In most cases, a bankruptcy filing immediately stops the foreclosure process.

As more fully explained below, Bankruptcy laws prohibit all collection efforts the minute a bankruptcy case has been filed. Because foreclosure is a collection action, it must be stopped immediately once the homeowner files bankruptcy.

In addition to stopping the foreclosure process, a Chapter 13 bankruptcy case allows the homeowner to repay mortgage arrears over a period of 36-60 months.

A Chapter 13 bankruptcy case gives the homeowner the power to repay the mortgage arrears on the homeowner's terms, not the lender's. Also, unlike a Chapter 7 bankruptcy, a Chapter 13 is a repayment plan and looks much better to future creditors than the Chapter 7 liquidation bankruptcy.

* Chapter 13 - In general.

When thinking about bankruptcy, saving a home from foreclosure may not be the first thing that comes to mind.

However, there is a type of bankruptcy called Chapter 13 that allows Washington homeowners to stop foreclosure and repay home mortgage arrears through the bankruptcy court.

In Chapter 13, homeowners essentially enter into a repayment plan to cure the default that has caused the homeowner to slip into foreclosure. Arrears may be repaid over a period of 36-60 months.

However, a Chapter 13 will only work if the homeowner earns enough income to pay for the mortgage, mortgage arrears as well as other expenses.

Chapter 13 is a wonderful option for homeowners who have returned to work after having fallen behind in their mortgage payments based on job loss, illness, divorce or other unfortunate life event. On the other hand, depending on the homeowner's income, Chapter 13 may not be a successful option for homeowners who face foreclosure due to interest rate adjustments on an Adjustable Rate Mortgage (ARM).

 What is Bankruptcy?

Bankruptcy consists of a series of federal laws that provide protection and solutions to those facing a wide variety of debt problems.

The various bankruptcy laws are divided into different chapters depending on the financial situation debt problem faced by individuals and businesses in the United States.

In October, 2005 Congress adopted the most dramatic changes to the bankruptcy laws in our history.

The Bankruptcy Abuse Prevention and Consumer Protection Act created various restrictions on bankruptcy filings and new rules and requirements for those seeking to file bankruptcy after October 17, 2005.

The passage of BAPCA and the new requirements under the bankruptcy laws has created the need for experienced bankruptcy attorneys for individuals desiring to file bankruptcy.

 Chapter 13

A Chapter 13 bankruptcy case allows individuals to reorganize their debt and protect certain assets from foreclosure, repossession or seizure.

The most popular reason for an individual to file a Chapter 13 is to save a home.

When facing foreclosure, a Washington homeowner may immediately stop a foreclosure sale upon the filing of a Chapter 13 bankruptcy case.

Under 11 U.S.C. 362, an automatic stay goes into effect the minute the bankruptcy case is filed. The automatic stay prohibits the foreclosing home lender from selling the home at a foreclosure auction. However, it is important that the foreclosing home lender receive formal notice of the Chapter 13 bankruptcy filing (formal notice must include the bankruptcy case number) prior to the foreclosure sale date.

In addition to stopping a foreclosure sale, a Chapter 13 bankruptcy case also permits a homeowner to repay his or her mortgage arrears over a period of 36-60 months. By repaying the mortgage arrears in Chapter 13, the homeowner is able to bring the mortgage current and can continue making regular monthly mortgage payments following the Chapter 13 bankruptcy case.

Generally speaking, a Chapter 13 bankruptcy case involves a mutually agreeable repayment "plan" where an individual proposes to repay certain debt over 36-60 months depending on the individual's yearly income.

The Chapter 13 bankruptcy case is overseen by the bankruptcy court. The bankruptcy court trustee collects plan payments and disburses the payments in the amounts and to the creditors as set forth in the plan.

Debts included in a Chapter 13 plan include: mortgage and auto arrears, taxes, student loan payments, credit cards, medical bills and domestic support obligations. The type of debts to be repaid in Chapter 13 depends on the income earned by the individual bankruptcy filer.

Not only is the homeowner able to save the home in Chapter 13, but, in many cases, is also afforded relief from other debts such as credit cards and medical bills while making plan payments in Chapter 13.

In cases where the homeowner does not have any non-exempt assets (for example home equity exceeding $125,000, stocks, bonds, mutual funds, etc), and makes all plan payments for the entire Chapter 13 period, the bankruptcy court may enter an order relieving you of credit card, medical and other dischargeable debts at the conclusion of the plan payment period.

Another reason to file a Chapter 13 is if you do not qualify for Chapter 7. Since October, 2005 people who make more than the median income for the state of Washington are now prohibited from filing Chapter 7 with limited exceptions. So, if you earn more than the state median income and your expenses are not sufficient to qualify for Chapter 7 you must file for Chapter 13 or another applicable bankruptcy case.

Some homeowners will not qualify for Chapter 13 if their debt exceeds a certain dollar limit.

As of July, 2007 the secured debt limit is $1,010,650 and the unsecured debt limit is $336,900. If a homeowner's debt exceeds the aforementioned sums, the homeowner may choose instead to file Chapter 11.

Additionally, Chapter 13 is limited to individuals. Businesses may not file Chapter 13.

To protect the homeowner's legal rights in bankruptcy, a Chapter 13 bankruptcy attorney should be consulted prior to filing any bankruptcy case.

 Chapter 7

Chapter 7 is a liquidation bankruptcy. The purpose of Chapter 7 is to give individuals a fresh start from their debt problems.

In a Chapter 7 bankruptcy case, the bankruptcy court appoints a trustee who is responsible for making sure the individual filing the bankruptcy case qualifies for Chapter 7. The trustee is also given the authority to investigate the individual's assets.

If the trustee identifies any asset to be non-exempt, such assets are sold by the trustee who then disburses the proceeds of the sale(s) to creditors.

If there are no non-exempt assets, a typical Chapter 7 case lasts approximately 3 months and results in the discharge of debts such as: credit cards, medical bills, auto repossessions, post-foreclosure debt and most civil judgments.

In a Chapter 7 case, it is of critical importance to consult an attorney who can advise you of the amount of exemption available for homes and personal property, otherwise you risk the sale of your home and the loss of your valuable property.

Please note, on July 22, 2007 the Washington legislature approved a substantial increase to the Washington homestead exemption from $40,000 to $125,000. Therefore, a bankruptcy trustee is unable to sell a home in bankruptcy unless the homeowner's equity exceeds $125,000.

While Chapter 7 stops the foreclosure sale, a homeowner is unable to repay the missed mortgage payments necessary to save the home from foreclosure.

When a homeowner facing foreclosure files a Chapter 7, the foreclosure sale may be stopped only temporarily. The foreclosing home lender will most likely file a request with the bankruptcy court (called a motion for relief from stay) to sell the property notwithstanding the Chapter 7 bankruptcy filing.

Put simply, if your desire is to save your home from foreclosure, Chapter 7 is not a viable option.

However, if your home has been sold at foreclosure auction, a Chapter 7 bankruptcy may eliminate any debt remaining after a foreclosure sale. Any sums due and owing a junior lien holder such as a 2nd mortgage after a foreclosure sale is called a "deficiency balance".

Sometime after the foreclosure sale, the mortgage holder who does not get paid out of the sale proceeds will most likely initiate a lawsuit to recover the deficiency balance.

 Chapter 11

While Chapter 11 also involves the reorganization of debt, it is used primarily by businesses and high net worth individuals to reorganize debt and remain in business.

In Chapter 11, companies attempt to stay in business through debt renegotiation and court supervision to prevent creditors from seizing assets without bankruptcy court approval. In a small minority of cases, high net worth individuals file Chapter 11 to repay debt while retaining assets.

The economic policy behind Chapter 11 is that a business as a going concern is of greater value than the sum of its parts if the assets were sold off. This allows employees to keep jobs and creditors to receive more than they would if the company filed a Chapter 7 case and the assets sold at auction.

 Chapter 12

Chapter 12 is used primarily by farmers, fisherman and other agricultural professions who have fallen behind in debt payments and desire to retain their farm or agricultural business.

 General Bankruptcy Information

To assist you in understanding how bankruptcy can help, we have prepared the following information:

1. Consult an experienced bankruptcy attorney

First and foremost, if you are thinking of filing bankruptcy to solve your foreclosure dilemma, it is imperative that you consult an experienced bankruptcy attorney.

Serious consequences may result in the event you file bankruptcy without consulting an attorney.

To this end, a homeowner with significant equity may risk losing the home if she/he files bankruptcy under the wrong bankruptcy chapter. While avoiding a foreclosure sale, the trustee in a Chapter 7 case will sell a home and pay off creditors when the equity exceeds the available property exemption. In the state of Washington, the home equity exemption is called the Homestead Exemption.

Currently, the Washington State Homestead Exemption is limited to $40,000. However, Washington State House Bill 1805 has been passed by both the Washington state House and Senate enacting legislation that increases in the Homestead Exemption from $40,000 to $125,000.

An experienced bankruptcy attorney can properly advise you as to which bankruptcy chapter best fits your individual needs and navigates you through the intricate and complicated bankruptcy laws. A bankruptcy attorney is inexpensive relative to the potential for losing your home by doing it yourself.

2. Filing bankruptcy stops the foreclosure sale

Under 11 U.S.C. 362 all collection actions are stayed upon a bankruptcy filing. A foreclosure is a collection action. While a bankruptcy filing occurs when a bankruptcy petition, schedules and a statement of financial affairs are prepared and properly filed with the United States Bankruptcy Court.

Once the bankruptcy documents are filed with the court, the lender (and the trustee carrying out the sale) are prohibited from continuing a foreclosure sale. A homeowner facing foreclosure can stop the sale with the filing of a Chapter 7 or Chapter 13 bankruptcy case.

While the Chapter 13 is the preferred bankruptcy case for homeowners facing foreclosure, a Chapter 7 filing also stops the sale. However, if you have too much equity in your home you risk losing your home if you choose to file a Chapter 7 bankruptcy.

3. Repay mortgage arrears

A Chapter 13 bankruptcy case may allow the homeowner facing foreclosure to repay home loan arrears over a period of 36-60 months. For example, assume Jane Homeowner falls behind $12,000 in her mortgage payments and is now facing foreclosure. Assume further that Ms. Homeowner chooses the 5 year repayment option in Chapter 13, Ms. Homeowner would pay her ongoing mortgage payment and $200/mo.

 Contact Us

For more information on understanding bankruptcy and foreclosure, or to learn more about our bankruptcy services, please feel free to call us at: 206 442-9500 (Toll-free: 1-800-206-6122).

To receive a free consultation regarding your (or your friend or family member’s) debt problems, please contact us today.