Can Filing for Bankruptcy Stop a Foreclosure?
May 13, 2024
The prospect of foreclosure can be a stressful experience for homeowners facing financial difficulties. With the current state of the economy today, more homeowners are facing the frightening prospect of losing their homes. However, in some cases, filing for bankruptcy can provide relief and potentially stop the foreclosure process.
As an experienced bankruptcy attorney, I've seen firsthand the turmoil that foreclosure can cause. At my firm, Steven C. Frazier, Attorney at Law, we help individuals facing financial distress explore their options and determine whether bankruptcy is right for them.
Located in Kingsport, Tennessee, I proudly serve clients throughout Church Hill, Johnson City, Bristol, and anywhere in Northeastern Tennessee.
Understanding Foreclosure in Tennessee
Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments by selling or taking legal ownership of a property.
Simply put, if a homeowner is unable to keep up with their mortgage payments, the bank or financial institution that lent the money for the home purchase can take ownership of the property and may sell it to recoup the money owed. This process can lead to the homeowner losing their home.
Tennessee primarily uses the non-judicial foreclosure process, meaning the lender does not have to go through the court system to foreclose on a home as long as they follow the specific procedures outlined in the state's statutes. This process can be relatively quick, with the foreclosure process beginning as soon as a homeowner misses a mortgage payment.
Tennessee law requires that homeowners be notified in advance of a foreclosure sale. Specifically, the lender must:
Send a notice of sale to the homeowner at least 20 days before the sale is to take place.
Publish notice of sale in a local newspaper for three consecutive weeks before the sale.
Tennessee does not have a redemption period for the homeowner to reclaim their property after a foreclosure sale under state law. However, filing for bankruptcy in certain cases can potentially help stop the foreclosure process and allow homeowners to catch up on missed payments.
How Can Bankruptcy Stop Foreclosure in Tennessee?
Filing for bankruptcy can be a strategic move to stop the foreclosure process on a house in Tennessee, offering a homeowner a chance to regain their financial stability. There are two main types of personal bankruptcy that homeowners can file: Chapter 7 bankruptcy and Chapter 13 bankruptcy. Each is tailored to a different financial situation and offers distinct ways to handle foreclosure.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," can temporarily halt foreclosure through an automatic stay. An automatic stay is a legal injunction that stops creditors, including mortgage lenders, from pursuing debt collection and foreclosure. Under Chapter 7, your non-exempt assets will be liquidated to pay off any existing debts.
While Chapter 7 may offer immediate temporary relief, it's important to note that it may not allow the homeowner to keep their property in the long run. Mortgage lenders can still go after a homeowner's property if they cannot catch up on their mortgage payments.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, on the other hand, is known as "reorganization bankruptcy." It allows homeowners to keep their property while reorganizing their debts into a manageable payment plan, typically over three to five years. For a homeowner facing foreclosure, Chapter 13 can be particularly beneficial.
An automatic stay also goes into effect when a homeowner files for Chapter 13, which immediately halts the foreclosure process. However, homeowners are only able to file for Chapter 13 if they have a regular and consistent income that will allow them to make the scheduled monthly payments laid out in their repayment plan.
Under Chapter 13, homeowners can catch up on overdue mortgage payments through their proposed repayment plan and avoid foreclosure permanently as long as they can keep up with their repayments and all current mortgage payments going forward.
Filing for bankruptcy might seem like a drastic measure, but it's a legal tool that can offer a lifeline to struggling homeowners. While both Chapter 7 and Chapter 13 bankruptcy can invoke the automatic stay, only Chapter 13 offers a long-term solution for saving your home. Thus, it's important to consult a knowledgeable bankruptcy attorney who can help you understand your rights and the implications of filing for bankruptcy.
Factors to Consider Before Filing for Bankruptcy
Before deciding to file for bankruptcy to stop foreclosure, homeowners should carefully consider several important factors. Understanding these aspects can help them make an informed decision about whether bankruptcy is a viable option for their situation.
Type of bankruptcy: Determine which type of bankruptcy best suits your situation. While Chapter 7 can temporarily halt foreclosure, Chapter 13 may allow you to keep your home by restructuring your debts.
Eligibility: Verify your eligibility for filing bankruptcy. Chapter 13 requires a steady income source to repay the restructured debts, whereas Chapter 7 has specific criteria regarding income, debts, and assets.
Impact on credit score: Filing for bankruptcy will negatively impact your credit score. This impact will last for seven years for Chapter 13 and ten years for Chapter 7, affecting your ability to obtain credit, offers of credit, and possibly employment and housing opportunities.
Assets and property: Consider how bankruptcy will affect your assets and property. Chapter 7 may require you to liquidate some assets to pay off creditors, while Chapter 13 focuses on repayment plans without selling assets.
Costs associated with filing for bankruptcy: Be aware of the costs involved in filing for bankruptcy, including attorney's fees, court filing fees, and any mandatory counseling or education courses.
Long-term financial goals: Reflect on your long-term financial goals and consider how bankruptcy fits into these plans. Bankruptcy can offer a fresh start but requires careful planning and budget management.
Psychological and emotional impact: Consider the psychological and emotional impact of filing for bankruptcy. While it can relieve the stress of foreclosure and debt, accepting the need for bankruptcy can be difficult for some individuals and families.
Taking the time to thoroughly analyze these factors and seeking the advice of a bankruptcy attorney can help homeowners make the best decision for their unique financial situation.
Bankruptcy isn't for everyone. Non-bankruptcy alternatives such as mortgage or loan modifications, state assistance programs, short sales, a deed in lieu of foreclosure, or negotiating with lenders might offer a more suitable resolution. However, if foreclosure is imminent, and you have exhausted the other avenues, bankruptcy can be a powerful tool.
Seek Experienced Legal Support
For Tennessee homeowners facing foreclosure, understanding your legal options is the first step toward regaining control of your financial future. While filing for bankruptcy can stop foreclosure and offer a way to restructure your debts, catch up on missed payments, and keep your home, the decision to file for bankruptcy should never be made lightly.
If you’re facing foreclosure and are considering bankruptcy as an option to keep your home, contact me at Steven C. Frazier, Attorney at Law, for a free consultation. Together, we can explore your options and decide on the best course of action tailored to your specific situation.