Understand Foreclosure Vs. Bankruptcy Options: How Chapter 7, Chapter 13 and Enforcement of Mortgage Liens Differ


The long-term impact of foreclosure vs. bankruptcy deserves deliberate examination before reaching a decision. Filing Chapter 7 or Chapter 13 may only temporarily prevent the loss of a home. When complying with all rules and making payments, homeowners may retain their home permanently. Allowing the enforcement of lien without filing Chapter 7 or Chapter 13 guarantees home loss and may create tax liability.

Effect of Foreclosure Vs. Bankruptcy in Chapter 7 Liquidation Cases

When facing imminent foreclosure, filing Chapter 7 immediately empowers the automatic stay provided by 11 U.S.C. Section 362. The automatic stay prohibits creditors to collect amounts owed, enforce liens, and contact debtors. However, foreclosure vs. bankruptcy rights change.

The act of filing invokes the automatic stay even though a creditor may not receive actual notice for days. When considering foreclosure vs. bankruptcy under Chapter 7, bear in mind that creditors must eventually receive all past due and future mortgage payments. If payments are not made, the court can and will allow the collection of mortgage debts and enforcement of liens to resume.

The change in a creditor’s rights in foreclosure vs. bankruptcy may be temporary. Chapter 7 may prevent enforcement of a lien for 30 to 60 days. In practice, following court procedures frequently requires one or two months before courts entertain motions to lift an automatic stay. This time may allow a debtor time to catch up mortgage payments when no longer paying other debts.

Impact of Foreclosure Vs. Bankruptcy in Chapter 13 Payment Plans

Filing Chapter 13 also invokes an automatic stay. Thereafter, a debtor may include past due mortgage payments in a proposed plan for repayment. A plan for repayment may propose up to 60 months to catch up past due amounts. All future mortgage payments must be made on time beginning the day a case is filed. In practice, Chapter 13 trustees collect one payment from debtors for proportional distribution among creditors.

Debtors who fail to make regular plan payments to a Chapter 13 trustee are at risk and the foreclosure vs. bankruptcy dilemma continues. Similar to a Chapter 7 case, creditors may request termination of the stay or case dismissal. Courts routinely grant these requests when payments are late.

Allowing Foreclosure to Proceed Without Filing Bankruptcy

A homeowner that allows foreclosure to proceed rather than filing bankruptcy may be liable for imputed income. Mortgage lenders that enforce liens frequently receive less than the total debt owed, legal costs and administrative fees.

Unpaid amounts become a deficiency balance that remains payable by the former homeowner. Thereafter, many lenders charge off deficiency balances and claim a tax deduction. The IRS considers a mortgage lender’s loss as income received by a borrower and may then assess non-dischargeable tax liability.

Best Foreclosure vs. Bankruptcy Strategies

Filing bankruptcy may allow debtors to keep their homes when making future payments or alternatively surrender homes without future payment obligation of any kind. The consequences of foreclosure vs. bankruptcy may transform a portion of a mortgage debt into priority tax liability that must be paid despite filing Chapter 7 or Chapter 13 later.

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