Chapter 7 Bankruptcy Effects on Foreclosures
Chapter 7 remains the most popular form of bankruptcy for consumers. Filing for Chapter 7 allows a debtor to stop collection actions, at least temporarily, and discharge most unsecured debts. The majority of debtors think this is a good deal. Even though unsecured debts may be discharged in a Chapter 7 case, the debtor must still figure out what to do with secured debts, such as a mortgage loan.
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Secured and Unsecured Debts
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When a debtor takes on secured debt, he signs a contract stating that if he does not pay the debt according to contract terms, the lender may take his property to settle the amount owing. Examples of secured debt include motor vehicle loans and mortgages. With unsecured debt, the debtor simply makes a promise to pay by signing the loan contract. Examples of unsecured debt include student loans and credit card debt.
Stop Foreclosure
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As soon as a debtor files a Chapter 7 bankruptcy petition, an automatic stay goes into effect. The stay prevents creditors from collecting on debts until the bankruptcy case is settled. If the debtor has been threatened with foreclosure, he can breathe easy now because the lender cannot foreclose on his home.
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Chapter 7
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The Chapter 7 process goes as follows: A trustee will be appointed to oversee the case. The trustee will examine the schedules the debtor filed with his petition and take charge of the debtor’s property. The debtor’s property becomes the property of the bankruptcy estate. The trustee will then separate property the debtor can keep from property that must be sold. The trustee will return all exempt property to the debtor and sell the non-exempt property to repay the debtor’s creditors. At the end of the case, the debtor will receive a discharge of most unsecured debts.
During the Stay
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It is important to note that a mortgage is not an unsecured debt; therefore even though many of the debts have been discharged, the mortgage debt remains. A Chapter 7 case takes a few months to be completed; and during that time, the debtor will not have to make payments on the mortgage. He will need to make other living arrangements. The debtor could save money and find a new house or apartment because Chapter 7 will not help him keep his house. Chances are, if the debtor could not make the payments prior to filing bankruptcy, he will not be able to make payments after filing bankruptcy. The best course of action would be for the debtor to find cheaper housing.
Conversion
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If the debtor can afford to keep the home, he should convert his Chapter 7 case into a Chapter 13 case. In a Chapter 13 case, the debtor would set up a repayment plan, spanning three to five years. During this time, the debtor can make up any missed payments, but he would also have to make the regularly scheduled payments on top of the missed ones. A debtor who fears that foreclosure will be in his future should consult an experienced bankruptcy attorney, who will aid the debtor in choosing the best course of action.
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References
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