By: Justin M. Kincheloe, Esq.
In the past year, over 75,000 homes have been foreclosed in California. Distressed homeowners are given a number of options to avoid losing their homes to foreclosure. The most common option utilized is the loan modification. Other options may include short sale, deed in lieu, and bankruptcy. Bankruptcy is typically the option of last resort. There are a number of things to keep in mind when considering filing bankruptcy to stop or delay a foreclosure.
Chapter 13 is likely the better option if the homeowner wants to keep his or her home. Filing a Chapter 13 Bankruptcy will immediately stay any pending foreclosure and give the homeowner an opportunity to have a payment plan approved by the bankruptcy court. This payment plan will serve to let the homeowner catch up on missed mortgage payments over a period of up to 60 months. The homeowner is required to begin making his or her contractual monthly mortgage payments after filing the Chapter 13. Depending on ability to pay, the homeowner may also be required to pay a percentage of his or her unsecured debts. Once the judge approves the payment plan, the plan is binding on all creditors and the debtor. The homeowner must then make each payment required by the plan. The homeowner will then emerge from Chapter 13 being current on his or her mortgage and may receive a discharge of other unpaid debts.
Chapter 7 is the option for homeowners who need additional time to make arrangements to relocate and “walk away” from the home. Just as in Chapter 13, filing a Chapter 7 immediately stays a pending foreclosure. However, unlike Chapter 13, Chapter7 does not provide for repayment of the arrears. Thus, the bank may proceed with foreclosure after either receiving approval from the bankruptcy court (by filig a motion for relief from stay) or waiting for the Chapter 7 case to discharge. It usually takes about 5 months to receive a discharge in Chapter 7. In the interim, the homeowner could apply for a loan modification to save the home from foreclosure, but the homeowner should be ready to relocate if the modification is denied. The Chapter 7 discharge will eliminate any potential deficiency judgment against the homeowner that may arise from a foreclosure sale. In effect, the homeowner “walks away” from the home without any further liability.
I highly recommend that distressed homeowners consult with a bankruptcy attorney before making the decision to file bankruptcy. For information about filing bankruptcy, contact Justin M. Kincheloe at Thompson Steinberg.
Justin M. Kincheloe, Esq.
Justin Kincheloe is a partner and co-founder at Thompson Steinberg. He is licensed to practice in California and has been practicing consumer bankruptcy law for over three years. Mr. Kincheloe was born and raised in Des Moines, Iowa before moving to California. He is an avid sports fan and has a real passion for music.
**The information presented here is general in nature and is not intended, nor should be construed, as legal advice for a particular case. This blog posting does not create any attorney-client relationship with the author. For specific advice about your particular situation, please consult with your own attorney.**