Bankruptcy

BE CAREFUL, MORTGAGE MODIFICATION APPLICANTS CAN END UP IN FORECLOSURE!!!

Recently, the big mortgage lenders are trying to show that they are sympathetic to struggling homeowners by offering loan modifications. In defense of the banks, the modification programs are offered in good faith. The reality is that the execution of these programs is so bad that the so called "mortgage modification" ends up accelerating the foreclosure process making it almost impossible to keep a home without filing for bankruptcy.

The process goes somthing like this...

When you are considering filing for Chapter 7, Chapter 11, or Chapter 13 bankruptcy, the banruptcy code prohibits you from paying any of your debts without a good reason...basically, you cannot pay them. But, as with any valid rule, there are exceptions that should be considered by any potential Chapter 7, Chapter 11, or Chapter 13 bankruptcy filer. I will discuss a few of those exceptions:

Exception 1

The most common question I am asked by a client considering filing for Chapter 7, Chapter 13 or Chapter 11 bankruptcy is "what will bankruptcy do to my credit score?" Before I get a chance to answer, the client usually answers the question themselves by saying something like "oh, I'm sure my credit score will be in the low 300's." These clients are always shocked when I tell them that they are not only wrong, but the opposite is true. In most cases, a bankruptcy filing will make a credit score go up, not down.

One of the most common fears of my clients upon deciding to file for Chapter 7 bankruptcy is that they will lose all of their property. While this fear is a valid feeling, the truth could not be further away. 99% of Chapter 7 bankruptcy filers are able to get a full discharge of their debts and not lose a single item of property: there are three reasons for this:

Reason 1: You do not own the property.

I recently ran across a question on a legal forum in which a person asked "why should I file for bankruptcy when my house is in foreclosure and that is my only debt?" She clarified that she had consulted a lawyer and he told her that foreclosure and bankruptcy led to the same result and that she should not bother with a bankruptcy filing.

This is the worst advice this woman could have been given! There is a world of difference between bankruptcy and foreclosure.

Let me explain the differences between foreclosure and bankruptcy.

FORECLOSURE

In a normal Chapter 13 Bankruptcy, the goal is to propose a plan to repay your debts over a period of 3-5 years. This type of plan can be used to save your home from foreclosure, or just pay down debts interest free. The typical Chapter 13 Bankruptcy Plan contains, among other items, payment to general unsecured creditors of anywhere between 10%-100% of the entire debt. But what happens if the Debtor has so much priority tax debt that the Chapter 13 Bankruptcy Plan payments will not be able to pay back all of the priority claim, let alone provide anything for the other unsecured creditors?

Recently, a number of my Chapter 7 Bankruptcy clients have been presented with a similar situation: the value of their home has fallen so much in the last few years that the second mortgage has become wholly unsecure. Of course the value of the home is subject to different valuations, but in many of these cases the estimate is so low that even the highest estimate would leave the second mortgage in the same situation.

You have many rights when filing for Chapter 13 Bankruptcy, but I would like to highlight one that I encourage all of my clients to try and take advantage of. Under Chapter 13 Bankruptcy, when you have a secured debt, you have the right to pay back the value of the collateral over the life of the Chapter 13 Bankruptcy Plan as payment in full!
Allow me to clarify:

SECURED DEBT