Chapter 7 is the most common form of Bankruptcy. Basically you would continue to make your current home and car payments and the credit card and other unsecured debt is discharged. You are allowed to keep all possessions that fit within the exemptions. The Chapter 7 takes about 5 months to complete. It is imperative that if you are keeping your house or car that you are CURRENT with your payments. Being in a loss mitigation or work out program would not be considered current and the mortgage company will move for relief of stay to get permission to foreclose.
Chapter 13 is more of a debt reorganization. A Chapter 13 is a repayment plan lasting between 3 to 5 years. Chapter 13 is a more expensive bankruptcy, but it has some important benefits if you wish to save your home from foreclosure. The Chapter 13 allows you to catch up on the mortgage arrears during the 3 to 5 year plan. The Chapter 13 plan is a great way to deal with tax issues as the priority taxes can be paid in the plan. Chapter 13 is not for everybody, I do not put anyone into a Chapter 13 unless they need to be there. Common reasons to do a 13 are: Mortgage foreclosure and you want to save the house, Too much income and you would not qualify for a 7, Tax issues that a 7 will not address, Large non-exempt assets that the value is more than you could pay back the trustee in 10 months, Prior filing of Chapter 7 within last 8 years.
Many people are struggling with their mortgage payments and some will fall in to foreclosure. I have compiled a to-do list.
1. Don't panic, but take this seriously. If you do nothing or wait until it is too late you will lose your home. Here in Central Florida mortgage foreclosures are usually 3 1/2 to 4 months in length.
2. Respond to the Summons. True, you do not have a defense, you owe the money and you are behind, BUT it is still a good idea to file a response requesting that notice be sent to your home. Send the original to the Clerk of Court and a copy to the foreclosure attorney. Do this because then they have to send notice and you will know when the sale date is. You can't always depend on a Foreclosure Vulture" to tell you they are buying your house on Tuesday, well not if the market is bad. The larger foreclosure firms are good about sending notices even if no response and a default judgment is entered, but this is only a courtesy, not a right.
3. Be careful about the short sale. Hungry realtors will try to talk you in short sale where the mortgage company allows you to sell the house for less than is owed.
Yes, it will stop the foreclosure but you risk having to pay taxes on the windfall you received on the debt the mortgage company wrote off. If you file bankruptcy
later, the taxes owed for the short sale would be a priority debt and nondischargeable.
4. The magic refinance that will save you. Fine, try it, but, there are things to consider: What is the new rate? Is it adjustable? Is there a balloon payment? Will there be an escrow to handle the taxes and insurance? How much is the mortgage broker charging you? The other issue is timing. Will it close and fund before the sale? I have seen cases where people lost houses waiting for the refinance that never came. Note: when you file a Chapter 13, you get to keep your existing mortgage and terms, you get a chance to catch up.
5. Selling the house. If you can, great, but in a bad market you may wish to file the Chapter 13 and sell the house at a better price when the market is better or when your house is no longer a "bargain/steal" because of an impending foreclosure. Note: for best results it is wise to spend 36 months to a maximum of 60 months or more in the Chapter 13 plan as you can pay the unsecured creditors the percentage assigned at Confirmation. Selling the house to pay off the plan before then will require paying the entire amount of unsecured claims.
6. Quit Claiming to investors. I wouldn't do it. If you chose this option make sure you know the investor and can trust him or her.
7. "I am working with the mortgage company". That is all well and good, but unless you have the money to reinstate or have received an order from the court stopping the sale, it is not stopped no matter how many packets you fill out or how many voicemails you leave your mortgage case worker. If the sale is two weeks away and nothing is changing you need to consult with a bankruptcy attorney. I have seen surprised people lose there home to foreclosure trying work with the mortgage company.
8. Save money to pay the bankruptcy attorney. You have not paid the mortgage for X number of months, surely you can stash $1,000 or more the get the Chapter 13 started to stop the foreclosure. I cannot speak for all attorneys, but I will not take a Chapter 13 without at least $1000 down.
9. Contact the bankruptcy attorney at least two weeks prior to the sale date, it will make things smoother for the attorney, you, the mortgage company and the courts. It is customary to charge extra for emergency filings. Make sure you gather all the documents required and complete the Credit Counseling Certificate. If you pay by check (I prefer cash or money order), I will take it to your bank and
it if it is not good, I will not file and if you don't fix it I will not retain you and will bill you, have your new attorney (if you can find one) notice me of your bankruptcy filing.
10. Face reality. If you cannot afford the mortgage even if you were caught up, you will need to downsize your housing cost. In a Chapter 13 you will have to make the regular mortgage payment according the terms of the mortgage, pay the arrears and foreclosure costs. The bankruptcy attorney fees and the trustee has a 6% fee on every dollar in the plan. The Chapter 13 payment will be higher. If you can't pay the regular mortgage, how can you pay more in a 13 plan?
11. Consider surrendering the home in a Chapter 7. When you file a Chapter 7, the automatic stay goes in to effect and the sale is stopped and can not be rescheduled until relief of stay is sought in Bankruptcy Court. The process usually takes about two months and gives you time to get a rental deposit together and move so you can rent and relax.
12. If you don't file and the sale has occurred you have 10 days to vacate before the eviction.
IRS TAX RELIEF
While most taxes are not dischargeable there are some exceptions. If the taxes were filed on time and are regular income taxes and the taxes are over 3 years old they are generally dischargeable. It is important to consult with an attorney to make sure they are not exception circumstances in your case. A Chapter 13 does have advantages over a Chapter 7 in this area.
A repossession is a legal event, it will be reflected on a credit report, whether voluntary or not and whether bankruptcy is filed or not. If bankruptcy is filed, the debt is included in the bankruptcy and you are no longer liable for the deficiency amount.
NOTE: if the item has been repossessed bankruptcy cannot get it back to you. Here in Central Florida once an item is repossessed, you have lost your right to redeem it in a Chapter 13 Bankruptcy. If you file prior to repossession, you can catch up the payments
in a Chapter 13, or if you file a 7 the creditor cannot repossess until relief of stay is granted by the Bankruptcy Court. This usually takes a month or so.
LIENS ON HOMES
Under Florida law a judgment creditor has a lien on real property, homestead or not. Luckily for Floridians, the judgment creditor can't foreclose on the judgment lien. The judgment creditor would place a lien on the home in the public records. When you sell, convey or refinance the home, the lien would be paid at closing.
Bankruptcy allows you to avoid the judgment lien on homestead property as it impairs your homestead exemption. I have to charge extra for this as it requires extra time and work. Usually liens are removed in Chapter 7s. To remove a lien in a Chapter 13 would take 3 to 5 years. The lien can be removed until the plan is completed, making a refinance to pay off the 13 impossible. Liens can only be avoided on homestead property owned AT THE FILING DATE. I can't go to bankruptcy court to set aside a judgment lien on a house you got 3 years after filing. but if the lien has not been avoided during the bankruptcy it can be handled in State court or b) a competent title company. Remember, not all lenders will use Florida title companies and are not familiar with Florida Bankruptcy and Homestead law, they will hold your situation up to the stricter stands of whatever state they work in.
CREDIT CARD DEBT
While credit card debt is dischargeable, there are some things to take in to consideration. First is the age of the debt. If you rack up substantial debt in the months before filing, you risk objections by creditors. Secondly, if you take out large cash advances, creditors are nervous because they do not know what you did with the money, (they track your every move with regular credit card purchases), Thirdly, if you do large balance transfers the creditor that bought the debt will not be happy. Creditors can file Adversarial Proceeding to have the "abuse" amount exempted from discharge. Usually when such a situation arises, it is possible to settle with the creditor and do payments on a Stipulation to Judgment. You must list ALL cards. You can’t pick and choose. If you choose to pay off a card to keep it, the Trustee can sue the credit card provider and divide the money among all creditors. Fear not, there will be credit cards in the future. After bankruptcy, you are the safest person to loan money to as you can't file another Chapter 7 for 8 years, your debt to income ratio is better and you no longer have all those payments.
CREDIT COUNSELING: You will be required to do TWO credit counseling sessions. First is the Pre-filing Credit Counseling and you will receive a Pre-Filing Certificate. You cannot file bankruptcy without this certificate, or the case is instantly dismissed. It can be done online, it costs about $50-$70 and can be paid with a debit card. It takes about one hour. Secondly, after filing after you have a case number you can take the Debt Management Course. The cost varies between $19 to $70 and can also be done online and paid with a debit card. WARNING: You must complete this second credit counseling with in 45 days of the Trustee's Meeting. The Court will send out a 21 day warning letter and a Form 23 to sign. Do It! Failure to do the course will result in the case closing WITHOUT a discharge, which means the creditors can call and sue again. I will have to charge you a MINIMUM of $350 to reopen the case to submit the Form 23 to get the discharge.