What Exactly Is Bankruptcy?

Bankruptcy is a federal court process designed to help people eliminate their debts or repay them under the protection of the bankruptcy court. Bankruptcies can generally be described as “liquidation” or “reorganization.”

Will Filing for Bankruptcy Protect Me from Creditors’ Efforts to Collect What I Owe?

When you file bankruptcy, an “automatic stay” goes into effect. The automatic stay prohibits most creditors from taking any action to collect the debts you owe them unless the bankruptcy court lifts the stay and lets the creditor proceed with collections.

What is the Difference between Chapter 7 and Chapter 13 Bankruptcy?

In Chapter 7 bankruptcy, you ask the bankruptcy court to discharge most of the debts you owe. In exchange for this discharge, the bankruptcy trustee can take any property you own that is not exempt from collection, sell it, and distribute the proceeds to your creditors.

In Chapter 13 bankruptcy, you file a repayment plan with the bankruptcy court to pay back your debts over time. The amount you’ll have to repay depends on how much you earn, the amount and types of debt you owe, and how much property you own.

What Might I Lose if I File for Bankruptcy?

  • You may be able to exempt up to $17,425 of your home’s equity. Some states have no homestead exemption; others allow debtors to protect all or most of the equity in their home. (This is only an estimate, so please consult a local bankruptcy lawyer to discuss your individual situation)
  • Insurance. You usually get to keep the cash value of your policies.
  • Retirement plans. Pensions that qualify under the Employee Retirement Income Security Act (ERISA) are fully protected in bankruptcy. Additionally, so are many other retirement benefits; often, however, IRAs and Keoghs are not.
  • Personal property. You’ll be able to keep most household goods, furniture, furnishings, clothing (other than furs), appliances, books and musical instruments. You may be able to keep jewelry only worth up to $1,000 or so. Most states let you keep a vehicle with more than $2,400 of equity. And many states give you a “wild card” amount of money — often $1,000 or more – that you can apply toward any property.
  • Public benefits. All public benefits, such as welfare, Social Security, and unemployment insurance are fully protected.
  • Tools used on your job. You’ll probably be able to keep up to a few thousand dollars worth of the tools used in your trade or profession.
  • Wages. In most states, you can protect at least 75% of wages that you have earned but not yet received.

How Creditors Can Get Around the Automatic Stay

Usually, a creditor can get around the automatic stay by asking the bankruptcy court to remove (“lift”) the stay if it is not serving its intended purpose. For example, say you file for bankruptcy the day before your house is to be sold in foreclosure. You have no equity in the house, you can’t pay your mortgage arrears, and you have no way of keeping the property. The foreclosing creditor is apt to run to court soon after you file for bankruptcy, to ask for permission to proceed with the foreclosure – and that permission is likely to be granted.

Will bankruptcy stop a foreclosure?

Yes and no… A home is an asset usually secured by a deed of trust. The mortgage company is entitled apply to the court for relief from the automatic stay, the order preventing creditor action by virtue of the bankruptcy. Depending upon several factors, you may be able to prolong a foreclosure until you have received your discharge from bankruptcy. Usually, to keep a home that is in foreclosure you will have to make a deal with the mortgage company. This is the key, you still must work something out with the mortgage company to repay the past due amount. This is why we say filing for bankruptcy is like putting a band-aid on a bullet wound… it may help you at first but major surgery is still required.

The bottom line is that bankruptcy may buy you a small amount of time but negotiations will still need to be made with the mortgage company to enable you to keep your home. Most people who file bankruptcy to save their home from foreclosure wish they had not because in most cases they are in a worse position that when they started. Filing bankruptcy removes your leverage and places your fate in someone else’s hands. Your best option is for you to stay in control, and allow AFS to attempt to work something out for you prior to filing.

Pros for filing bankruptcy to stop foreclosure

  • The foreclosure proceedings will be temporarily suspended.

Cons for filing bankruptcy to stop foreclosure

  • There will be a bankruptcy on your record for 10 years.
  • The mortgage company can work around the bankruptcy and still foreclose.
  • You lose any leverage and control you once had.
  • A deal must still be worked out with the mortgage company to repay the past due amount.
  • If you are 1 day late on any trustee payments your case may be dismissed, the stay will be lifted and you will be back in foreclosure.
  • We can negotiate on your behalf with the mortgage company to keep your home from foreclosure and get your loan back in good standing.

We are not attorneys and in no way are giving you legal advice. We are only attempting to explain how bankruptcy may affect foreclosure in our opinion. You must consult a local attorney to discuss your case as it concerns bankruptcy.