Bankruptcy

You may be aware that filing a bankruptcy can prevent a foreclosure.  Bankruptcy law is an immense area of law that contains its own rules, its own code, and its own court system.  A thorough explanation of bankruptcy law relating to foreclosures could take up an entire treatise, much less one page of a website.  Therefore, while this page will explain some of the eligibility requirements and the general process of a bankruptcy proceeding, this should be used as general guidance and certainly not as legal advice. 

Each state has its own rules and its own exemptions which could affect your willingness and ability to file a bankruptcy to prevent a foreclosure.  As such, if after reading this page, you believe that a bankruptcy may be something you would like to further consider to prevent a foreclosure, please seek out a bankruptcy attorney licensed in your state for specific guidance and advice.

There are several types of bankruptcy, but generally speaking, a Chapter 7 bankruptcy and a Chapter 13 bankruptcy apply to a majority of individuals (if you have a significantly high debt load, you may not qualify for a Chapter 13 and would have to file a Chapter 11, but again, please see a licensed attorney in your state for more information). 

A Chapter 7 bankruptcy is a “liquidation” bankruptcy, in which a bankruptcy trustee will liquidate “non-exempt” assets and use the funds to pay towards your creditors.  It is usually a 3-4 month process at the end of which your unsecured debts would be discharged.  It does not contain a mechanism to bring your mortgage arrears current, and is therefore not usually an option for people attempting to save their homes.  As such, we will focus primarily on a Chapter 13 bankruptcy.

A Chapter 13 Bankruptcy provides for a restructuring or reorganization of debts for a person with regular income. This particular chapter of bankruptcy allows you to take care of all or a percentage of your debt over a period of 3-5 years. At the conclusion of this payment period, any unsecured debt which has not been paid because of the bankruptcy is discharged. This means that you are no longer legally liable for any discharged debt. In contrast with other sorts of bankruptcy, a Chapter 13 Bankruptcy has numerous pluses and minuses. One key reason for filing a Chapter 13 Bankruptcy is to prevent a foreclosure. Completing a Chapter 13 helps you save your home.In a Chapter 13 Bankruptcy (in the most straightforward form), your monthly earnings and monthly obligations will be reviewed to see precisely how much you have left at the end of each month. This amount is going to be paid monthly to a bankruptcy trustee, who will make these payments to your creditors. The amount of money each creditor will get depends on your case. Certain creditors take priority over various other creditors. As an example, if you are delinquent on your house payments, the bank for your home loan would get paid ahead of the credit card companies.A Chapter 13 Bankruptcy starts with the filing of a bankruptcy petition along with forms outlining your earnings, expenses, property/assets and debts. Upon filing the case, an “automatic stay” is put over you and your property. This is an umbrella of protection that prevents your lenders from taking any action to collect a debt. This automatic stay will stop a foreclosure and it should stop collection calls and letters. Included within this paperwork is a Chapter 13 bankruptcy plan, that outlines the amount offered to be paid each month to the bankruptcy trustee.

Around a month after the filing of the bankruptcy, a “creditor’s meeting” is going to be held. In this meeting both you and your lawyer will get together with the bankruptcy trustee. One of the main responsibilities of a bankruptcy trustee in a Chapter 13 Bankruptcy is to protect your creditors’ interest to make sure that you are paying an acceptable amount to your creditors. Any installments you are delinquent to priority or secured creditors (such as the mortgage company) is required to be paid in full throughout the plan. Any unsecured creditors (including credit cards) might be paid a percentage of what is owed to them depending on the plan payment along with the balance due to those creditors.

As an example, suppose that you owe $30,000 in unsecured credit card debt. Also consider that your monthly pay and expenses provide that you could pay $300 per month throughout the bankruptcy plan for 5 years. Over 60 months, $18,000 should be paid through this theoretical plan. The other $12,000 due on the unsecured debt would be discharged.

As a different example, imagine you are in arrears on your mortgage payments in the amount of $25,000 together with $10,000 in unsecured credit card debt. Your income and expenses provide that you could pay $250 every month within the plan for 60 months. This would have only $15,000 paid by the plan. This plan is not viable given that the arrearage on the mortgage has not been paid in full through the plan. The plan payment in this circumstance must be at minimum $416.67 ($25,000 divided by 60 months) to ensure the secured creditor is paid completely on the arrearage.

(Remember that these cases are highly simplistic and will not take all circumstances into account, but are offered to give you a broad introduction to the Chapter 13 plan payment process).

Inside 45 days of the creditor’s meeting, the Court is going to schedule a confirmation hearing. This is where the Judge establishes if the plan you have recommended is reasonable, and whether to confirm the plan. Any persisting objections to your plan from the trustee or by a creditor will be heard by the Court during the confirmation hearing. If the plan is confirmed, you would make your plan installments throughout the course of the plan. If the plan is not confirmed, you ought to have the chance to file an altered plan to correct any concerns which kept the plan from being confirmed by the Judge. Failure to make plan payments will result in the Trustee filing a motion to dismiss your case. If a case is dismissed, your creditors can proceed with collection actions, including foreclosure.

Upon finishing the plan payments, you are likely to be given a discharge. A discharge releases a debtor from all debts either provided for with the plan or debts which had been disallowed for any reason. Some other debts (such as your mortgage) usually are not discharged. The creditors for the debts which are discharged may never again take any action to collect the debt.

Whenever you have made all payments outstanding under your plan and you have made all your post-petition home loan payments (payments scheduled after you filed for bankruptcy), then you should be up to date on your mortgage loan moving forward.

This is the broad process for a Chapter 13 Bankruptcy. This process is definitely not appropriate in all scenarios. Again, this is an elementary review of the process of a Chapter 13 bankruptcy. It may not apply to your distinct circumstance. Please visit a licensed bankruptcy lawyer in your state should you want specific guidance on a bankruptcy as it relates to your circumstances.