Can Chapter 7 Bankruptcy Stop Foreclosure?
The answer to this question is a clear "sort of". While the filing of a chapter 7 bankruptcy will stop a foreclosure sale, it will seldom prevent the eventual foreclosure.
When most people ask this question, they mean it as "can chapter 7 stop foreclosure and let me keep my home?" To this, the answer is usually no. This is a result of the absence of a process in chapter 7 bankruptcy for the homeowner to restructure or cure the past due mortgage balance. A mortgage that is past due and in default at the beginning of a chapter 7 will be still be past due and in default at the end a chapter 7 bankruptcy, unless the homeowner somehow catches up the mortgage independent of the bankruptcy process. Few homeowners are in the position to make a large cure payment to reinstate the mortgage within a few months of filing bankruptcy.
Chapter 13 bankruptcy does provide these tools, as a chapter 13 plan can propose to cure and maintain payments on a home mortgage, allowing the homeowner up to 5 years to get the mortgage caught up. The chapter 13 plan would provide for the default being cured, so that at end of the plan, the mortgage is fully reinstated, allowing the homeowner to continuing paying after chapter 13 and keep the home. More on how chapter 13 bankruptcy helps homeowners prevent foreclosure.
The confusion about the topic of chapter 7 bankruptcy stopping foreclosure arises out of the fact that the automatic stay in a chapter 7 bankruptcy will in fact derail a particular pending foreclosure sale. So if a bank plans to sell a house at foreclosure on Tuesday and a chapter 7 bankruptcy is filed on Monday, that Tuesday foreclosure sale is stopped by the automatic stay. A core function of the automatic stay is to serve as a giant pause button to allow the bankruptcy process to work. However, unless some part of the bankruptcy process intervenes, the foreclosure will be un-paused, either at the close of a bankruptcy case or when the foreclosing creditor obtains permission to continue. The lender gets a new sale date and proceeds with foreclosure sale.
While seldom seen in practice, one might have a situation where a home is valuable enough that a chapter 7 trustee believes that he or she should sell the property instead of the lender, with the aim to pay both the lender and other creditors. The automatic stay in chapter 7 facilitates the opportunity of the trustee to consider the values of the property and its potential value to the bankruptcy estate.