BANKRUPTCY - PROTECTING THE HOME

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Millions of Americans are turning to Bankruptcy to save their homes from Foreclosure. There are a multitude of reasons why people are facing foreclosure - some people bought homes with ARM (Adjustable Rate Mortgages) that, when entered into, seemed financially feasible, yet became unfeasible when the interest rate increased, others have lost their jobs, thereby reducing or eliminating their income, which has made them unable to remain current on their monthly mortgage payments, still others simply got in over their head and entered into a mortgage that was beyond their means. Whatever the reason may be, foreclosures are at a historically unprecedented high, which has led people to search for ways to keep their home. Home foreclosure rates are the highest in U.S. history, most analytical data suggests that an even larger percentage of American homeowners will be facing foreclosure in the next few years.

Filing for Bankruptcy is a method some people have used to keep their home, however, filing for Bankruptcy is not always the best solution to keeping one's home, whether someone will be able to keep their home through filing for Bankruptcy depends on the individual's financial position and which Bankruptcy Chapter the individual files under.

Chapter 7 Bankruptcy allows the debtor to immediately wipe out many debts, but in exchange, the debtor must give up any property they own that is not protected by state or federal exemption laws.

Chapter 13 Bankruptcy allows the debtor to keep their property by agreeing to repay all or a portion of their debts over time (3-5 years) under the supervision of the Bankruptcy Court.

Most debtors will not have a choice between filing for a Chapter 7 or Chapter 13 Bankruptcy. If the debtor does not have a steady income, the debtor must file for a Chapter 7, in contrast, if the debtors income is above a threshold amount and/or the debtor fails to pass the "means test", the debtor may be required to file for Chapter 13.

The attorneys at Hanley Law will address your specific concerns and advise you of which Bankruptcy Chapter(s) you qualify under.

Filing for Chapter 7 Bankruptcy will not ultimately prevent a Foreclosure on a mortgage or deed of trust, however, the automatic stay will put it on hold (usually for ~ 3 months) while a debtor's Bankruptcy case is pending. If a debtor wants to keep their home, the debtor must continue making their mortgage payments before, during, and after Bankruptcy. If the debtor has already missed mortgage payments, the debtor must make them up to prevent foreclosure. Note that the automatic stay is a court order that goes into effect as soon as an individual files for Bankruptcy. A foreclosure cannot happen while a debtor is in Bankruptcy (due to the Automatic Stay), unless the foreclosing party gets permission from the Bankruptcy judge by filing a Motion to Lift the Stay.

Debtors w/"Non-exempt" Equity in Home:

The job of the attorney when representing Chapter 7 Bankruptcy debtors is to exempt as much property as possible from the Bankruptcy estate, so the debtor may retain the property after filing for Bankruptcy. The duty of the Trustee in a Chapter 7 Bankruptcy is to liquidate any and all assets of the debtor, the proceeds of which are used to pay-off unsecured creditors of the debtor.

If the debtor has non-exempt equity in their home, the debtor will lose their home if they file a Chapter 7 Bankruptcy because the Trustee will sell the home and use the proceeds to pay-off the debtors unsecured creditors (assuming that the amount of equity will cover the mortgage payments, costs of sale, etc...). Non-exempt means that he value of the home is greater than the mortgage and other liens, taking into account the homestead exemption (see Homestead Law).

Mortgage Payments:

In order for a debtor to keep their home, the debtor MUST keep making their mortgage payments, and if the debtor is behind on their mortgage, the debtor MUST become current and continue making their mortgage payments once a Chapter 7 Bankruptcy is filed. Most homeowners don't have equity in their home, rather, a bank or other lender that has the deed of trust or mortgage has most of the interest. Until the mortgage is paid off, the lender has the right to foreclose if the debtor misses mortgage payments. A Chapter 7 Bankruptcy will not change this, although it may put the foreclosure on hold for a while (Automatic Stay).

Keeping Your Home Often Depends on the Homestead Exemption:

Even if a debtor remains current on their mortgage payments, a debtor may still lose their home, unless the Homestead exemption protects their equity (see Homestead Law). If a debtor files for Chapter 7 Bankruptcy and the Trustee has the house sold, the proceeds raised by the sale goes in the following order to (1) the mortgage lender to pay off the mortgage, (2) the lienholders to pay off the liens, (3) the costs associated with the sale and any taxes due, and finally, (4) the debtors unsecured creditors (assuming the Homestead exemption fails to adequately protect the debtor). Any money left over after all the costs above are paid off goes to the debtor.

The Trustee will not sell the house if there is nothing left over for the unsecured creditors. If the Trustee determines that there would be leftover proceeds from a sale of a debtors home to give some to unsecured creditors, the Trustee will sell the home at auction. Thus, the Homestead exemption often determines whether the debtor will lose their home in Bankruptcy because if the Homestead exemption protects the debtor by leaving no money for the Trustee to distribute to unsecured creditors after selling the debtor's house, then the Trustee will not sell the house, which means the debtor keeps their house. If the debtor wants to keep the home, then he/she will need to pay the non-exempt portion to the trustee. For example, a Debbie Debtor has a home worth $300,000. Debbie Debtor has a mortgage of $150,000. Debbie Debtor is married to Harry and therefore has a homestead exemption of $75,000. Debbie Debtor will have to pay the Trustee $75,000. (non-exempt).

For a more detailed discussion on Homesteads, please see Homestead Law.

Liens on Debtor's Home:

Filing for a Chapter 7 Bankruptcy won't eliminate liens on a debtors home that were created with the debtors consent (mortgage) or non-consensual liens (such as tax liens or mechanics' liens). However, if a debtor's property has sufficiently decreased in value, filing for Chapter 7 Bankruptcy can eliminate the need for the debtor to pay their second and third mortgages.

For example: Brian has a $200,000. first mortgage on his home, and a second and third mortgage of $50,000. each. Brian has no other liens encumbering his property. Brian's home is worth $350,000. Since all of the mortgages are covered by the home's value, any of the mortgage holders can foreclose on its lien if Brian defaults, in which case, Brian's house would be sold and all the mortgage holders would get paid what they were owed.

In the example above, if Brian's house decreased in value by 50% ($175,000.), and the second or third mortgage holder tried to foreclose, all of the money would go to the first mortgage holder (who would receive $25,000. less than what was owed) and the second and third mortgage holders would get nothing.

Main Way Chapter 7 Assists One in Saving Their Home:

The main way a Chapter 7 Bankruptcy helps the debtor retain their home is by discharging many other debts of the debtor (credit card debt, medical bills, lawsuit judgments, etc.), which allows the debtor to devote more money to becoming current on the mortgage due, thereby preventing foreclosure.

Practical Consideration to Avoiding Foreclosure:

The first strategy of the debtor should be to negotiate with the lender to come current on the mortgage due. Lenders have learned that high foreclosure rates cost them lots of money. Therefore, lenders are often willing to renegotiate mortgage payment terms with borrowers in default in order to avoid foreclosure. The attorneys at Hanley Law often successfully negotiate new payment terms with borrowers to allow the borrower to retain their home.

Chapter 13 Bankruptcy provides many opportunities for saving a debtors home that are unavailable to a Chapter 7 filer.

If a debtor is facing Foreclosure on their home or their car is being repossessed, and the debtor wants to keep that property, using a Chapter 13 Bankruptcy allows the debtor to make up the missed payments over time and reinstate the original agreement. This is generally not allowed in a Chapter 7 Bankruptcy where most often the debtor will ultimately lose the property.

A debtor may want to use a Chapter 13 Bankruptcy if the debtor has more than one mortgage and is facing foreclosure due to the debtors inability to make all the payments. If the home's value is less than or equal to what the debtor owes on the first mortgage, the debtor can use a Chapter 13 to change the additional mortgages into unsecured debts, which do not need to repaid in full, this lowers the amount of their monthly payments.

Not only is filing for Chapter 13 a better option (and, sometimes, only option) for debtors wishing to keep their home, many times, a Chapter 13 is also the proper Chapter to pursue when a debtor wants to retain a reliable car. If a debtor wishes to retain their reliable car, but the car is worth far less than what the debtor owes on it, the debtor can take advantage of a Chapter 13 Bankruptcy "cramdown" (for cars purchased more than 2.5 years before filing for Bankruptcy), to keep the car by repaying its replacement value in equal payments over the life of the debtors plan, rather than paying the full amount the debtor owes under the contract. This also applies to other goods that a debtor may have contracted for, such as a dishwasher, washer/dryer, television, etc.

Additional Resources

Hanley Law

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