Foreclosure and Bankruptcy

The following is a guest post by Caroline Palmer, and associate attorney at Oak View Law Group.

It seems like only yesterday when the real estate market was booming and everyone was investing, whether it was a home or investment property.  Then the bottom of the sub-prime lending market dropped out, leaving hundreds of people facing either foreclosure or bankruptcy, or more typically, both; and leaving the economy devastated in its wake.

Bankruptcy, whether it’s chapter 7 or 13, affects every aspect of a consumer’s finances, especially their home. Dozens of people facing the loss of their home are filing for bankruptcy, hoping to save their icon of the American dream.  But filing for bankruptcy while facing foreclosure isn’t always the answer.

Most people filing for bankruptcy in order to save their home, hear about the marvelous laws regarding automatic stays and homestead exemptions jump with joy, until they receive notice that the foreclosure proceedings are continuing even after they file.  Here’s why.

The Automatic Stay

Automatic stays are just what they say they are, stays on debt proceedings that are put into place the moment the bankruptcy petition is filed with the Federal Bankruptcy Court.  These stays prevent creditors from starting any proceedings to collect on a debt while the bankruptcy is going on. 

From the first enactment of the Federal automatic stay laws, creditors have been able to get relief from the automatic stay relatively easily, by showing that the creditor’s interest in the property is jeopardized.  In addition, Congress added another exception to the automatic stay provisions in 1994, requiring debtors with a secured loan on a single real estate asset to file a reasonable payment plan or make reasonable interest payments based on the fair market rate on the value of the creditor’s real estate during the bankruptcy proceedings.

Finally, while automatic stays will halt the foreclosure process it can only do so to a certain point.  Once judgment has been given in a foreclosure, then depending on the given state’s foreclosure procedure, it might be too late for the automatic stay to have any affect. And once the foreclosure proceedings have reached the point of being sold, then it is definitely too late for an automatic stay to take effect.

The Homestead Exemption

A Homestead exemption, for those who don’t know, is one of the judgment exemptions every state and the federal government has enacted to prevent judgment debtors and bankruptcy filers from losing all of their equity in their home.  All of these exemptions vary from state to state, and some states allow a debtor to choose between the state and federal government homestead exemptions, except for California which allows their citizens a choice between two different state exemption plans.

In addition, since bankruptcy law does not cover voluntary loans, like mortgage payments and student loans, filing for bankruptcy will not get rid of the mortgage.  Under current bankruptcy law, a debtor is required to reaffirm their mortgage in order to keep their home 45 days after the mandatory 341 meeting with their creditors.  Therefore, even once a debtor has finished the bankruptcy, their mortgage lender can still foreclose on their home.

The best way to prevent foreclosure is to work out a payment or modification plan with your lender.  There are numerous non-for-profit credit counselors as well as commercial debt management companies who can save you time and money in addition to helping you keep your home.

Comments

[Funny about Money]

I recall hearing, some years ago, that if you homestead your house (just on general principles), it will damage your credit rating, because credit bureaus and lenders interpret that as a sign that you're about to declare bankruptcy. Anybody know if that's true?

[Budgeting in the Fun Stuff]

We filed for the Homestead Exemption in Harris County asap since it reduces the taxable value in Houston houses by $15k, which saves us about $500 a year. Everybody I know has filed for their Homestead Exemption in order to receive that "discount". Our credit wasn't damamged to my knowledge...it's higher now than it's ever been.

[Jackie]

Yeah I suspect that many folks file bankruptcy out of misguided notions of what it can and cannot do for them.