One of the most common questions I receive from unfortunate debtors in foreclosure is "when is the best time to file bankruptcy?" I believe the best time to file is during the foreclosure process for a couple of reasons. The most important reason is if you file a Chapter 7 during foreclosure, you can still include your mortgage payment as a necessary deduction in the means test; essentially qualifying you for the Chapter 7. Since you are still "contractually obligated" to make the payment, the US Trustee CANNOT object to the expense, regardless of how high it is. If the debtor waits until after the foreclosure process, then the debtor could only use the IRS Standard for housing for the applicable household size. From my practical experience, a mortgage payment is the most important variable in the means test. It will make or break your Chapter 7 eligibility.
Yet another reason to file bankruptcy during foreclosure is the automatic stay. The automatic stay (refer to my guide on the automatic stay) will delay the foreclosure since the creditor MUST file a motion to lift the automatic stay to continue the foreclosure. Some creditors wait a couple of months before they file the motion; adding considerable time before the debtor has to be out. The third and final reason why filing during foreclosure benefits the debtor is what I call the "window period". If the debtor waits until the creditor pursues a deficiency, they might be ineligible for a Chapter 7 if they have obtained a higher paying job or valuable assets. Strategically speaking, filing a Chapter 7 during foreclosure will benefit the debtor 9 out of 10 times.