How Foreclosure Works and What You Can Do About It

Written by Ben Tejes
Updated Nov 13th, 2023
The information provided in this article does not, and is not intended to, constitute legal or financial advice; instead, all information, content, and materials available in this article are for general informational purposes only. 

You may be researching how foreclosure and COVID-19 works or what happens when the foreclosure moratorium ends. Wherever you are, the purpose of this article is to provide you with all of the information and answer all of your questions in regards to bankruptcy and foreclosure. We will cover both Chapter 7 and Chapter 13 foreclosure scenarios. Here’s the guide we will be using:

  • What is a Foreclosure?
  • Judicial vs. Non-Judicial Foreclosures
  • Bankruptcy and Foreclosure
  • Alternatives to Foreclosure
Many families face losing their homes each day because they are behind on their mortgage payments. A small financial crisis can cause you to miss a few mortgage payments. Once you are two or three payments behind on your mortgage, it may be impossible to catch up. Many mortgage companies demand full payment of the past due to balance or they will foreclose on the mortgage. Let’s discuss bankruptcy and foreclosure in more detail and ways to stop foreclosure. Through this, you can determine if bankruptcy is the right choice for you. 

3 Questions to Consider

You have options to stop a foreclosure auction immediately, but should you? Most of this article will cover nuances related to bankruptcy and foreclosure to provide the information you need to make the most informed decision. You should consider these 3 important questions before we start, so you can understand your options and estimated payments for the options. The calculator below helps answer these questions.
  1. What is your estimated Chapter 13 plan payment? Is it affordable when compared to current monthly obligations?
  2. Would you qualify for a Chapter 7 bankruptcy?
  3. What are your alternatives to a foreclosure bankruptcy?

What is a Foreclosure?

A foreclosure is the legal proceeding a bank or mortgage company uses to seize real estate if a borrower (the owner of the property) fails to pay mortgage payments. When you take out a loan to purchase your home, you sign a loan agreement and a mortgage. The loan agreement creates the debt that you owe to the lender. The mortgage is the legal document that places a lien on your home to secure the debt. 

Each state has foreclosure laws that lenders must follow. In most cases, lenders are required to send a notice in writing to the homeowner. The notice states:

  • The principal balance owed on the loan;
  • The total past-due mortgage payments (mortgage arrearage);
  • The total of late fees and other costs owed to the lender; and,
  • The deadline for catching up on the outstanding payments.

Understanding the Foreclosure Auction

A foreclosure action by the lender is a process of assuming ownership of the home or selling the home at a foreclosure auction to satisfy the debt. The terms of the loan agreement and the mortgage outline how to repay the debt according to the terms of the promissory note. For example, if you fail to make the mortgage payments or default on any other terms of the loan, you acknowledge that the home will be used to repay the debt.

If you do not pay the mortgage arrearage or the full balance owed on the account before the deadline, the lender may proceed with a foreclosure action. Most lenders do not begin a foreclosure action until several months after your first missed payment. The lender may call and write letters to get you to catch up on your mortgage payments.

However, at some point, the lender turns the account over to a foreclosure attorney to handle the foreclosure. It could take several months for the foreclosure attorney to begin the action. It depends on the attorney, the lender, and other factors that are not within your control.

What is Important to Consider About Foreclosures

The lender could technically begin the foreclosure process the day after the missed payment. Many people mistakingly assume that a lender must wait until the grace period for a missed payment expires, or that a lender must wait a certain number of days or months before beginning a foreclosure.

If you read your mortgage documents, you will note that you are in default the day after your payment is due. For payments due on the first of the month, you are in default on the second day of the month. You may have until the 15th to pay the payment without a late fee, but this is simply a grace period for the late fee. You are in default if you do not make the payment on or before the date it is due.

Therefore, you should never assume that a lender will not begin foreclosure proceedings the very next month. Generally, lenders do not start foreclosures that quickly because they want your money, not your home. However, they do have the legal right to start the foreclosure at any time after your first missed payment.

Foreclosure Process

There are two types of foreclosures.

Judicial Foreclosures 

In some states, the lender must file a foreclosure lawsuit (judicial foreclosure) to gain court permission to sell the home. You are served with the foreclosure lawsuit and have a specific number of days to respond to the lawsuit. If you do not respond to the lawsuit, the court enters a default judgment and orders your home to be sold at the next foreclosure sale.

A judicial foreclosure involves filing a summons and complaint with the court asking that the court order the home to be sold at a foreclosure auction. You must be served with a copy of the foreclosure complaint. In most states, you have 20 to 30 days to respond to the complaint.

The court schedules a hearing. At the hearing, the foreclosure attorney for the lender presents evidence of the debt to the court. In most cases, an employee of the mortgage company testifies that you have missed your mortgage payments and how much you owe.

You have the right to hire an attorney to defend the foreclosure action. Even if you are behind on your payments, if the lender broke the law, you could have a valid defense. You may want to talk to a lawyer before your time to respond to the complaint runs out to discuss your legal rights and your options. 

At the hearing, you present evidence proving that you paid the mortgage payments. However, if you are behind on the mortgage payments or you did not respond to the complaint before the deadline set by the court, you may not have a valid defense to the foreclosure action. 

If the court finds that your mortgage payments are past due and you have no legal defense, the judge will likely grant the foreclosure and schedule your home to be sold at the next foreclosure sale.

Non-Judicial Foreclosures

Some states allow for non-judicial foreclosures. These foreclosures are generally handled by the Clerk of Court’s Office or the Sheriff’s Office in the county where the property is located. The mortgage lender must send you a notice of default and give you a specific number of days to cure the default (catch up on the missed payments).  Generally, the lender must file and serve notice of the intent to foreclose the mortgage because of non-payment. The time frames and rules for non-judicial foreclosures vary by state. 

If you fail to make up the missed payments, the property may be sold by the sheriff or the clerk of court at a designated time and place. In some states, the mortgage company may be permitted to list the home for sale after the default date passes without payment. 

How Long Does It Take for a Bank to Seize my Home?

Most lenders do not want your home. They want your mortgage payments. For that reason, many banks do not begin foreclosure proceedings until you are several months behind on your mortgage payments. 

However, it is important to remember that a bank could begin legal action to seize your home as soon as the first payment is late. Therefore, it is up to the lender when it begins foreclosure proceedings. The amount of time it takes to complete the foreclosure depends on state foreclosure laws.

In most cases, a mortgage company calls you to ask about a past due payment. If you don’t respond to the phone calls, the mortgage company sends a letter. If you still don’t pay the past due mortgage payments, the lender may send increasingly threatening letters. At some point, an attorney may send a letter stating that this is the last notice to pay the mortgage arrears (past due mortgage payments), or the lender will begin foreclosure proceedings. 

Once you retain a foreclosure attorney, you may owe additional fees to catch up on the mortgage payments. If you file a foreclosure action, you will have to pay all associated costs to stop your home from being sold at a foreclosure auction. Typical costs include attorneys’ fees, appraisal fees, and costs of the foreclosure lawsuit.

Bankruptcy and Foreclosure

When you file for bankruptcy relief, the mortgage lender cannot proceed with a foreclosure action without approval from the bankruptcy court. The Automatic Stay provisions of the Bankruptcy Code protect you from creditor actions. The intent of the automatic stay is to give you time to either reorganize your debts in Chapter 13 or obtain debt relief through Chapter 7.

What happens to your home after you file for bankruptcy depends on several factors. The overriding factor that determines what happens is the chapter of bankruptcy you choose to file. Let's dig into the Chapter 7 foreclosure and the Chapter 13 foreclosure guides.

Foreclosure Alternatives  

You may have reasonable foreclosure alternatives to bankruptcy to save your home from foreclosure. While it is easy to get behind on your mortgage payments, it can be very difficult to catch up on past due mortgage payments. Most people do not have thousands of dollars to give to their mortgage company. 
Bankruptcy is one way of stopping foreclosure, but a non-bankruptcy alternative to foreclosure might work too.

Here are common alternatives to foreclosure:
  1. Refinance Your Mortgage
  2. Loan Modification
  3. Forbearance Agreements
  4. Chapter 13 bankruptcy can stop foreclosure
  5. Deed in Lieu of Foreclosure

Should You File Bankruptcy to Stop Foreclosure?

Each situation is different, so you are the best person to make the decision of what you should do. Feel free to reach out to us if you have any questions related to this article or related to foreclosure. Often the best solution may be to have a free bankruptcy consultation with a local bankruptcy attorney who specializes in Chapter 13s, and we can definitely help you find one in our bankruptcy attorney network.

You can also take one of our debt relief calculators such as the Chapter 13 calculator above to help you compare your debt relief options.