phone calls and even sending bills to the debtor in the mail. The automatic stay also stops foreclosure of property, even when the case filed is under Chapter 7 rather than Chapter 13. Filing Chapter 7 bankruptcy does not stop foreclosure permanently but it will provide the debtor a reprieve of about two to six months during which time they can get their personal property out of the house, find other financing or perhaps sell their property and extract the equity from the home. However, the eligibility requirements for Chapter 7 bankruptcy are stricter, so even if the debtor only needs a temporary delay in foreclosure, they may have to file Chapter 13 bankruptcy instead of Chapter 7. Debtors should also consider whether they have nonexempt property in order to determine the actual cost of the Chapter 7 case.