Bankruptcy and Foreclosure

Bankruptcy will stop a foreclosure sale. It will stop all state court actions unless and until the automatic stay is lifted by the Bankruptcy Judge. It may force the mortgage company to take a different stand, one more amenable to modification or negotiation.  In the foreclosure crisis that the nation is facing, it has probably become more common to file for bankruptcy relief only to stop a foreclosure sale. However, it is an abuse of the Bankruptcy Code to file a bankruptcy for the sole purpose of halting a foreclosure sale. When a bankruptcy is filed, one of the first things which occurs is that the clerk sets a meeting of creditors which will take place within a month or six weeks. If the debtor does not show up for the meeting, another meeting will be set, and if the debtor fails to show for the second meeting, the case can be dismissed. A debtor who files a bankruptcy for the sole purpose of stopping a foreclosure sale will not usually appear for the mandatory meeting, and will not usually file all the documents required. The case will eventually be dismissed, and the mortgage company will eventually get the automatic stay lifted so that the foreclosure can proceed. It is important that each debtor acts in “good faith” when filing for bankruptcy protection, and filing solely to stop a foreclosure is not acting in good faith. The mortgage companies have too many properties which have already been foreclosed upon, and are more likely to allow modification. There are millions of foreclosed and vacant homes across the country and with over one million foreclosures being filed each year, there will be more.  The current economic circumstances are dismal and for many there is no real choice but to file for protection. If and when you file, be sure not to fall into the category of “bad faith” filings, make sure to follow through with filing all the documents required and attending the meeting of creditors. A fresh start is available.

Bankruptcy and Foreclosure Statistics:

In 2010 there were a total of 1,139,601 Chapter 7 Bankruptcies and 438,913 Chapter 13 Bankruptcies filed in the U.S.  The total consumer Chapter 7 filings were 1,100,116., while the total consumer Chapter 13 filings were 434,739. In the Middle District of Florida there were a total of 47,730 Chapter 7, and 15, 967 Chapter 13 filings, by individuals. It appears that Florida’s middle district had the third highest non-business Chapter 7 filings in the nation, being topped by the Central District of California and the Northern District of Illinois, which had 105,094 and 49,017, respectively. Business Chapter 7 filings were 39,485 in 2010, along with 4,174 Chapter 13 filings nationwide. There were over 1 million home foreclosures in the nation during 2010, alarmingly close to the number of bankruptcies filed. This figure could have been much higher if it had not been for the home foreclosure robosigning scandal in the 4^th quarter. Foreclosures are expected to be over 1.2 million, and bankruptcies are expected to reach 1.6 million in 2011. 

Chapter 20 Bankruptcy?

Chapter 7 Bankruptcy is primarily for consumers. Chapter 13 Bankruptcy is primarily for people who can pay a percentage of the debts they owe. But what is a Chapter 20?  There is no Chapter 20 in the Bankruptcy Code. It is a theory, an intellectual pondering, on a scenario wherein someone files a Chapter 13 to reorganize their secured debt, and then converts the case to a Chapter 7 to get rid of their unsecured debt. Some use the scenario where a Chapter 7 is filed and when a discharge is received, a Chapter 13 is filed to reorganize the remaining debt. Most theorists would say that converting to Chapter 7 from a 13 should only be used, and is only possible, when a Chapter 13 debtor’s financial circumstances have worsened after filing. Otherwise, someone who filed a 13 with the intention of later converting to a 7, would be planning to fail, and could, in essence, be viewed as abusing the system. When one files a Chapter 13, the creditors have the comfort of knowing that they will be paid part of what is owed, according to the plan the debtor has filed. When someone files a Chapter 7, the creditors all back off and do nothing. At the very least, the creditor can report the money owed as a loss for that calendar year, a direct deduction from gross income. There do not appear to be yearly figures available for the number of Chapter 13 bankruptcies which have been converted to Chapter 7, nor do there appear to be any statistics available for those converting a 7 to a 13. The Bankruptcy Code allows the debtor to convert a chapter 7 case to a chapter 13 case as long as the debtor is eligible under the new chapter. However, a condition of the debtor's voluntary conversion is that the case has not previously been converted to Chapter 7 from another chapter.  In addition, a debtor cannot receive a Chapter 13 discharge if the debtor has received a Chapter 7 discharge within the last 4 years. Moreover, a Chapter 13 debtor who suffers a drastic loss in income, has a right to convert the case to Chapter 7. So, there are two forms of Chapter 20 Bankruptcy, which combine 7 and 13. One being a 7 followed by or converted to a 13, and the other being a 13 followed by or converted to a 7. In either scenario the debtor is required at all times to act in good faith. Here is a link to a case which discusses Chapter 20: http://www.rib.uscourts.gov/D/1998/Keachcnf.PDF

The Two Entity Theory in Bankruptcy

When you file for Chapter 7 Bankruptcy protection, you create a new, separate, and distinct legal entity from yourself. It is called your bankruptcy estate and is comprised of everything you own and everything you owe, on the date that you file a petition. It has a life of its own which lasts for a number of months. The second entity is viewed as you without all of your debt and is called your post-petition estate. In theory, these two entities are distinctly different. The trustee in bankruptcy can get at any non-exempt assets which you own on the date of your filing, but cannot get his or her hands on things that came into your possession on the day after you file bankruptcy. If you had an income tax refund or an inheritance coming to you on the date you filed, these items are part of your bankruptcy estate. But if you win the lottery on the day after you file bankruptcy, in theory, the trustee cannot get at those funds because they are part of your post-petition estate. In all likelihood someone who wins the lottery shortly after filing, would probably want to pay off their debts with the winnings, and would probably make a motion to have the bankruptcy dismissed.  Bankruptcy has long been viewed as a system of people helping other people out of debt. It rarely becomes adversarial. Most creditors back off when you file for bankruptcy, because the automatic stay prevents them from trying to collect the debt or even calling you on the telephone. The clean slate or fresh start are available, you can legally erase the debt. If your expenses exceed your income and you just cannot make ends meet, you may want to create a new, separate and distinct legal entity which will help you get out of debt.