How a Bankruptcy Filing Impacts a Foreclosure
Many debtors facing foreclosure in North Carolina turn to bankruptcy as an option. One of the main reasons debtors facing foreclosure file for bankruptcy protection is to take advantage of the automatic stay, which prohibits most collection attempts, including a foreclosure. To the extent that the debtor has had two prior bankruptcy cases pending in the prior 12 months, there may not be an automatic stay. The automatic stay is triggered upon filing for bankruptcy and acts as an injunction, protecting debtors from creditors’ collection efforts. The automatic stay provides time to deal with a pending foreclosure and is applicable in Chapter 7, Chapter 11 and Chapter 13 bankruptcy cases.
Chapter 7 bankruptcy normally provides only a brief (one to four months commonly) reprieve from foreclosure and extinguishes the debtor’s personal liability connected to the mortgage note. However, the Chapter 7 debtor is not able to discharge homeowners association dues that arise after the bankruptcy filing through the time where the debtor is no longer owner of the property. Also, in the event that the property has non-exempt equity in it, the Chapter 7 trustee may seek to sell the property.
Chapter 13 bankruptcy provides the debtor with time to bring the past due payments current as well as restructure non-mortgage debt through the Chapter 13 plan, which can last up to 60 months. If an obligation is secured only by a principal residence, then Chapter 13 will not permit principal balance reduction or interest rate reduction. If a junior mortgage is fully unsecured (i.e. the senior mortgage(s) payoff exceeds the fair market value of the property) then it is possible to strip off the mortgage. Also, if the collateral is not exclusively a primary residence then it may be subject to impairment. The Local Rules for the Eastern District of North Carolina (where Wake, Johnston, Harnett, etc are located) provide that ongoing mortgage payments must be paid through the Chapter 13 payment as well as the curing of the arrears. This is referred to as the conduit requirement. The Local Rule provides that a trustee has the power to waive the conduit requirement.
A Chapter 11 plan can provide for the curing of arrears like Chapter 13 or can provide a more comprehensive restructuring of a loan. Compared to Chapter 13, Chapter 11 generally requires more time, effort and money. Chapter 11 is often used by debtors whose debts exceed the Chapter 13 debt limits. Unlike Chapter 13, the Chapter 11 creditors have the right to vote on the debtor’s plan and some class of creditors must vote to accept the plan in order for the debtor to achieve confirmation.
For more information on how the automatic stay may help you, contact Sasser Law Firm to set up a free consultation.