When a bankruptcy case is filed, with few exceptions an “automatic stay” goes into effect. The stay prevents creditors, including mortgage lenders, from taking any action to collect a debt. If a foreclosure is pending, it must be stopped. If you file a Chapter 7 bankruptcy, however, the foreclosure may only be stopped temporarily. The lender will likely file a motion for relief from the stay. Such motions are routinely granted by the Courts. This will allow the lender to start the foreclosure process again.

Usually, the better alternative to deal with a mortgage arrearage is Chapter 13. Chapter 13 allows an individual or couple with regular income to deal with their debts by making regular payments to a Chapter 13 Trustee over a period of 3 to 5 years. The plan can cure an arrearage on a home mortgage over a 60 month term, and deal with other short-term debts such as credit cards, car loans, and medical bills. This can free up funds so that future mortgage payments can be made in a timely manner.

In addition, in many jurisdictions a Chapter 13 plan can “strip off” a second or third mortgage on property, if the property value is less than the amount owed on the first mortgage. Once the lien is stripped off, the 2nd mortgage can often be paid little or nothing through the plan, and the remaining balance completely discharged at the conclusion of the plan. (Lien strips are also available in Chapter 7 cases in many jurisdictions, but stripping off a junior lien still does not solve the problem of an arrearage on the first mortgage.)

Another huge advantage of Chapter 13 is that your attorney fees can be included in the plan, so that the case can be filed without a big upfront expense.

Deciding whether to file a bankruptcy case, and if so what chapter to file under, can be complicated. It is critical to get good advice from a qualified and experienced bankruptcy attorney before making your decision.