The prospect of losing a home due to financial difficulties is a distressing reality for many homeowners. In January 2023, nearly 32,000 U.S. properties had foreclosure filings, according to real estate data company ATTOM.
Individuals facing foreclosure often wonder whether bankruptcy can put a pause on the foreclosure process.
Chapter 7 Bankruptcy
Filing for bankruptcy can help people alleviate their financial burdens. Chapter 7 bankruptcy, also known as “liquidation bankruptcy,” involves the sale of debtors’ non-exempt assets to settle their outstanding debts. Once the courts receive a Chapter 7 bankruptcy petition, they initiate an automatic stay on all collection processes. This filing temporarily stops the foreclosure process as well.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, also known as “reorganization bankruptcy,” allows debtors to pay back what they owe within a period of three to five years. Similar to Chapter 7, filing for Chapter 13 enacts an automatic stay that generally suspends foreclosure actions during the repayment period.
Secured Versus Unsecured Debts
A key distinction lies in understanding the nature of the debts. Financiers link mortgage loans to collateral, a home, making them secured debts. Bankruptcy can help homeowners manage unsecured debts, such as credit card bills or medical expenses. However, it might not fully discharge the obligation of repaying secured debts like a mortgage.
While bankruptcy can provide temporary respite from the foreclosure process, it has limitations. Bankruptcy is not a permanent solution to foreclosure. Instead, it offers homeowners an opportunity to reorganize their financial affairs and work toward a sustainable resolution.
