Before the housing crisis, I warned all my Chapter 7 bankruptcy clients, “make sure you are current on your house the day we file your case.” If you went into Chapter 7 bankruptcy even one payment behind, the mortgage company would get relief from the automatic stay, and they’d start to foreclose. Once that train left the station, it was hard to stop.
That’s still a good plan if you can do it; but not everybody can. If you file Chapter 7 bankruptcy while the house is behind, the motion for relief from stay is important, but it’s not time to panic.
What to do when you get a motion for relief from the automatic stay?
1. If you can afford the house payment, and you want to be certain you will keep the house, then you need to get caught up. In fact, you really should be caught up when the bankruptcy is filed. Everybody knows, if you really want to keep your house, you need to get current and stay current. That applies before bankruptcy, during, and after.
2. If you don’t want to, or can’t afford to keep the house, make plans to move out. See my blog on how long do I have. (Remember to pay the home owners association!) I suggest to many people that they file bankruptcy right before a foreclosure, to stop the foreclosure and get a little more time to live for free (except for the association) and save money for movers and the rent deposit.
3. What if you need a loan modification? Then it’s more complicated. If you catch up (assuming you can), then you won’t get the mod. You’ll never get a loan modification if you keep catching up. At the same time, you don’t want to get foreclosed. Trying to stay at least two, but no more than three payments behind is the safest place to get a loan modification.
Filing a motion for relief does not mean they have decided to foreclose you. It may simply be their lawyers generating legal fees. (Those fees will get put at the end of the mortgage if you get the mod. If you don’t get it, the bankruptcy will wipe out what you owe so it doesn’t matter to you.)
The old rule was once they got relief from the stay, they went straight to foreclosure: that doesn’t apply any more. Sometimes they do; sometimes they come with a mod offer much better than before; sometimes they wait for you to request a mod (again). Really there’s no telling.
Once they get relief from stay, is there anything else I can do to stop them?
First, like I say, keep trying to apply for a loan modification.
Second, if your income has improved in a big way, you can file a Chapter 13 bankruptcy. Under Chapter 13 , you would make your current payment, and make a monthly payment to the court to catch the house up. Before the crisis, we did that a lot. Now usually, if your income shows you can catch up, they will agree to that voluntarily. So we don’t do that much any more.
Third, you can file against them in circuit court in your county, and make them prove they have the right to foreclose. This is the Virginia approach to these foreclosure challenges in the news. (In some states, they have to go to court against you to foreclose; in Virginia you have to go to court against them.)
There is one law firm I know of in Northern Virginia that does this. Compliance Counsel. As far as I know, they have not gotten anyone a paid for house. But they have, at least some of the time, gotten the mortgage companies to make a new mod offer, rather than fight it out.
Now, I got through all that strategy without explaining what a motion for relief from the automatic stay is. If you are interested, that’s next.
Two bankruptcy protections.
People file bankruptcy to get protection from their creditors. You get two kinds of protection. You get long term protection from your debts. That’s the bankruptcy discharge. The discharge is your “new opportunity in life and clear field for future effort.”
Shorthand that’s your “fresh start.” The Supreme Court said that your “fresh start” is the principal purpose of the bankruptcy code.
The bankruptcy discharge, about three months and two weeks after we file your Chapter 7 bankruptcy case, gets you your fresh start. The discharge forbids anyone from taking any action to collect your discharged debts from you.
You get that discharge when your bankruptcy is approved.
The second protection, right when you file your chapter 7 bankruptcy case, is the automatic stay. The automatic stay prevents your creditors from taking action against you–and it also prevents them from taking action against your property. The automatic stay is sometimes called your “breathing spell.”
The automatic stay is temporary. Why? Because, when your bankruptcy is discharged–in about three months and two weeks–if you haven’t made your car payment, they are going to repossess your car. And if you are not making your house payment, the mortgage company–at least the first mortgage company (maybe not the second)–will eventually foreclose on your house.
Unlike the automatic stay, the discharge does not stop people who are on the title or deed to your property from claiming the property, if you don’t pay.
Relief from the stay. Sometimes the creditors don’t want to wait that three months and two weeks, for the automatic stay to be replaced by the discharge. They want it sooner. The car creditors don’t want the car wrecked. The mortgage companies–well who knows what they are thinking these days.
Anyway, they file a motion for relief from the automatic stay. The judge will give them relief from the stay unless you are completely current.
As I said before, staying completely current, if you can afford the house, and want to keep it, is your best plan. As I also said, if you need or want a mod, getting completely current means you won’t get the mod. You need to go back to your strategy.
(One more thing to keep in mind. Cash is king. If you have the ability to catch up but want the mod, hang on to the money and see what happens. You can always catch up later in the foreclosure process–you will need to cover the late fees. Draining all your cash now, and then not being able to pay later, may not be smart.)