Can I Still Defend Against Foreclosure if I Have Filed for Bankruptcy?

Amy Collins: Chapter 7 & Foreclosure Defense

Amy's home in Addison, Illinois, is worth 25% less than the value of her mortgage. She is currently employed as a nurse at a local urgent care clinic. Amy has missed some mortgage payments, but is not actively in foreclosure. She realizes that she will likely lose her home and, given that the home is so deeply underwater, she does not have any real financial benefit to keeping the property. Amy's house has two mortgages, so she is not a good candidate for a deed in lieu of foreclosure. She would have to settle the second mortgage before being approved for a deed in lieu of foreclosure. Amy has children in school and would like to remain in her children's school district for as long as possible.

Amy has two main options for pursuing a foreclosure defense strategy. Amy's income is within the limit for passing the means test, so she is eligible for a Chapter 7 bankruptcy. She has some unsecure debts that she could discharge and, like the vast majority of Americans, does not have any significant assets other than her cars and retirement fund. Filing a Chapter 7 bankruptcy will help Amy get rid of her debts and will sever her personal liability under the note, which would remain secured against her home by her mortgage. If her lender then files a foreclosure lawsuit against her, she is protected from any deficiency judgment that may arise. Her credit has also started to improve because the Chapter 7 bankruptcy discharge has forced her lender to stop reporting her mortgage as delinquent. More importantly, two years after her discharge, Amy may be eligible to purchase another home with a Federal Housing Administration loan. With the FHA's lower interest rate and superior terms, she will have a better opportunity to pay off her mortgage. Paying off a mortgage as soon as possible is a critical goal of an informed borrower. Working to pay interest is never advisable, but that is what many Americans unwittingly do each day.

If the lender files a foreclosure action Amy now has options. She can ignore the lawsuit and begin looking for somewhere else to live. Even an uncontested foreclosure case can take a year to complete, so she has a great deal of time. If Amy wants to extend her time in the home, she can fight the foreclosure lawsuit. Defending a foreclosure significantly extends the time it takes a lender to complete the case, and may even result in the case being dismissed. If Amy's income increases or if she changes her mind, she may even be able to obtain a loan modification and remain in the home. Filing a Chapter 7 does not eliminate Amy's chances of obtaining a loan modification. No matter what she decides, she will have zero personal liability for the debt after her Chapter 7 discharge is granted. This kind of predictability is invaluable in a foreclosure situation and is one of the luxuries of being informed.

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