Chapter 7

Will I Lose My Property If I File Bankruptcy?

by Michael Sosna

We hear this question often: “Will I lose my house, my car and my other personal property, if I file bankruptcy?”

The simple answer is usually no.

Because bankruptcy law allows debtors to exempt – or protect – a certain amount of value (or equity if subject to a loan) in their home, their car, their household goods and other property, most debtors can fully protect all of their property from creditors and the bankruptcy trustee. And, in the rare instance where the value/equity of an item of property exceeds the allowable exemption amount, the debtor can increase the amount of his/her Chapter 13 plan payment to protect, and keep, the property in question.

A more detailed answer depends on which kind of bankruptcy you file.

A Chapter 7 bankruptcy is the “quick” bankruptcy, usually taking three to four months from start to finish. (For a more detailed discussion of Chapter 7 and Chapter 13 bankruptcy, see our article “What is the difference between Chapter 7 and Chapter 13?”) A Chapter 7 case is generally used if you have a significant amount of “unsecured” debt—credit cards, medical bills, etc.—but are current on your “secured” debts—mortgages , car loans, etc. (or if you are not current on your secured debts but you intend to “surrender” the collateral—the car, house, furniture, etc.).

Chapter 7 is known as a liquidation bankruptcy, because the Chapter 7 Trustee can liquidate – or sell – any non-exempt property and use the money to pay unsecured creditors. However, if all of your property is exempt, and thus protected, yours will be a “no-asset” Chapter 7 in which you receive a discharge of your debts and keep all of your property.

A Chapter 13 bankruptcy takes three to five years to obtain a discharge and is generally used if the debtor is behind in his or her secured debts – a mortgage loan for their house, a car loan, a furniture loan. In that instance, the purpose of the case is to keep your property and catch up the payments. In a Chapter 13, the debtor makes monthly payments to the Chapter 13 Trustee who pays the claims that need to be paid over the life of the plan. With respect to mortgages, at the end of the case, the mortgage arrears are paid in full and the mortgage is current. With respect to other types of secured debts (car loans, etc.), either the arrears or, more likely, the entire car or furniture debt is paid in full. As long as the debtor makes the monthly Chapter 13 plan payment, the creditor – the mortgage company, the car loan company etc. – is prevented from foreclosing or repossessing.

A Chapter 13 will also discharge your unsecured debts. In most cases, unsecured creditors receive only a small amount or even no distribution from the Trustee. In other cases—such as for high income clients—unsecured creditors will receive some distribution from the Trustee. Either way, at the end of the case, whatever remaining balance owed to the unsecured creditor is discharged (unless the debt falls under an exception to discharge, such as the exception for student loans; you should ask your attorney about debts that are not discharged).

Another instance is where you own property with “nonexempt equity” (i.e. the value or equity exceeds the amount that you can exempt under the law) that would otherwise be subject to liquidation by a Chapter 7 Trustee. You can still protect and keep the property in a Chapter 13 bankruptcy, so long as your Plan payment provides that your unsecured creditors will receive the amount they would have otherwise received if the Chapter 7 Trustee had liquidated (sold) the asset.

For example, let’s assume you have a car with a value of $5,000, but you only can exempt $3,500 of that value. In a Chapter 7 case, the Trustee could sell the car, give you back $3,500 – the value exempted – and use the remaining $1,500 to pay unsecured creditors. However, if instead you file a Chapter 13 and increase your Chapter 13 Plan to pay an additional $1,500 over the life of the Plan, say 60 months, then for a little more than $25 a month extra you are allowed to keep your vehicle and get your Discharge. This is because the unsecured creditors got paid what they would have received if the car had been “liquidated” in a Chapter 7 case.

As you can see, properly claiming your exemptions and protecting your property can be complicated. That is why you need an experienced bankruptcy attorney – like the attorneys at Sosna Law Offices, PLLC – to advise and guide you through the process, so you not only receive a discharge of your debts but also keep all of your property.

What is the Difference Between Chapter 7 and Chapter 13?

by Michael Sosna

AN OVERVIEW

Chapter 7 bankruptcy is usually best if you only have “unsecured debts” such as credit card debts and medical bills. It normally takes three to four months from the time you file until you are granted your discharge. A “discharge” is an order entered by the bankruptcy court wiping out your obligation to pay certain debts.

Chapter 13 bankruptcy is usually best if you are behind in your home or car payments. This chapter allows you to catch up payments on those debts without losing your property. You also receive a “discharge” in a Chapter 13. However, a Chapter 13 plan must last at least three years and no longer than five years. You receive the discharge upon completion of the plan.

In both types of bankruptcy, you must appear before a Trustee.

In both bankruptcies, you receive a discharge of your debts.

In both bankruptcies, you usually are able to discharge all of your unsecured debts, i.e., credit card debts, medical debts, personal loans, and other debts that are not secured by a lien against your property.

In both bankruptcies, you are allowed to keep property, under certain conditions, and most people keep their home, vehicles and other personal property after their discharge (i.e. after their bankruptcy is concluded).

But which debts you discharge, which debts you must continue to pay, and what property you keep can depend on the type of bankruptcy you file.

CHAPTER 7

A Chapter 7 bankruptcy is a quick bankruptcy, usually taking only three to four months from the time you file until you receive your discharge. There are no payments to a Trustee in a Chapter 7 case.

A Chapter 7 bankruptcy is a liquidation bankruptcy, which means that the Trustee can sell non-exempt property and use the proceeds to pay unsecured creditors. However, most people who file a bankruptcy are able to exempt, or protect, all of the property they wish to keep, such as their home, vehicles and other personal property. This means that the Trustee is not allowed to claim it or sell it (see also “Will I lose my property if I file bankruptcy” to learn more about exemptions). If the value of an item of property (or equity if subject to a lien) exceeds the amount you are able to exempt, and you want to keep that property, you will need to file a Chapter 13 bankruptcy.

In order to file a Chapter 7 bankruptcy, your household income generally must be below the median income for a household of your size in North Carolina. There is a complicated formula—known as the “means test”—that determines whether the debtor’s household income is above the median. The means test compares the average monthly household income, minus certain allowed deductions, with the median income for a family of similar size. If your income is above that level, you typically are not allowed to file a Chapter 7 and must file a Chapter 13 bankruptcy.

If you have outstanding secured debts – a mortgage, a car payment, a furniture payment – and are current in your monthly payments, you can still get a Chapter 7 Discharge of your unsecured debts by agreeing to reaffirm those secured debts and to continue to make the normal monthly payment. If you are behind in those payments, you will likely want to file a Chapter 13 bankruptcy instead.

CHAPTER 13

A Chapter 13 bankruptcy is a longer bankruptcy case: it must last at least three years and can last as long as five years. In a Chapter 13 bankruptcy, the debtor makes monthly payments to a Trustee, who uses that money to pay certain creditors according to a Chapter 13 Plan.

People generally use a Chapter 13 when they are behind in their mortgage payments and/or vehicle payments and are facing possible foreclosure or repossession. Once a bankruptcy case is filed, the creditor – the mortgage company, the car loan company, the furniture company – is prevented from taking any action to collect the debt. Any pending foreclosure case is stayed (stopped) from proceeding further, and creditors are prevented from repossessing vehicles or taking any other collection action.

In order to obtain this protection, debtors file a Chapter 13 Plan which proposes to pay – over 36 to 60 months – the amount necessary to bring those secured debts current. For a mortgage it means paying the arrears by monthly payments over that time, in addition to the normal mortgage payment, to the Chapter 13 Trustee. At the end of the case, the mortgage arrears will have been paid in full and the mortgage will be current.

For car loans or other secured debts – furniture loans, appliance loans, etc. – the Chapter 13 Plan either proposes to pay the arrears through the Plan, while continuing to make normal payments directly to the creditor or, more often, paying the entire balance due through the plan over 36 to 60 months. At the end of the case, these debts will either be current or paid in full.

Typically, unsecured debts are discharged in a Chapter 13 just as in a Chapter 7 and usually with only small, if any, payments made by the Trustee to those creditors. However, there are circumstances where an unsecured creditor receives a larger distribution from the Trustee over the life of the Plan.

One of those instances is where the household income is above the limit allowed by the Chapter 7 means test. If the means test determines that the monthly household income is above the median, then we must go a step further and calculate your “disposable monthly income.” Your disposable monthly income is the amount of your plan payment each month that must be paid to unsecured creditors.

Another instance is where you own property with “nonexempt equity” (i.e. the value or equity exceeds the amount that you can exempt under the law) that would otherwise be subject to liquidation by a Chapter 7 Trustee. You can still protect and keep the property in a Chapter 13 bankruptcy, so long as your Plan payment provides that your unsecured creditors will receive the amount they would have otherwise received if the Chapter 7 Trustee had liquidated (sold) the asset.

For example, let’s assume you have a car with a value of $5,000, but you only can exempt $3,500 of that value. In a Chapter 7 case, the Trustee could sell the car, give you back $3,500 – the value exempted – and use the remaining $1,500 to pay unsecured creditors. However, if instead you file a Chapter 13 and increase your Chapter 13 Plan to pay an additional $1,500 over the life of the Plan, say 60 months, then for a little more than $25 a month extra you are allowed to keep your vehicle and get your Discharge. This is because the unsecured creditors got paid what they would have received if the car had been “liquidated” in a Chapter 7 case.

This article is meant only as a general overview of Chapter 7 and Chapter 13. Every case is different. In addition, there are other types of bankruptcy cases (Chapter 11 and Chapter 12). In order to determine which type of bankruptcy is best for your particular situation, it is important to obtain the advice of an experienced bankruptcy attorney, like the attorneys at Sosna Law Offices, PLLC. We offer a free consultation so that you can discuss the particulars of your situation and receive expert advice on which bankruptcy will be best for you.

Your Car/Truck and Bankruptcy

by Michael Sosna

Bankruptcy provides a number of options for people who want to keep their cars(s) and/or truck(s). Because of the difference between Chapter 7 (no payments to a Trustee with a discharge of debts in 3 to 4 months) and Chapter 13 (payments to a Trustee with a discharge of debts in 3 to 5 years), the options are different.

In a Chapter 7 bankruptcy, people are entitled to exempt, or protect, a certain amount of the equity or value in their motor vehicles. In most cases, people are able to exempt all their equity so that the Trustee, on behalf of creditors, cannot take the vehicles and they are entitled to keep their vehicles.

If you have a car or truck loan and you are current in your payments, Chapter 7 allows you to keep your vehicle as long as you agree to continue to make your regular payments pursuant to your loan contract. You are not allowed in bankruptcy to discharge – wipe out – the vehicle loan and keep the vehicle; if the is car or truck is the security for a loan, you must pay the loan to keep the vehicle.

If you have a car or truck loan and no longer wish to keep making those payments, you can surrender, or give up, the vehicle and discharge the loan balance, meaning the creditor/loan company can never try to collect that balance from you.

If you have a vehicle or truck loan and are behind in your payments, and want to keep your vehicle, in most instances you do not want to file a Chapter 7 bankruptcy because there is no payment plan to allow you to catch up the arrears. In those situations, you will want to file a Chapter 13 bankruptcy instead.

In a Chapter 13 bankruptcy you are also allowed to exempt or protect a certain amount of your equity in your car or truck. In most instances, people are able to exempt all of their equity and so the ownership of vehicle(s) doesn’t increase the amount of the Plan payment.

However, if there is a motor vehicle loan, a Chapter 13 may allow you to lower the monthly payment of that obligation. If you are current in the vehicle loan payments, you can continue to pay the loan company directly at the contractual rate. However, it is often cheaper to pay that loan through the Plan. For example, if you have only 2 years left to pay under the vehicle loan contract, but you stretch that payment over 5 years in a Chapter 13, you effectively lower the monthly amount you pay on that loan. Usually, the bankruptcy interest rate is lower than the loan interest rate, which may also lower the payment if paid through the bankruptcy Trustee.

If you are behind in your vehicle payment, a Chapter 13 allows you to propose a plan to keep your vehicle. Once you file your bankruptcy case, the creditor/loan company is prohibited from taking any action against you, including repossession. In your bankruptcy you can either 1) continue to make your regular installment payments directly to the loan company and catch up the arrears in equal payments over 36 to 60 months or 2) you can pay the entire loan balance in your Chapter 13 Plan over that time period – whichever is least expensive. As long as you make your Chapter 13 Plan payment on time, the creditor can take no action against you. At the end of your case you will either have paid off the loan, if paying the entire debt through your Plan, or be current in your payments, if you were only paying the arrears through the Plan.

Your Home in Bankruptcy

by Michael Sosna

Keeping Your Home

If you are current in your mortgage payments, you will keep your home whether you file a Chapter 7 or a Chapter 13 bankruptcy, as long as you continue to make your regular monthly payment on time. Filing a bankruptcy will not prevent you from seeking a mortgage modification from your lender to lower the amount of your monthly payment.

If you are behind in your mortgage payments and want to keep your house, you can file a Chapter 13 bankruptcy. In a 13, you make a payment each month to the Chapter 13 Trustee which includes your regular mortgage payment and enough to pay off the arrears during the time of your Chapter 13 Plan, normally 5 years, and the Trustee pays your lender. The filing of the bankruptcy stops any efforts by your mortgage company to foreclose as long as the case is filed before the foreclosure becomes final. As long as you continue to make your Chapter 13 Plan payments on time, the mortgage company can take no steps against you.

A Chapter 7 bankruptcy will not help you if you are behind in your mortgage payments and want to keep your home because there is no payment provision to allow you to catch up your arrears.

While you are in a Chapter 13, you can also apply for a mortgage modification to lower the amount of your monthly payment and a “forbearance” of the arrears. A forbearance means the mortgage company will tack your arrears on to the end of the loan, making you current in your payments at the time the forbearance is granted. When that happens, you start making your mortgage payments directly to your lender and your Chapter 13 Plan amount will be lowered. In some instances, for example if your mortgage was the only “secured” debt in your case, you may be able to convert to a Chapter 7, make no more payments to a Trustee and discharge your “unsecured debts."

Walking Away From Your Home

Sometimes people decide that they can no longer afford the mortgage payments on their home. There are lots of reasons this can happen. Loss of a job or even a reduction in hours and pay; perhaps a medical problem that forces a person out of work for an extended period and results in unexpected expenses; or perhaps some other unanticipated but necessary expense. Whatever the reason, occasionally families decide that realistically they no longer have the money in their budget to pay for their home.

Giving up one’s home is always a difficult decision. But you never want to throw good money after bad; continuing to try to make payments when foreclosure is inevitable means you are throwing money down the drain.

Bankruptcy – both a Chapter 7 and a Chapter 13 - can provide some relief in these situations because you can surrender (walk away from) the home and “discharge” the debt, meaning that the mortgage company cannot come after you for the remaining balance on the mortgage, even if the sale of your house at foreclosure doesn’t bring enough to pay off the balance of the debt. As a result of not having to continue to make the mortgage payment, you will be better able to pay your future expenses, including rent or a mortgage for your new home.

What happens when the mortgage company doesn’t foreclose?

“Surrendering” your home in bankruptcy means stating in the bankruptcy schedules (paperwork) you file that you intend to walk away from your home and discharge the mortgage debt. But just saying you surrender it to the mortgage company does not terminate your ownership of the home. Transfer of title to real property can only be accomplished by the recording of a deed or by foreclosure.

As a result, even though you state your intention to surrender your home, until the mortgage company forecloses or accepts a deed transferring the property from you to them, you continue to be responsible for other costs involving the property, such as property taxes or homeowner association dues, and in some towns the upkeep of the property – for example keeping the lawn mowed.

There are two ways to avoid this problem. The easiest is simply to prepare and record a deed, transferring title to the property to the mortgage company. If the mortgage company does not formally reject this transfer of title, the law presumes they accepted the transfer and your legal ownership – as well as the costs and responsibilities – is terminated. As a practical matter, the mortgage company rarely rejects the deed.

The problem is that the Register of Deeds, the office in which the deed transferring the property is recorded, will not accept a deed for recordation if there are outstanding real property taxes due for the home. If the amount is not large, very often it makes sense to pay the tax in order to simply end your legal ownership.

But sometimes the taxes owed are a large amount. If you have not been paying your mortgage and the taxes are included in the amount of your monthly payment, the mortgage company may not have paid the taxes. Then the amount necessary to pay the taxes and record the deed may be more than you can afford.

This is a problem that sometimes occurs and bankruptcy attorneys have been searching for the solution.

In some bankruptcy courts, the Judges have allowed a creative solution. Pursuant to the Court’s order, the owner sends a deed – in this instance called a Quitclaim Deed – to the mortgage company, thus avoiding the cost of paying the outstanding property taxes, and the Judge gives the mortgage company a period of time (normally 60 days) to either:

1. Record the deed and accept ownership of the property;
2. Reject the deed by filing a written statement with the court; or
3. Start foreclosure proceedings.

Sometimes this is enough to push the mortgage company into action and it will either record the deed or start foreclosure. If the mortgage company fails to respond, the Court will then authorize the owner to file the Quitclaim Deed to transfer ownership. Although this does not avoid the problem of paying the property taxes, it does remove any uncertainty about whether the mortgage company has accepted the deed. This is because the transfer is not based on an presumption but upon a Court Order.

Was this post helpful? We at Sosna Law Offices, PLLC, are committed to helping you resolve these and other bankruptcy issues. If you have not already done so, please contact us today to schedule your free one-on-one consultation with one of our attorneys.