Bankruptcy

Filing bankruptcy in Virginia generally stops foreclosure immediately, but it does not automatically eliminate the mortgage or permanently prevent foreclosure. The effect depends primarily on whether the homeowner files Chapter 7 or Chapter 13 bankruptcy.

Bankruptcy stops foreclosure

When a homeowner files bankruptcy, federal law generally creates an Automatic Stay under 11 U.S.C. § 362. This means:

• A scheduled foreclosure auction generally must be stopped.
• The mortgage lender generally cannot complete the foreclosure while the stay is effective.
• The substitute trustee for the lender must generally suspend foreclosure activity.
• The lender may request permission from the bankruptcy court to resume foreclosure.
• The mortgage debt and lien do not automatically disappear if bankruptcy is completed. The property must still pay the debt even if the borrower is no longer responsible.

The automatic stay usually takes effect immediately upon filing, without a separate court order. Exceptions apply, especially when the homeowner has filed bankruptcy repeatedly.

Chapter 7 versus Chapter 13 bankruptcy

Chapter 7: usually a temporary delay

For example, suppose a Virginia homeowner owes $300,000 on the mortgage, is $20,000 behind on payments, has a foreclosure sale scheduled for November 20, and files Chapter 7 bankruptcy on November 10.

The foreclosure sale generally cannot proceed on November 20 while the automatic stay remains effective. However, the lender can file a motion for Relief from the Automatic Stay. If the bankruptcy court grants the motion, the lender can resume foreclosure in accordance with applicable law.

Even after the homeowner receives a Chapter 7 discharge, the mortgage lien generally remains enforceable against the property.

Chapter 13: can provide longer-term protection

Chapter 13 is different because the homeowner may be able to:

1. Stop a scheduled foreclosure.
2. Continue making regular mortgage payments.
3. Repay overdue mortgage payments through a court-supervised plan lasting three to five years.
4. Keep the house if the required payments and other conditions are satisfied.

For homeowners with sufficient income who want to save their property, Chapter 13 can possibly provide a more effective option.

When can the lender resume foreclosure?

The mortgage lender may resume foreclosure when the bankruptcy stay no longer prevents it. Common circumstances include:

• Relief from stay: the bankruptcy judge grants the lender permission to foreclose.
• Bankruptcy dismissal: the homeowner’s case is dismissed.
• Chapter 7 case progression: the stay expires or terminates under applicable bankruptcy provisions.
• Chapter 13 payment default: the homeowner fails to comply with the repayment plan or required mortgage payments, and the lender obtains appropriate relief.

There is no guaranteed 30-, 60- or 90-day foreclosure delay from filing bankruptcy. The actual period depends on the case.

Virginia foreclosure requirements after bankruptcy

Virginia is primarily a nonjudicial deed of trust foreclosure state. A lender generally does not need a separate court judgment to foreclose under a deed of trust. The lender can sell the property at an auction, and never go to court.

Under Virginia Code § 55.1-321, a foreclosure sale involving owner-occupied residential property generally requires at least 60 days’ advance mailed notice to the homeowner after they are 120 days late.

However, if a foreclosure sale was already properly noticed and then postponed, Virginia law may permit the sale to proceed without a new notice, subject to applicable bankruptcy requirements.

Can a homeowner sell the house while in bankruptcy?

Yes, but the process depends on the type of bankruptcy, whether the property belongs to the bankruptcy estate, and whether court or trustee approval is necessary.

For a Virginia real estate broker working with homeowners facing foreclosure, important considerations include:

• Whether the bankruptcy case remains open.
• Whether the automatic stay is still effective.
• Whether a Chapter 7 trustee controls the property.
• Whether bankruptcy court approval is needed before closing.
• Whether mortgage liens and other claims can be satisfied at settlement.

A bankruptcy filing does not necessarily prevent a homeowner from listing or selling a home. However, an ordinary listing agreement or purchase contract does not replace any required bankruptcy approvals.

What if foreclosure occurs before bankruptcy is filed?

This is especially important. If a foreclosure sale has already been completed under applicable Virginia law before the bankruptcy filing, filing bankruptcy generally does not reverse that sale. The precise timing of when the sale becomes legally effective can matter, so an attorney should review any last-minute filing.

Example foreclosure timeline

1. Mortgage delinquency of 60 days will result in a default or acceleration notice.
2. Foreclosure can be initiated after 120 days late. The lender instructs a trustee to pursue foreclosure under the deed of trust. An additional 60-day notice will be provided once a foreclosure is initiated.
3. If a homeowner files bankruptcy, an automatic stay generally stops the pending foreclosure sale.
4. Bankruptcy proceeds, and during the bankruptcy process the borrower and the lender can pursue their options.

A note on cost

Legal expertise is needed to understand your options. Usually a minimum of $1,000 is required to start any bankruptcy, and some attorneys will do a consult for $300 to $500 to explain the steps and the process. The full cost of bankruptcy can be $1,000 to $3,000 if it is personal. If a business is involved, the costs are even greater.