Is It Better to File for Bankruptcy Before or After My Home is Foreclosed?

If you plan to file for bankruptcy but are also facing foreclosure, the timing of your bankruptcy can make a difference, depending on what you want to do with your home. In some cases, you should file for bankruptcy first, before the foreclosure sale occurs. In others, it may be better to let the foreclosure run its course, and then file for bankruptcy.

Below you can learn about the benefits and drawbacks of each option.

Bankruptcy's Automatic Stay and the Bankruptcy Discharge

When you file for bankruptcy, an automatic stay goes into effect that freezes all collection activities against you. A creditor can't take money or property from you while the stay is in effect, and any lawsuits against you must pause, including foreclosure actions. Even trying to collect through phone calls or letters violates the stay. (Learn more about bankruptcy's automatic stay.)

Once the bankruptcy court enters a discharge at the case's conclusion, the stay terminates, and creditors whose debts weren't discharged (wiped out) by the bankruptcy can resume collection. Bankruptcy eliminates most, but not all, types of debts. The balance due on your mortgage note is discharged, but the lender still has the right to the collateral if you don't pay.

When You Should File for Bankruptcy Before the Foreclosure Sale

In some situations, filing for bankruptcy before the foreclosure sale has advantages. Here are some reasons why you might want to consider using a bankruptcy to stop or delay foreclosure.

You Want a Mortgage Loan Modification

Many clients in foreclosure want a loan modification, or a similar agreement, with the bank. If you file for bankruptcy early in the foreclosure process, the automatic stay will temporarily stop the foreclosure. When your bankruptcy case is over and the court discharges your debts, the foreclosure will continue unless you secure an agreement with the bank to hold off on the foreclosure while you negotiate a loan modification. (Learn how to get a mortgage loan modification.)

One big advantage of having the bankruptcy under your belt before the foreclosure sale: The discharge of your other debts might mean that the bank will be more likely to approve your loan modification.

Peace of Mind

If you don't want to keep your home and your bankruptcy is complete before the foreclosure sale, you won't need to worry about any lingering deficiency balance once the foreclosure goes through. The bankruptcy will eliminate it.

Even if you try to keep the property after your bankruptcy through a loan modification, you'll know that if you don't succeed, you can walk away without owing anything.

You Want More Time in Your Home

If you file for bankruptcy before your home is sold at foreclosure, the automatic stay will prevent the foreclosure case from moving forward. Although the foreclosure will likely resume when your bankruptcy case ends, the delay will add to the time it takes the lender to sell your house, giving you more time to live in it.

You Want to Keep Your Home Through Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, you make payments to your creditors over a period of three to five years.

The Chapter 13 payment plan can allow you to pay off your overdue mortgage payments over time. At the end of your plan, you'll be current with your mortgage again. You won't have this opportunity if you file for bankruptcy after your home is sold at foreclosure. (Learn more about using Chapter 13 bankruptcy to avoid foreclosure.)

When You Should File for Bankruptcy After the Foreclosure Sale

Below are some situations where you might want the foreclosure sale to go through, and then file for bankruptcy.

To Discharge Homeowners' Association or Condominium Dues

You aren't liable for payment of dues that a homeowners' association (HOA) or condominium association assesses before you file your bankruptcy petition. However, you are liable for association dues assessed on property in your name after you file for bankruptcy.

If you file your bankruptcy after the foreclosure sale, you avoid having to pay dues assessed after you file, because the property is no longer in your name. Any dues that you owe would be those assessed before your filing, and they would be wiped out by your discharge.

You Are Filing Bankruptcy Only to Avoid a Deficiency

If the only reason you are filing for bankruptcy is to avoid a mortgage deficiency balance, you might want to think twice. Filing for bankruptcy before the foreclosure might be jumping the gun. You might not be liable for a deficiency anyway.

What is a deficiency? A deficiency is the difference between how much you owe at the time your home is sold at foreclosure and its fair market value. For example, if you owe $350,000 on your first mortgage and your home sells for $300,000, the deficiency is $50,000. In many states, the mortgage lender can sue you to collect this amount. (Learn more about deficiency balances after foreclosure.)

Bankruptcy wipes out your personal liability for a mortgage deficiency no matter when you file. But even without bankruptcy, you still might be able to avoid liability for a deficiency. There are a number of situations where borrowers who are foreclosed on don't owe a deficiency:

• State laws. Some states don't allow a mortgage lender to sue former homeowners for a deficiency, at least for certain types of loans.
• Waiver of deficiency. Many lenders will waive (give up their right to) a deficiency in certain situations, especially if you apply for a short sale or deed in lieu of foreclosure, or if you have an attorney fighting the foreclosure.
• No collection attempts. Many lenders, even if they obtain a deficiency judgment, won't try to collect it.

You Have Assets or Property of Value

Many states have laws that allow a debtor (the person who files the bankruptcy case) who doesn't own a home to keep more personal property. The federal exemption laws work the same way. You might be able to keep property you otherwise would have lost by filing for bankruptcy after the foreclosure sale, when you no longer own a home.

Here's an example of getting to keep more personal property by filing for bankruptcy after foreclosure.

In 2023, the federal bankruptcy homestead exemption allows you to protect $27,900 in equity in your principal residence. If you don't use the homestead exemption to protect your principal residence, the federal exemption allows you to use $13,950 of it to protect any property, personal or real, that you choose.

Bethany has $25,000 of equity in her home. She also has shares in UFT Corporation worth $8,000 and cash of $5,000. If she files bankruptcy before a foreclosure with the hope of stopping or delaying that foreclosure, she could use the federal homestead exemption to protect that $25,000 in home equity. Unfortunately, the federal exemptions have no exemption that would protect shares in a corporation or cash. But Bethany would have $2,900 of unused homestead exemption that she could use to protect $2,900 in shares or cash as she wished.

If Bethany filed bankruptcy after a foreclosure, she'd no longer own the home and wouldn't need to use any of the federal homestead exemption. Instead, she could apply the $13,950 allowed by the bankruptcy code to the shares of UFT Corporation and still have $5,950 of the exemption left over, enough to cover her cash.

When You Have No Choice About Your Bankruptcy's Timing

In many cases, you won't have a choice regarding the timing of your bankruptcy. For example, perhaps you need to file for bankruptcy immediately because of other lawsuits, wage garnishments, or other immediate threats to your money or property. You should always consider your total financial picture when determining the best time to file for bankruptcy. (Learn more about timing your bankruptcy.)

Consider Professional Help

As you can see, many circumstances can affect the best time to file a bankruptcy case. And we can't cover them all here. Nor can we address your specific situation.

Applying some strategy can help minimize any losses you might suffer. A knowledgeable bankruptcy attorney can help you find the answers you need to make decisions about your financial future.