Strategic Foreclosure Delay: Using Bankruptcy to Secure a Successful Home Sale

The foreclosure process moves fast. If selling your home is the best path forward, you need a powerful legal tool to stop the auction clock and secure your closing. Chapter 7 and Chapter 13 bankruptcy provide that tool.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Updated on October 11, 2025.

Listen: The Professor’s Audio Briefing.

Key Takeaways for Homeowners:

• The Automatic Stay is your “Pause Button.” Filing either Chapter 7 or Chapter 13 immediately halts the foreclosure process, providing critical time to organize a sale.
• Chapter 7 for a Quick Sale: If a buyer is already lined up and you need a few weeks to close, a Chapter 7 filing can secure that window.
• Chapter 13 for Maximum Time: If you need several months, Chapter 13 is the better option, as the automatic stay remains in effect as long as you make plan payments.
• Discharge Your Debt: Bankruptcy can eliminate any resulting deficiency judgment, ensuring you walk away from the property debt-free.

The Race Against the Foreclosure Clock

Once a mortgage is in default, the lender begins the legal process to reclaim and sell the property. This process, known as foreclosure, culminates in an auction or sale date. For many homeowners, a successful private sale is the most financially advantageous outcome because it usually results in a higher sales price than a bank-run auction.

However, the speed of the foreclosure timeline can make closing a sale impossible. This is where bankruptcy becomes an essential strategic tool.

How the Automatic Stay Provides the Time You Need

The single most powerful feature of both Chapter 7 and Chapter 13 bankruptcy is the Automatic Stay (11 U.S.C. § 362).

Effect: This immediately cancels the scheduled foreclosure sale and forces the lender to stop all proceedings until the stay is lifted or the case is dismissed. The legal pause can last anywhere from a few weeks to several months, giving you the necessary control over the sale timeline.

Definition: The moment a bankruptcy petition is filed, the automatic stay is instantly imposed by federal law. It acts as an injunction, stopping almost all collection activity and civil litigation against the debtor, including a pending foreclosure action. No specific action, such as filing a motion, is required for the automatic stay to take effect. It does so “automatically” by the filing of the bankruptcy petition.

Chapter 7 vs. Chapter 13: Which is Right for a Sale?

The choice between Chapter 7 (Liquidation) and Chapter 13 (Reorganization) depends entirely on how much time you need.

Bankruptcy Type	Purpose for Sale	Time Gained	How it Works
Chapter 7	Buy Time for a Pre-Arranged Closing	3-6 Weeks	The stay is imposed immediately. The goal is to close the sale before the lender can successfully file a Motion for Relief from the Automatic Stay (which is inevitable in Chapter 7). You then dismiss the case upon closing, or the proceeds pay the mortgage in full within the case.
Chapter 13	Buy Time for a Full Sale Process	3-6+ Months	The stay is imposed and remains in place as long as the proposed Chapter 13 repayment plan is successful. This buys significantly more time to list the home, find a buyer, and move through the full closing process. The sale is often approved by a motion to the Bankruptcy Court.

Beyond the Sale: Eliminating the Deficiency Judgment

A crucial benefit of filing for bankruptcy when facing foreclosure is the ability to eliminate the risk of a deficiency judgment.

A deficiency occurs when the home is sold (either through foreclosure or a short sale) for less than the outstanding mortgage balance. The difference is the “deficiency.” The lender can then sue you for this amount and obtain a judgment.

Strategic Advantage: By filing for bankruptcy before or immediately after the foreclosure/sale (depending on the state), any remaining debt (the deficiency) is treated as an unsecured debt and is discharged (legally wiped out) along with your other dischargeable debts.

This ensures you walk away from the property with a complete financial fresh start, free from any remaining mortgage liability.

Alternative Paths: When Selling Isn’t the Goal

While the focus here is on selling your home, there are other alternatives to foreclosure to consider depending on your situation.

Deed in Lieu of Foreclosure: You voluntarily sign the deed over to the lender. This is often cleaner than a foreclosure, but it does not automatically eliminate a deficiency balance unless expressly stated in the agreement. The lender usually has requirements, such as the property needing to be clean and well-maintained.

Loan Modification/Forbearance: An attempt to negotiate a change to the loan terms to make payments affordable. This is generally sought before the final stages of foreclosure. Depending on the lender, they may be willing to add the arrears (months you are behind) to the end of the mortgage.

For example, if you have 60 months left on your mortgage, but you are five months behind, they add the five months to the “backend” of the mortgage, meaning you now have 65 months left.

Chapter 13 to Save the Home: If you wish to keep the property, Chapter 13 allows you to cure the mortgage arrearage (past-due payments) over the course of a 3-to-5-year repayment plan while making your ongoing monthly mortgage payments. For a deeper understanding of Chapter 13, please see this prior blog post.

A Critical Note on Tax Liability (1099-C)

If your lender agrees to a short sale, Deed in Lieu, or simply forgives any portion of the mortgage, they may issue a Form 1099-C (Cancellation of Debt) to you and the IRS. This canceled debt is typically treated as taxable income.

Expert Recommendation: Immediately consult with an experienced Certified Public Accountant (CPA) or tax attorney. In many cases, if you were insolvent (liabilities exceeded assets) at the time of the cancellation, or if the debt was discharged in bankruptcy, you may be able to exclude this amount from your taxable income. Do not attempt to resolve a 1099-C without professional tax advice.

Conclusion: Act Fast and Seek Qualified Counsel

Using the automatic stay to facilitate the sale of a home is a complex legal maneuver. The rules surrounding motions for relief, case dismissals, and handling of sale proceeds are strategic and require an experienced attorney.

As an expert in consumer bankruptcy law, my recommendation is to immediately hire an experienced bankruptcy attorney once foreclosure papers have been served. Your goal should be to leverage the power of federal bankruptcy law to secure the best possible financial outcome.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link. You can also listen to my podcast on Spotify.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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Please note that the information on this site does not constitute legal advice and should be considered for informational purposes only.

Update Timeline:

• Updated on December 31, 2024.
• Updated on September 4, 2025.