Many individuals with excessive unsecured debt such as credit cards, medical bills, and other uncollateralized obligations may be reluctant to consider filing a Chapter 7 bankruptcy case and find relief and a fresh start from these burdensome debts because they fear to lose their home. Of course, this is a paramount concern in any bankruptcy case and depends on three factors or variables.
The first variable simply has to do with the choice of the debtor, or debtors, if they are a married couple filing jointly. Do the debtors want to keep the house? Is it a good idea to keep the house? Perhaps the house is underwater, the interest rate is exorbitant, or the monthly payments are unmanageable based on the debtor’s monthly income. The better choice may be to surrender the home and look to purchase in the future once personal finances improve and return to normal.
The second variable is more crucial than the first and is whether the debtor is current on the mortgage. It may be wise at this important juncture to consult with an experienced bankruptcy attorney, especially since a foreclosure may be imminent. If the desire is to keep the home, some lenders may provide some time to become current although it is more than likely that a lender with a delinquent loan will file a motion to lift the stay and foreclose as soon as possible after the Chapter 7 bankruptcy filing. Prospective Chapter 7 debtors who wish to keep their homes but are delinquent must plan for the future in this situation. The assistance of an experienced bankruptcy attorney is often essential at this time.
The third and final variable is how much equity, if any, is in the property. If there is some equity in the property, this amount must be compared to the Utah homestead exemption to determine how much of this equity is non-exempt, since this amount will be available to the trustee for distribution to creditors. If there is no equity in the home, the trustee has nothing to distribute to creditors.
When considering whether to file for chapter 7 bankruptcy case, it’s important to remember that all dischargeable debts are extinguished, including credit cards, medical bills, and even any unpaid debt for any surrendered property like a home or motor vehicle.
Once a debtor makes his or her decision about whether to keep or surrender a home, there are three options – reaffirm, “stay and pay,” or surrender. The latter is the easiest option – simply hand over the keys and surrender the home.
A reaffirmation means that the discharge of the debt is avoided and it is re-established or reaffirmed. A debtor must agree, usually in writing, to continue to make the mortgage payments according to the terms of the original loan. It is as if the bankruptcy case was never filed. Filing bankruptcy does require making some sacrifice. It is, therefore, best to take advantage of the benefits of the process as much as possible because of the sacrifice involved. Thus, debtors must always be cautious when reaffirming debt since it prevents an otherwise dischargeable debt from being discharged.
The notion of “stay and pay” means to continue paying on the debt without reaffirming and is a wiser course of action, in most cases, than reaffirmation. This simply means that the debtor continues to make payments on a debt that he or she no longer legally is obligated to pay.
Although this option does not technically appear in the text of Title 11, (the Bankruptcy Code), it is still prevalent since most lenders are perfectly content to allow someone to remain in the house in return for a continued stream of payments. There is no need to foreclose or dispose of the property otherwise until payments are missed. A primary benefit of not signing a reaffirmation agreement is that the lender may still foreclose but is unable to file a lawsuit for any deficiency.
One of the Morrison Law Group’s qualified and knowledgeable bankruptcy attorneys may answer any bankruptcy debtor’s questions about any relevant bankruptcy law. The Morrison Law Group can also help if you just want to talk about Chapter 7 or Chapter 13 bankruptcy options. Call 801.456.9933 today to schedule a FREE consultation. We have locations in Ogden, Logan, Sandy, and St. George to serve the residents of the counties of Weber, Cache, Salt Lake, Utah, Morgan, Davis, Washington, and surrounding areas.
