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WILL FILING FOR BANKRUPTCY STOP A FORECLOSURE ACTION?

Foreclosure is the legal process by which a lender or a mortgagee causes the property to be sold when the debtor or the mortgagor is unable to pay the mortgage debt. In a Chapter 13 bankruptcy proceeding, the debtor creates a plan of reorganization by which he will repay the debts over a period of time. Accordingly, a Chapter 13 debtor is unlikely to lose his home because the mortgage payments will, in theory, continue to be made. A Chapter 13 debtor must continue to make mortgage payments in order to keep the home.

In a Chapter 7 liquidation, however, a debtor could possibly lose his home, depending on certain factors. These factors include any "exemptions" provided by the law of the debtor's state. Another factor is the status of the mortgage or loan: if the payments are current, it is far less likely that a lender will begin foreclosure proceedings. If the loan is already in foreclosure, the lender is likely to continue the foreclosure proceedings. If the loan is delinquent but not in foreclosure, a debtor can attempt to make a "reaffirmation" arrangement with the lender to catch up on overdue payments and to assure future payments. For the most part, lenders would rather receive payment than institute foreclosure proceedings.

A debtor that is already in foreclosure proceedings can indeed put a temporary stop to the foreclosure by filing for bankruptcy. The act of filing for bankruptcy creates an "automatic stay" to prevent lenders and other creditors from proceeding with or continuing legal action against a debtor. Some debtors facing foreclosure proceedings will file for bankruptcy in an effort to forestall foreclosure. An automatic stay is not a permanent protection against foreclosure because lenders are entitled to protect their interests. Put another way, a lender that has instituted foreclosure proceedings against a primary residence will probably be able to eventually continue with the proceedings.