How Does Bankruptcy Stop Foreclosure, Eviction or Lawsuits?

How Does Bankruptcy Stop Foreclosure, Eviction or Lawsuits?

“How does a bankruptcy filing stop evictions, foreclosures, and things like that?” People often have questions about bankruptcy, and you’ll often hear people wonder, “Stop your eviction, stop a foreclosure, prevent foreclosure, or save your home by filing bankruptcy.” 

People think, “Well, if I’m filing bankruptcy, I’m saying I can’t pay my debts. So how does that keep them from evicting me or foreclosing on a home that I own?” It really depends on what type of bankruptcy you’re filing and whether you can make the payments to get current with that creditor. This gets into some complexities that I will discuss in other videos and posts. 

What happens when you file bankruptcy?

But essentially, when you file bankruptcy, whether it’s chapter 7, 13, or 11, those are the three most common ones that both business and individuals file, it’s typically filed electronically with the federal bankruptcy court. 

For example, a client comes in and they say, “My house is about to get sold at a trustee sale, essentially a foreclosure that’s supposed to happen tomorrow morning.” Technically, we can prepare a skeleton bankruptcy petition, the basics of it, just a couple pages, to get it filed. And then we’ll have a short period of time, a number of days, to file all the normal other documents. 

An automatic stay

It’s an emergency petition, but we can prepare it, file it electronically. upload it to the court system, and as soon as it’s filed, legally, technically there is a court order. It’s called an automatic stay. So, it’s a bankruptcy stay or an automatic stay and that’s the name for the order that goes into place as soon as you file bankruptcy. 

And as soon as you do, then it automatically puts a stop legally on anything taking place against any of your assets. So, the foreclosure that was about to happen, a legal proceeding where an eviction was about to go through, an unlawful detainer, any type of legal action, a judgment, collections, all those are automatically stopped the minute that you file. 

Don’t wait till the last minute

Now, it’s not a good idea to wait till the last minute because even though legally a minute before a trustee sale filing bankruptcy puts a stop to the sale of the house, just procedurally and practically, the trustee sale may still go forward and somebody may buy the house. And then you notify them of the bankruptcy, and you have to undo whatever was done. 

So, legally, you did stop it but it’s always better to do it earlier, so you can give notice to everybody that “A bankruptcy was filed,” and that stops legal proceedings, foreclosures, and evictions the minute that you file. But it’s always better to file it and give notice so that everybody knows so that they can cancel or postpone any kind of legal proceeding or trustee sale.

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