Get advice if 1) you can’t afford your house payments, 2) it has an income tax lien, or 3) your mortgage modification was rejected.

 

The last blog gave three reasons why you should get advice from a bankruptcy attorney before selling your home. Here are three more. They will help you make better decisions about your home, and could save you lots of money.  

1.  If you think you can’t afford the house payments:   

You may really need to sell your home if it’s more house than you need, or its cost is way beyond your present financial abilities.

But, if you would greatly prefer to keep your home, and wish there was a way to do so, you may be able to. You may be able to reduce your home’s monthly cost, and do so even if you are under threat of foreclosure. Or you may be able to afford your present monthly cost, or a reduced cost, if no longer had to pay all or most of your other debts.

Last week’s blog gave you some ways to reduce the debts on the house itself (second mortgage lien “stripping” and judgment lien “voidance”), and next week’s will give some more.

As for reducing or getting rid of the rest of your debt, even if you don’t like the idea of filing bankruptcy you should find out your options. Especially with home prices starting to rise now in most parts of the country, now could well be the best time to use some of the extraordinary tools of bankruptcy. For example, if your home is “underwater” (you owe more than it’s worth), with a second mortgage “stripping” you can take advantage of the last half-decade’s loss of equity in your home, which likely you would not be able to do in a year or two if values continue to rise.

2.  If you have income tax debt:   

If you owe back income taxes, these taxes may have already attached to your home’s title through the recording of a tax lien. Or that may happen soon. With that tax lien or fear of one arriving, you would understandably feel some pressure—especially when combined with financial pressures on the home from other sources—to sell your home to pay those taxes.

But bankruptcy can often help you deal with your tax debts, often in surprisingly beneficial ways. Some income taxes—usually if they are old enough—can be forever “discharged” (legally written off) altogether. And those that can’t be discharged would likely be able to be paid much less than they would outside bankruptcy, through huge savings in interest and penalties, and other possible advantages. Tax liens in particular can be handled much better within bankruptcy. And most importantly, you and your home can be protected throughout the time the taxes are taken care of, taking away much of the pressure for you to sell your home.

So if income tax debts or tax liens are part of why you feel you must sell your home, first find out how bankruptcy would handle them.

3.  If your mortgage modification application was rejected:   

Although arguably the processing of mortgage modifications has improved over the last couple of years, they often continue to be a terribly frustrating procedure to go through. There are definitely times when mortgage modification requests are rejected because the homeowner failed to fully complete the application or the mortgage lender did not process it accurately. It may not even be clear why the modification was not approved. After going through this challenging process without a reduction in your mortgage payments, understandably you may well feel like you have no choice but to sell your home because you can’t afford it.

However, sometimes a bankruptcy filing—either Chapter 7 or 13, depending on the circumstances—can help get a mortgage modification approved. Reducing your debts through bankruptcy provides you more resources to put into your house, generally making you a better candidate for mortgage modification.

Conclusion

Deciding whether to sell your home of course involves many factors—personal, financial, and legal. Based on these last two blogs you can see that there are tools to help you keep your home—either for a limited period of time or permanently—that you likely were not aware of earlier. And these are just a few tools (with a few more next week), and they are just being discussed in general terms. Consider how much sense it would make to have your own unique situation be carefully reviewed by a competent attorney, resulting in a game plan designed to meet your personal needs and goals. You may be pleasantly surprised by the options and advantages that would apply to you. Let us help you make an informed and wise choice about your home. 

If you’re hurting financially, getting advice from a bankruptcy attorney before you sell your home could save you lots of money. 

 

Here’s how:

1.  Get rid of judgment liens, instead of pay them.

If you have been sued by a creditor, or by anybody, and you didn’t resolve and pay the obligation, most likely a judgment was entered against you.. You might not even realize or remember if this has happened to you. It may have been many years ago, potentially even before you bought your home.

Even if you did deal with it at the time and settle the matter, and are making payments under an agreement with the creditor, most likely a judgment was still entered against you in case you didn’t end up paying as agreed.

Either way, the judgment is very likely a lien against your home. That lien amount is often substantially more than the amount you thought you owed the creditor, because of extra costs that the creditor stacks onto the basic debt—for court filing fees, attorney fees, late charges, and continuously accruing interest.

Even if you haven’t been sued by a creditor, if you are behind on payments a creditor may sue you in the near future. That creditor could get a judgment against you and place a lien on your home’s title before the closing of your intended home sale.

In all these situations, the judgment lien generally has to be paid in full before the house sale can close. If, as usual, the judgment is paid out of the proceeds of the sale, this reduces the amount you receive. Or the lien could reduce the amount of money available to go to more important debts, such as taxes, child or spousal support.

If there are not enough sale proceeds to pay the judgment, you will either have to pay the full judgment amount out of your pocket, or at least some discounted amount to get the creditor to release the lien. To the extent that you don’t pay it in full, you would likely continue owing the balance. Finally, if you don’t have enough to pay off the judgment creditor and it won’t settle under reasonable terms, that could kill your sale.

In contrast, either a Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts” can often “avoid”—permanently get rid of—that judgment lien and “discharge”—legally write off—the debt that resulted in the judgment. That would allow you to sell the home without paying anything on that debt.

2.  “Strip” a second mortgage.

Chapter 13 (but not Chapter 7) can often allow you to “strip” your second (or third) mortgage from the title of your home, resulting in you paying little or even nothing on that mortgage. This can save you tens of thousands of dollars, or even hundreds of thousands of dollars, especially when considering the interest savings over the length of time that you would own your home.

Chapter 13 is able to do this by changing the debt secured by the mortgage to an unsecured one, and then lumping that debt in with all your other unsecured creditors, and paying them only as much as you are able to over a 3-to-5-year period. This only works if your home is worth no more than the balance on the FIRST mortgage (plus the balance on any property taxes or other “senior” liens). In this situation, the law effectively acknowledges that all of your home’s value is eaten up by liens that are legally superior to the second mortgage, leaving no equity at all for that second mortgage, making it an unsecured debt.

At the end of your Chapter 13 case, having paid what your budget says you can afford to all of your unsecured debts, including the debt formerly secured by the second mortgage, the remaining balances on all of your unsecured debts, including the second mortgage one, would be permanently written off. You end up with your home completely free and clear of that mortgage, and much less underwater.

3.  Buy time for better offers.

Filing bankruptcy can buy more time for you to sell your house. It can buy a little extra time or even potentially a couple more years to sell.

A home sold under time pressure will almost never get you a good price. You will much more likely receive the maximum sale price after buyers have had plenty of time to view the property and make offers.

If you feel under immediate time pressure to sell because of a threatened or pending foreclosure, or because of other creditor problems, Chapter 7 can usually buy at least an extra few weeks, often an extra few months, and sometimes even longer, depending on the aggressiveness of your mortgage holder.

A Chapter 13 case could buy you many months or even a few years, depending on the circumstances. This may be very important for family and personal reasons. Also, considering that in many real estate markets the property values are steadily increasing, the additional time may even allow you to regain some of the property value lost in the “Great Recession.”

These advantages in selling your home—advantages in money and timing—are only possible if you meet with a competent debtor-creditor attorney and formulate an appropriate strategy, BEFORE you decide to sell the home.

The next blog will give you more ways that bankruptcy can give you huge advantages with your home. These can completely change whether or not you should sell your home, if you sell when you should sell, and who would get paid from the sale proceeds.

 

Give yourself a fresh financial start not just with your debts, but also with your assets.

 

How to How to Get the Most Out of Your Bankruptcy

The focus in bankruptcy is on dealing with your debts, wiping out and getting a handle on the negative side of your balance sheet. But getting a financial fresh start means not just getting relieved of your debts, but also protecting your essential assets—the positive side of your balance sheet. You can maximize this crucial benefit of bankruptcy by not selling, using up, or borrowing against your protected assets BEFORE filing your bankruptcy case.

In my daily work as a bankruptcy attorney, I constantly meet with new clients who have sold, spent, or borrowed against important assets in desperate attempts to keep their heads above water. Some of them have even done so thinking that they would just lose that asset once they file a bankruptcy so why hang onto it. But it is much more difficult to get your financial footing if you have nothing to stand on—if you don’t have at least basic housing, household goods, clothing, transportation, and, where appropriate, tools of trade, unemployment or disability benefits, and retirement savings. 

Bankruptcy Protects Assets

If you are like most people, bankruptcy will protect all of your assets. First, Chapter 7 “straight bankruptcy” protects all “exempt” assets, so that a very high percentage of people who file under Chapter 7 keep everything they own. Second, if you have assets which are worth more than the applicable “exempt” amounts provided by law, Chapter 13 “adjustment of debts” can almost always protect those “non-exempt” assets as well. And third, if you do have assets that are not “exempt,” with wise pre-bankruptcy planning with a knowledgeable bankruptcy attorney those assets can be all the better protected once your bankruptcy case is filed.

Get Legal Advice BEFORE Wasting Your Assets

Bankruptcy cannot protect what you’ve already squandered. When people sell, spend, or borrow against their assets before filing bankruptcy, most of the time those assets would have been completely protected had they filed bankruptcy while they still had them.

Think about this: if you are considering spending, selling, or borrowing against any of your assets, do you know whether that asset is one which would be protected in bankruptcy?  Do you know the full consequences of whatever you are planning on doing, either in your effort to avoid filing bankruptcy or to position yourself for filing?

These kinds of decisions can have serious long-term consequences, so they shouldn’t be made without legal advice about the alternatives. Consider a person in her late-50s cashing in a substantial amount of her 401(k) retirement plan to keep paying creditors when those creditors could be—and eventually are–written off in bankruptcy. That decision would likely significantly harm the quality of her retirement lifetime, with no tangible benefit to show for it.  Or consider a husband and wife selling a free-and-clear vehicle that’s in good condition on the assumption that they’ll lose it once they file bankruptcy, using the money to pay creditors that could be—and eventually are written off in bankruptcy—only to be left with a single older vehicle that won’t reliably get them to work. That decision would lead to anything but a fresh start for them. Of course they would have been better off to find out if their reliable vehicle could have been protected, which it almost certainly could have through either Chapter 7 or Chapter 13, possibly assisted by some asset protection planning beforehand.

For understandable reasons and some not so sensible ones, people tend to get legal advice only when they are in serious trouble, and after they have made and acted on these kinds of harmful decisions. Please avoid this. You can get a better fresh start by getting the necessary advice so that you can preserve your important assets before they are gone. 

What if you could pay less per month, lower the interest, and pay less until you owned your vehicle free and clear?

 

Bankruptcy as a Game-Changer

Bankruptcy is full of surprises, mostly pleasant ones. The most important reason to see a bankruptcy attorney sooner rather than later is that you will then more likely be able to take advantage of those pleasant surprises.

Vehicle Surrender or Repossession Almost Never Good

Whether or not bankruptcy can save your car or truck, surrendering it without having a well-informed plan about what you are going to do next is almost never a good idea. And putting yourself into a situation in which it gets repossessed can really hurt, both immediately and long-term.

Almost always, if you surrender your vehicle, you will owe money on the debt after your creditor sells the vehicle and credits your account the sale’s proceeds. And you will usually owe much more than you think you will. Sometimes shockingly more.

That’s partly because the vehicle will likely be sold for less than it is worth. The creditor is not trying to be unfair about this, but it’s usually efficient for it to sell repossessed vehicles at an auto auction, where most of the purchasers tend to be used car dealers who can only pay enough for the vehicle to be able to make a profit when they re-sell it. On top of a low selling price, your creditor will tack onto your balance all of its repossession and sale costs, which can really add up. The end result is that you will likely owe a lot of money, and will likely get sued to make you pay it. Once wage and bank account garnishments start, you will probably be forced to consider bankruptcy. As you will see, it’s much better to consider it BEFORE surrendering or losing your vehicle to repossession.

Escaping Your Catch-22

If you need your vehicle, but just can’t afford the monthly payments, you could very sensibly believe you don’t have much choice but to let the vehicle go. You know your contract requires you to make the payments or lose the vehicle. You may have been struggling for months to keep the payments current, putting up with late fees and constant notices or phone calls from the creditor. You might even be thinking about how you can do without this vehicle, especially if you have already fallen behind.

How Chapter 7 Can Help

The main way Chapter 7 “straight bankruptcy” can help is by discharging (legally writing off) all or most of your other debts so that you can more easily afford your vehicle payment. If you are a month or two behind on your payments, filing the bankruptcy case would put an immediate stop to any approaching repossession. You would then have a month or two, sometimes more, to catch up. Chapter 7 allows you to focus your financial energies on your most important debts. If for you that’s your vehicle loan, and if getting rid of your debts would help enough, filing Chapter 7 BEFORE losing your vehicle could well be your best move.

How Chapter 13 Can Help

But admittedly that may not be enough help. You may be able to afford the monthly payments if you had no longer had any other debts, but have no way to make up the missed payments that quickly. Or you might have other important debts that you’re behind on, like taxes or child support, and can’t see hanging on to your vehicle in the midst of all these financial pressures. And you might not even be able to quite afford the monthly vehicle payments even with no other debt obligations.

Chapter 13 may be able to cut through ALL of these problems.

First, Chapter 13 can give up to 5 years to catch up on the back payments. Under some circumstances, you might never even need to catch up on them.

Second, Chapter 13 often allows you to pay your vehicle payment first, before other important debts like taxes and support.

And third, if your vehicle loan was entered into more than 910 days before your Chapter 13 case is filed (that’s about two and a half years), you can do a “cramdown” on the vehicle loan: lower your monthly payment, and likely pay less overall for the vehicle before owning it free and clear. How much the monthly payment can be reduced depends on a bunch of factors, but especially if your vehicle is worth significantly less than you owe on it, the payment can often be made much lower.

And if you qualify for a “cramdown” and you’re behind on your vehicle loan at the time you file your Chapter 13 case, you don’t ever have to catch up on those missed payments.  They are just part of the re-written, new “crammed down” obligation.

Take Charge and Choose Your Best Option 

So you can see that you might NOT want to surrender a vehicle or allow it to be repossessed, if instead you could keep that vehicle through either Chapter 7 or 13. That may be especially true if you qualified for a lower monthly payment under the Chapter 13 “cramdown.”

Often, having a reliable vehicle is essential to achieving a successful re-start of your financial life.  Before you lose that essential part of your financial plan, come see us to find out your options. 

Acting honorably towards a favorite creditor or two before filing bankruptcy can make you anything but their favorite.

 

Paying Your Favorite Creditor Before Filing Bankruptcy

Although bankruptcy law fixates on what you own and who you owe at the moment your bankruptcy case is filed, there are some important ways that the law can look into the past. “Preferences” are an example where the bankruptcy system can potentially look into and upset a certain limited piece of your past.

If during the 365 days before you file a bankruptcy you pay a creditor more than you are paying at that time to your other creditors, then after you file bankruptcy that favored creditor could be required to give to your bankruptcy trustee the money that you had paid to this creditor. So for example, if you paid your mother $1,000 to pay off a debt you owed her, and then six months later filed a bankruptcy case, your trustee could likely require her to pay that $1,000 to the trustee. That $1,000 would then be divided by the trustee among your creditors as prescribed by law (with your mother likely getting just a tiny portion of it, based on her pro rata share of all your debts).

That $1,000 is called a “preference” or a “preferential payment,” which the trustee can undo, or “avoid.” You are considered to have paid that creditor in “preference” to your other creditors.  

The Harsh Practicalities of Preferences

The result is that your good intentions backfire. You want to be considerate to a special creditor—often a family member, your long-time family doctor, or some other kind of favored creditor–by paying off that debt and keeping it out of your bankruptcy case. You may have wanted this creditor not to know about you filing bankruptcy. Or you may have just wanted to take care of your moral obligation.

But the result becomes the opposite. Your favored creditor gets mixed up in the bankruptcy case, and in a way more embarrassing than would have been otherwise. He or she has to give up the money you paid—and may have to scramble to come up with it somehow after having spent it. After that, you may well continue to feel that you have a family or moral obligation to make good on that debt, so you end up paying that debt to your favored creditor a second time, after your bankruptcy is over. And finally, if your bankruptcy is a Chapter 13 case then you would not even be allowed to do that until the case was over 3 to 5 years later. A mess all around.

The Good News—It’s Preventable

This mess can be avoided altogether if you get legal advice from an experienced bankruptcy attorney before you make the preferential payment(s) to your favored creditor. Or even if you’ve already made the payment(s) by the time you see your attorney for the first time, there are often ways to get around it.

Careful, though, because the law about preferences is complicated. Section 547 of the Bankruptcy Code on preferences is a head-scratcher. It’s about 1,300 words long, containing 56 sub-sections and sub-sub-sections. Take a look at it and you’ll see it’s certainly not clear.

What is clear that if there is any chance that you may be filing a bankruptcy case within a year, before paying anything to a relative, friend, or any other special creditor that you feel obligated to pay, talk first to an experienced bankruptcy attorney. Especially do so if you figure this does not apply to you because you don’t consider the person you are paying to be a “real” creditor—because it’s a “personal debt,” was never put into writing, or nobody knows about it.

And most importantly, if you’ve already made such a payment before you see your attorney, absolutely be sure that you disclose that to him or her, and do so right away, early at the first meeting. It could well affect your game plan, and maybe the timing of your bankruptcy filing.

Preferences are mostly a problem when they only come to light AFTER your bankruptcy is filed. Be sure to be candid with your attorney so that does not happen to you. Avoid that and most likely preferences will not be a problem for you. 

Words I hate to tell new clients: “If only you’d come to talk with me sooner.”


Bankruptcy attorneys are in this area of law because we really want to help people. What makes me want to come to the office every day is the privilege of listening to people’s tough stories and then giving them good news about how I can help make their life much better—how they can now get relief from their debts or a feasible plan to save their home, or a way to solve some other seemingly impossible situation, like a back child support or income tax garnishment. Every day I get to help intensely anxious people suddenly become hopeful as they learn about solutions they did not realize they had.

Not that it’s always so pleasant. Some goals are beyond reach even with the strong medicine of bankruptcy. Difficult choices sometimes have to be made. Life can be tough.

But the toughest situations are those in which the person took some action—usually not long before seeing me—which may have made some sense at the time but ended up being a mistake, a self-inflicted wound.

The goal of my next few blogs is to help you avoid these.

Here’s what we will be covering.

1) Preferences:  If within a certain amount of time before filing bankruptcy, a debtor pays any significant amount of money (or anything else of value) to someone she owes, the bankruptcy trustee could under certain conditions force that creditor to pay to the trustee whatever amount the debtor paid to the creditor. That creditor could be a relative or friend who had lent the debtor money, and the debtor felt a deep obligation to repay it before filing bankruptcy. This relative or friend could be sued by the trustee to make him or her “return” the money (but to the trustee, not to the debtor).

2) Wasting exempt assets:  New clients constantly tell me how they’ve borrowed against or cashed in their retirement funds in a desperate effort to pay their debts. Or they’ve sold a vehicle or some other precious asset. Then they learn that whatever they’ve sold or borrowed against would have been completely protected in their subsequent bankruptcy case. And the debts they paid with the proceeds would simply have been “discharged” (legally written off) in that bankruptcy. They have lost something of significant value in effect for no real benefit.

3) Surrendering a vehicle that could have been saved:  People often really need a vehicle but owe on it more than it is worth and can’t afford the payments. So they either voluntarily surrender it to the creditor, or wait to file bankruptcy until after it gets repossessed. Instead with a “cramdown,” they could well have been able to keep that vehicle by paying much lower monthly payments and paying much less for it overall.

4) Letting a creditor sue and take a judgment: If a debtor is sued by a creditor and waits until after a judgment is entered, in some situations, that judgment could make the debt harder to discharge in a subsequent bankruptcy case. 

5) Selling a home out of desperation:  Bankruptcy—and especially Chapter 13—provides some amazing tools for dealing with debts related to a home, including  the first mortgage arrearage, the second mortgage lien, judgment liens, income tax and child support liens, and other liens of all sorts. Homeowners may hurriedly sell their home because of pressure from any of these kinds of creditors. But if they do so, they could lose out on the opportunity to hold onto their home by saving tens of thousands—or possibly even hundreds of thousands—of dollars. Or at least they could likely sell it at a higher price with more market exposure and/or sell it when the timing is better for their family.

As you can see, doing what seems right and sensible can really backfire if you don’t get legal advice about these kinds of unexpected consequences. In the next few blogs I explain these in more detail so that these mistakes will make sense to you and you can avoid them.  

Although either type of consumer bankruptcy will temporarily stop a foreclosure of your home, which is better for you in the long run?

 

The Simplistic Answer

If you are behind on your mortgage, and definitely want to keep your home, then the simple guideline is: file a Chapter 7 “straight bankruptcy” case if that allows you to catch up on your arrears as fast as you need to, otherwise file a Chapter 13 “adjustment of debts” to give you more time.

A Truly Unique Decision

Many considerations can come into play in deciding whether a Chapter 7 or 13 is better for you overall. Even if we focus only on considerations related to saving your house, the decision still turns on your unique circumstances.

For example, following up on the “simplistic answer” stated above, a vague rule of thumb is that mortgage holders will tend to allow Chapter 7 debtors who are behind on their mortgage about a year to catch up. The mortgage holders will generally negotiate a “forbearance agreement” with large enough monthly catch-up payments (beyond the regular monthly mortgage payment amount) to bring the account current in a year or so.

But some specific mortgage holders may have a policy of allowing a longer or shorter period, and some may lengthen or shorten the length based on the particular facts.

The situation can be complicated by the reality that a Chapter 7 filing may make you eligible for a mortgage modification, but you may well not know until after you’ve filed the bankruptcy case and applied for the modification.

Another twist is that Chapter 13 allows for the potential “stripping” of a second mortgage, which Chapter 7 does not. If so, then even if you might have been able to cure the mortgage arrearage fast enough to pull off a Chapter 7 case, the tens of thousands of dollars saved through the “stripping” would very likely make Chapter 13 the better option.

Might Chapter 7 Be Enough?

So would—in your unique situation—a Chapter 7 buy you enough time, or would you instead need the much stronger medicine of Chapter 13?

Chapter 13 deservedly is known as being the home-saving bankruptcy option. But here are some examples where Chapter 7 may be enough to save your home:

  • you have a sale pending on your house but you’ve run out of time with a scheduled foreclosure;
  • you have some money coming to cure the arrearage but again have run out of time;
  • you are very close to getting a mortgage modification approved, or are more likely get it approved after discharging you debts in bankruptcy; or
  • you have decided to surrender the house but need a little more time to get into another home.

Chapter 13 Is Great If You Need It

Admittedly, these are relatively rare situations. Much more common is if your income went down through unemployment or a lower paying job, so that keeping up with the home mortgage payments became impossible. And then you regained that income, or maybe not all of it, and now owe a huge amount of missed mortgage payments, late charges and other fees. It does not take long for that arrearage amount to become so large that there’s no way that you could catch up on it within a year or so.

So Chapter 13 can give you as much as five years to catch up.

It can also buy you much more time to sell your home, until you are in a better time of year for home sales, have reached a point in your family’s life when moving makes more sense, or maybe even want to wait a couple of years for the home’s value to rise.

Chapter 13 can also be much better at dealing with other house-related debts, such as property taxes, second mortgages, and income tax, support or homeowners’ association liens.

Conclusion

There is much that goes into the decision whether to file a Chapter 7 or Chapter 13 case. This blog should convince you that, while both have advantages, you really need an experienced bankruptcy attorney to help you make the right choice for your unique circumstances. 

Both Chapter 7 and Chapter 13 will stop a foreclosure.

 

The Bankruptcy Code says that a bankruptcy “petition filed… operates as a stay, applicable to all entities, of—…  any act to… enforce [any lien] against any property of the debtor…  .” See Section 362(a)(4). This means that the mere filing of your bankruptcy case will immediately stop a foreclosure from happening.

But What if the Foreclosure Still Occurs?

But what if your bankruptcy case is filed just hours or even minutes before the foreclosure sale, but the foreclosing mortgage lender or its attorney can’t be contacted in time for them to be informed? Or what the lender is contacted in time but messes up on its instructions to its foreclosing attorney so that the foreclosure sale mistakenly still takes place? Or what if the lender refuses to acknowledge the effect of the bankruptcy filing and deliberately forecloses anyway?

As long as the bankruptcy is in fact filed at the bankruptcy court BEFORE the foreclosure is conducted, the foreclosure would not be legal. Or at least would very, very likely be immediately undone. It does not matter whether the foreclosure happened mistakenly or intentionally.

A Foreclosure by Mistake

If a foreclosure happens by mistake after a bankruptcy is filed, or because the lender didn’t find out in time, lenders are usually very cooperative in quickly undoing the effect of the foreclosure. It is usually not difficult to establish that the foreclosure occurred after the bankruptcy was filed, and that usually quickly resolves the issue. If a lender fails to undo such a foreclosure after being presented evidence that the bankruptcy was filed first, the lender would be in ongoing violation of the automatic stay. This would make the lender liable for significant financial penalties, so they usually undo the foreclosure right away.

A Foreclosure Purposely Conducted after Your Bankruptcy is Filed

This almost never happens. If you are harmed by a foreclosure intentionally done after your bankruptcy filing, you can “recover actual damages, including costs and attorneys’ fees, and in appropriate circumstances, may recover punitive damages.” See Section 362(k). Bankruptcy judges are not happy with creditors who purposely violate the law. Enough of them have been slapped that most creditors know better.

Chapter 7 vs. Chapter 13

For purposes of stopping a foreclosure that is about to happen, it does not matter whether you file a Chapter 7 or Chapter 13 case. The automatic stay is the same under both.

But how long the protection of the automatic stay lasts can most certainly depend on whether you file a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” That’s because even though you get the same automatic stay, each Chapter gives you very different tools for dealing with your mortgage. That’s why your mortgage lender will likely react differently depending on which Chapter you file under and how you propose to deal with the mortgage within each.

That’s the topic for our next blog. 

The “automatic stay” gives protection for you and your assets that is awesomely fast. And very broad. Don’t take it for granted.

 

The last two blogs have dug into the relatively rare situations in which the “automatic stay” does not protect you or your assets. But it’s important to understand that those are unusual exceptions. Almost all the time, the moment your bankruptcy case is filed all creditors must immediately stop every possible kind of collections effort against you.

Awesomely Fast Protection

The automatic stay goes into effect simultaneous with the filing of your bankruptcy petition. The “petition” is the document “commencing a case under [the Bankruptcy Code].” Sections 101(42) and 301(a). So the very act of filing the petition itself “operates as a stay.” Section 362(a).

The instantaneous effect of the automatic stay is amazing especially in comparison to most other court procedures. Most take weeks, or even in the case of emergencies at least days or hours. Usually some kind of request or motion needs to be filed to get the court’s attention, the other side is given some opportunity to respond, and then there may be a hearing of some sort, before finally a judge makes a decision.

But the automatic stay skips all that. It is, at least at the beginning, completely one-sided, in your favor. You “win” an immediate court order, without the creditors having any immediate say about it, without involving a judge at all.

So the automatic stay gives you an immediate breathing spell, freezing all collection efforts against you, whether your creditors like it or not.  

Awesomely Broad Protection

This break from your creditors covers “any act to collect, assess, or recover” a debt—just about anything a creditor could do to.

Besides stopping all collection phone calls and bills, the automatic stay stops all court and administrative proceedings against you from starting, or from continuing. If your bankruptcy is filed right before a lawsuit is to be filed at court against you, the lawsuit can’t be filed. Same with a home foreclosure. A prior judgment against you can’t result in your paycheck or bank account being garnished. If you’re behind on your vehicle loan payments, the repo man can’t come looking for your vehicle. If you owe back income taxes to the IRS, it can’t record a tax lien against your home and vehicle.

The automatic stay is powerful stuff.

“Relief” from the Automatic Stay

Any creditor can ask the court to cancel the automatic stay so that the creditor can again take action against you, your assets, or the collateral in particular. The most common situation for this is a creditor asking for the right to take back the collateral securing the debt—to repossess a vehicle or to start or continue a home foreclosure. Whether or not the court will give it this right, or give “relief from stay” in any situation, depends on all the details of the case. It requires a careful analysis to be done by and discussed with your attorney. 

Very rarely, the filing of a bankruptcy will NOT stop the creditors from chasing the debtor. Here’s how to avoid this happening to you.

 

The Essential “Automatic Stay”

In just about every bankruptcy case, stopping creditors from pursuing you and your assets is a crucial part of what you get for filing the case—regardless whether it’s a Chapter 7 or Chapter 13 case. This benefit of filing bankruptcy—called the “automatic stay”—generally applies to every case, to every creditor, and to just about to everything that a creditor can do related to collecting a debt.

Exceptions to the “Automatic Stay”

In our last blog we explained some narrow exceptions, which only apply to a narrow set of creditors and to a narrow set of their actions.

Today’s blog is about a very different kind of exception to the “automatic stay,” one that, although very rare, is potentially very dangerous because it could result in this crucial benefit not applying to your case at all. As a result your creditors could continue chasing you and your assets as if you had not even filed a bankruptcy case.

You absolutely want to avoid this from happening. And it’s usually not hard to avoid it.

This Dangerous Exception Only Applies if You Had a Previous, Recent Bankruptcy

If you are now considering filing bankruptcy, AND YOU HAVE NOT FILED a prior bankruptcy case within the last year which was dismissed (thrown out by the court), then this exception will not apply to you. You need to be absolutely sure about this, so please finish reading this blog to make sure.

The Rationale for This Rare Exception

Before these rules were enacted, a very small minority of people filing bankruptcy would file a series of separate cases, one after another, with the intention each time of using the new “automatic stay” of each new case to repeatedly delay a foreclosure or some other collection action.  Congress decided that this was an inappropriate use of the bankruptcy laws, and put a stop to it by taking away the benefit of the “automatic stay” as follows.

The Two Rules

The First Rule: The “automatic stay” WOULD NOT go into effect at all when filing a new case if within the past year you had filed two or more other bankruptcy cases, and those earlier cases had been dismissed.  If this were to happen, the “automatic stay” COULD potentially still be applied to your case after filing but only by convincing the bankruptcy judge that you meet certain conditions.

The Second Rule: The “automatic stay” WOULD go into effect filing a new case if within the past year you had filed one other bankruptcy case, which was dismissed, BUT the “automatic stay” would expire after 30 days. Its expiration COULD be avoided, but only by convincing the bankruptcy judge that you meet certain conditions.

The conditions referred to above that you’d have to meet for imposing or preserving the “automatic stay” involve justifying why the previous case(s) was (were) dismissed and why the present case is being filed. (The details of these conditions are complicated and beyond what can be covered in this blog.)

Watch Out to Make Sure of No Prior Recent Bankruptcy

Be careful because sometimes people can file a bankruptcy case and have it dismissed without realizing or remembering what happened. For example, if someone files a bankruptcy case without an attorney, and somehow does not complete it, the case would get dismissed. Or is someone does hire an attorney and the case gets filed, because of some miscommunication the case could get dismissed. Either way, months later when this person wants to file bankruptcy he or she could not understand or recall that in fact a case did get filed and dismissed.

So…

Avoid this problem by thinking carefully about whether there is any possibility that a bankruptcy case was filed in your name in the past 365 days. And if it possibly happened, tell your attorney about it right away.