THE “automatic stay” in bankruptcy is a powerful tool available to debtors to prevent collection efforts from creditors, including foreclosures. Whether you file a Chapter 7 or Chapter 13 bankruptcy petition, an “automatic stay” is in effect immediately once a bankruptcy petition is filed, i.e., most creditors (with a few exemptions) cannot take any action against your property to collect an outstanding debt. Upon filing, the court issues a Notice of Bankruptcy Filing which notifies the concerned creditors that there are certain prohibited actions under the Bankruptcy Code that they cannot take, including “starting or continuing lawsuits or foreclosures”.
As you may be aware, defaulting on one’s mortgage allows the creditor/lender to take the initial legal steps to take over your house. California allows both judicial and non-judicial foreclosures. In a judicial foreclosure, the lender sues the borrower in court to obtain a decree of foreclosure and order of sale.
On the other hand, in a non-judicial foreclosure, which is the more common type used in CA, the lender is allowed to sell the property as long as the sale is permissible under the contract and the legal procedure is followed. To start the non-judicial foreclosure process, a Notice of Default is issued to the borrower which must be recorded at the County Recorder’s Office. After ninety (90) days from the recording of the Notice of Default, a Notice of Trustee’s Sale is issued and at least twenty (20) days thereafter, an auction sale can be held.
Whether the “automatic stay” as discussed above is permanent or not during the pendency of the bankruptcy petition depends on the kind of bankruptcy petition you file. If a Chapter 7 bankruptcy (“liquidation bankruptcy”) is filed, the scheduled foreclosure sale will be postponed because of the automatic stay. However, the lender is allowed to file a motion to lift the automatic stay, essentially a request to the court to allow the sale. If the motion is granted, the auction sale may proceed. Nonetheless, the sale of the property will be delayed for a few months, at least. Chapter 7 is a good option for a homeowner who is looking for a temporary reprieve of the auction sale. [To keep your residence under Chapter 7, you should (1) be current in your mortgage payments (or can get current in your payments), (2) can continue paying it and (3) your home equity is covered by the applicable homestead exemption.]
On the other hand, filing a Chapter 13 petition allows you to keep your home even if you are in arrears with your mortgage. You can pay off the arrears during the pendency of the petition – in three (3) or five (5) years. A feasible repayment plan, which should show the debtor’s ability to pay at least his first mortgage monthly payments, must be approved by the bankruptcy court.
An indirect benefit of filing Chapter 13 is “lien stripping” which allows the cancellation of junior liens (like a second mortgage) on your property provided the value of your residence is equal or less than your first mortgage. In lien stripping, the second mortgage is converted into an unsecured debt in which case you may not have to pay for it at all.
If you are contemplating of filing bankruptcy or other alternatives, it is advisable to seek the counsel of a bankruptcy lawyer to guide you on the intricacies of filing for such a petition.
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Atty. Gwendolyn Malaya-Santos is a member of the State Bar of California and the Integrated Bar of the Philippines. To schedule for a free initial consultation, please call Tel. Nos. (213) 386-5651 (Los Angeles office) or (626) 329-8215. Attorney Santos’ offices are located at 3540 Wilshire Blvd., Suite 1012, Los Angeles, CA 90010 and Riverside Turner Riverwalk, 11801 Pierce Street, 2nd Floor, Riverside, CA 92505.
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Information contained in this article does not, nor is it intended to, constitute legal advice for any specific situation and does not create a lawyer-client relationship. It likewise does not constitute a guarantee, warranty, or prediction regarding the outcome of your legal matter. We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy code.
