Written by attorney Alon Joseph Nager

Refinancing using bankruptcy

When foreclosure is an imminent issue there're very few options for United States citizens to stop the foreclosure and obtain refinancing to put the consumers mortgage back into a performing status. In most states for closure laws tend to favor a lender that has not been paid pursuant to its contracts with the borrower as such at the point where a foreclosure is imminent there has been defensive defaults and/or other statutory occurrences that affirmatively disallow a consumer to begin repayment of their loan and maintain the ownership of their. In this article we will examine how the United States bankruptcy code in either chapter 7, 13 or 11 can assist the consumer in keeping their home and obtaining new financing.

Background information on bankruptcy in chapter 7, 13 and 11

Chapter 7 Bankruptcy

Under Chapter 7 of the bankruptcy code the law creates a social bargain whereby an individual can attain complete relief for his or her debt in exchange for surrendering any nonexempt assets which he or she owns. What this means is that where no assets exist an individual may obtain 100% relief from their debt including mortgages car loans credit card bills and any other debt which an individual has a legal obligation to pay. One of the confusing issues in a Chapter 7 bankruptcy is what is an asset. For the purposes of bankruptcy an asset is property, which is valuable that a bankruptcy court through a trustee could sell to pay unsecured debts of the individual, filing bankruptcy. For example a person who owns a house where the house is worth $250,000 and where the individual has a mortgage on the house of $200,000, the equity, or the difference between the value of the house and the amount owed on the mortgage, which in this case is $50,000 is an asset. Where an individual with $50,000 of equity or asset value in their home to file Chapter 7 bankruptcy in their state did not have a method of exempting that $50,000 under a homestead exemption, a bankruptcy trustee could sell the home liquidating the $50,000 of equity and use those funds to pay the individual's unsecured debts. On the other hand if there is no equity in the property say individual odor $250,000 on the house and it was only worth $250,000 then a bankruptcy trustee has no interest in selling the property because without any equity it has no asset value. For our purposes here at Chapter 7 that's filed to stop a foreclosure on a house where there is no asset value creates a situation where an individual can obtain relief from their debt and a superior bargaining position with a bank to induce the bank to refinance their home loan because the individual now will not have any continuing obligation to pay the mortgage if the bank determines not to refinance the debt and allow the individual to keep the home.

Chapter 13 Bankruptcy

In a Chapter 13 bankruptcy the bankruptcy code establishes guidelines whereby an individual can really organize their finances, begin repayment of a loan which is otherwise in default, reduce the amount of money that they have to pay on their unsecured debt, or elect to surrender property that is securing either mortgages or automobile loans. Some of the tools at the disposal of an individual filing a Chapter 13 bankruptcy include making payments on mortgage or rear urges in a plan. This means that if you have $60,000 in back to mortgage payments and you would like to keep your home you can propose to the court a plan whereby you would pay $1000 a month for 60 months or five years in repayment of the mortgage arrearages. Another powerful tool in Chapter 13 is the ability to strip off or cram down a second or third or fourth mortgage on your home in order to cram down or strip off these mortgages the value of the home must be less than the amount owed on the superior liens on the property. An example would be a property that is worth $250,000, which has a first mortgage of $252,000, a second mortgage of 120,000 and the third mortgage of 50,000. Under a cram down or strip off because the hundred and the $20,000 and $50,000 second and third liens are not secured by any of the equity in the home, because the first exceeds the value of the home, the bankruptcy code allows an individual that is file Chapter 13 to reclassify the loans on the house is unsecured debt. The reason it's so powerful is because the once the second and third mortgages are removed from the home and put into the unsecured portion of a Chapter 13 plan once the plan is paid only remaining mortgage will be the first mortgage and depending on the level of payment that's made towards the unsecured debt there may be little or no payment required to be made. Finally while in a Chapter 13 bankruptcy and making payments under an approved plan of reorganization and individual filer is building their credit score and will be able to refinance their home somewhere between 24 and 60 months after their original filing date. While this is only some of the advantages that can be obtained while in Chapter 13 these are some of the most important tools for homeowner to use to avoid foreclosure and obtain refinancing of their.

Chapter 11 Bankruptcy

In Chapter 11 of the bankruptcy code, another section under the code where a reorganization can take place all of the tools available in the Chapter 13 are available in the Chapter 11. While this chapter is not typically used for individuals there are circumstances under the code where a person seeking to file bankruptcy cannot qualify for Chapter 13. Specifically, under section 109 of the bankruptcy code subsection E. in order to file Chapter 13 an individual must have less than $336,900 in unsecured debt and or less than $1,010,650 in secured debt. If these numbers are exceeded individual only has Chapter 11 as a framework for reorganizing under the code.

Debt relief

While traditional refinancing may not be available to individual that is in default on their mortgage, the bankruptcy chapters described above will give the individual consumer a distinct advantage in bargaining with their bank to obtain some measure of relief on their debt. - If you file chapter 7 and you no longer owe or can be required to repay a deficiency after foreclosure on your mortgage and home than an individual as actual bargaining power with the bank to say for example if you agree to allow me to repay my loan at a lower interest rate at a payment that I can afford I will agree to be really obligated to the bank on the outstanding balance of the mortgage on my home. - In a Chapter 13, pain relief can be a direct result of reducing the total mortgage obligation by stripping off those liens which are otherwise not secured by the value of the home. - Also in Chapter 13, the consumer that is in default on their mortgage loan can begin repayment of normal payments and place all of the arrearage, previously unpaid balances, and a plan forcing their existing mortgage company to accept payments under the Chapter 13 bankruptcy plan. While this does not refinance the loan it does allow the consumer to begin repayment of a loan where a mortgage company will not otherwise allow repayment begins and is demanding payment in full. - In Chapter 11 the advantages are numerous. While the discussion of the advantages and disadvantages of Chapter 11 could consume pages and pages of this article it will suffice to say that the advantages offered the consumer by filing Chapter 11 where necessary because of the debt levels give the consumer the ability to negotiate with the bank if for no other reason because the expense of a Chapter 11 proceeding for the bank will not have 10 times give pause to the bank that might otherwise not be inclined to negotiate.

It's also noteworthy to point out that certain government programs for instance HOPE, have programs whereby individuals that qualify under all the criteria and institutions that agree with the HOPE programs outlines for modifications, can modify their home loans, essentially refinancing those loans, to more favorable terms which will allow the consumers to keep their home.


While traditionally consumers that are in default on their mortgage have little to no options under state law to stop a foreclosure and maintain the ownership of their home, this article has outlined how the bankruptcy code can effectively assist consumers to obtain effective refinancing through modification, cram down and renegotiation. The results of the use of these tools are more often than not the reduction of the amount of money the consumer has to pay in order to maintain their home. While other methods of refinance or modification outside of bankruptcy may promise results through programmatic application to institutions for help, the rights afforded individuals in bankruptcy offer absolute entitlement to relief. It is the entitlement or certainty of the bankruptcy code that makes refinance through bankruptcy a critical Avenue to successfully continuing ownership of a home.

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