Bankruptcy, Foreclosure, & Credit – How it Affects You

The “Ask the Wiz” board has become inundated with questions about bankruptcy, foreclosure, credit and how it affects your business, your finances and your real estate.

The following are answers to common questions:

Q: “What is the difference between chapter 13 and chapter 7 bankruptcy?”

Chapter 7 Bankruptcy is a complete liquidation of your assets and debts. With few exceptions, all of your debts and contractual obligations are wiped out in Chapter 7 Bankruptcy. However, all of your assets may be subject to liquidation and sale. There are some exemptions in bankruptcy; that is, some items that you cannot lose in bankruptcy. These items are set forth in 11 United State Code Section 522:

• Real property, including co-op or mobile home, to $15,000 Disability
• illness or unemployment benefits
• Life insurance payments for person you depended on, needed for support,
  Life insurance policy with loan value, in accrued dividends or interest, to $8000
• Unmatured life insurance contract, except credit insurance policy
• Alimony, child support needed for support
• ERISA-qualified benefits needed for support
• Animals, crops, clothing, appliances, books, furnishings, household goods,
  musical instruments to $400 per item, $8000 total
• Health aids
• Jewelry to $1000
• Lost earnings payments
• Motor vehicle to $2400
• Personal injury recoveries to $15,000 (not to include pain & suffering
  or pecuniary loss)
  Wrongful death recoveries for person you depended on
• Crime victims' compensation
• Public assistance
• Social Security
• Unemployment compensation
• Veterans' benefits Implements, books & tools of trade to $150

There is not much to keep, but state law may provide additional (or different) exemptions. In addition, good advance planning may allow you take advantage of the exemptions to their fullest extent. A good bankruptcy attorney can help (this is why you should shop for talent, not price when choosing a bankruptcy attorney).

Chapter 13 bankruptcy is like a forced settlement on your creditors (called “reorganization”). In most cases, you will be paying back 100% of your debt (especially secured debts, like mortgages), but on a 3 to 5 year payout. Chapter 13 is good for people who own a house, are still working and can continue to make monthly payments. If you are not working and your debts exceed your assets, Chapter 7 is usually more appropriate. You can always start Chapter 13, then convert to a Chapter 7.

Q: What debts are not dischargeable?

With some exceptions, the following debts remain even after bankruptcy:

• Child support & alimony
• Student loans that became due less than 7 years ago
• Federal and state income tax obligations less than 3 years old
• Debts for restitution from criminal convictions and drunk driving
• Debts the bankruptcy court decides where from intentional acts, fraud or wrongdoing (e.g., lying on your bank loan application).

Q: What is chapter 11 bankruptcy?

Chapter 11 is reorganization for businesses and individuals with debts too large for Chapter 13.

Q: What happens if my tenant files for bankruptcy?

The filing of a petition for bankruptcy (7 or 13) automatically “stays” any collection efforts of creditors. This means you cannot evict a tenant for foreclose upon a borrower (or, if you have started, must stop proceedings) who has filed. This “stay” does not last forever; you can march into bankruptcy court and request that the stay be lifted against you so that you can proceed with the eviction. Thus, bankruptcy may only delay an eviction a month or two.

Q: How long does bankruptcy stay on my credit report?

Information about your bankruptcy can remain on your credit report for up to 10 years.

Q: I was divorced, and my spouse got the house – How can I get my name off my mortgage?

You can't. If you borrow money to purchase or refinance your home secured by a lien on your home, the lien remains when you transfer your half of the property to your spouse. However, the promissory note you signed for the debt still remains your obligation. If your ex-spouse is now in default, you should get try to get a deed back. Once you own the property again, you can negotiate with the lender, rent the property or sell it. Once you give up your ownership, you are out of luck, yet still on the hook.

Q: My home loan is in default – What happens now?

If you are default on your payments, the lender can commence foreclosure proceedings to take back the property. This can take anywhere from 4 to 9 months, depending on what jurisdiction you live. In addition, the lender will have to evict you from the property after the foreclosure is complete. Since most lenders do not start proceedings until you are in default at least three months, you may have up to a year or more to remain in the property. Furthermore, you have a legal right to contest the foreclosure proceeding (if you have legitimate legal defenses, such as improper procedure) or even file for bankruptcy. Properly used, the legal system can buy you months of time. However, if you abuse the system, you can be sanctioned by the court, be required to pay fines and be denied discharge in bankruptcy.