Frequently Asked Questions About Chapter 7 Bankruptcy and Home Foreclosure
Authored By: D.C. Bar Pro Bono Center
This FAQ provides general information about how a D.C. resident’s bankruptcy filing affects the foreclosure of homes in the District of Columbia. This FAQ does not apply to rental or investment properties or to any home that is not used as the bankruptcy filer’s primary residence. Please consult with a licensed attorney for advice about your particular situation. Get information about free legal help with your foreclosure or bankruptcy issue.
1. If I file Chapter 7 bankruptcy, will it stop the bank from foreclosing on my home?
It is important to understand that bankruptcy and foreclosure are different processes. Chapter 7 bankruptcy is a way that debtors get rid of their debts. Foreclosures are lender recover their money after a homeowner stops paying their mortgage. Frequently there are interactions between bankruptcies and foreclosures.
Chapter 7 bankruptcy will not, in the end, prevent a foreclosure on your home. But, once you file for Chapter 7 bankruptcy, the bankruptcy court will order an automatic stay, which will put a hold on the foreclosure while the bankruptcy case is pending. The lender may, however, ask the judge to allow the foreclosure to proceed. Or, the lender may wait to foreclose until the bankruptcy case is over.
If you want to keep your home, you need to keep making your payments before, during, and after bankruptcy. To prevent foreclosure, you must make up any already-missed payments and keep your payments current. The deed of trust that you signed when you borrowed money to buy your home gives the lender the right to foreclose if you stop making payments on your mortgage. Your obligation to make payments under the deed of trust may be cancelled (discharged) in bankruptcy, so the lender could not garnish your wages or bank accounts to collect the money. Even if the debt is discharged, the lender still has the right to foreclosure.
- If you can’t catch up your missed mortgage payments right away or all at once but you could, with time, catch up on your payments, a different type of bankruptcy called Chapter 13 might help you avoid foreclosure. In Chapter 13, the debtor makes payments to creditors for 3-5 years. The payments made to a mortgage lender must be enough to keep the normal mortgage payments current AND catch up on any missed payments by the end of the 3-5 year plan. You need to have a high enough income to make all the mortgage payments plus pay some amounts to your other creditors. If you stop making payments during the bankruptcy plan, the lender usually can foreclose.
2. I filed Chapter 7 bankruptcy to stop foreclosure. Do I need to keep paying my mortgage and other home-related expenses?
Yes – just like the mortgage, to avoid legal and tax problems, you must keep paying important home-related expenses.
TAXES. If you remain the deeded owner of the property, you must continue to pay property tax – even if you are surrendering your home in Chapter 7 bankruptcy. The foreclosing lender will eventually pay the property tax, but until that happens, the Department of Tax and Revenue will attempt to collect any unpaid taxes from you.
HOMEOWNER’S ASSOCIATION FEES. If you hold the deed to the property, you are responsible for paying homeowner’s association dues and assessments - even if you are surrendering your home in Chapter 7 bankruptcy. If you move out of the property, you are still responsible for any penalties for violations such as painting, overgrown lawn, and other required property upkeep. Once the lender forecloses, the lender will likely pay the association dues, but this could take months or years.
- HOMEOWNER’S INSURANCE. If someone gets hurt or injured on your property, then you remain potentially liable because you are the deeded owner of the property – even if you are surrendering your home in Chapter 7 bankruptcy. So it is wise to maintain homeowner’s insurance on the property.
3. I filed for Chapter 7 bankruptcy. I understand my mortgage debt will be discharged in bankruptcy, but after that, what happens? Will I get to keep my home?
For most DC bankruptcy filers who have equity in their home, the home cannot be sold to pay the homeowners’ creditors.
But, the bankruptcy’s automatic stay won’t prevent a foreclosure if you haven’t kept current on your mortgage payments. The lender can ask the bankruptcy court to lift the stay so the foreclosure can proceed. Or, the lender can wait until the bankruptcy case is completed before foreclosing.
In some cases, if you have not lived in your home in DC for more than three years and four months and you have a lot of equity in your home (more than $155,675), the bankruptcy court may allow the sale of your home if selling it would produce funds to pay creditors. You would be able to keep $155,675 of the proceeds, and any extra amount would be paid to your creditors.
In some cases, if you have not lived in your home in DC for more than two years, when you file for Chapter 7 bankruptcy your home may become part of the bankruptcy estate. If you have more than $22,975 in equity in your house, the bankruptcy trustee determines whether selling the house will produce funds to pay unsecured creditors.
If the bankruptcy trustee decides to sell the home, it will probably be sold at auction.
- If you have equity in you your home and have lived in DC for less than three years and four months, it is a good idea to consult with a bankruptcy lawyer before you consider filing bankruptcy.
4. How do I transfer the title of my home after filing Chapter 7 bankruptcy?
There are several ways for the title of your home to transfer to a new owner.
The lender may ask the bankruptcy court to allow it to take the property out of bankruptcy protection and continue with the foreclosure sale.
You may ask the lender if you can transfer the deed to the lender in lieu of foreclosure. This means you sign over all the interest in the property to the lender. This avoids foreclosure.
- The lender may wait until the bankruptcy case is completed to foreclose and take back ownership of the home.
Remember, until the property is back in the possession of the lender or the deed is transferred to a new owner, you are still the legal owner of the property, and you remain responsible for important home-related expenses like taxes, homeowner’s association fees, and insurance.
5. My Chapter 7 bankruptcy case is over and the lender has not started foreclosure proceedings. Can I sell my house myself?
If there is no equity in the property, the lender may not be in a hurry to foreclose.
You can sell your house yourself if the sale will bring enough money to pay off what would have been the mortgage amount.
- If you cannot sell the house for enough money to pay off the mortgage, your lender needs to give permission for you to “short sell” (sell for a price less than the debt owed), and receives the sale proceeds.
6. After the Chapter 7 bankruptcy and the foreclosure, what happens to my credit rating – can I buy another house?
Yes, you can buy another house, but you might have difficulty getting a mortgage.
The bankruptcy and foreclosure will be on your credit report, even if the balance of your debt was discharged in bankruptcy. A Chapter 7 bankruptcy remains on your credit report for 10 years, and a foreclosure remains on your credit report for 7 years.
- Lending institutions may wait several years from the date of the bankruptcy discharge or foreclosure sale before approving a home loan application.