Bankruptcy and Foreclosure
How Bankruptcy Affects Foreclosure Types of Bankruptcy
- Chapter 7 – Individual or Business Liquidation:
When a borrower files for Chapter 7 bankruptcy relief, all foreclosure action is temporarily stopped. This is a temporary postponement because Chapter 7 is a liquidation bankruptcy. After the filing, the lender will file a motion to have its loan and the property removed from the bankruptcy so that it can finish its foreclosure proceeding. Depending on how far along the foreclosure process is, Chapter 7 filing can buy an additional 1 – 4 months of time to deal with the foreclosure. - Chapter 13 – Individual Reorganization:
This is a file for a “plan of reorganization.” The borrower can state that they want to keep the property and catch up on back payments. If the borrower can show they now have the financial ability to catch up the delinquent home payments and propose a good faith plan, the plan can be approved and foreclosure stopped. However, if the borrower misses a payment after the plan is approved, the lender has the option to move to have the property removed from the bankruptcy and the foreclosure can be restarted. Automatic Stay: When a bankruptcy is filed, it automatically stops a foreclosure even if the Trustee doesn’t know about the filing. One of the following things must be done before the lender can proceed: - Lender files a motion for “relief from stay” and if there are grounds to do so, the court will sign an order lifting the bankruptcy stay and the lender can finish its foreclosure proceedings.
- The debtor receives their discharge
- The property is abandoned from the bankruptcy estate. This is obtained by filing a motion by the debtor or the debtor’s attorney. A motion for abandonment will be granted if the bankruptcy trustee agrees that there is no equity for any other creditors to be distributed above the amount of the liens on the property. If there is little or no equity in the property the motion for abandonment would likely be granted allowing the property to be removed from bankruptcy to complete a short sale.
New Bankruptcy Rules: Congress amended the Bankruptcy Code in 2005. The primary reason was to force more debtors into Chapter 13 filings so that unsecured creditors could receive more money from debtors. In Chapter 7 liquidation, most unsecured creditors never receive any money for their debt. Debtors also have to receive mandatory credit counseling prior to filing for bankruptcy. The law also kept individuals from filing multiple sequential bankruptcies to keep delaying foreclosure. Understanding Bankruptcy with Foreclosure and Short Sale: - If a debtor is in a Chapter 7 proceeding and they would like to do a short sale, the debtor or his attorney can motion the court to abandon the property so that the short sale can be completed.
- Bankruptcy postpones foreclosure. If it is a Chapter 7 – it will be one to four months. If it is a Chapter 13 – it will be for as long as bankruptcy plan is in effect not to exceed 60 months.
- A “Motion to Lift Stay” can remove a property from bankruptcy in 30 days or less.
- In a Chapter 7 proceeding, about 4 months after the case is filed, the debtor will receive discharge. This means that they are no longer legally responsible for any of the debts that could be discharged through the bankruptcy proceeding. The bankruptcy case remains open, but the debtor’s liability is extinguished.
- In Chapter 7, voluntarily removing a property from bankruptcy to complete a short sale simply takes a motion to abandon property filed by the debtor or the debtor’s attorney. In Chapter 13, the debtor keeps the absolute right to dismiss the case at any time upon their own motion. So in Chapter 13 if the debtor would like to proceed with a short sale, the debtor can move to dismiss their bankruptcy to allow the short sale process to be completed – or – they can amend their plan to remove the property from the Chapter 13 proceeding. Amending is usually best so that the debtor still has the protection of bankruptcy law against any other debts and/or any possible deficiency from any of the lenders on the property.
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