Bankruptcy General Information

Traditionally,Bankruptcy was the only defense to foreclosure. This was so because the entity that you took your mortgage out with, generally was the same party that still held your loan Unfortunately with the development of the securitization paradigm, the entity that you took your loan out with no longer owns your loan. Under this reasoning,Bankruptcy should be considered, but only after reviewing all of your other options

If Bankruptcy is th best option for the borrower, under Chapter 13 it can provide the "fresh start" that it was designed for.

There are various types of bankruptcy and, depending on your circumstances ,consumers usually seek protection under either a straight liquidation Chapter 7, or a Chapter 13 reorganization, payments are made into a plan in order to pay off all, or some portion, of your creditors over a 3-5 year period. However even in a Chapter 13, after the the 3-5 period,  unsecured debts may be discharged as an unsecured creditor cannot receive less than it would in a Chapter 7, which is usually nothing. 

Costs of Bankruptcy

In addition to attorney's fees, a Debtor filing for Bankruptcy protection must also factor in the filing fees charged by the United States Bankruptcy Court. As of December 2008, the current fees for individual Bankruptcy are as follows:

Chapter 7  -  Two Hundred Ninety-Nine Dollars

Chapter 13 - Two Hundred Seventy-Five Dollars

In some cases, for good cause shown, a Debtor may be able to pay this fee in installments, however there currently is no provision for Debtors to completely avoid paying the filing fee

Misconception that Bankruptcy is now very difficult to receive

There is a great misconception that after the Bankruptcy Act of 2005 was passed, debtors became extremely limited to file for Bankruptcy relief, One of the changes is that a debtor has to meet some initial qualifying criteria before they can file a petition.

One of the most important weapons of filing bankruptcy, is the automatic stay provision. No matter how persistent your creditors are calling you around the clock, and sending letters to you, once you file your bankruptcy Petition, the automatic stay is "automatically" in effect.

What this means is that all of your creditors must stop all contact with you IMMEDIATELY, or face the wrath of the bankruptcy court, which includes heavy fines.

The major changes of the 2005 bankruptcy law amendments include :

• Contacting a credit counseling agency, and receive a certificate from them that you received their information.This usually can be done over the phone or internet, and when completed the agency can mail or fax the certificate to you. The cost for this service currently is around Fifty Dollars.
  
  
• Under a Chapter 7 Bankruptcy you must qualify under a "means test" under section 707(B), that looks back at your income averaged over the previous 6 months.
  
  
  • A presumption of abuse arises under the current means test if the debtor's monthly income after all monthly allowed expenses are deducted, multiplied by 60, is the lesser of ten thousand dollars or 25% of non-prioity unsecured debt, as long as that 25% is at least six thousand dollars..
    
  • Debtor's whose income falls below the "median household income" threshold are exempted from the calculation above.
    
    
• Under a Chapter 13 Bankruptcy a different version of the same official Bankruptcy form utilized in a Chapter 7 (Official Form 22C) is used. The objective of the form in a Chapter 13 Bankruptcy is not to find out if the debtor makes too much income to qualify for Bankruptcy, but whther the debtor in Chapter 13 makes enough regular income to fund a plan to pay his or her debtors over a period of 3-5 years.
  
  
• Most individual debtors filing for bankruptcy relief are required to complete either Official Bankruptcy Form 22A or 22C  Statement of Current Monthly Income and calculations). Bankruptcy Form 22A is the form chapter 7 debtors will complete
  for “means testing” purposes; Form 22C is the form chapter 13 debtors will complete. [The Official Bankruptcy Forms can
  be found on the [ Administrative Office of the U.S. Courts Web site.]
  
  
• A debtor must enter income and expense information onto the appropriate form (i.e., Form 22A or Form 22C), and then make calculations using the information entered. Some of the information needed to complete these forms, such as a debtor's  current monthly income, comes from the debtor's own personal records. However, other information needed to complete the forms comes from the Census Bureau and the Internal Revenue Service (IRS).
  

Bankruptcy and Foreclosure

In the past, when a homeowner faced a foreclosure the only option that was open was the mere possibility of filing for protection under a Chapter 13 Bankruptcy petition. Fortunately, there are many more avenues available to homeowners today, however Bankruptcy still may be the best option for a homowner to pursue given his or her circumstances.

When faced with the imminent foreclosure auction of your home, a Chapter 13 Bankruptcy can immediately stop the auction of your home by utilizing what is known as the "automatic stay" provision of the United States Bankruptcy Law.

Howevever your personal situation should be examined very closely before deciding to file for bankruptcy to stop foreclosure. While it is true that once you file for bankruptcy, all collection activity is stopped immediately (including the mortgage servicer and / or lender), which is called the "automatic stay, bankruptcy should only be your first option if you are facing an imminent foreclosure auction of your home.

The automatic stay will last as long as the Petition is being reviewed by the bankruptcy court, and if a Chapter 13 bankruptcy plan is approved by the Trustee, the automatic stay remains in effect during the duration of the plan (which can be up to 5 years), as long as the debtor maintains the required plan payment.

If your Chapter 13 plan is not approved by the Trustee, things revert to where they stood before you filed. Additonally, if you fail to make the agreed upon payment in to your Chapter 13 plan each month, your bankruptcy will be terminated as well.

When deciding on whether bankruptcy is the right option for you, you must have a clear idea of an affordable budget that will allow you to maintain current mortgage payments over a 3 to 5 year period of time, paying extra each month to catch up on the deliquent amount you owe the lender, as well as an amount to the rest of your other secured and unsecured creditors. 

Many so called "foreclosure relief agencies", and attorneys, recommend bankruptcy as an option to prevent foreclosure before even considering other defenses. Unless your home is facing an imminent foreclosure auction, it is best to review ALL other potential defenses to your foreclosure first, before filing for bankruptcy.

Chapter 7 Bankruptcy usually liquidates most non-priority unsecured debt (like credit card debt, etc), but basically has no efffect
on secured debt, such as a home mortgage, or auto loan which is secured by the asset as collateral.

However, Chapter 7 Bankruptcy still can play a very important part in an inevitable foreclosure situation.

If you are left with no other options with regards to saving your home, filing a Chapter 7 Bankruptcy, may help eliminate some of the debt your lender is seeking to recover under your mortgage.

When a creditor has "secured debt", the lender is only secured to the extent of the value of the "collateral" being used as security for the loan. In the case of a mortgage, the lender is secured only to the extent of the property value. Due to the recent slump in real estate property values, many times borrowers owe more on their property than its fair market value.

Therefore, in a situation where a homeowner decides they will "walk away" from their mortgage, or just let the foreclosure "happen", and the homeowner qualifes for a Chapter 7 bankruptcy, the homeowner needlessly provides the lender with a greater claim for money than it rightfully is owed.


Claiming Chapter 7 Bankruptcy, will not save your credit, or your home
in this situation, however it may eliminate part of the lender's claim for a deficiency judgment against you for any shortfall from a foreclosure auction of your home that provides the lender far less than the amount of indebtedness that you owe.

Additionally, homeowners who enter into "short sale" agreements, or "get out from under" the property they own, for less than the amount they owe, are required to report the amount they "saved" in the transaction as income on an IRS 1099 Form. However the United States Congress has relaxed this requirement for loans on the borrowers principle residence through next year.

Chapter 13 Bankruptcy on the other hand is basically a reorganization plan for the debtor, as opposed to a straight liquidation of unsecured debts. The good news is that under Chapter 13 is that it applies to secured as well as unsecured debt.

Chapter 13 is only available to those debtors that have enough "regular income" to fund a plan to repay their creditors.
This is not as difficult as it sounds. As opposed to a Chapter 7 bankruptcy, where the debtors can be inelegible if they have "too much" income, in a Chapter 13 Petition, debtors will be inelegilbe if they do not "have enough" income to support a repayment plan.

If a debtors Chapter 13 plan is approved by the Bankruptcy Trustee, the debtor has to continue to make payments on his or her current mortgage. In developing the Chapter 13 Bankruptcy plan, the debtor (and his or her attorney) must devise a payment plan to catch up on any arrearages on the home mortgage, and other secured debts over a period of 3 years,and if approved by the Trustee the plan may be extended to 5 years. To be accepted a plan usually must take into account that at least some money is paid to unsecured creditors.

However in Chapter 13 Bankruptcy, an unsecured creditor can be paid "no less than what it would have received in a Chapter 7 Bankruptcy. Most unsecured creditors receive nothing when a debtor files a Chapter 7 liquidation Bankruptcy, unless the
unsecured debt is priority debt. Examples of priority unsecured debt would be certain types of taxes, a court ordered domestic
support obligation.

Therefore a Chapter 13 Bankruptcy can help a debtor catch up on his or her mortgage (while making current mortgage payments, and also possibly eliminate much of a debtors unsecured debt.

Whteher or not Bankruptcy is the right option for you under your circumstances, is a very serious question to consider, and can have serious consequences to you, even if done correctly. It is recommended that you seek advice from a competent attorney on
the subject of Bankruptcy.

The US Court website has videos on Bankruptcy basics that can be found here

Nothing above should be considered legal advice, This is merely presented for educational puposes, and no attorney client
relationship is formed without the Law Office of Glenn F. Russell receiving a signed retainer or fee agreement for services.

This page was last updated on 07/02/2009