Can Bankruptcy Stop Foreclosure?

Rental property and personal bankruptcy

Can Bankruptcy Stop ForeclosureForeclosures continue to occur at an alarming rate in many parts of the country. Many homeowners who obtained subprime mortgages earlier in the past decade or who now find themselves unemployed or underemployed because of the depressed economy are unable or unwilling to make their monthly mortgage payments

State and federal programs for distressed homeowners to assist in loan modifications are available to some but you may not qualify. For others, a short sale transaction is a way to extricate themselves from a home whose value is less than the loan amount, but these can be complicated and may not work for any number of reasons.

As a result, many people facing overwhelming financial pressures turn to bankruptcy as a solution, but can a bankruptcy stop foreclosure?

The Foreclosure Process

Once you miss at least 3-4 consecutive mortgage payments and the lender has sent you notices warning you of possible foreclosure, the lender will generally begin the process to repossess your home. This can take several months and in some instances more than one year.

Minnesota is a non-judicial foreclosure state, meaning that there is usually no court action. When the foreclosure is done without court action, it is called a “foreclosure by advertisement.” Mortgages typically have a power of sale clause allowing an attorney to foreclose on your home. A lender may choose, however, to go to court in a judicial foreclosure to obtain a judgment of foreclosure.

If your home is taken, there are certain reporting and notice requirements before the lender can sell it at an auction conducted by the sheriff, usually at a greatly reduced price. In Minnesota, as long as it’s a foreclosure by advertisement, you are not subject to a deficiency judgment if the sale is for less than the loan amount.  This means that most of the time, as long as there is only one mortgage, a homeowner in Minnesota can walk away from a house free and clear.  If  there is a second mortgage, however, watch out.  These days the holders of second mortgages are suing people in large numbers after the first mortgage has foreclosed.  Sometimes they don’t even wait for the first mortgage to foreclose if the payments are not up to date.

Accordingly, if you are facing foreclosure, can a bankruptcy stop the foreclosure or benefit you in some way?

Can a Chapter 7 Bankruptcy Stop a Foreclosure?

Whenever you file for bankruptcy protection under a Chapter 7, an automatic stay of all legal proceedings, including foreclosures, goes into immediate effect. A Chapter 7, if you qualify, allows you to discharge most if not all of your debt.

Unfortunately, the lender is allowed to file a motion to lift the automatic stay as it pertains to your property as the lender can otherwise suffer economic harm. In this instance, a Chapter 7 will only temporarily delay the foreclosure.

It is very difficult to fight the motion to lift the automatic stay.  About the only practical way to stop the motion is to get the payments up to date or make arrangements to bring the payments up to date.  In a Chapter 7 the automatic stay ends when the discharge is granted, usually around three months after the case is filed.  This means that most of the time lifting the stay doesn’t mean much anyway, because the stay was going away by itself.

At the least, you may be able to save thousands of dollars while not making any mortgage payments and take the time to look for alternative housing.  Once the foreclosure is stopped, many lenders are very slow to get it started again.  While the automatic stay officially only stops things for about three months, you will very likely gain much more time than that.

Can a Chapter 13 Bankruptcy Stop a Foreclosure?

The other bankruptcy filing available to a homeowner is Chapter 13. Under this plan, you must submit a repayment plan that includes all your creditors and that is approved by the bankruptcy trustee. The automatic stay also goes into immediate effect once you file.

Unlike a Chapter 7, this chapter allows you to keep your home but you must have proof of sufficient income to not only maintain the current mortgage payments but to make up the arrearages over the life of the repayment plan. Many repayment plans are for the maximum 60 months. Under a Chapter 13, then, you may be able to stop the foreclosure so long as the indicated conditions are met.

In a Chapter 13 it might also be possible to do a lien strip.  We’ll know for sure when the Eighth Circuit Court of appeals finally decides the Fisette case.  A lien strip would benefit homeowners with multiple mortgages. It would eliminate payments on all mortgages except the first one. If your home’s value has declined and the first mortgage has secured all the home’s equity, if any, then the other mortgages  would be considered unsecured debt and will be discharged.

In any case involving a foreclosure, consult with an attorney to explore all your legal options.

 

Eligibility Requirements for Filing a Chapter 7 Bankruptcy Petition

Debt Relief, MN Bankruptcy

Debt Relief, MN BankruptcyIf you are one of many people across the country who are suffering from more debts and obligations than your budget can seem to handle, you are probably thinking about seeking the protection of a Chapter 7 bankruptcy. Like most, you may also be wondering if there are specific rules or regulations that determine your eligibility to file a petition.

In order to file a petition for a Chapter 7 bankruptcy, you need to meet certain conditions defined within the bankruptcy codes. To begin with, your level of income must fall below a specific amount, and if so, you next have to pass another set of eligibility standards called the ‘means test’. However, the bankruptcy laws also state that the bankruptcy court can dismiss your petition if you have previously filed for bankruptcy during a specific length of time. The bankruptcy court can also dismiss your petition if feels you might be defrauding your creditors.

In previous bankruptcy laws prior to 2005, the judge presiding over the case could dismiss any Chapter 7 petition if you had enough disposable income to finance a Chapter 13 Bankruptcy repayment schedule to your creditors. With the new bankruptcy laws in effect, there are much clearer guidelines that determine if you will be allowed to remain in Chapter 7 bankruptcy, or if you might be required to petition for a Chapter 13. Only disabled veterans who have built up debts while on active duty, and people who have taken on too much debt because of a struggling business are allowed to submit an uncontested Chapter 7 petition.

These new guidelines for filing a Chapter 7 petition begin by determining how your ‘current monthly income’ amount compares to a standard or ‘median’ income level, and is it also based on your particular household size in your state. This amount is also calculated by averaging your total earnings during the previous six months prior to filing your petition. If your earnings happen to fall below or are equal to this median amount, you will certainly be able to qualify for a Chapter 7 petition.

On the other hand, if your earnings are above this median figure, then you must meet the next challenge by passing the ‘means test’ required in the up-dated bankruptcy guidelines. The means test is used to find out whether you have enough disposable income, after deducting living expenses and other debts like child support or alimony for instance, to repay your creditors over a three to five year repayment plan in a Chapter 13 petition. These guidelines were designed to keep people with higher levels of income from filing for a Chapter 7 bankruptcy.

The new bankruptcy laws also state that you may not file a Chapter 7 petition if you have already received a discharge of your debts in a Chapter 7 case within the previous 8 years, or in a Chapter 13 within the previous 6 years. In addition, you cannot file if either a previous 7 or a 13 was dismissed anytime within the previous six months because you violated a court order, you committed any fraudulent activities, or you dismissed your case because a creditor sought relief from the protection provided by the automatic stay.
Finally, the bankruptcy court can also have your case dismissed if it is felt you attempted to commit fraud against your creditors, or tried to conceal your assets or personal property from the bankruptcy court in order to avoid the liquidation process. The liquidation of your assets is necessary so that the court-appointed trustee on your case can repay as much of your unsecured debts as possible to your creditors.

It is important to remember that simply because you qualify under the means test guidelines does not mean you should automatically file a petition for a Chapter 7 bankruptcy. The test is only intended to confirm that you are eligible to file. Any decision to file for Chapter 7 bankruptcy should be made only after considering all other options and possible alternatives, and only after discussing these options with knowledgeable and qualified bankruptcy attorney.

If your would like to know more about Chapter 7 Bankruptcy and your Eligibility, Call David Kelly Today at: 952-544-6356

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