BANKRUPTCY

Bankruptcy may be a solution for people that have unsustainable debt. Please contact us for a free consultation. Many homeowners behind in their mortgage payments and are unable to catch up. In the event of a foreclosure action against a borrower the filing of a Chapter 7, 13 or 11 bankruptcy petition initiates an automatic “stay” which will stop the foreclosure sale.

CHAPTER 7: A Chapter 7 bankruptcy initiates an automatic stay and begins the process of the liquidation of assets. Certain assets are exempt from bankruptcy liquidation including a certain amount of cash and equity in the home and the car. However, the foreclosure trustee may file a motion for relief of stay in order to continue the foreclosure process. The bankruptcy judge will decide whether the stay will be lifted which will allow the foreclosure to proceed.

CHAPTER 13: A Chapter 13 bankruptcy is not liquidation, it is a re-organization. It is much more likely that the “stay” will be allowed to remain in effect in this type of bankruptcy. The bankrupt borrower must file a “plan” which, if approved by the court, will allow the borrower to continue making the regularly scheduled loan payments but must also make an additional payment to repay the back unpaid loan payments (the amount in arrears) over a 3 to 5 year period. If the bankrupt is able to make both of these loan payments, he will be able to keep his home. To qualify for a Chapter 13 bankruptcy the maximum amount of secured debt allowed is currently $1,149,525. The maximum amount of unsecured debt allowed is currently $383,175. The unsecured creditors may also receive some amount of monthly payments depending upon the amount of income available after the bankrupt makes the two monthly loan payments and after the court approved personal expenses are paid.

Another advantage to a Chapter 13 bankruptcy is that if a second trust deed on the property has no equity (the property is not worth more than the current amount of the first trust deed) then the second trust deed may be reclassified as unsecured debt and “stripped” which causes it to be removed as secured debt and discharged by the court.

Property “exempt” from creditors cannot be seized to repay a debt or taken and sold by the bankruptcy trustee in a Chapter 7 case. If you file for a chapter 13, the trustee won’t take your nonexempt property, but your repayment plan must provide that creditors will be paid at least the total value of that property during the repayment according to the plan. Exempt property includes part of equity in a car, reasonably necessary clothing, personal effects, life insurance, part of the equity in a residence known as a homestead, pensions, tools of trade or profession to a certain value, and unpaid earned wages. Certain non-exempt tax obligations, such as student loans or other debts that cannot be discharged in Chapter 7 may be paid off over time in a Chapter 13.

CHAPTER 11: If a borrower does not qualify for a Chapter 13 bankruptcy because they have too much secured or unsecured debt they may instead file or transfer to a Chapter 11 bankruptcy. This type of bankruptcy is much more expensive and complicated than a Chapter 13 but is not limited to a maximum amount of secured or unsecured debt. The bankrupt must also obtain the approval of a secured and an unsecured creditor for their Chapter 11 plan to be approved by the court which is often a major challenge.

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