How does bankruptcy save a house from foreclosure?

Bankruptcy, Chapter 13 Bankruptcy especially, is routinely used to save a house from foreclosure. It boils down to a two step process: (1) stay the foreclosure with the filing of the bankruptcy case and (2) catch up the past-due amount over 3 to 5 years.

Automatic Stay of Foreclosure

The reason a lender cannot just continue along with the foreclosure once the case has been filed is that the foreclosure proceedings, like most other collection activity, has to stop due to the automatic stay. The stay goes into effect the moment the case is filed electronically with the court--no court action is required (hence the "automatic" part of the automatic stay).

Sometimes, repeat bankruptcy filers might not get a stay, or have a more limited stay. A creditor might also obtain relief from the stay to allow a foreclosure to proceed, although it needs to have a reason to request such relief.

Cure and Maintain in Chapter 13 Plan

Once the foreclosure has been stayed, the chapter 13 plan will need to propose a means to pay the debt to the residential mortgage lender. The most common mechanism is a cure and maintain provision, where the chapter 13 proposes to pay the past due amount (missed payments, late fees, valid foreclosures charges, etc) over 3 to 5 years ("cure") as well as pay the ongoing mortgage payments when due ("maintain"). Elsewhere, I discussed the math of a cure-and-maintain plan. Once the chapter 13 is complete, the mortgage is declared current, and the homeowner then continues with regular mortgage payments after the bankruptcy.

Curing the default doesn't require the mortgage lender to agree. With a typical plan, as long as the debtor can afford the payment, the lender often has no legal grounds to object to a proposal to cure and maintain the mortgage debt in chapter 13. The bottom line on most chapter 13 plans filed to save houses from foreclosure is whether the debtor-homeowner makes the necessary payments to the chapter 13 trustee.

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