Stopping Foreclosure in Bankruptcy

If you fall behind on mortgage payments, I strongly recommend that you consult an attorney regarding whether to file for relief under chapter 13 of the bankruptcy code. The filing of the bankruptcy triggers an automatic stay which prevents your creditors from taking any collection action against you or your property, including stopping phone calls and letters demanding payment, lawsuits, garnishments, repossession and other collection activity. The automatic stay also stops a foreclosure action.

In Washington, a mortgage lender can seek to foreclose on real property either by: (1) a non-judicial foreclosure or (2) by a judicial foreclosure which is a lawsuit filed by the mortgage lender against the borrower (the owner of the real property). Although judicial (lawsuit) foreclosures do occur, a nonjudicial foreclosure is the much more common procedure.

In most situations, If you are more than 120 days behind on mortgage payment, the mortgage lender (or often a mortgage servicer) can initiate the foreclosure process. The lender begins the foreclosure process by providing you with a notice providing information of “loss mitigation options” available to you. You can request a meeting in person to discuss options but you must do so within 30 days.

If you do not respond within 30 days or if you do not work out a loss mitigation (such as a loan modification), the lender/servicer can serve a Notice of Default on you. 30 days later, they can serve (and record with the County Recorder) the Notice of Sheriff’s Sale. You can request a mediation but there are strict requirements for doing so under Washington law.

The Notice of Sheriff’s sale provides notice of a sheriff’s sale schedule to occur in at least 90 days. The filing of the chapter 13 case prior to the sale date will either stop or continue the foreclosure sale. Of course, the bankruptcy filing must occur before the nonjudicial sale. If you file a chapter 7, the automatic stay will also apply to stop the sale. If you do not wish to keep the home and instead wish to surrender the real property, a chapter 7 bankruptcy may be beneficial because the mortgage will also be discharged in the bankruptcy. The credit report should show a bankruptcy discharge, not a foreclosure. However, if you wish to keep the property, the problem with a chapter 7 filing is that there is not a plan to catch up on the missed mortgage payments. The mortgage lender would file what is known as a motion for relief from stay (lifting the automatic stay), so that the lender could proceed with the foreclosure sale.

The chapter 13 case includes a chapter 13 plan which needs to provide for the missed mortgage payments over the course of the case. So long as the bankruptcy automatic stay is in place in the chapter 13 case, the mortgage lender cannot foreclose on the property. The key to a successful chapter 13 “homesaver” case is to: (1) propose a feasible plan which is going to be confirmed by the bankruptcy court; and (2) make consistent plan payments to prevent the mortgage lender from seeking to lift the bankruptcy stay. For instance, if your mortgage payment is $1,500 per month and you are $15,000 behind on mortgage payments, the plan needs to provide for the ongoing mortgage payments and also catch up on the missed payments. The goal of the plan is to satisfy all of the missed payments by the end of the case so that you are current with all mortgage payments when the case is completed (when you have obtained the Order of Discharge).

I do not recommend that anyone file a chapter 13 case without an attorney, particularly when the debtor owns real property.