Bankruptcy is a legal proceeding which permits an individual or a business to eliminate some of their debts with their creditors. Bankruptcy permits an individual to have a financial fresh start while also helping creditors to establish their rights to certain claims.
In the majority of cases, a creditor is not permitted to collect on a debt one a bankruptcy is filed. The creditor is required to wait until the bankruptcy process is completed because of the automatic stay. The reasoning behind this practice is that, in many cases, payment terms are often re-evaluated and reorganized during a bankruptcy.
Bankruptcy provides an individual of a business that is unable to pay their debts a way in which to resolve their financial difficulties. It helps to rebuild credit and move towards a more positive and stable financial situation.
Can My Home be Affected in a Bankruptcy Proceeding?
In a Chapter 7 bankruptcy, called a liquidation bankruptcy, an individual is able to have most of their debts cancelled, or discharged. When an individual files for this type of bankruptcy, the court issues an automatic stay, which immediately stops the majority of creditors from attempting to collect payment.
Not all debts can be discharged in a Chapter 7 bankruptcy, such as student loans. It is also important to note that, in this type of bankruptcy, the individual’s property is sold in order to pay off their debts.
Because of this, Chapter 7 bankruptcy is often chosen by individuals who do not own a home so they do not run the risk of losing it. There are exemptions individuals can choose in order to keep some of their property, but it will depend on the value of their home whether or not this will apply. A married couple that files for bankruptcy together can usually double the value of the exemptions.
It is important to be aware that there are negative consequences of a Chapter 7 bankruptcy. The discharge may have a negative effect on the individual’s credit score, which may affect future attempts to obtain credit lines, such as a new mortgage loan.
An individual should choose a Chapter 7 bankruptcy if:
- They are unable to pay any of their debt even using a repayment plan;
- They need quick relief from creditors;
- Most of their debts can be discharged, such as credit cards, personal loans, and medical bills;
- They do not own much property which could be sold to pay creditors.
In a Chapter 13 bankruptcy, on the other hand, the individual’s debts are not eliminated. Instead, the debtor and the creditors create a repayment plan with payments the debtor can manage.
An advantage of this type of bankruptcy is that the individual can keep some of their property, including their home. It also does not have as negative of an effect on the individual’s credit score as the Chapter 7 bankruptcy.
What Can I Do to Protect My Home During Bankruptcy?
It may be possible for an individual to keep their home when they file for bankruptcy, but the situation must be right. The individual filing for bankruptcy must ensure that they meet the requirements for the chapter they choose to file.
For example, a Chapter 7 bankruptcy requires the individual to be current on their payments and to protect all of their home equity with a bankruptcy exemption. On the other hand, a Chapter 13 bankruptcy allows the individual to catch up on their missed mortgage payments as well as keep their home.
This first step is to determine whether the individual can protect all of their home equity in the bankruptcy. In both a Chapter 7 and a Chapter 13, assets are protected with exemptions.
It is important to note that there are state and federal exemptions. Some states require the use of state exemptions, while others permit the filer to choose.
There are only a few states which permit an individual to keep their home equity when they file bankruptcy. The majority of states have a lower homestead exemption.
If an individual files a Chapter 7 bankruptcy and the exemption is not sufficient to cover all of their home equity, the court-appointed trustee will sell the home. The proceeds will then be used to pay for other unsecured debts, such as medical bills and credit cards.
In contrast, a Chapter 13 does not require the individual to give up property. Instead, they pay for the nonexempt portion of their home equity in the repayment plan. The filer must demonstrate they have enough income to pay what is required in the repayment plan.
It is important to note, however, there are other requirements aside from simply being able to protect or pay for the home equity. In a Chapter 7 bankruptcy, the individual will be able to keep their house if they meet the following requirements:
- They are current on their house payments;
- They protect all of the home equity with a bankruptcy exemption; and
- They continue making the required payments in the future.
A Chapter 13 bankruptcy may be a more suitable choice to allow an individual to keep their home, if they can afford a payment plan. Chapter 13 bankruptcy may also allow the individual to get rid of a 2nd or 3rd mortgage on their home.
A Chapter 13 bankruptcy provides the opportunity for the debtor to get caught up on their house payments, which a Chapter 7 cannot accomplish. The Chapter 13 repayment plan allows the individual to pay off their debts, usually in three to five years.
What Other Legal Issues are Involved in Bankruptcy Proceedings?
There are many legal issues involved in bankruptcy proceedings. Issues that an individual should consider when filing for bankruptcy include:
- Ensuring they are eligible to file for bankruptcy;
- Filing under the proper chapter of bankruptcy;
- Ensuring that they are not over the limit for the number of times they can file for bankruptcy within a specific time period;
- Understanding their obligations under the particular chapter of bankruptcy that they filed for, including which debts will need to be paid and which nonexempt assets will need to be surrendered in order to do so; and
- Being aware of updates or changes made to federal, state, or local bankruptcy laws, which may affect their case, debt obligations, and legal rights.
The best way for an individual to ensure all of these criteria are addressed is to discuss their case with a bankruptcy attorney.
How has COVID-19 Affected Bankruptcy and Home Possessions?
In response to the COVID-19 pandemic, The Coronavirus Aid, Relief and Economic Security Act (CARES) was passed, which made some temporary amendments to the bankruptcy laws. It is important to note that this Act is evolving and being extended, so it is important to check for the most up-to-date information regarding the Act and how it applies currently to bankruptcy cases.
The CARES Act has provided foreclosure relief for loans that are federally backed, such as Fannie Mae or Freddie Mac or loans that are owned, insured, or guaranteed by the FHA, VA, or USDA. In addition, many private lenders are providing relief to consumers. These actions may prevent an individual from having to file bankruptcy during the pandemic.
For individuals who do file for bankruptcy, the CARES Act has modified the current monthly income definition to exclude payments made by the federal government related to coronavirus relief. Additionally, payments made under federal law related to the pandemic do not constitute disposable income, which is required to be committed to the Chapter 13 repayment plan.
Do I Need a Lawyer for Help with Bankruptcy Issues?
Yes, it is essential to have the assistance of a bankruptcy lawyer with any bankruptcy issues you may face, even if you are simply considering filing. Your lawyer can explain the different types of bankruptcies in further detail and advise you which best suits your situation.
Your lawyer can also assist you in preparing all of the necessary documents as well as represent you in bankruptcy court. Having a lawyer on your bankruptcy case is the best way to ensure your rights, as well as your home, are protected.