On Real Estate: Using bankruptcy to stop foreclosure

July 23, 2009

Most people facing foreclosure aren’t in the position to satisfy delinquent mortgage accounts and save their homes. Walking away and starting over for once comfortable and financially viable families is common today.
While some lenders have lightened up on aggressive foreclosure practices in favor of restructuring stressed loans, others are still active. For borrowers against the wall and unable to fight off the foreclosure wolf, filing bankruptcy can offer a reprieve and time to pull themselves out of the red.
Personal bankruptcy
Generally speaking, a bankruptcy is a request for the court to forgive or restructure a variety of personal debts. Personal bankruptcies are filed under Chapter 7 or Chapter 13 of the Federal Rules of Bankruptcy Code. These laws are tailored to serve people with different sets of circumstances. They are also specifically defined. While both Chapter 7 and Chapter 13 result in protection from the court, they differ in several areas. In regard to foreclosure, both types of filings are treated relatively the same during the initial stages of the process.
It is commonly thought that a Chapter 7 bankruptcy automatically means a court will forgive the debts of those seeking protection. The process isn’t that simple. In what could be a series of hearings, debtors are required to disclose assets that could be monetized to pay creditors. This includes equity in real estate. If a person has no non-exempt assets to be liquidated, the court decides whether to discharge debts included in a petition for protection. A Chapter 7 bankruptcy is also known as a “liquidation” plan.
Debtors filing for bankruptcy under Chapter 13 are treated differently. Those seeking protection proposes a creditor repayment plan to the court. The court decides if this plan is acceptable and a three- to five-year repayment plan is commenced. Bankruptcies falling under the Chapter 13 law are sometimes called debt “reorganization” or “repayment” plans.
Treatment of foreclosure
In the beginning stages of a Chapter 7 and Chapter 13 bankruptcy, the court usually issues an automatic “stay” in all collection activities. During this period, creditors, by law, must cease their attempts to collect unpaid debts until the court discharges a bankruptcy or the stay is lifted. It is possible for creditors to file motions to have any stays lifted before the court decides to do so.
The purpose of a stay is to give the debtor time to gather pertinent financial information they wish to include in their bankruptcy petition. It’s often the perfect time for a homeowner to decide whether to keep their home.
Misconceptions
Although an automatic stay is usually issued in both Chapter 7 or Chapter 13 bankruptcies and will stall a foreclosure, it does not guarantee a debtor will keep his or her home. With Chapter 7 bankruptcies, creditors, especially home lenders, are usually able to continue collecting unpaid debts after stays are lifted and bankruptcies are discharged. This means a foreclosure may proceed, as initiated, after a bankruptcy is complete. In Chapter 13 bankruptcies, foreclosures are usually stopped if the debtor agrees to make up missed payments as part of the repayment plan and make regular payments on time thereafter. It is also common for automatic stays to remain in place for the life of a Chapter 13 repayment plan, making it a viable option for stopping foreclosure.
Stopping foreclosure by filing bankruptcy could contain variables that, in some cases, make the process a bit more complicated than desired. An experienced bankruptcy attorney should be consulted.

from the July 22-28, 2009, issue

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