The threat of foreclosure can be the last straw that encourages someone to consider bankruptcy. A bankruptcy filing can help in some cases by forestalling the foreclosure and giving the homeowner more time to work things out. Yet bankruptcy is not the ‘silver bullet’ many people are hoping for. In order for bankruptcy to be of any help in preventing foreclosure, timing is everything.
So what actually happens in the foreclosure process? How does the homeowner go from property owner to someone looking for a place to rent? There are different rules depending on the state one lives in, but the process is fairly similar across-the-board. The first thing to know is the difference between the judicial and non-judicial foreclosure:
- Judicial – The judicial foreclosure is one that can only be approved by a court. Lenders must file official Complaints, borrowers have time to respond, and the court eventually makes a decision regarding enforcement of the bank’s lien.
- Non-Judicial – A non-judicial foreclosure requires no court intervention. It can be conducted based on deeds of trust that gave the power of sale to trustees in the event of mortgage default.
In the state of Illinois, we have only judicial foreclosures. That means anyone in our state has the benefit of the court system to provide an avenue of relief in the event foreclosure proceedings are initiated.
The Foreclosure Process
If you were to fall behind on your mortgage payments, the best thing would be to contact your lender and see if you can work things out. Failure to do so could lead to the initiation of the foreclosure proceeding – should you miss three or four mortgage payments. Here’s how the process works:
- The lender files a Notice of Default detailing the amount in arrears and the deadline for that amount to be paid off; the borrower receives a copy of the notice.
- The borrower has 30 to 60 days to make good on the amount in arrears. If he/she fails to do so, the lender follows up with an official Complaint filed with the court.
- The court reviews the Complaint and, after finding in favor of the lender, gives the borrower 30 to 90 days to make good on the debt.
If the borrower makes good, the case is settled. If not, the house is seized and auctioned; proceeds are given to each lien holder in order of seniority.
Slowing the Process with Bankruptcy
Bankruptcy can help financially troubled homeowners forestall or prevent foreclosure. However, there are some contingencies. For example, neither Chapter 7 nor Chapter 13 bankruptcies can stop a foreclosure from proceeding once a Complaint has been filed with the court. A borrower could still lose his or her house even though the debt itself is relieved. Both kinds of bankruptcies result in an automatic stay that at least gives the homeowner some time.
Chapter 13 bankruptcy allows the homeowner the ability to restructure his or her debts according to a court-approved plan for repayment. An approved plan would mean the lender could no longer pursue foreclosure based on current past-due amounts. Future arrears are still subject to future action.
A chapter 7 bankruptcy allows the mortgage debt to be discharged entirely. However, the homeowner does not get to keep the property. The lien is still enforced to pay off the debt.
Bankruptcy is not a perfect solution for the homeowner in default. However, it can be used to slow down the foreclosure process thereby giving a homeowner more options for making good on his or her mortgage.