Before we dive into how bankruptcy might impact foreclosure, it’s essential to understand the foreclosure process in California. California is a non-judicial foreclosure state, meaning that most foreclosures don’t go through the court system. Instead, the lender can initiate a trustee’s sale to foreclose upon the property. The foreclosure process typically begins after multiple missed payments, and it can proceed relatively quickly.
Filing for bankruptcy can immediately stop a foreclosure. This is due to the automatic stay, a court order that goes into effect as soon as bankruptcy is filed. The automatic stay requires all creditors, including mortgage lenders, to immediately cease all collection activities. This includes foreclosure. However, it’s important to note that the lender can file a motion with the bankruptcy court to have the stay lifted for the property in question.
In a Chapter 7 bankruptcy, the trustee will sell your assets to repay creditors. However, in California, you can likely keep your home if you’re current on your mortgage payments and don’t have much equity in the property. This is because California has generous homestead exemptions. However, the automatic stay will only delay foreclosure if you’re behind on payments. Once the bankruptcy is over, the foreclosure process can resume.
Chapter 13 bankruptcy is different. This type of bankruptcy involves a repayment plan, and you can keep your assets, including your home, as long as you continue making payments. If you’re behind on your mortgage, you can include these arrears in your repayment plan. This can stop foreclosure as long as you make your plan payments. At the end of your successful Chapter 13 plan, the arrears will be caught up, and the foreclosure will be permanently resolved.
If you want to keep your home and stop foreclosure, Chapter 13 is usually the better choice. This is because you can address mortgage arrears through your repayment plan. However, Chapter 13 requires that you have a steady income and that your total debt isn’t too high. You’ll need to carefully review your financial situation and options with a bankruptcy attorney to determine which path is best for you.
While bankruptcy can stop foreclosure, it’s not the only option. You might be able to work out a loan modification with your lender. This could lower your payments and make it easier to catch up on any missed payments. You could also try a short sale if you owe more on your mortgage than your home is worth. In a short sale, the lender agrees to let you sell your home for less than the mortgage balance. California also has a legal process called a civil judgment for foreclosure, but this is less common.
Foreclosure and bankruptcy law are complex, and the best approach for your situation will depend on many factors. These include how far behind you are on your mortgage, how much equity you have in your home, your other debts, and your income. A bankruptcy attorney can review your situation and provide guidance on your options for stopping foreclosure and dealing with your debts. Don’t wait to seek help if you’re facing foreclosure – the earlier you act, the more options you’ll likely have.