In Foreclosure, Should I File Chapter 13 or Chapter 7?
There are several different “chapters” of bankruptcy. Some are work-out others are wipe-out, but here is the general idea. When someone files bankruptcy it’s almost like someone builds a “bullet-proof” barrier around the house. No one can touch them! However they are not free of all responsibility and most people do not understand that.
The person who just filed bankruptcy appears before a judge who looks at their status and then determines what kind of monthly payments he or she needs to make to the bank. Usually banks have to agree to the terms set by the judge. The homeowner stays in his home under the guidelines of a bankruptcy and he has to pay the agreed amount to the bank.
Depending on if it’s Chapter 13 or Chapter 7, some or all “unsecured” debt is wiped out, homeowners can still keep their homes, cars, personal belongings, etc. Some assets you may be asked to sell. Bankruptcy will usually stay on an individuals credit report for 7-10 long years, and it will haunt them the whole time. Bankruptcy makes it very difficult to qualify for loans or purchases because of the derogatory marks on their credit.
As far as which one is better, Chapter 13 or Chapter 7 when going through foreclosure, it all depends. I’m not an attorney and every situation is different and homeowners needs are different. This is where a competent bankruptcy attorney will help you to determine which Chapter is better to file based on your needs and if you’re going through foreclosure and need the protection of a bankruptcy.
Difference Between Chapter 7 and Chapter 13
Chapter 7 is the “wipe out” and Chapter 13 is the “work out”. Bankruptcy is a federal court action designed to help individuals repay their debts or eliminate their debts depending on their circumstances. Chapter 13 bankruptcies are designed to reorganize debts in an effort to repay all debt. Chapter 7 bankruptcies are geared more towards liquidation of assets. Both Chapter 7 and Chapter 13 immediately stop the foreclosure process and any creditors from taking further action against an individual.
Chapter 7 Bankruptcy
When someone files a Chapter 7 bankruptcy, all assets are frozen. The attorney will create what is called an automatic stay. Everything “Stays” put. The homeowners can’t buy anything, they can’t sell anything, and they can’t even give away anything. If they try to sell their home, they couldn’t. If they try to give away savings, they can’t. Any unsecured debt like credit cards, unsecured loans, etc. are eliminated or wiped out. They do not exist anymore. Then the trustee or attorney who represents the court and the creditors will look at all the assets (house, car, furniture, equipment) anything of value and decide what must be liquidated to pay some of the debt that was wiped out.
If the homeowners are in the middle of foreclosure, a Chapter 7 will stop the foreclosure process. Obviously banks want their money so they will usually ask the trustee to release the property from the automatic stay so they may continue with the foreclosure process. Once the property has been released from the bankruptcy, the foreclosure process starts right where it left off. If the bank asks for this release, it is called an abandonment of asset.
So, now that you know banks can do this, did you ever wonder if you could do this? Yes, you can. But why would you ever want to encourage a bankruptcy? Sometimes you may be in a position where you need more time to work out a deal. If a person files a Chapter 7, it will buy you more time. Anywhere from 3-4 weeks more.
Note: You are not a financial advisor, don’t advise them to declare bankruptcy, just let them know this is an option. Let them make the decision and meet with an attorney.
The thing you should always remember when a Chapter 7 is filed, is that you can NEVER purchase anything or record anything while the property is in bankruptcy. If you do, you will be in serious trouble. You can still work with the homeowners, get all the paperwork filled out, just don’t record anything until after the bankruptcy has been discharged.
Chapter 13 Bankruptcy
Chapter 13 is a little different. When someone files a Chapter 13, they don’t take all the assets and sell them. Instead they take all the monthly payments from creditors and discount them for penny’s on the dollar. It’s like a debt consolidation plan. Whatever amount is agreed upon has to be paid to the bankruptcy count every month for the next 3-5 years. So the homeowners get to keep their house, their cars, and all their assets. Now, as long as the homeowner stays current with the mortgage payments and pays the amount agreed upon to creditors, they will be fine. However, if any payments are missed, the trustee will dismiss the bankruptcy.
If the person cannot pay the required amount set by the judge, then in 3 months the home will go back up for auction. Believe it or not, this happens all the time. So if one files bankruptcy, follow it or give the person your business card as a 2nd alternative if for some reason they fail to make their payments again.
If you come across a homeowner who has filed a Chapter 13 and want to work out a deal all you have to do is ask the trustee to release the home from bankruptcy so you can buy it. Remember, you can work with homeowners in bankruptcy, you just can’t record anything until after the bankruptcy has been discharged.
Hypothetically speaking, most homeowners who file bankruptcy are not in a great financial situation. Most will be able to make the scheduled payments for a few months and then they are back where they started. On average, those who file bankruptcy to prevent foreclosure end up going to foreclosure anyway because they have not changed their financial situation. So if you come across anyone who has filed Chapter 13 and thinks they will be ok, always offer your business card as an alternative option because more than likely they will call you.
[Note: Bankruptcy should be the last alternative or option and should not be used to stop foreclosure unless the homeowner has no other option or else they need the protection of a bankruptcy due to other circumstances or situations they currently are up against.]
How Bankruptcy Affects Credit Report
Bankruptcy usually affects credit reports in a really bad way. It will be a big negative mark on a persons credit for at least 7-10 years. For most it’s 10 years. Everything is tied to credit especially when borrowing. Your borrowing power will be affected for some time, however it won’t be affected forever. You’ll still be able to get credit cards and slowly work yourself to good standing again even after you file. It will feel like starting from scratch. Your credit limit might be $1000 and interest rate 30% because you are considered high risk.
If you show you can keep up with payments, every 6 months your credit card limits will increase giving you more borrowing power and increase your credit score. Eventually, you can even build your credit back to good standing and purchase a car or a home, even with a Bankruptcy on your credit. It may affect the interest rate is all. So yes, BK affects a persons credit in a bad way and won’t come off for 10 years, however, life will go on and over time you will still be able to buy most anything you were able to buy before and after 10 years that derogatory mark will fall off completely.
I have tried from the very beginning to work with WF. when I knew I could not make the payments I called for help, but I was told “no help till you are late” then when I was late now no one will work me because I’m late.
I’m considering a filing Chapter 13, with the hope of working out a payment I can afford, Does anyone know what will happen to the amount I owe that is delinquent, is it added to end of the loan or what?
I’m also looking at a “short sale”. Bottom line, if I could, I would like to stay in home. Your thoughts?
UNHAPPY WITH WELLS FARGO
You might check out Nolo.com
It discusses how bankruptcy can help stop or delay a foreclosure. I would caution that many people that file bankruptcy to prevent foreclosure find themselves in an unmanageable position after the bankruptcy.
The is especially the case with Chapter 13 since you’ll end up paying a payment to the bankruptcy court on top of all the other bills you have. In many cases, this ends up requiring you to pay more out of pocket every month because all of your debts are split across a 60 month (or whatever you agree to) period. This means many of your debt payments will increase rather than decrease.
And if you go into foreclosure again after you begin the bankruptcy workout, you probably won’t be able to file bankruptcy again and the foreclosure action can pick up right where it left off, leaving you with very little time to act. Hopefully, that won’t happen, but you need to be aware it could.
Bankruptcy can be a good way out in certain circumstances, but be careful and think it through carefully.
My husband and I are filing bankruptcy in February due to financial difficulties. We planned on re-affirming on our house. Today my husband was offered a job out of state, much better money and more stability. Obviously we are going to accept it and move. The housing market in our area is terrible and we owe as much as the house is worth. Should we just foreclose on the house? How much worse on a credit report does a foreclosure look compared to just a bankruptcy? Will we ever be able to get another mortgage?
There are better alternatives than bankruptcy and foreclosure. I would only file bankruptcy if you need the protection of it. Yes, your credit will be ruined no matter which option you choose and like I mentioned in the article, you can get another loan eventually, however your interest rates will be a lot higher because you pose a risk.
Filing bankruptcy doesn’t release you of all your obligations either. If you file bk, you will also have a bk on your credit and the property may still go to foreclosure. Many homeowners now are trying the lease option approach.
Another option is a short sale, where an investor will negotiate with the bank to accept less than what is owed so you can sell it. Although it will ding your credit, it won’t be as bad as a bankruptcy or foreclosure.
If I was planing on moving, I would buy something now while my credit was still good and then work really hard to keep foreclosure off my credit by trying other alternatives. You could also try deed-in-lieu. Check out my freereports on Options of Homeowners. I think it will help you a ton.
We filed chpt 7 BK under old rules and kept the house in Ohio because there was <$10K in equity. There was no reaffirmation filed so lenders recourse is against the house in only with no deficiency. We attempted to sell house for 2 years for just enough to pay off loans. We are clearly upside down now with debt about $140K and market value probably about $120k.
It made no sense to even try to bring things current and maintain the debt as that would defeat the purpose of the bankruptcy which was to get us back to -0- and a new start.
Due to loss of my income, we fell behind on payments with Wells Fargo Home Loan (HELOC). They wouldn't take partial payment. We also stopped payments on the first with WFB, knowing foreclosure would be eminent.
We are now pending the sheriff sale.
WFB failed to respond a second time to the claim that WFHL was in first and the courts judgement awarded WFHL first position. The WFHL loan is the smaller loan ~$45K while the WFB loan is ~$95K.
The Appraisment for sheriff sale was $85k with minimum bid being 2/3 of appraisment.
IF I have someone else with the credit and funds to work with me do I have any alternative route other than letting it go to the sheriff sale? Could the larger note be purchased at a step discount and then simply refi redeem the smaller loan in full? Should I try to repurchase it at the sheriff sale for the much lower price? Was there a better alternative that I missed?
You might look at doing a short sale or deed-in-lieu. There is a link in the above post with other options of homeowners. Take a look.
We live in CT and
My wifes business has failed, the business was purchased 3 yrs back with a lien of 165k on home to secure note with previous owner of business. House was worth 575K back then, now its worth 350k. We owe 400k on mortgage but I can no longer afford home payment with just my job.
We have to go bankrupt because of mounting credit card bills(business stop producing income for 6 months) and to discharge note with previous owner. Also bankruptcy chapter 7 should strip previous business owner lien on our house. Goal with business to remove remaining Note debt and lien on our house.
Regarding mortgage we are two months behind payments and will not be able to make payments on 400k mortgage.
My question is that of timing.
If we are pursuing a Loan modification or perhaps a short sale, should this be done before filing bankruptcy or after? Our choices are limited as we run out of funds but would it be better to hold of filing chapter 7 for as long as we can to attempt loan modification on home or regarding the home mortgage holder is it better to attempt loan modification of home mortgage after?
Considering my mortgage is 400k on a home worth 350k what is realistic to expect as a modification, fixed rate of 3%? or reduction in principal (hope now program)?
It really depends on your situation. I know you’ve explained your situation in some detail, but there is a lot more to it and I can’t tell you what to do nor give you advice… What I can tell you is that loan modifications and short sales can be done before or after a bankruptcy. I personally like to do short sales before bankruptcy, that way if the numbers work out for the homeowner, they don’t have to file BK. Also, if by chance the lender files a deficiency judgment for the amount that was lost, a BK will eliminate it.
I entered Chapter 13 a little over a year ago. Mortgage arrears of about $4000 are in there. Have had a hard time since then of staying up to date. About 3 or 4 payments behind.
Mortgage company filed for a stay and was release from the Bankruptcy.
No equity in the house. Paid $197.000 for it 3 years ago. Terrible 9% adjustable loan (Not sure what it would have been this year).
I will now have to deal directly with the mortgage co and will face foreclosure if I can’t work something out. I have no money and cant afford the current payments. 2 years behind on Property taxes.
I live in Ga.
After losing my job 2 years ago, and my wife’s salary at her work being reduced by almost 50% last month, things are not good. We are significantly behind on our mortgage, and we have received a foreclosure notice. I have been in constant touch with our lender, and their attitude is “we can’t do anything, just get yourself current on your payments!”. We have significant equity in our home, and I have a rental property which I have placed on the market. When the rental property sells, there will be sufficient funds to get current on the mortgage, and pay down a large chunk of the remaining principle. I have communicated that with the lender, but they refuse to offer any solutions. The best they were able to do was offer me a “deed in lieu”, but with the remaining principle on the mortgage only about 35% of the home’s current value,(65% equity) that was nothing more than an insult. I have considered a Chapter 13, but that hinges on having income to repay the current debt within 5 years. I have several prospects for employment as of this writing, but even in the best case scenario, I wouldn’t start work until mid October at the earliest. I have talked to a credit consular, and they told me that without a job and source of income, there was little they could do. Does anyone have any suggestions to delay the foreclosure proceedings for a few months, until my rental property sells and closes, and I begin working again? Thanks!!!
Have you tried to borrow the money from a good friend, family member or relative? Have you tried to take out a cash advance from credit cards? Sell personal belongings to people you know who will sell them back to you later or just sell them because they can be replaced later. 65% equity is much harder to replace and something you don’t want to lose.