1.WHAT HAPPENS TO YOUR HOME WHEN YOU FILE BANKRUPTCY?
When you are considering filing bankruptcy, you undoubtedly have many questions. Most people wonder what property, if any, will they be able to keep when they file. Books, furniture, jewelry, tools, musical instruments, vehicles and other items most people think of as essentials of life are subject to being taken by the Trustee in Bankruptcy and sold with the proceeds being used to pay some of your creditors. Depending upon where you live, you have the right to keep certain kinds of property because the law considers it to be exempt, or not subject to seizure by the Trustee. This is known as exempt property and what is or is not exempt varies from State to State. The idea is that if you lose everything you own in Bankruptcy, starting over will be next to impossible and essentials will be too costly to replace. There is one piece of property, however, that many people feel could never be replaced. The decision to file or not to file often hinges upon understanding what will happen to their home.
It would be an understatement to say that making this decision is something you must carefully consider and discuss with your attorney. Making the wrong decision could result in the loss of your property, and in some instances a foreclosure and responsibility for repayment of tens of thousands of dollars to the Mortgage company if the property is not properly included in your Bankruptcy and lost in foreclosure. There are many technical issues involved and each case is unique. Obviously, your case is the most important one to you. Be sure to choose wisely and with the advice of counsel.
Because the issues involved in keeping your home in Bankruptcy are complex, we are going to split this discussion into two blog entries. This week will concentrate on the different kinds of mortgages, some basic definitions and a discussion of factors the Court will consider when determining if you will be able to keep your home.
2.HOW IS A HOME TREATED IN BANKRUPTCY?
In order to understand what might happen to your home, you have to first understand why it is treated differently than other kinds of property under the Bankruptcy law. Most of the property you own is not subject to a lender’s security interest, or a lien, that gives them the exclusive right to payment of a debt. Car loans and mortgages are the two biggest exceptions. This right, or “security interest,” means that they can be paid to the extent that the property is worth at sale toward the amount of the debt owed. If they are not paid, they have the right to repossess the property, as in the case of a vehicle, or foreclose on a home. In order to retain a home when you file Bankruptcy several factors need to be considered.
A.How Much Is Your Home Worth?
In order for the Court to determine whether or not you may be able to keep your home, you will need to have a market estimate of what the home is worth. This can be done by comparing the home to other similar homes in the area.
B.How Much Do You Owe On Your Home?
The second, and probably more important factor to consider is how much you owe on your home. This is the amount you owe on your mortgage, but could be increased by other debts such as property taxes, tax liens, judgments, second mortgages that create additional mortgages or liens on your home. While all of these kinds of liens may have an effect on how the Court treats your home in Bankruptcy, the most important one to consider is your mortgage.
C.Are You Current On Your Mortgage?
If you are current on your mortgage, you may be able to simply continue to make payments and not put your home at risk in a Bankruptcy. If you are behind, you have some options available to you that may help you to catch up on the amount in arrears over time and still keep your home. If you are current, you may be able to file Bankruptcy without putting your house at risk at all. There are other factors which will determine if this is possible. We will discuss those later.
D.If You Have Equity, How Much Of It Can You Keep?
As discussed earlier, the amount of equity you have in your home is determined by subtracting the amount of mortgages and liens from the amount you owe. While in many cases there is no equity, often there is a sizeable amount. Since the purpose of Bankruptcy is to give someone a new start, most states allow you to keep a certain amount of that equity in an attempt to either help you to retain your home, or keep some of the proceeds if you sell your home or if it is taken by the Trustee. This is known as an Homestead Exemption. The amount of this exemption varies from a few thousand dollars to an unlimited amount if you meet certain requirements. Some states utilize the rules of the Federal Law, and yet others give you a choice of which one is best for you. This is something you would need to discuss with your attorney. He or she knows what is best for your specific situation.
3.SOME BASIC BANKRUPTCY INFORMATION
A.Filling The Case
The first step in filing a Bankruptcy is completing a Petition. This is a fairly simple document that tells the Court that you are asking for protection from your creditors and also tells the Court under what chapter of the Bankruptcy law you wish to proceed. Along with the Petition, you must file proof that you took a required Counseling Course and some other procedural documents. When these are filed with the Court, you are given a case number and a date for you to return to the Court for a meeting with your creditors.
There are additional documents required to complete a Bankruptcy filing. These are lists of debts, lists of property, financial records, tax records and other information required by the Court. In most cases, all of the documentation is filed with the Petition. If there are documents missing, the Court Clerk will give you a list of what you need to file and will give you a deadline for filing them. If you fail to complete the filing you risk the chance that the Court will dismiss your case.
When you file your Bankruptcy, a Trustee, a person appointed by the Court, takes over all of your property. It is the Trustee’s job to determine what property you can retain, what can be sold to satisfy creditors, and what payments, if any, you should have to make toward outstanding debt. In theory, the Trustee is an unbiased person who makes these decisions based upon Federal Bankruptcy Law and the rules of the particular Court involved.¬ (These are known as local rules.)
B.The Automatic Stay If Execution
Once your case is filed, you are protected from any action from creditors, including but not limited to debt collection, repossession, and foreclosure. This protection, known as a “Stay of Execution” remains in place during the time the case is pending, though some of those protections may be removed if the Creditor asks the Court for “relief” from the stay. This is of particular interest to you if you have a mortgage. We will discuss this in detail in next week’s blog.
C.Chapter 7 and Chapter 13
While there are several other kinds of Bankruptcy, the most commonly utilized are Chapter 7 or Chapter 13 cases. At the end of the case, the debtor is no longer responsible for repayment of debts listed in the Bankruptcy. This is known as a “discharge” of debt. How the debtor gets to the end of each kind of case is much different and you and your attorney will have to discuss which case is the right one for you. It is important to understand that how your home is treated by the Court under the two may be different.
A Chapter 7 is also known as a “no asset” case. In this kind of filing, the debtor is essentially saying that they have no assets, or that their liabilities are greater than their assets, and that they can no longer pay their debts. The Trustee reviews the information given and determines what debts may be discharged and what property, if any, may be taken and sold to satisfy outstanding debt. In order to qualify for a Chapter 7 Bankruptcy, however, you must meet some minimum requirements with respect to the amount of money you earn. The Court applies a “means test” to determine if you should be required to pay back some or all of your debt over a period of years. If you made too much money over the most recent 6 month period, you will not be able to file this kind of Bankruptcy. The amount is different from state to state. If you make less, you may file a Chapter 7 Bankruptcy and have your debt discharged in a relatively short amount of time.
If you do not qualify for a Chapter 7, you will have to file a Chapter 13 or “wage -earner’s” case. In this kind of Bankruptcy, your lawyer will prepare a repayment plan and present it to the Court. Under this plan, you will be required to pay a portion of your income to the Court over a period of 3 to 5 years. When you complete the plan, your remaining debt will be discharged. However, it is important to realize that arrearages on your mortgage will have to be brought current during that time, and you must keep making the regular mortgage payment and keep it current.
This week’s blog is just to give you some of the basics of filing a Bankruptcy. Next week, we will discuss how filing a Bankruptcy could affect your home ownership, and some of the strategies you and your attorney can consider when determining whether you should file a Bankruptcy and under which Chapter you should proceed. Specifically we will look at how filing under the different Chapters works and what you can do to retain your home outside of Bankruptcy. Often, keeping your home is as simple as negotiating terms with your lender after you file. Sometimes, you need to take more technical steps to keep it. And sometimes it simply is not possible to hold onto it. Bankruptcy Laws give you several ways to get a fresh start and to keep the property you call home. We will discuss some of them in detail next week.
DISCLAIMER: This article is not intended to be legal advice and does not create an attorney/client relationship. There is no substitute for consulting with an attorney to determine if Bankruptcy is right for you, or if some other course of action will be more beneficial. While it is possible for you to file a Bankruptcy without an attorney, it is important to know that the procedure is complex and mistakes can be very costly. Even if you decide to proceed on your own, it is highly recommended that you speak with an attorney before you make that decision.