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What is a Bankruptcy?
A Bankruptcy generally removes your personal liability for most types of debt. Bankruptcy historically was intended for use where one was insolvent, meaning that their debts were greater than their assets.
Bankruptcy when in foreclosure?
While homeowners may not realize this, if you are in foreclosure, chances are that your are insolvent due to sheer magnitude of the debt owed on most mortgages, particularly where real estate prices have either fallen or not risen.
Types of Bankruptcy
Bankruptcies are not all the same. To begin with, there are three common variants: Chapter 7, Chapter 13, and Chapter 11. Each type of bankruptcy has certain features and it is critical to select the correct Chapter to file under, depending on your particular circumstances. Read below to learn about the benefits and features of each of these types of bankruptcy.
Chapter 7 Bankruptcy: the basics
Chapter 7 - This type of bankruptcy is essentially a liquidation. Under a Chapter 7, you include all your debts in a petition, and once they are discharged, you will not be personally liable for them any longer.
Most debts are dischargeable although there are exceptions, such as student loans which are in most cases not dischargeable. For a foreclosure, a Chapter 7 provides a couple things:
First, it will impose an automatic freeze on the foreclosure process. Second, it will absolve you of personal liability for the mortgage debt.
This means you wont be personally responsible for any amounts owed to the bank. Importantly, the Chapter 7 will not stop the bank from eventually resuming the foreclosure and selling the property at sheriff sale to attempt to satisfy their debt. A Chapter 7 is the most inexpensive type of bankruptcy to file as well.
Chapter 7 Bankruptcy provides immediate relief from debt collectors
Filing a Chapter 7 Bankruptcy provides immediate relief from bill collectors by stopping any collection activity. When the case is filed, an immediate freeze is placed on any collection activities. This freeze is typically in effect for 90 days. If a creditor tries to take collection action against you during this freeze, they must reverse any action they take and can be liable for penalties.
What is the goal of a Chapter 7 Bankruptcy?
Chapter 7 is intended to give you a fresh start or a "clean slate" by eliminating your debts. In a successful Chapter 7 case, all eligible debts become "discharged", meaning you are no longer liable for them. As a result, financial recovery becomes possible.
Can anyone file for a Chapter 7 Bankruptcy?
While anyone can file for Chapter 7 Bankruptcy, not everyone qualifies to receive a discharge. If you do not qualify, your case can be dismissed without a discharge or can be converted to a Chapter 13 bankruptcy. If your income is below the median for your state and family size, there is no "presumption of abuse" and you qualify. Even if your income is above the median, there are ways to rebut the presumption of abuse and qualify. This entails a detailed look at your financial situation to determine if you have eligible expenses.
Which debts are dischargeable in a Chapter 7 Bankruptcy?
Most debts are dischargeable in a Chapter 7 Bankruptcy, especially the most common types of debt such as credit cards. There are exceptions however, such as student loans which are in most cases not dischargeable. Personal liability for home loans or car loans is dischargeable, but your creditors can still pursue their collateral, unless a reaffirmation agreement is entered into.
How does a Chapter 7 Bankruptcy affect a foreclosure?
While a Chapter 7 can temporarily freeze a foreclosure which is in process and eliminate your personal liability for mortgage debt, it cannot ultimately save your home, unless other steps are taken, such as applying for (and obtaining) a loan modification. We have seen many cases where clients who were in foreclosure were improperly advised to file a Chapter 7 at the wrong time. It is very important for your attorney to truly understand the foreclosure process and work with you to develop a customized game plan with respect to the timing of bankruptcy filing and other foreclosure defense tactics in conjunction with one another.
What are the steps in a Chapter 7 Bankruptcy?
Preparation for Chapter 7:
The filing of a Chapter 7 case involves preparation with your attorney using financial information and documents (paystubs, bills, bank statements, etc.) so that the document which begins your case (called a petition) can be filed with the court. Part of this preparation involves taking an online credit counseling course which must be done prior to the filing of your petition. We recommend using Allen Credit & Debt Counseling Agency to complete the brief online course. The cost is only $20.
Filing of Chapter 7 Petition:
Once your Petition is filed, a trustee is appointed who is tasked with determining if there are any assets available which can be sold to satisfy your creditors. In the majority of cases this is not the case, especially due to the fact that many exemptions exist to protect basic assets, however it is important to thoroughly review your assets before the filing to determine if the Trustee could potentially sell some of the assets once a case is filed.
Providing Documents to the Trustee:
The Trustee will require various documents to be submitted shortly following the filing of the petition. These documents typically include last 2 filed tax returns, proof of income, and information about major assets like your home (property value and any mortgage statements). If documents are not available, explanations can be provided.
Meeting of Creditors:
Approximately a month after filing, you will need to attend a meeting of creditors. This "meeting" usually does not involve creditors at all. Rather, it is a brief (under 10 minutes typically) interview with the Trustee, given under oath. The Trustee asks you questions regarding the petition and is looking to determine if the information provided is accurate.
Critically, you MUST bring your drivers license (or passport) as proof of identity and you MUST also bring proof of your social security number (card or other proof) to the meeting of creditors.
In New Jersey, the meeting of creditors can be held in one of several locations. For most North Jersey cases, the meeting is held in Newark at One Newark Center, Suite 1401, Newark, NJ 07102. Directions to all the locations can be found here: http://www.njb.uscourts.gov/court-info/directions-first-creditor-meeting. The Newark location is in an office building and upon arrival you will see many other individuals and attorneys waiting for their turn to speak with the Trustee.
Second Credit Counseling Course:
You need to complete a second credit counseling course following the meeting of creditors. This can be done through the same provider given above.
Order Granting Discharge and Moving Forward:
Barring any unusual issues or problems, you will be granted a discharge of your debts. You are no longer liable for discharged debts.
Chapter 13 Bankruptcy
Chapter 13 - This type of bankruptcy is designed to give the filer time to catch up on payments owed. Generally, a Chapter 13 allows for a debtor to take arrears and divide them into 60 payments which are payable over 5 years.
Depending on how much is owed and how much the house worth, a Chapter 13 can be a good option for the right homeowner. We frequently see Chapter 13 bankruptcies filed where they are of little benefit due to misunderstanding about how they work. While Chapter 13 Bankruptcy provides an immediate avenue to restructures your debts, it is important to assess whether it is worth restructuing them in the first place.
What is the goal of a Chapter 13 Bankruptcy?
Chapter 13 is intended to give you the chance (and the necessary time) to restructure and repay your debts.
Can anyone file for a Chapter 13 Bankruptcy?
While anyone can file for Chapter 13 Bankruptcy, not everyone qualifies to have a proposed plan confirmed. If you do not qualify, your case can be dismissed without a discharge or can be converted to a Chapter 7 bankruptcy. If your income is above the cutoff for Chapter 7 , then you will likely need to file under Chapter 13.
How does a Chapter 13 Bankruptcy affect a foreclosure?
Many homeowners have been turned down for a loan modification or simply cannot catch up on mortgage payments after a temporary hardship has been resolved. A Chapter 13 bankruptcy, by allowing you to proposed a repayment plan, can act similarly to a loan modification and stop a foreclosure permanently. By breaking arrears up into 60 payments, it affords you the chance to finally catch up and eliminate the danger of a foreclosure. Whether a Chapter 13 makes sense for a homeowner depends on many factors. It is very important for your attorney to truly understand the foreclosure process and work with you to develop a plan that can work for you.
What are the steps in a Chapter 13 Bankruptcy?
Filing of Petition
Plan Proposal and Beginning of Payments
Making Payments as Called for by Your Plan
Chapter 11 Bankruptcy
Chapter 11 - Perhaps the most famous type of bankruptcy due it being the one major corporations often resort to in tough times, the Chapter 11 is for "restructuring" debt. Although thought of as a corporate remedy, Chapter 11 options can be available to homeowners in certain circumstances, such as for rental properties, or properties where business activity is conducted. Although a Chapter 11 is the most complex and costly type of bankruptcy to pursue, it is the only one where a radical restructuring of a loan is possible.
We have experience with all of the above and can help you determine if bankruptcy is right for your situation, and if so, which type of bankruptcy would work best.
Each type of bankruptcy has certain features and it is critical to select the correct Chapter to file under, depending on your particular circumstances.
Please contact us for more information regarding bankruptcy options.