Bankruptcy laws are defined under national and local laws. These laws can be very complex. However, since this is an option, it should be considered in the very early stages.
Typically, a homeowner has several options in relationship to bankruptcy, the most common are Chapter 7 and Chapter 13.
Chapter 7 bankruptcy is generally for those who have no means to repay debt. For those who have available income, Chapter 13 bankruptcy reorganizes their assets and debts so their creditors will receive at least partial payment.
Chapter 7 bankruptcy requires the borrower meet the means test.
It takes into account your income, expenses and family size to determine whether you have enough disposable income to repay your debts. Although it was designed to restrict the number of debtors who can get their debts forgiven through a Chapter 7 bankruptcy, most people who take the means test pass it easily.
Nevertheless, this exercise should not be taken lightly and should only be handled by attorneys that specialize in this field of practice.
Those who don’t qualify for Chapter 7 or who want to retain certain assets — like a house — can choose instead to restructure their debts and pay them off through Chapter 13 bankruptcy.
Chapter 13 bankruptcy is for homeowners that do not meet Chapter 7 requirements and are above the median income for the respective zip code. Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy doesn’t liquidate assets and discharge unsecured debts in a short period of time.
Chapter 13 was intended to help people facing financial difficulty keep their property while gradually catching up on past due balances.
A typical Chapter 13 bankruptcy repayment plan is between 36 and 60 months and the borrower/petitioner keeps payments current and makes monthly payments toward past due balances. A trustee is assigned by the courts and is responsible for examining and prioritizing debts to determine any and all assets that will be liquidated for the purpose of paying off secured creditors.
Bankruptcy Stalls Foreclosure
Bankruptcy may stop stop a foreclosure and allow homeowners to reorganize their debt and keep their properties. However, the reality is that more often that is not the case and the bankruptcy only stalls the foreclosure.
If the homeowner is not able to make the payments after bankruptcy, the house will foreclose anyway.
Another major drawback to bankruptcy is that it makes it very difficult for homeowners to sell their property once they enter the bankruptcy process and makes it nearly impossible to negotiate a short sale. The only possibility is if the bankruptcy trustee agrees to release the property from the proceedings ands allow it to be sold.
It is important to note that bankruptcy is only temporary and in many cases the most prudent course of action is to see the property. However, this is a personal decision based on a specific financial situation