I have heard that everyone that files for Bankruptcy loses their house. True?
No, that is not true. One of the most used remedies of Chapter 13 is to cure the default on a home, or car. Once all payments under the plan are completed, the homeowner/debtor is current on their mortgage payments and the Bankruptcy Court issues an Order as such. I have heard so many stories from frustrated clients that paid their lenders without a bankruptcy and found the lender tacked on fees and applied the payments to the fees instead of the principal, so the homeowner is still in default and in danger of losing their home. The Bankruptcy Code’s provisions offer certainty. At the conclusion of the Chapter 13 Plan, the Court will Order the Mortgage Current.
The Chapter 13 also allows the homeowner/debtor to strip any mortgages that are completely unsecured, that means there is zero equity in the property for the loan to attach to. The word ‘strip’ is used to signify that the mortgage changes from secured to unsecured through the magic of bankruptcy. In order to make this change, the mortgage must be completely unsecured on the day the petition is filed. Since the mortgage is now unsecured the lender is paid the same percentage as the other unsecured creditors and the balance of the debt not paid through the plan is forgiven and the lender must release the lien when the plan is complete.
The math calculations are Fair Market Value of the Home, less secured debts. If a secured claim does not have any Fair Market Value to attach to, then the homeowner/debtor can ask the court to treat the secured claim as unsecured and pay the claim as unsecured (which means the same as the other unsecured creditors, like credit cards) creditors and once the homeowner/debtor completes all payments under their Chapter 13 Plan the Court Orders the former secured lender to release its lien against the property. If this is a client’s goal, my office advises the homeowner/debtor to obtain a professional appraisal of their home.
Chapter 13 Trustees are now allowing homeowner/debtors time to obtain a loan modification after filing their petition. What this means is that the homeowner/debtor can file a Chapter 13 Bankruptcy to stop a foreclosure, pay the secured lender the proposed monthly mortgage payment for a limited amount of time, 6 – 9 months while the homeowner/debtor and the lender work out a loan modification. If the modification is successful then the homeowner/debtor has saved their home from foreclosure and handled their other debts. If the modification is not successful within the time frame allowed by the bankruptcy court the homeowner/debtor must either pay the prepetition monthly mortgage amount and modify their plan to cure the default over the rest of the length of their plan, or dismiss their Chapter 13 case, or convert to Chapter 7, which allows the lender, with the Courts permission, to continue the foreclosure process. This remedy offers the homeowner/debtor the protection of the automatic stay during negotiations and debt forgiveness if negotiations fail.
If the homeowner/debtor who is in default on their mortgage payments files a Chapter 7 there is a high likelihood the homeowner/debtor will lose their home. Most lenders file a Motion for Relief from Stay, set a hearing date and if the homeowner/debtor is unable to pay the amount necessary to cure the default at or before the hearing, the Court will allow the creditor to go forward with the foreclosure. Sometimes the debtors’ property has a large equity cushion; if this is the case the Court will not grant the creditor relief. The creditor can also agree to modify the loan but it has been my experience that most creditors foreclose. If this is the case my office acts as the buffer for the move-out date and has in some cases obtained ‘moving’ money for a cooperative homeowner/debtor.
Our office also filed Chapter 11’s for Debtors whose total amount of secured and/or unsecured debts disqualifies them for the remedy of Chapter 13. Usually, Debtors who have a home and investment properties have debts in excess of what a Chapter 13 allows.
Chapter 11 is an expensive bankruptcy and a great remedy when the reduction of the amount due under the mortgages outweighs the cost of the bankruptcy. A Chapter 11 Debtor has a lot more involvement in the case and a different title than a Chapter 13 or Chapter 7 Debtor. Chapter 11 Debtors are called Debtors in Possession. They have many tasks including submitting monthly reports, opening different types of bank accounts and adding the U.S. Trustee’s Office as an additionally insured on all their insurance policies. The Debtor in Chapter 11 is called the Debtor in Possession because the Debtor has the powers and duties of the Trustee, including opposing and filing claims against creditors.
Another major difference between Chapter 11 and Chapter 13 is that the creditors in Chapter 13 must accept their payments if the Court determines the Plan is legal and reasonable; the creditors involved in a Chapter 11 vote to accept the plan and the debtor must find at least one class of creditors that will say yes to his/her/their plan.
So the short answer is, a person who cannot afford their home or is unsuccessful at negotiating a modification will lose their home and gain debt forgiveness, this is especially important on investment property which may come with a deficiency even when the property is foreclosed. A person who can work out a modification or present a plan that the Court or the Creditors will accept can keep their home and investment property. Foreclosure outside of bankruptcy on investment property allows the creditor to obtain a deficiency judgment and proceed to collect on the debt through the typical collection activities from bank levy to wage garnishment. Bankruptcy prevents deficiency judgments and gives a fresh start.