Recent Article Illustrates the Difference Between Chapter 7 and Chapter 13 Bankruptcy in Preventing a Foreclosure Sale

For homeowners who fall behind on their mortgage payments, filing for bankruptcy can provide some relief. Both Chapter 7 Bankruptcy and Chapter 13 Bankruptcy trigger an automatic stay on the bankruptcy filer’s assets, including their home. While the automatic stay is in effect, a lender may not foreclose on the home. Prior posts on this blog have discussed this in detail with regard to Chapter 13 Bankruptcy. However, a recent article written by several professors from University of North Carolina Chapel Hill offers some empirical data on the effects of Chapter 7 Bankruptcy and Chapter 13 Bankruptcy on home foreclosures.

The article, which will be published in the journal Housing Policy Debate, is one of the first to use data to examine the effect of automatic stay provisions on home foreclosures in bankruptcy. This is important, because 71 percent of bankrupt homeowners identify saving their home as an important motive for their bankruptcy.

The article starts by looking at a sample of homeowners in foreclosure across the United States. Of this sample, 8 percent filed for bankruptcy, about two-thirds of which were Chapter 13 and one-third of which were Chapter 7. Next, the article looks at the likelihood of a foreclosure auction among the different groups. Foreclosure auctions were more likely to occur among those that did not declare bankruptcy. For those that filed for bankruptcy and still had their homes foreclosed upon, the time that they were able to stay in their home was significantly longer.

Chapter 13 filers were able to stay in their homes for an average of 26 months, compared to 16 months for Chapter 7 filers and 8 months for those who did not file for bankruptcy. The article concludes that federal bankruptcy courts offer significant protection for homeowners in foreclosure. Even if bankruptcy’s automatic stay is lifted, filing for bankruptcy dramatically reduces the chance that the homeowner will lose their home.

This evidence confirms that bankruptcy can offer significant protections for homeowners, but that the protection may depend on what type of bankruptcy if filed for. Homeowners tend to prefer Chapter 13 Bankruptcy, and this article suggests there are good reasons for that preference.

Because Chapter 13 Bankruptcy involves a payment plan that lasts between 3 and 5 years, it takes much longer than Chapter 7 Bankruptcies which typically lasts about 3 to 6 months. During the Chapter 13 payment plan, the automatic stay provision remains in effect. This gives homeowners a chance to catch up on their mortgage payments, and explains why foreclosure is less likely to occur among bankruptcy filers.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code