Why don’t people in mortgage foreclosure just file for bankruptcy so they can stay in their home?

I had a client ask this question recently. The short answer is that the bankruptcy proceeding does not allow someone to stay in their mortgaged home. For that reason, people in foreclosure don’t always choose bankruptcy protection. Let me explain this a bit further.

Filing for bankruptcy protection temporarily stays all collection activity against the debtor. For a mortgage holder though, the process works out a bit differently. The mortgage holder is allowed to ask the court to lift the automatic stay and allow the mortgage holder to proceed directly against the property, although not the individuals who are occupying the property. Practically, this means that shortly after a bankruptcy petition is filed by debtors who own a mortgaged home, the attorneys for the mortgage company will request that the court lift the automatic stay and about 99% of the time that request is granted and the foreclosure proceeding can continue in Oklahoma state court. The ultimate judgment that the mortgage company gets is only against the property though and not against the people that own the property and probably have individual liability to the mortgage.

The reason many homeowners are able to stay in their home for so long after foreclosure is that even after mortgage foreclosure cases are filed, the owners are usually allowed to stay there until the sale of the property is completed at the end of the case and sometimes until the sheriff literally kicks them out of the house.

There is another reason that some people don’t just file for bankruptcy after foreclosure starts: bankruptcy law limits a person’s ability to file for bankruptcy protection to one time during each seven-year period under each chapter of the bankruptcy code. That means that if a person files for bankruptcy protection in April 2010 under Chapter 7, that person will not be able to seek the same type of protection under Chapter 7 again until after April 2017 (this is of course assuming that the discharge in bankruptcy is actually granted to the person, if the case is dismissed then the limitation on every 7 years probably does not apply.)