Mortgages are among the largest loans ever secured by individuals. The cost of purchasing real property can add up to multiple years of a person’s income, making it prohibitively difficult to save enough capital for a cash purchase.
Lenders provide the funds necessary for a real estate purchase, and they limit their financial exposure by treating the acquired property as the collateral for the loan. Until the property owner has fully repaid the principal balance and any accrued interest, the lender typically has the option of foreclosing as a means of recouping the amount initially provided for the transaction.
Lenders may worry about their legal protection when homeowners file for bankruptcy. In fact, a bankruptcy case may be an attempt to delay or avoid foreclosure. What happens to foreclosure proceedings when a homeowner files for bankruptcy?
There are multiple options available
The most important step when responding to a borrower’s bankruptcy is usually to avoid violating the automatic stay. Creditors must immediately halt all collection efforts after they receive automatic notice of the pending bankruptcy case from the credit bureaus or direct notice from the property owner.
At that point, a consultation with an attorney is likely necessary. It may be possible to lift the automatic stay and resume collection efforts after filing a Motion for Relief from Stay. If the debtor has insufficient equity to justify their retention of the property or if they have continued to miss payments after filing their bankruptcy petition, the courts may lift the automatic stay and allow the lender to resume foreclosure proceedings.
If the filer pursued a Chapter 7 bankruptcy, the lender may be able to proceed with foreclosure efforts if they do not bring the loan back into compliance after receiving their discharge. In a Chapter 13 bankruptcy case, lenders can potentially work with homeowners to modify a mortgage and make the arrangement more sustainable. The best solutions depend on the details of the situation, including the number of missed payments, the amount of accrued equity and the type of bankruptcy filed.
Consulting with an attorney familiar with lender bankruptcy protections and foreclosure proceedings is often critical when a property owner with a balance still due on their mortgage files for personal bankruptcy. An attorney can help a lender avoid financial losses caused by a borrower filing for debt relief.