Can Bankruptcy Stop Foreclosure in New York? Here’s What to Know

Hey there, I’m your friendly neighborhood bankruptcy expert. And I’ve got some good news for you New Yorkers facing foreclosure: bankruptcy might just be the lifeline you need to keep your home and get back on your feet.

I know, the word “bankruptcy” can sound scary. But trust me, it’s not the end of the world. In fact, filing for bankruptcy can be a smart way to stop foreclosure dead in its tracks and give you some breathing room to sort out your finances.

So, if you’re feeling overwhelmed by mounting mortgage debt and the threat of losing your home, take a deep breath. I’m here to walk you through how bankruptcy can help and what your options are. Let’s do this together, one step at a time.

Understanding Bankruptcy and Foreclosure in New York

When you’re facing foreclosure in New York, it feels like your world is crashing down. You’re scared, stressed, and wondering how you’ll keep a roof over your head. I’ve been there. I know how overwhelming it is to fall behind on mortgage payments and feel like there’s no way out. But after years of helping clients navigate this difficult situation, I can tell you that there is hope.

What is Foreclosure?

Foreclosure is a legal process where a lender tries to recover the balance of a loan from a borrower who has stopped making payments. They do this by forcing the sale of the property used as collateral for the loan. In New York, foreclosure is a judicial process. That means the lender must file a lawsuit in state court to foreclose on a property.

How Bankruptcy Can Help Stop Foreclosure

Filing for bankruptcy can temporarily stop foreclosure proceedings in New York through something called the “automatic stay.” The automatic stay is a court order that goes into effect as soon as a bankruptcy case is filed. It prohibits creditors from continuing collection activities, including foreclosure. This gives you time to catch up on missed mortgage payments or negotiate with your lender. Chapter 13 bankruptcy allows filers to repay mortgage arrears over 3-5 years while Chapter 7 only provides a temporary reprieve.

“Filing bankruptcy stops foreclosure immediately. It’s a powerful tool to help you save your home and get back on your feet financially.”

The Role of a Foreclosure Defense Attorney

A foreclosure defense attorney in New York can help you explore legal options to avoid losing your home. They can identify any errors or legal violations made by the lender during the foreclosure process and use those as leverage to negotiate. An attorney can also advise on whether bankruptcy is a good option for your situation and guide you through the process of filing to ensure the automatic stay goes into effect to halt the foreclosure action. I’ve seen firsthand how the right legal strategy can turn a desperate situation around. Don’t try to navigate this alone – get an experienced advocate on your side.

How the Automatic Stay Stops Foreclosure

The automatic stay is your secret weapon in the fight against foreclosure. It’s an incredibly powerful tool that can stop the foreclosure process dead in its tracks.

What is the Automatic Stay?

The automatic stay is an injunction that automatically stops lawsuits, foreclosures, garnishments, and most collection activities against the debtor the moment a bankruptcy petition is filed. Under the automatic stay, creditors are prohibited from initiating or continuing foreclosure proceedings or even making phone calls demanding payments.

There are some limitations to the automatic stay, however, and certain situations where a creditor can ask the court to remove the stay.

How Long Does the Automatic Stay Last?

The automatic stay remains in effect until the bankruptcy case is closed, dismissed, or a discharge is granted or denied. If the bankruptcy court dismisses the case, the stay is immediately lifted. If a discharge is granted, the stay of actions against the debtor is replaced by the discharge injunction. For Chapter 7 cases, this typically occurs about 3-4 months after filing. In Chapter 13 cases, the automatic stay remains in effect throughout the 3-5 years of the repayment plan.

Exceptions to the Automatic Stay

There are several exceptions to the automatic stay’s power to stop foreclosure. If the borrower has had a bankruptcy case dismissed within the previous year, the automatic stay will only last for 30 days unless extended by the court. The automatic stay also does not apply to foreclosures of properties that are not the debtor’s primary residence, like investment or vacation properties. Lenders can file a motion for relief from the automatic stay in some circumstances. But for most homeowners facing foreclosure, the automatic stay provides a much-needed break to regroup and find a solution. I’ve seen it give my clients peace of mind and a fighting chance to keep their homes.

Chapter 7 Bankruptcy and Foreclosure

Chapter 7 bankruptcy, also known as “liquidation” or “straight bankruptcy,” can provide some relief for homeowners facing foreclosure, but it has its limitations. Let’s break down how it works.

How Chapter 7 Bankruptcy Works

Chapter 7 bankruptcy allows debtors to discharge most unsecured debts and get a fresh financial start. The Chapter 7 trustee gathers and sells the debtor’s nonexempt assets and uses the proceeds to pay creditors. For most Chapter 7 filers, all of their assets are exempt and there is no liquidation. The whole process typically takes 3-5 months, after which qualifying debts are discharged.

When Can a Lender Resume Foreclosure in Chapter 7?

Since Chapter 7 bankruptcy does not have a mechanism for debtors to catch up on missed mortgage payments, lenders can resume the foreclosure process once the automatic stay is lifted. The lender must file a motion for relief from the automatic stay and get court approval first. If approved, the lender can proceed with the foreclosure, but any deficiency balance may be discharged in the bankruptcy. Debtors may be able to delay but not prevent foreclosure with Chapter 7. It can provide a few months of breathing room, but it’s not a long-term solution for saving your home.

Pros and Cons of Chapter 7 Bankruptcy

The main benefit of Chapter 7 bankruptcy for homeowners facing foreclosure is that it can temporarily stop the process and discharge other unsecured debts, freeing up funds for the mortgage. Chapter 7 is also relatively quick, taking 3-5 months. The downsides are that it does not provide a way to make up missed payments and keep the home long-term. Filers also risk having nonexempt property liquidated by the trustee.

“Chapter 7 bankruptcy can delay foreclosure and give you some breathing room, but it’s not a permanent solution. It’s best for those who are ready to walk away from the home and get a fresh start.”

If your goal is to keep your home, Chapter 13 is usually a better bet. But Chapter 7 can still be a helpful tool in certain situations. An experienced bankruptcy attorney can help you weigh your options.

Chapter 13 Bankruptcy and Foreclosure

If you’re facing foreclosure but want to keep your home, Chapter 13 bankruptcy may be your best shot. It provides a powerful mechanism for catching up on missed mortgage payments over time.

How Chapter 13 Bankruptcy Works

Chapter 13 bankruptcy, or “reorganization,” allows debtors to keep their property and repay all or a portion of their debts over a 3-5 year period. Filers propose a repayment plan to make installment payments to creditors using their regular income. Chapter 13 is especially helpful for debtors who have fallen behind on mortgage payments and want to keep their homes, as it allows them to pay off the arrears over time while also making their regular payments.

Proposing a Chapter 13 Repayment Plan

In a Chapter 13 repayment plan, debtors must pay certain debts in full, known as “priority claims,” which include mortgage arrears. The plan will state the monthly payment amount and how payments will be disbursed among creditors. For the plan to be approved, it must pay unsecured creditors at least as much as they would receive under Chapter 7 liquidation. If the court approves the plan, the debtor makes payments to the Chapter 13 trustee who then distributes it to creditors.

Eligibility Requirements for Chapter 13

To be eligible for Chapter 13 bankruptcy, individuals must have regular income and their unsecured and secured debts must be within certain limits. As of 2021, unsecured debts must be less than $419,275 and secured debts must be less than $1,257,850. Debtors must also complete an approved credit counseling course within 180 days before filing. 

If a previous bankruptcy case was dismissed within 180 days for certain reasons, the debtor may be ineligible to file again. I’ve seen Chapter 13 bankruptcy help countless clients save their homes from foreclosure. It’s not an easy process, but for many, it’s worth the effort to keep a roof over their heads. If you’re considering bankruptcy to stop foreclosure, the most important thing is to act quickly. The longer you wait, the fewer options you may have. Schedule a consultation with a foreclosure defense lawyer to explore your options and start working on a plan to protect your home.

Alternatives to Bankruptcy for Stopping Foreclosure

When you’re facing foreclosure in New York, it’s easy to feel like you’re out of options. But the truth is, there are alternatives to bankruptcy that can help you avoid losing your home.

Loan Modification

One option is a loan modification. This is where you work with your lender to change the terms of your mortgage to make payments more affordable. I’ve seen loan modifications make a real difference for homeowners who’ve fallen on hard times. Lenders may be willing to extend your loan term, reduce your interest rate, or even forgive part of your principal balance. The key is to be proactive and honest about your financial situation. Gather proof of your hardship, like medical bills or unemployment paperwork, and write a hardship letter explaining why you can’t make your payments.

Short Sale

Another alternative is a short sale. This is where you sell your home for less than what you owe on the mortgage, and the lender agrees to accept the sale proceeds as payment in full. Short sales can be a good option if you owe more than your home is worth and can’t afford your payments. They do damage your credit, but not as badly as a foreclosure. The downside is that short sales can take a long time to complete, and there’s no guarantee your lender will approve the sale. But it’s worth exploring if you’re facing foreclosure and want to avoid bankruptcy.

Deed in Lieu of Foreclosure

A deed in lieu of foreclosure is another option to consider. This is where you voluntarily transfer ownership of your home to the lender in exchange for them releasing you from your mortgage debt. Deeds in lieu can be a good choice if you’ve already tried a loan modification or short sale and haven’t had any luck. They’re usually faster than a short sale and less damaging to your credit than a foreclosure. But like with a short sale, your lender has to agree to accept a deed in lieu. They may be more likely to do so if they think foreclosure will be a long and costly process.

Foreclosure Mediation

In New York, you may also have the option of foreclosure mediation. This is a process where you and your lender meet with a neutral third party to try to work out a deal to avoid foreclosure. Mediation can be a good way to force your lender to consider alternatives to foreclosure and ensure they’re following all the proper procedures. It’s not a magic bullet, but it can buy you some time and improve your chances of reaching an agreement. The key with any of these alternatives is to act fast and get help from a qualified professional. A HUD-approved housing counselor or an experienced New York foreclosure defense attorney can guide you through your options and help you negotiate with your lender.

Dealing with Deficiency Balances After Foreclosure

Even if you can’t stop a foreclosure, you may still have options for dealing with any remaining mortgage debt, known as a deficiency balance.

What is a Deficiency Balance?

A deficiency balance is the difference between what your home sells for at foreclosure and what you owed on the mortgage. For example, if you owed $300,000 and the home sold for $250,000, you’d have a $50,000 deficiency. In some states, lenders can sue borrowers to collect deficiency balances. These lawsuits are called deficiency judgments.

Can Lenders Collect Deficiency Balances?

In New York, lenders are allowed to seek deficiency judgments after foreclosure. But there are some limitations. First, the lender has to file a separate lawsuit within 90 days of the foreclosure sale. This lawsuit is called an action for a deficiency judgment. Second, the borrower can defend against the lawsuit by forcing the court to determine the fair market value of the property. The deficiency will be limited to the difference between the court-determined value and the outstanding balance, rather than the foreclosure sale price. Finally, once the lender gets a deficiency judgment, they have to collect it within 20 years. The judgment also accrues interest at a rate of 9% per year, which can add up quickly.

Eliminating Deficiency Balances in Bankruptcy

If you’re facing a large deficiency balance after foreclosure, bankruptcy may be able to help. In Chapter 7 bankruptcy, deficiency balances are treated as unsecured debt, which means they can be discharged along with things like credit card debt and medical bills. In Chapter 13 bankruptcy, deficiency balances are included in your repayment plan as unsecured debt. You may only have to pay a small percentage of the total amount owed, and the rest can be discharged at the end of your plan. Of course, bankruptcy has its own consequences, like damage to your credit score and the loss of certain assets. But if you’re facing a huge deficiency judgment, it may be the best way to get a fresh start.

Tips for Navigating the Bankruptcy and Foreclosure Process

If you’re considering bankruptcy to stop foreclosure in New York, here are a few tips to keep in mind:

Seek Legal Advice Early

Don’t wait until the last minute to consult with a bankruptcy attorney. The sooner you get professional advice, the more options you’ll have for saving your home or minimizing the damage to your finances. Many bankruptcy attorneys offer free initial consultations, so it doesn’t cost anything to learn about your rights and explore your options.

Gather Important Documents

To assess your financial situation and develop a strategy, your attorney will need to review certain documents. These may include:

• Recent mortgage statements
• Past-due notices
• Proof of income, like pay stubs or tax returns
• A list of your other debts and assets

Having these documents ready before your consultation can save time and help your attorney give you more targeted advice.

Communicate with Your Lender

Even if you’re planning to file for bankruptcy, it’s important to stay in communication with your mortgage lender. Ignoring their calls and letters will only make things worse. Many lenders have loss mitigation departments that offer alternatives to foreclosure, like loan modifications or short sales. Being proactive and honest about your situation can sometimes open the door to negotiation.

Explore All Options

Bankruptcy is a powerful tool for stopping foreclosure, but it’s not the only option. Before you file, make sure you’ve explored alternatives like:

• Loan modification
• Short sale
• Deed in lieu of foreclosure
• Foreclosure mediation

A HUD-approved housing counselor or a New York foreclosure defense lawyer can help you understand the pros and cons of each option and choose the best strategy for your unique situation. At the end of the day, the key to navigating the bankruptcy and foreclosure process is to take action early, arm yourself with knowledge, and surround yourself with experienced professionals who can guide you to the best possible outcome. With the right help and legal strategies, you can avoid foreclosure and regain control of your financial future.

Conclusion

Listen, I get it. Facing foreclosure is terrifying, and the idea of filing for bankruptcy can feel like admitting defeat. But sometimes, it’s the bravest and smartest thing you can do to protect your home and your financial future.

Bankruptcy isn’t a magic wand that makes all your problems disappear, but it can stop foreclosure in New York and give you a chance to catch your breath and regroup. Whether you choose Chapter 7 or Chapter 13, you’ve got options and legal protections on your side.

The key is to act fast, stay informed, and work with a skilled bankruptcy attorney who can guide you through the process. You don’t have to face this alone. With the right help and a little bit of hope, you can emerge from this challenge stronger and more resilient than ever. I’m rooting for you every step of the way. Contact The Law Office of William Waldner to set up your free consultation.