The Myth of Bankruptcy and Foreclosure

By: Dave Dinkel

The myth of bankruptcy and foreclosure is simply that bankruptcy stops foreclosure. Closer examination reveals that this may not be entirely true. Bankruptcy is a serious action to take to stall a foreclosure that will have long lasting ramifications.

Specifically Chapter 13 bankruptcy allows the person filing to work-out a repayment plan that extends over a 36 to 60 month period. The amount of the repayment is based on the income of the "petitioner" and can substantially eliminate certain debt. But this debt is only non-exempt items which are not fully collateralized by an asset, such as an auto or a home.

What happens is the petitioner petitions the court to accept his Chapter 13 filing. It does not have to be accepted but if it is accepted, the court appoints a trustee who determines a repayment schedule. The petition does not have to be accepted if the petitioner filed too recently or if his assets don't qualify. If accepted, the trustee begins his work of determining how the monies from the homeowner will be distributed to his creditors. As soon as the filing was accepted, the petitioner (homeowner) no longer has the ability to sell any of his assets without the trustee's authorization. Assuming you want to stop your foreclosure by filing bankruptcy, you will temporarily lose your ability to sell your home without the trustee's approval.

If you find a buyer, the trustee will allow the sale, but only if he can be convinced the price is at fair market value (FMV). He needs an appraisal, because homeowners could sell their assets below market value prior to their filing. It is the trustee's responsibility to make sure this doesn't happen by checking bank statements and the public records back six months and sometimes longer. If such a sale took place, the trustee could have the deed voided and the sale reversed. This would be very inconvenient and costly for the new homeowner and the petitioner.

Lenders know that many homeowners will file bankruptcy because attorneys' advertise so heavily and the homeowners do not understand the legal process. When the lender gets notice that a bankruptcy has been filed by the homeowner, they immediately instruct their attorney to petition the court for its release from the bankruptcy filing. A special hearing will be scheduled so there may be a few day's delay in your having to leave your home. However, when the court hears the lender's petition to release the home, the court will approve it. Now the homeowner has a bankruptcy to contend with, and his home will be back on track to be sold.

The larger consequence of the home being released is that the homeowner will have a bankruptcy on his credit report for ten years instead of seven years for a foreclosure. Actually, the bankruptcy is a matter of public record for 20 years and will stay on the individual's credit report under "Public Records" for up to 20 years. So bankruptcy is a short-term fix with very long-term consequences. Consult an attorney as soon as you believe bankruptcy may be an option for more complete information.

Foreclosures
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