If a foreclosure is imminent, filing for bankruptcy will stop the sale and put everything on hold. A debtor is barred from pursuing collection outside of the bankruptcy process once you have filed. If you need additional time to work out a solution with your lender, but the foreclosure is already set, filing for bankruptcy may give you the time to you need, and provide the protection in case you cannot reach an agreement on your own.
Bankruptcy may allow you to stay in your house and reduce or discharge many of your debts, but this comes at a cost. Your bankruptcy will appear on your credit report for 10 years, reducing your creditworthiness. You may not be approved for a new car loan, home loan, or personal loan during this time, or you will be approved with significantly higher costs. However, the removal of your debt through a bankruptcy may be the only way to improve your credit standing in the long term.
Bankruptcy can be either voluntary or involuntary, meaning that your creditors can force you into bankruptcy. However, with individuals involuntary bankruptcy is quite rare. The purpose of bankruptcy laws is to give a debtor a fresh start, and repay creditors according to the means of the debtor. Bankruptcy can be filed through a joint petition for married people or individually regardless of marital status. In bankruptcy proceedings priorities are established depending on the type of debt incurred, with secured debts receiving a higher priority than unsecured debts.
There are 94 federal judicial districts in the United States that handle bankruptcy cases. Bankruptcies are not handled in your state court system. It is advisable to use an experienced bankruptcy attorney to assist you through this process. Bankruptcy is governed by federal laws under Title 11 of the United States Code.
The Bankruptcy Code specifies six basic types of bankruptcy. Most individuals file under the three main chapters of the bankruptcy code, Chapter 7, Chapter 13 and Chapter 11, which applies to businesses. Chapter 12 applies to family farmers and fishermen, Chapter 9 is for municipalities and Chapter 15 is for cross-border cases, in which a debtor is subject to the laws of the United States and other foreign countries. While all types will provide relief from creditors, it is important to understand which type applies to your situation. The costs and remedies are different for each type and depending on your financial situation, the value of your assets and if you are an individual or a business facing foreclosure, it is important to understand your options.
Chapter 7: Chapter 7 Bankruptcy is often referred to as liquidation, meaning that your property is sold to repay your debts. Your debtors will settle or discharge your debts often for much less than owed. Once you have filed a bankruptcy action, an automatic stay begins on any collection efforts. Your home could be exempt from the liquidation. The home-stead exemption is based on state law and the value of your property. Not all liens are discharged in a Chapter 7 either, and your mortgage or car loan may be excluded. If you do not have sufficient asset to warrant liquidation, your case is considered a “no-asset case” and many of your debts will be discharged without a repayment.
If your goal is to stay in your home and you can continue to make your regular mortgage payment, a Chapter 7 may not be appropriate. If your monthly income is greater than the state median, a bankruptcy judge will review your financial situation through what is called a “means test”. If you have disposable income available to repay some of your debts, your debts will likely not be discharged. Your filing under Chapter 7 could be considered abusive and your case will be converted to a Chapter 13 or dismissed.
After filing a Chapter 7 petition, a trustee is appointed to administer the case and oversee the liquidation. It is important to provide the trustee with all of the available information being requested, such as tax returns. The trustee will schedule a meeting of creditors, where you will be put under oath and asked questions about your financial situation and your assets. It is imperative that you answer all questions honestly, as making a fraudulent statement will create additional problems. At this meeting you will be asked questions by the trustee to insure that you understand the consequences of a discharge of debts through a bankruptcy. If you have assets in excess of the exempt values, the trustee will also oversee the liquidation. Your unsecured creditors must file a claim to receive payment from the proceeds of the liquidation.
Some debts are exempt from being discharged through a Chapter 7 bankruptcy, including child-support and alimony, most taxes and student loans, and any fines or restitution imposed by criminal courts. Debts arising from dissolution of marriage property settlement or from a negligent act leading to a judgment are not dischargeable under Chapter 7.
The filing fee for a Chapter 7 Bankruptcy is $299. With the court’s approval the filing fee may be paid in installments or be waived completely.
Chapter 13: Chapter 13 is often used to stop a foreclosure if you want to remain in your home. Unlike Chapter 7, there is no liquidation of your assets; therefore, Chapter 13 is often preferable to Chapter 7 because you can keep your property regardless of the value. Under Chapter 13, you may keep your home and make up your delinquent mortgage payments overtime. However, it is required that you make your regular mortgage payments each month after your Chapter 13 filing or you may still risk loosing your home.
Chapter 13 is appropriate if you wish to reorganize your debt and have a regular source of income, or if your income exceeded the thresholds allowed under the “means test” in Chapter 7. Under Chapter 13, you repay your debt over 3 to 5 years. The term of your repayment is determined based on your income level but is not to exceed 5 years. During this time of repayment, your creditors are not allowed to pursue collection claims.
As in Chapter 7, a trustee is appointed to your case and will schedule a meeting of creditors. During this meeting you will be sworn in and asked questions regarding your financial situation. Failure to provide truthful answers can lead to a claim of fraud. During or shortly thereafter the meeting of creditors, a repayment plan will be created. Your debt is not discharged as in Chapter 7, and you must complete the repayment plan to obtain the eventual discharge of the debts.
In Chapter 13, you will meet with the federal bankruptcy judge at your confirmation hearing where your payment plan will be approved or disapproved. Your creditors can object to the repayment plan at your hearing and ask that you repay them through liquidation under Chapter 7. The judge can approve your plan, request a modification to the plan, convert it to a Chapter 7 or dismiss your case.
Once your repayment plan is approved, it acts like a consolidation loan with payments being made to the trustee, who disburse funds as approved to your creditors. You must make your payments to the trustee directly or through a payroll deduction. During the repayment you cannot incur new debt without the approval of the trustee as it could prevent you from complying with the repayment plan. If you fail to make your payments as scheduled to the trustee, your case can be converted to a Chapter 7 for liquidation or be dismissed. Failure to pay child-support, alimony or taxes during the repayment period could also lead to a Chapter 7 conversion or dismissal.
After successful completion of the repayment plan, your debts can be discharged and creditors can not pursue collection. You will want to discuss the discharging of your debts with an attorney before requesting a discharge.
While many of same debts are exempt from protection under Chapter 13, like Chapter 7, such as alimony, child-support, taxes, restitution and educational loans, Chapter 13 does allows for the discharging of debts incurred through a property settlement in a divorce proceeding and for debts resulting from a judgment for property loss due to negligent actions.
If you are facing foreclosure because of past due amounts on your mortgage that you can not negotiate for repayment with your lender, but currently have the ability to make your regular monthly payments, a Chapter 13 is worth considering. The filing fee for a Chapter 13 Bankruptcy is $274, which can be paid in four installments with the approval of the court.
Chapter 11: If you are a sole proprietor or a business owner a Chapter 11 bankruptcy may be appropriate. Generally, Chapter 11 acts much like a Chapter 13, in that your debts are reorganized rather than liquidated. For business owners, liquidation would not be desirable, as the value of your business as a working entity is greater than the liquidation of the property. Under Chapter 11 you would be able to continue operating your business, while your creditors are precluded from collecting on your debts. Individuals may file under Chapter 11; however, it is more complicated and expensive than a Chapter 13 or 7, while providing no additional relief. The filing fee for Chapter 11 is $1,039, which can be paid in four installments pending the approval of the court.
Chapter 12: Chapter 12 applies to family farmers or fisherman only, who wish to reorganize their debt. Like Chapter 13, debt can be repaid over a 3 to 5 year period. While family farming or fishing operations could pursue relief under Chapter 11, because of the small nature of their business and the seasonal nature of their income, the government enacted a simpler code that acts similarly to Chapter 13 for individuals. The filing fee for Chapter 12 is $239, and may be approved by the court to be paid in installments.
Chapter 9 and Chapter 15: Chapter 9 applies only to municipalities, not to individuals or businesses and is not applicable in the event of a foreclosure. Chapter 15 applies to cross-border issues, in which the laws of the United States and the laws of another country apply. It is an ancillary filing that cooperates with the insolvency proceedings in another country, but can attach to property held in the United States .
Filing a bankruptcy proceeding is complicated but it can sometimes be your only way to re-establish yourself financially. In 2005, the bankruptcy laws were modified and now will require that you meet with an approved financial, credit or debt councilor before filing or discharging your debts. Meeting with a councilor before filing will help you understand if bankruptcy is your best option or if other options could be beneficial. While discharging your debts may sound appealing, it is important to understand that your credit rating will be changed and your ability to obtain additional loans will be compromised. The United States Trustee Program maintains a list of approved credit counseling and debtor education providers on their website.
When facing a foreclosure, the most important thing you can do to save your home or your creditworthiness is to communicate with your lender as soon as possible. Foreclosure is not something that will just go away. You need to be proactive to protect your rights and your property.