Why Would You Do Both?

[Holding Pattern]

I'm good with finances. Legalities, not so much so. This may be a naive question but here it goes...

Why would someone file bankruptcy AND let the house go to foreclosure auction? Wouldn't it make more sense to include the house in the bakruptcy especially since the person filing had only a few thousand in cc debt.

We're left to guess...thought you all might provide some insight... ty.

[Greebo]

If you declare bankruptcy you're losing the house either way unless you reaffirm the loan.

[Palooka]

I thought now you could pick what you want thrown into bankruptcy and keep what you want. Like some choose to keep their cars or houses. Some throw it all in like say with CC or medical debt.

[Greebo]

Originally Posted by Palooka

I thought now you could pick what you want thrown into bankruptcy and keep what you want. Like some choose to keep their cars or houses. Some throw it all in like say with CC or medical debt.

That's what re-affirming the debt is - choosing to keep that debt.

But if the house payment has not been made in months, the BANK takes the house to foreclosure, not the owner. Sorry I didn't think to say this last time - I was exhausted and my brain was shut down.

So the bankruptcy gets you out of debt - but it doesn't mean you get to keep the unpaid for house. So if you go to bankruptcy and you include the house, then the bank will get the house. The bank will then foreclose.

If the house is already in foreclosure, you're about to lose the house anyway - so including it in the bankruptcy would have no affect on the foreclosure UNLESS you could bring the payments current.

So - Bankruptcy relieves you of your obligation to pay a debt, but does not remove the right of the lender to reclaim secured assets (house, car).

Foreclosure is the process by which a lender reclaims those assets.

[scottp999]

Greebo is right on. There is no option to save your house without paying for it. Many people don't know that.

Chapter 7 is Liquidation
Chapter 13 is Reorganization

Chapter 7 requires a means test to qualitfy for or get bumped to 13. Your qualifed assets are liquidated. There is no repayment plan. A trustee gathers your qualified assets and liquidates them to pay as much as you can to your creditors. The house debt is not included, and is one of the debts that you will not get discharged. So while you may postpone foreclosure, you will still need to bring the loan current to keep the house. Chapter 7 does not extinguish debt on property (secured debt).

See: http://www.uscourts.gov/bankruptcyco.../chapter7.html

Chapter 13, gives people with regular income a chance to come up with a payment plan to pay all or some of their debts. A payment plan lasts about 3-5 years. Your mortgage will be part of the plan. Usually the valid notice of default (notice to foreclose) is still valid if you miss the payment under the plan for your mortgage. This means, you miss one payment under the plan on your mortgage, and they can pick up on the foreclosure process right where they left off.

See: http://www.uscourts.gov/bankruptcyco...chapter13.html

Both postpone foreclosure. Chapter 7 during what is called a "stay" and chapter 13 until the payment plan is worked out, and then it's up to you to make the payment plan payments on time to keep the house.

The hope in chapter 7 is that you get enough unsecured debts discharged that you can have a fresh start that allows you to have enough money to make the mortgage payments.

There is no magic to discharge mortgage debt. You hear congress talk about giving judges "cramdown" authority to re-write mortgage contracts and write off principal, but it has not happened and woould cause mortgage interest rates to probably double, since the creditors would need to price in additional losses from bankruptcy judges. Under chapter 7 your unsecured debts can be discharged or written down. Under chapter 13, unsecured debt amounts can be negotiated for the payment plan.

The only way people are getting write downs on principal is through the short sale method. They are still tough to get, and they are only granted in some cases because the borrower is agreeing to move out and lose title to the property. In many cases, investors and mortgage insurance companies will only write off principal in a short sale if the borrower agrees to a promissory note to pay them back for some part of the writeoff amount. Those promissory notes are unsecured debt.

In theory, you could do a short sale, have the investor or pmi company get you to sign a promissory note for all or some of the amount they are writing off. That amount becomes unsecured, and then you could file chapter 7 or 13. It is very difficult to get chapter 7 and discharge unsecured debts. You have to have someone search and look through your assets and liquidate them, if you have any. You have to pass a tough means test. I am sure there are people who qualify, but they are truly broke (no assets) and need to start over. Congress made Chapter 7 much harder to get a few years ago. If you get caught hiding assets you are in deep stuff!

I'm not a lawyer, just someone who has researched these avenues. I suggest anyone considering bankruptcy talk to a good lawer. Anyone considering a short sale find an experienced realtor and even consult a real-estate attorney. Laws vary by state.

[Palooka]

Greebo, I get what you are saying.

[Holding Pattern]

As usual Greebo, concise answer to my question. Thank you all for the replies.