In most cases, a Bankruptcy will usually delay any foreclosure process. This is because when a bankruptcy case is filed, a restraining order is entered under 11 USC 362 called the Automatic Stay, which prevents any further debt collection efforts against debtors or their property.
So if someone is facing foreclosure, a Bankruptcy will immediately freeze the process. This may be permanent, as in most Chapter 13 cases, or it may be temporary, as in most Chapter 7 cases. The reason most Chapter 7 restraining orders are not permanent is due to the fact most Chapter 7 cases are over within 4 months time, and/or, the lender will file a “motion for relief of stay” which will remove the restraining order against that lender on the property.
In California, the typical foreclosure is four (4) months. Add to this the 2 to 4 months of being in default before the process is started, and most people generally will not be foreclosed upon in under 8 months.
After foreclosure, the lender still needs to evict the debtor, which may take another month. So if you add a Bankruptcy to the 9 month foreclosure process, its not surprising to see debtors in their homes for a year from when they last stopped paying.
Moreover, since the Bankruptcy has erased the personal liability of the debtor, there is no recourse the lender has against the borrower, even if the foreclosure results in less than full payment on the loan. Additionally, since California has the “one action rule,” even post bankruptcy claims arising from staying in the property without paying will not result in any liability to the debtor.
The lenderís choice is to non-judicially foreclose and forever give up their claim for money damages against the debtor, or, to judicially foreclose in a Court of Law and obtain a deficiency judgment against the borrower. Virtually all foreclosures are non-judicial foreclosures since a judicial foreclosure is very time consuming, and even when the lender prevails, the debtor still has a 1 year right of redemption, whereby the borrower can come back within 1 year, tender the amount due, and get the property back.
So if you are surrendering your house in a Chapter 7, at least in California, you can pretty much expect to stay there for at least 6 months to a year from your last mortgage payment. This monthly savings truly gives debtors a bankruptcy fresh start!
Part II of this article will explain how the forgoing may even extend longer, sometimes even years from the last payment!
Written by Michael G. Doan