Bankruptcy & Foreclosure

Many bankruptcy lawyers preach the gospel of filing bankruptcy to any home owner facing foreclosure against his or her house. Filing bankruptcy, many explain, will stop foreclosure on the home and “save your credit” in the process.

The reality of this situation is that bankruptcy is considered as a valid option. Basically, filing for bankruptcy, whether it is a Chapter 7 or a Chapter 13 bankruptcy, provides a homeowner with an opportunity to save their home and is used when other options, such as borrowing the money to make up the arrears, don’t exist or need the time to fund a loan.

Bankruptcy is a federal court action designed for consumers to assist them in repaying their debts (a reorganization bankruptcy) or eliminating the debts all together (a liquidation bankruptcy).

Reorganization bankruptcies are commonly referred to as Chapter 13 bankruptcies. Filing for a Chapter 13 bankruptcy immediately stops all creditors from taking further action against your home and vehicles, if any. With the assistance of a court appointed trustee, the court establishes a repayment plan to pay back all the mortgage arrears and a portion of the unsecured creditors (credit cards, etc). This plan is based upon all non-exempt assets owned by the individual(s), the amount of non-exempt income, and the person’s overall ability to pay back the debt. The repayment period generally last between three to five years.

Liquidation bankruptcies are commonly referred to as Chapter 7 bankruptcies. Like a Chapter 13, a Chapter 7 bankruptcy immediately stops all actions taken by creditors to collect on debts owed. Unlike Chapter 13 bankruptcy, a Chapter 7 liquidates the debts owed and wipes the slate clean. However, an individual will have to turn over all non-exempt property (or its cash equivalent) over to the court as payment for those debts. This includes real estate, cars, jewelry, furniture, investment accounts, 401K’s, and other assets not covered in Arizona law. The entire process generally takes three to six months at most.

When facing foreclosure, an automatic stay goes into effect when bankruptcy is filed. This stay prohibits creditors from attempting to collect the money that is owed. This includes stopping the foreclosure process in its tracks.

Though this may sound like an easy solution to anyone’s foreclosure woes, if a person is behind in his or her house payments, he or she will almost certainly lose the house under a Chapter 7 bankruptcy. In this situation, the mortgage company will petition the court to lift the automatic stay in order to continue with the foreclosure process. A Chapter 13, on the other hand, will allow an individual to retain the house if the home owner is able to start making the normal house payments and repay any deficiencies through the court ordered repayment plan (dividing the arrears by 36 months).

However, the bankruptcy court may order an individual to sell the house in order to use the equity to pay off some of the debt (which rarely happens). In addition, filing for bankruptcy may result in the loss of other personal property. As mentioned before, an individual must give the court any non-exempt property in order to pay back the creditors. Non-exempt property may include family heirlooms, boats, cars, stamp or coin collections, expensive musical instruments, stocks, bonds, artwork, and other personal property.

It is important for someone to weigh every alternative available before deciding on a course of action.