While most homeowners want to avoid this option if possible, sometimes bankruptcy is inevitable and beneficial. According to our distinguished legal counsel and leading California Bankruptcy attorneys, the following four questions are most commonly asked by distressed property owners:
1. Will Bankruptcy stop my Foreclosure?
2. How long will the Foreclosure process be stopped for?
3. Can I stay in the house during Bankruptcy proceedings?
4. Can I still keep my house after the Bankruptcy?
With few exceptions, a Bankruptcy filing will stop a Foreclosure proceeding. When a Bankruptcy case is filed, a Restraining Order is entered under “11 USC 362” called the “Automatic Stay”, which prevents any further debt collection against the debtors or their property. However the automatic stay is limited and will not last forever.
TYPES OF BANKRUPTCY
Chapter 7 is the most frequently selected type of Bankruptcy filing for individuals. It is generally the simplest and quickest form of Bankruptcy, and provides the debtor with the greatest relief. Note that Chapter 7 does not excuse homeowners from paying their mortgages. In fact, the debtor filing Chapter 7 who wants to keep their home must continue to pay the mortgage. Also, be aware that filing a Chapter 7 petition will not prevent a bank from foreclosing on the home if payments are delinquent.
With Chapter 13, the Foreclosure process will be permanently stopped if the debtor proposes a feasible repayment plan which is then confirmed by the Bankruptcy Court. Such a plan must prove the ability to maintain the proposed mortgage payments. It must also provide for an additional “catch up” payment to cure the arrears over the next 3 to 5 years.
Also, thanks to the process of “Lien Stripping” where 2 nd mortgages are eliminated because of reduced property values, Chapter 13 restructuring often provides a much more affordable payment structure than you might think. Keep in mind, to be eligible for Chapter 13, you must have regular, stable income, and debts below the predetermined levels.
WHO SHOULD FILE BANKRUPTCY?
1. Borrowers denied a Short Sale from their bank
2. Borrowers with a lot of other debt that cannot be cleared through a Short Sale (i.e., consumer credit, vehicles, etc)
3. Borrowers with stable income that want to keep their home (Chapter 13 only)
4. Borrowers who need to immediately stop foreclosure proceedings and postpone the sale date (auction) of their home.
STRIPPING 2ND MORTGAGES WITH CHAPTER 13 BANKRUPTCY
“Lien Stripping” is an option for Chapter 13 debtors whose liens are unsecured by an asset. An unsecured lien is usually in the form of a 2 nd or 3 rd mortgage with the lien balance owed on the 1 st mortgage exceeding the value of the home.
For example, if you have a 2 nd mortgage on your home, and the current value of your home is less than the amount you owe the 1 st (senior lien holder), the junior lien is treated as an unsecured claim and may be “stripped off” as a part of the Chapter 13 proceeding.
The net effect of “stripping” a junior lien is to convert what was once a secured debt into an unsecured debt, which will then be treated in a Chapter 13 case the same as a credit card or an unsecured creditor.
TYPES OF LIENS ELIGIBLE TO BE STIPPED DURING BANKRUPTCY
In Chapter 13 Bankruptcy, liens such as mortgages and security liens may be voided if they are junior liens and the balance owed to the senior lien holder exceeds the current value of the property to which they are attached.
Chapter 13 Bankruptcy is commonly used to strip property liens such as lines of credit and second/third mortgages due to the fact that they are generally unsecured (no collateral). As a result of declining property values, it is common for the value of the property to be less than the balance owed to the 1 st lien holder (1 st mortgage lender).
In some circumstances, non-purchase money liens on other property may also be stripped during the Chapter 13 reorganization process.
To understand whether your liens are eligible to be stripped when you file for a Chapter 13 Bankruptcy, we encourage you to meet with an attorney. Every financial institution is unique and requires an individual assessment to determine how your bankruptcy action will proceed.
ABOUT CHAPTER 13
Chapter 13 is often used by people who have fallen behind on home or car payments. It allows you to pay creditors over an extended period of time according to a plan created for you by the court. In theory, after making monthly installments over a 3 – 5 year period, all remaining debts are wiped away, or “discharged”.
Chapter 13 Bankruptcy might also be used to discharge debts that a Chapter 7 Bankruptcy cannot. Debtors who have too much disposable income to qualify for a Chapter 7, or have assets they would lose under chapter 7, may choose instead to proceed under Chapter 13.
NOT EVERYONE CAN FILE CHPATER 13
Only individuals with an approved level of stable income may use Chapter 13. There is also a limit on the amount of debt that may be eligible for Chapter 13 Bankruptcy. The debtor must have less than $260,525 in unsecured debt and $1,081,500 in secured debt. Unfortunately, due to the inflated real estate values in Southern California, many people exceed the prescribed debt limits on the value of their houses alone. While this is an outdated rule, it still applies.
HOA JUDGMENTS & BANKRUPTCY
Nowadays, it is common for homeowners to neglect paying HOA (Homeowner Association) dues while in Foreclosure hoping they will be wiped out by the Foreclosure process or Bankruptcy.
While it is true that unpaid HOA dues can generally be included for discharge in a bankruptcy petition the successful inclusion of these fees depends upon the circumstances of the filer, the amount of money owed to the HOA, and the debtor’s intent for the property.
However, if the HOA dues have been converted to a “judgment” or “lien” against the home/condo, the HOA itself may then be considered a secured creditor due to said judgment or lien. If this is the case, and the debtor wishes to retain the property, the debtor must pay/satisfy the judgment or lien outside of the Bankruptcy first to clear the title of the property.
In California, HOA liens/judgments are very powerful and can lead to the garnishment of wages, levy against bank accounts, and even the forced sale of your home to satisfy the debt.
If you have an HOA judgment/lien against your home and you still retain ownership, the simplest way to resolve the debt is to short sell the home and have the buyer pay the HOA judgment/lien balance prior to closing escrow. Of course, in order for a buyer to agree to pay the judgment balance, your Short Sale Agent must negotiate with your lender and get the best possible price for your home.