Bankruptcy

[ILLMAS]

What happens to your personal home if you include it in with your bankruptcy filing? Does the bankruptcy cancel the debt or does the bank take the house?

Thanks

[rfassett]

The house is collaterolizing (sp) the debt making it a secured debt. Consequently, unless the debtor reaffirms the debt (and that means the debtor is agreeing to pay the debt with no concessions by the bank) then the bank will foreclose on the property. The bank will then sell the home to try to cover the mortgage. But as far as the debtor is concerned, again if the mortgage is not reaffirmed, the debt is cancelled (discharged) for ever and a day. The end result is the debtor gets a fresh start with a new address. The foregoing is assuming a Chapter 7 bankruptcy. The rules are different for a Chapter 13, 12, or 11.

[jainen]

>>Does the bankruptcy cancel the debt or does the bank take the house? <<

Generally secured debts get priority in a bankruptcy, but there are many opportunities for negotiation. Each state has different laws and precedence, including homestead acts. If you choose to file without legal counsel, you are pretty much stuck with however the judge feels that day.

[rfassett]

There is not much area for negotiation in a Chapter 7 as far as the primary residence is concerned. Congress has been extremely reluctant to give the Bankruptcy Court the ability to modify the primary mortgage. (The banking industry still has the stronger lobby in Washington.) But as jainen points out, each state does have its own set of exemption rules. The way that works is that if the exemption amount is greater than or equal to the equity in the house, then you can keep the house if you reaffirm the debt. If the exemption amount is significantly less than the equity in the home, then the trustee would more than likely capture the house as an asset available to sell to pay off other creditors. Again the foregoing assumes a Chapter 7 bankruptcy. In a Chapter 13, on the other hand, if there is a second mortgage on the property and the first mortgage in "under water", then many of the districts across the country are allowing the lien securing the "unsecured" second mortgage to be stripped and the debt discharged.

[rfassett]

I missed something that the original poster MAS said. There is no "IF you include" it. A bankruptcy filing requires you to list ALL of your assets and ALL of your debts and the debtor is attesting to the fact that the petition is true to the best of their knowledge. Do people hide assets? Most likely. Is it legal? No. What happens if they are caught? The bankruptcy filing is considered fradulent and the bankruptcy is dismissed with or without prejudice (depending on the judge and the severity of the fraud). That simply means that life is as if you had not ever filed the bankruptcy - or worse, not allowing you to file again for a certain amount of time. I do a lot of bankruptcy counseling - and I always, always, always tell my clients to be honest to a fault. I do not understand why anyone would want to risk the new start - considering where they are coming from and what the new start means to them, but there are some who want to play that game. If I am aware of it, they get their counsel from someone else. I don't swim in those waters.

[jainen]

>>Congress has been extremely reluctant to give the Bankruptcy Court the ability to modify the primary mortgage<<

Usually the Court itself is reluctant to modify anything. The judge expects the debtor, trustees, and creditors to present their opinions. While we usually think of a mortgage as "secured," that only protects the lender up to the balance of the equity. In a lot of BKs these days the whole purpose of the proceedings is to escape debt that exceeds FMV. Faced with large losses, banks can be pretty creative in their offers. Negotiate with them.

[rfassett]

I do not disagree with you that that is how the press and the public perceive that it is being done - and in your district it may very well be the case. But in my district, the rhetoric is there, but the substance is not. The only way you get a first mortgage modification in this district is outside of bankruptcy. A second mortgage in a Chapter 7 can be discharged to the extent that there is no value in the property securing even a little bit of that second. The second will not ininiate foreclosure proceedings because it has nothing to gain. The second's lien, however, does not go away, and if and when that property gets sold, they will have their hand out. This point is what makes the Chapter 13 appealing because the lien held by the second can get stripped away. That is how things are playing out in this district. I always encourage folks considering bankruptcy to do their homework in their own district and then hire the most competent legal counsel that they can afford.

[jainen]

>>The only way you get a first mortgage modification in this district is outside of bankruptcy<<

Technically, once the bankruptcy is filed nothing can be done except through the trustee in consideration of all the competing claims. However, it is generally not too difficult to bring reasonable proposals to the trustee. Also, sometimes the reality of bankruptcy will get the bank's attention. When the numbers work out, you can get what you need and withdraw the bankruptcy petition. Probably not what you want, but maybe at least what you need.

I'm not saying any of this is easy. It is enormously difficult. But it is possible to negotiate things in bankruptcy.