How Does Bankruptcy Stop a Foreclosure?

          If a bankruptcy case is filed before a foreclosure sale is completed the bankruptcy will irrefutably stop the foreclosure from going through.  What is it about the filing of a bankruptcy case that stops the foreclosure?  It is the automatic stay that stops the foreclosure.  This automatic stay is akin to a shield that once enacted by the filing of the bankruptcy case protects debtors from collection actions of creditors, and this includes foreclosure.

          This shield is, as the title would have you believe, automatic.  Courts take violations of this stay very seriously, and when creditors violate the automatic stay the creditor can be in jeopardy of financial sanctions, including paying for the debtor’s attorneys fees to enforce the stay and in egregious cases punitive damages.

          While all bankruptcy chapters provide an automatic stay (with exceptions for repeat filings) the different chapters are not created equally when it comes to retaining your home.  A Chapter 7 filing would stop the foreclosure but would only act as a band aid.  The Chapter 7 case typically lasts only 3 months, and creditors routinely seek the court’s approval to lift the stay and proceed with the foreclosure.  A debtor does not have tools at their disposal to readily combat the creditor’s request.  A Chapter 13, on the other hand, is designed to allow a homeowner to cure any defaults on their mortgage over a 5 year term.  Also, some courts (including San Jose, Salinas, and Monterey) have local guidelines that allow individuals to have additional time while in a Chapter 13 case to pursue a mortgage modification (and be protected from foreclosure by the automatic stay).  (See our article on bankruptcy and foreclosure posted on evanslawonline.com)