Foreclosure and Bankruptcy
Many lawyers and so-called consumer advocates will
preach the gospel of 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 bankruptcy should be
considered as a last option. Filing for bankruptcy, whether it is a
Chapter 7 or a Chapter 13 bankruptcy, will have only provide temporary
solutions with lasting negative consequences.
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
someone. With the assistance of a court appointed trustee, the court
establishes a repayment plan to pay back all or part of the debts
owing. 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 release the automatic stay in order to continue with the
foreclosure process. A Chapter 13, on the other hand, may 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.
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. 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.
Bankruptcy should not be used to stop foreclosure
unless there are other mitigating circumstances that call for the
protection of bankruptcy. Very rarely does a situation warrant the
need for bankruptcy since there are many options available to a home owner
facing foreclosure (to learn more about these options, click
here).
It is important for someone to weigh every
alternative available before deciding on a course of action. To sit
down with someone for free to discuss your situation, click
here.
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