Times Have Changed and So Has Bankruptcy

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Times Have Changed and So Has Bankruptcy

Bankruptcy is often a difficult and very personal decision that carries a lot of emotion for many people.

It requires a shift in perspective and attitude to realize that bankruptcy laws were enacted precisely to give good, honest people a fresh start and a chance for their family to start over. If you are one of the many homeowners these days who is experiencing difficulty making your mortgage payment, you may have already considered bankruptcy.

If so, you should know that recent new legislation in bankruptcy law has affected most homeowners. There have been dramatic changes in bankruptcy law in recent years in response to the real estate crisis and the economic meltdown. Two of the most promising new developments are lien-stripping and the “cramdown” bill.

Bankruptcy and Your Mortgage Payments

The “cramdown” bill, the most exciting piece of legislation now pending before Congress, is formally known as the “Helping Families Save Their Homes in Bankruptcy in 2009″ bill.

This revolutionary bill, which easily passed the House of Representatives, is welcome news for homeowners whose homes are “underwater” (the value of the loans is greater than the current market value of the house). As currently written, it gives bankruptcy trustees authority to reduce the amount of loans to the current fair market value of the home. Although the bill has not yet become law, it seems likely that homeowners may have to prove that they have first tried to negotiate a voluntary loan modification. The trustee will need to verify this information and the trustee will almost certainly need to use Federal guidelines to determine the value of the home at today’s market value.

In addition, if your lender will not give you a principal reduction on your loan and you file bankruptcy, a good bankruptcy attorney may make an effective case for “stripping” your property of its second loan or Home Equity Line of Credit. This is known as “lien-stripping.”  A bankruptcy trustee may allow this if there is not enough equity in your home to pay-off your second mortgage or Home Equity Line of Credit.  If you have lost so much equity in your home that there is no value attached to the second, junior lien, then it can be considered an unsecured debt and discharged just as any other unsecured debt.

The world of bankruptcy can be very confusing. For those who’ve been considering it or are just curious as to whether it could be a viable option in their current financial situation, here’s a brief summary of the bankruptcy options open to families and individuals.

The ABC’s of Bankruptcy

There are four kinds of bankruptcy proceedings. They are referred to by the chapter of the federal Bankruptcy Code that describes them.

Chapter 7 is the most common form of bankruptcy.  It is available to individuals, couples and certain legal entities.  In this Chapter, a trustee sells all of your non-exempt assets and distributes the proceeds to your creditors. There is no repayment plan necessary in Chapter 7. You simply walk away from your debt.  Chapter 7 may be appropriate for you if you do not have any major assets that you would like to keep and your income is so low that there is no possibility that you can ever repay the debt that you carry.

Any income you earn after the date of filing is yours to keep and cannot be seized by creditors.  You may be discharged within 4-6 months of filing a Chapter 7. You’re then free of debt and able to go on with your life.

Chapter 11 is mainly for corporations or partnerships. Individuals whose income exceeds the limits established for Chapter 11 would be eligible to file for a Chapter 13.

Chapter 12 is a reorganization plan for family farmers.

Chapter 13 is a repayment plan for individuals with regular income whose unsecured debt is less than $269,250 and whose secured debt is less than $807,750. Under this chapter you may be able to keep any real estate that you own. You will be required to make regular payments to the Chapter 13 trustee who will distribute the money to your creditors for the life of the plan (about 3-5 years).  Also under this Chapter you can pay as much as 100% of your debt over time or as little as 10%, depending on your level of debt and your income.

Preparing for bankruptcy

If you know you want to file bankruptcy or think you may have to later on, it is wise to start preparing for that possibility well ahead of time so that you don’t make mistakes. Consult with an attorney.

For example, you need to know which debts are dischargeable and which are not. In many cases your IRA’s, KEOGH’s and retirement plans are protected under bankruptcy.  Many people will max-out their credit cards and liquidate their IRA’s and retirement accounts to try to pay certain bills. If it helps you avoid bankruptcy, that’s great. But if you end up in bankruptcy anyway after having gone through all of your assets, you could find yourself in a very difficult position.

You should also be careful about transferring assets, property or money prior to filing a bankruptcy. Although your intentions may be innocent and you may be simply moving money around trying to rob Peter to pay Paul, a bankruptcy trustee may cast a suspicious eye on certain financial transactions occurring within a few months of filing bankruptcy. A good bankruptcy attorney will be able to advise you about what to do and what not to do.   At RealEstateLawCenter.org, we offer a free bankruptcy evaluation and consultation to help you determine how to proceed.

In any bankruptcy, regardless of which Chapter you choose, you are allowed to keep certain things in order to make a fresh start. Some things may have value to you alone and may be worthless to creditors, such as household furniture and personal items. A trustee will allow you to keep the things you need to continue to make a living and maintain a stable family structure.

It’s best to make a list of your assets and take it to your attorney when you are ready to file. He or she will calculate the dollar amount of those assets and will be able to give you a heads up as to what the trustee may or may not allow you to keep.

If you own a home you can either include it in the bankruptcy and reaffirm the debt or file a bankruptcy and not include the home. If you are attempting to modify your loan, your attorney may be able to help you to get your lender to consider a modification of your loan even if you have filed for bankruptcy and included your home in the bankruptcy.

The important thing to remember is that a well-prepared bankruptcy benefits your creditors as well as you and your family. If you are able to make payments through a repayment plan, creditors avoid having to spend the time, money and effort it would take to try to collect the debt. The court takes care of all the paperwork. If you are unable pay them off, they will most likely charge-off your debt, take a tax write-off and move on.

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