Including the Debts on Your Real Estate in Your Bankruptcy Case
First, be aware that both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” can help you keep your house. Talk to an attorney so that you are well informed about your options, including what it would take for you to keep your home. Believe it or not, under some circumstances you can significantly reduce your monthly payments, and even reduce the debt against your house by tens or even hundreds of thousands of dollars.
But, if you have been fully informed about your options and have decided to surrender your home, Chapter 7 can give you many advantages while you do so.
The Timing Advantages of Surrendering Your Home in a Chapter 7 Case
A Chapter 7 case can give you a precious few extra weeks or months of staying in your home, usually at no cost because you are not paying your mortgage(s). This gives you time to gather more money for your transition to other housing. Or it can give you the necessary time to complete a pending sale of your home that was coming up against a foreclosure. Or in some situations Chapter 7 even buys you the leverage for “cash for keys”—the lender paying you money to move out on a set date.
The filing of a Chapter 7 case imposes the “automatic stay,” the immediate stopping of virtually all creditors’ actions against you, including foreclosure of your home. So if you have a foreclosure sale pending, with the right timing that foreclosure would be stopped and delayed. That “automatic stay” lasts the length of your case, usually 3 to 4 months. But the delay may be shorter than that if the creditor asks the bankruptcy court for “relief from stay”—permission to re-start the foreclosure. At that point it might be possible to negotiate the above “cash for keys” option or some other arrangement that would be advantageous to you.
The Debt-Discharge Advantages
Depending on what debts you have against your house, a Chapter 7 case may be able to discharge (legally write off) obligations that you would be saddled with if you surrendered the house without filing bankruptcy.
For example, if you have a second mortgage, a foreclosure by the first mortgage lender would usually leave the second mortgage debt unpaid and still owed by you in full. The same thing would likely happen if you simply surrendered the house, without a bankruptcy filing. This could leave you owing tens of thousands of dollars, which your Chapter 7 case would almost certainly discharge.
There are various other debts potentially secured by the home—such as a judgment lien, income tax lien, homeowners’ association dues and assessments—which would also likely be left owing after a foreclosure by your mortgage holder. Also, some of those creditors would likely be spurred into going after you personally once they were foreclosed off the real estate. Dealing with all of this through a Chapter 7 case, and getting it taken care of all at once instead of letting it drag on for years, is often the most sensible solution.
The Home Sale Advantages
If you are trying to close a sale, including a short sale, a Chapter 7 filing may well help. Besides potentially giving you more time if your sale is threatened by a foreclosure, it can give you two other important advantages.
First, if you have a judgment against you which has turned into a judgment lien attached to the house, a Chapter 7 “judgment lien avoidance” may well get rid of that lien so that it does not need to be paid. That may enable the sale to proceed when there was not enough money to pay the secured creditors beforehand, or could even leave you with money from the sale proceeds that would have otherwise gone to that judgment creditor.
Second, the pending bankruptcy’s anticipated discharge of a second mortgage may provide leverage on that creditor to stop holding up a short sale, or convince it to accept less than it would have otherwise.
The Income Tax Advantage
When a creditor reduces or eliminates the debt you owe to it—such as debt owed to your second mortgage lender through a short sale—the amount that you no longer owe can under some circumstances be considered income for income tax purposes. This is called “cancellation of debt income.” Details of this are beyond the scope of this blog and should be discussed with your tax professional. But generally, if this occurs while in a bankruptcy case, such cancellation of debt is not treated as income, thereby avoiding a potentially serious future tax hit.
Contact the law Office of Andrew B. Finberg
As you can see, Chapter 7 brings a surprising array of potential advantages to you when you are letting go of your house. To learn which of these—and possibly others—apply to your unique circumstances, come in to see us for a free, no-obligation consultation if you are in New Jersey. Let us help you understand your options.
The Law Office of Andrew B. Finberg works with individual consumers and business owners facing financial challenges. Please call (856) 988-9055 or use this form to contact your New Jersey bankruptcy attorneys at The Law Office of Andrew B. Finberg, LLC. We look forward to the opportunity to bring you peace of mind.