Foreclosure/Repossession

Bankruptcy Prevents a Foreclosure Sale

When a consumer files for Bankruptcy an automatic stay is put into effect. This automatic stay is equivalent to a stop sign which temporarily stops a lender’s ability to pursue collection on the debt that you owe. For a home owner facing foreclosure, this forces the lender holding the mortgage on your home to stop the foreclosure sale. Thus, the filing of a Chapter 13 or Chapter 7 can prevent a foreclosure sale from taking place as long as the petition is filed before the actual foreclosure sale.

Stopping a Foreclosure through a Chapter 13

The foreclosure notice received is a result of a default on the mortgage. When a default occurs, most mortgage lenders accelerate the entire balance of the loan to be due at once. Included in this amount is the amount of any mortgage payments that were not paid (arrears), interest, penalties, and cost of the lender in going forward with the foreclosure. Negotiating with mortgage lender is a not option at this point because most of the time the mortgage lender will require that you at least pay the amount of your mortgage arrears. Of course, this is often not possible for the consumer.

The U.S. Bankruptcy Code gives the consumer an important tool in keeping their home. Under Chapter 13 Bankruptcy, a consumer is allowed to modify the payment timing of their mortgage arrears and the penalties, interest, and cost that are associated with the arrears. This amount is put into the Chapter 13 plan and allowed to be paid back over a period of 3 to 5 years, depending on the actual length of the Chapter 13 plan. Thus, the mortgage lender will have no choice but to accept payments for the arrears and penalties over the Chapter 13 period so long as the consumer maintains his normal monthly mortgage payment once the Chapter 13 payments begin.

Stopping a Foreclosure through a Chapter 7

A Chapter 7 Bankruptcy also has the benefits of the automatic stay. Thus, the lender will be forced to stop the foreclosure sale so long as they have actual notice of the Bankruptcy filing before the foreclosure takes place. The parameters of the Chapter 7 are different from a Chapter 13 in that the Chapter 7 has no mechanism to pay back mortgage arrearage claims (there is no payback in Chapter 7). Thus, the Chapter 7 is most of the time a delay mechanism for the home owner who wishes to stay in the home longer and needs more to plan for a future move out date.

Filing Chapter 7 under this situation has another key benefit for the consumer — they are entitled to a discharge of the mortgage obligation with no personal recourse from the lender. This is beneficial compared to a foreclosure or short sale where the consumer will often be taxed (1099 income) on the amount of the debt the lender wrote off.

Bankruptcy Prevents Vehicle Repossession

The same principles of the automatic stay also apply to vehicle repossession efforts. The filing is like a stop sign preventing creditors from repossessing your vehicle.

Chapter 13

Chapter 13 provides an important tool for consumers who are behind on their vehicle. Chapter 13 allows the debtor to pay back the balance owed at a lowered interest rate (typically 5%) over the course of their Chapter 13 plan (3 to 5 years) This often times makes keeping a vehicle feasible as the payment is now manageable for the debtor (See example 1). Additionally, if the vehicle is over 910 days old, the debtor will be able to “cram down” the current value of the vehicle to lender (See example 2).

Example 1 — Debtor has a $10,000 dollar balance left on a vehicle. Interest rate is at 12% and there are 30 months remaining. Under a Chapter 13, the debtor will be able to pay back this $10,000 over 60 months at a 5 % interest rate.

Example 2 — Debtor rolled negative equity from a previous vehicle. Now, 3 years later she owes $17,000 on a vehicle that is only worth $10,000. She can now pay back only $10,000 to the lender over the course of her plan (typically 60 months) at a 5 % interest rate.

Chapter 7

A Chapter 7 Bankruptcy has no repayment options through a plan. However, the lender is unable to pursue collection activity during the Bankruptcy case. This allows the debtor a few different options for the vehicle during the Chapter 7 period.

Keep the vehicle and do a reaffirmation agreement for the loan. This will enable you to keep the vehicle and continue making normal monthly payments. This can be ideal if you are not very behind on the vehicle. Additionally, some lenders will modify the terms of the vehicle within the reaffirmation to make the vehicle more affordable for the debtor.

Surrender the vehicle after the Chapter 7 case and get a new car your discharge has gone through. This is an ideal option for those who are in an arrangement where the vehicle payment is too high or if they are upside down on the vehicle. In this situation, the vehicle note is discharged just like any other debt. Most of you are able to get a new vehicle after your Chapter 7 case is closed. There are many special financing programs for people after Bankruptcy (the terms are not as bad as you might think)

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