As real estate values plummet and foreclosures skyrocket in California, more and more debtors are inquiring as to whether Bankruptcy can stop Foreclosure. The short answer in most cases is Yes. With few exceptions, a Bankruptcy will stop a foreclosure proceeding and save a home. The bigger question, however, is how long will the foreclosure process be stopped and are there any other benefits that will accrue that are related to the home.
Once a bankruptcy is filed, the automatic stay protections of 11 USC 362 are put into place. If a debtor is on title to the property, or is on the loan to the property, the automatic stay will stop foreclosure in most cases. Nevertheless, a foreclosure may still continue in limited situations such as when multiple bankruptcy cases have been successively filed or the property was transferred to the Debtor’s name immediately prior to filing.
In Chapter 7, its generally a temporary situation wherein a few months time might be obtained. See my other blog here for more information.
In Chapter 13, the foreclosure process will be permanently stopped if the debtor proposes a feasible plan which is then confirmed by the Bankruptcy Court. To propose such a plan, one must prove that one has the ability to maintain current mortgage payments and provide an additional “catch up” payment to cure the arrears over the next 3 to 5 years. So in effect, there are two payments: The normal mortgage payment and the Chapter 13 payment.
While at first blush this may seem like a tall order, in today’s economy its often a lot easier than one would expect. This is because in most Chapter 13 cases filed these days, the second and all junior mortgages will be eliminated from the property as a result of a valuation process. This is known as “lien stripping,” and can generally substitute as the funding for the Chapter 13 Plan.
For example, a $150,000 second mortgage payable at $900 per month which is “stripped off” the property might then fund the Chapter 13 plan and cure the $40,000 in arrears over the next 5 years. Or, if the arrears were only $20,000, then the other $20,000 might then be used to pay off a car loan. Regardless, when the debtor then emerges after bankruptcy in 5 years, the debtor is essentially debt free, with all vehicles paid for, all mortgage arrears cured, and all other unsecured debt such as credit cards eliminated.
No doubt, Bankruptcy is the most powerful foreclosure tool one can use in this Country. And in these tough economic times, its not so much a question of whether a bankruptcy can stop foreclosure, but more of a question of what else can the bankruptcy do in addition to stopping the foreclosure. For instance, it may be possible to attack the mortgage itself and entirely strip it off the property if there is an enforceability issue. TILA claims may be brought. A sale may be saved. These are only a few and the opportunities chapter 13 has to offer in the context of real estate is extensive!
Likewise, if new legislation is passed, arrears may no longer be an issue since the home loans will be entirely restructured into 1 mortgage reduced to fair market value, with a lower interest rate, a lower payment, and spread over 40 years.
For example, a home purchased for $900,000 with 80/20 loans in the amount of $900,000 but is now worth $500,000, could be saved from foreclosure, all junior liens eliminated, and have the original combined mortgage payments of $5,988.00 reduced to $2,411.00, all at the same time all vehicles will be paid for, and all unsecured debt eliminated. Technically, such a situation could take place by paying $100 per month for a year in light of the recent 9th circuit Kagenveama.
So don’t give up! Although California is a non-judicial foreclosure state which allows a note holder to proceed against the property without having to sue in Court, Bankruptcy is the most powerful tool that can not only permanently stop a foreclosure, but also restructure all other debt as well. As always, see a competent bankruptcy attorney in your area immediately if you desire to save your home from foreclosure.
Written by Michael G. Doan