Should You Consider Filing Bankruptcy During a Mortgage Foreclosure?

If you're facing a mortgage foreclosure in Pennsylvania, you might feel overwhelmed and uncertain about your options. The stress of potential home loss can be daunting, but it’s essential to remember that you have choices. One option that often arises in discussions about financial distress is bankruptcy.

Understanding Mortgage Foreclosure

Foreclosure is the legal process by which a lender attempts to recover the balance of a loan from a borrower who has missed or stopped making payments on a home mortgage. In Pennsylvania, the foreclosure process generally follows these steps:

1. Missed Payments

The process begins after a borrower has missed one or more mortgage payments.

2. Notice of Default

Before a residential mortgage can be foreclosed in Pennsylvania, the lender must give a 30-day notice of intention to foreclose, giving the borrower an opportunity to cure, and prohibiting the lender from collecting attorneys’ fees incurred during the notice period.   The notice may also list credit counseling agencies in the county where the borrower lives. Notices must be sent to the borrower at the property and at their mailing address, if different.

3. Foreclosure Lawsuit

If payments remain unpaid, the lender files a foreclosure lawsuit in court.  A copy of that complaint is served on the borrower.  If you receive a copy of the complaint, its important to act quickly.  There are deadlines within which you are required to respond to the complaint.  If you do not respond, you could lose your right to defend yourself and a judgment can be entered against you.

4. Judgment and Sale

If the court rules in favor of the lender, the property may be scheduled for a sheriff’s sale.

The emotional and financial toll can be significant, leading many homeowners to explore bankruptcy as a potential solution.

What Does Bankruptcy Do?

Bankruptcy can be a powerful tool that provides relief during financial hardship. There are two primary types of bankruptcy that individuals may consider—Chapter 7 and Chapter 13—and both have distinct implications for homeowners:

Chapter 7 Bankruptcy

Chapter 7 bankruptcy allows for the liquidation of certain of your assets to pay off debts. There are some assets you can protect or exempt from the bankruptcy process.  It can provide a quick discharge of most unsecured debts, but it may not help you keep your home if you're behind on your mortgage payments.

Chapter 13 Bankruptcy

More relevant for those facing foreclosure, Chapter 13 allows you to keep your home while reorganizing your debts. Other bills such as credit cards and loans, medical bills and utility bills, and other debts on your credit report can be reduced or completely wiped out. Income taxes can also be included and in many cases reduced and real estate tax arrears can also be included in the Chapter 13 bankruptcy. It enables you to force a repayment plan on your lender, extending the timeline to catch up on missed mortgage payments over three to five years.

Should You Consider Bankruptcy During Foreclosure?

Here are some factors to consider when deciding whether to file for bankruptcy during a mortgage foreclosure:

1. Immediate Relief from Foreclosure Proceedings

Once you file for bankruptcy, an “automatic stay” goes into effect, which temporarily halts all foreclosure actions and any collection attempts. This can provide you with crucial breathing room to evaluate your finances and explore your options without the immediate threat of losing your home.

2. Stop the Sheriff Sale

You are able to file a Chapter 13 Bankruptcy to stop the Sheriff Sale even if the Sheriff Sale is scheduled for the next morning. In addition, Chapter 13 Bankruptcy has the great feature of allowing a second mortgage to be wiped out and treated as an unsecured debt (like a credit card or personal loan) if there is no equity in the property for the second mortgage. 

3. Opportunity to Catch Up on Payments

If you choose Chapter 13 bankruptcy, you can propose a repayment plan that allows you to catch up on your mortgage arrears over time. This option is particularly beneficial if you are committed to keeping your home and believe you can manage future payments within your adjusted budget.

4. Impact on Credit

It’s important to note that bankruptcy will affect your credit score. However, if you are already facing foreclosure, your credit may have already taken a hit. Consider how bankruptcy might provide a fresh start and whether it is more favorable than the long-term implications of foreclosure on your creditworthiness.

Consult an Experienced Bankruptcy Attorney

Filing for bankruptcy while facing a mortgage foreclosure can be a lifeline for some homeowners, providing the time and structure needed to regain financial stability. However, it is not a one-size-fits-all solution.  Before making any decisions, it’s advisable to consult with the experienced bankruptcy attorneys at Fiffik Law Group.  We can assess your financial situation, explain your options, and help you understand the potential benefits and consequences of filing for bankruptcy as part of the foreclosure process.