Bankruptcy and Home Foreclosure

Southeast Alabama Bankruptcy Attorneys helping stall foreclosures in Dothan, Ozark, Enterprise and all of Alabama

One of the most powerful features of bankruptcy law is the automatic stay on creditor actions, which takes effect the moment the bankruptcy petition is filed. Once the bankruptcy estate is created, the automatic stay prevents any action to collect a debt, including foreclosure on a debtor’s home or property. Thus, by filing a Chapter 7 or Chapter 13 bankruptcy petition, a debtor can at least delay an impending foreclosure, usually for 3-4 months. Under Chapter 13, the debtor will be able to keep his or her home once the judge approves a debt repayment plan. Under Chapter 7 liquidation, depending on the amount of equity the debtor has in the home, there are two potential outcomes. If the amount of equity falls within the dollar limits of the relevant homestead exemption, the debtor may keep the home through the bankruptcy. However, if the amount of equity exceeds this limit, the home may ultimately be sold to satisfy creditor claims. Even in this situation, the automatic stay can provide the critical relief of a much-needed delay in the foreclosure process.  In determining how best to protect a debtor’s home through the bankruptcy process, other factors come into play; such as the debtor’s income, and how far behind the debtor is on the mortgage payments.

While the automatic stay typically ensures at least a 3-4 month delay in the foreclosure process, debtors should be mindful of two important exceptions:

  • If the bank holding the mortgage successfully petitions the court to lift the automatic stay as to the mortgaged property, the bank will not have to wait until the completion of the bankruptcy proceedings in order to move forward with the foreclosure. Even then, however, the stay will delay foreclosure for over a month, as the petition process must go through the courts.
  • If the bank has properly given the foreclosure notice required under state law before the bankruptcy petition is filed, then the automatic stay will not delay the foreclosure process. For example, if in Alabama the foreclosure notice must be filed three months before the foreclosure sale, and you receive the notice in January but don’t file for bankruptcy until February, the foreclosure sale will take place as scheduled in March. Thus, it is important to be aware of the debt relief available to you under state law if you begin to fall behind on your mortgage payments.

In a Chapter 7 liquidation proceeding, there are homestead exemptions (which vary from state to state) that allow a debtor to keep his or her primary residence out of the bankruptcy estate. This means the home will not be liquidated to satisfy the claims of creditors if it falls within the applicable exemption qualifications. The homestead exemption cannot be applied to a secondary or vacation home. Some states allow an exemption of up to a certain dollar amount; others phrase the limitation in terms of acreage. The amount of equity a debtor has in the home is typically the decisive factor in Alabama. For example, if a debtor has $10,000 worth of equity in the home, and the relevant state homestead exemption is for $12,000, then the debtor may claim an exemption on the home and prevent its sale in a liquidation proceeding.

On the other hand, if a debtor has $14,000 worth of equity in the home, and the relevant state homestead exemption is $12,000, usually the debtor has the option to either a) pay the $2,000 by which the equity exceeds the dollar limit directly to the bankruptcy estate for distribution to creditors; or b) surrender the home to the estate for liquidation, but keep $12,000 of the proceeds to go towards the purchase of a new residence.

The biggest worry debtors have when considering filing for bankruptcy is what will happen to their home. Many simply assume they will lose their home if they “go bankrupt.” However, a competent bankruptcy attorney can help you assess your debt relief options and obtain the most protection available under the law. If you are behind on your mortgage payments and facing potential foreclosure, call the Houston County bankruptcy lawyers of Parkman White, LLP today at 334-792-1900, or email us for a consultation. We have the tools and expertise to guide you through this emotionally trying process, and we can help get you back on solid financial footing.