Using Bankruptcy to Eliminate Debts and Stop a Foreclosure

There are two types of bankruptcy. Chapter 7 eliminates all debt eligible for discharge and Chapter 13 requires the debtor to repay creditors in a payment plan approved by the court. Deciding which to choose depends on the type of debt, the debtor’s income, and if the foreclosure of the debtor’s home is looming.

Eliminating Debt in Chapter 7

In Chapter 7, a debtor can have debt discharged within a few months. To qualify, the debtor’s income must not exceed the median income in their state. If it does, the debtor must pass the means test. In Chapter 7, the debtor can eliminate unsecured debt, like credit card debt and medical bills. If the debtor has secured debt, the debtor must redeem (pay the creditor the replacement value), reaffirm (enter into new contract terms), or surrender the property to the creditor. After a Chapter 7 discharge, child support, student loans, certain tax debt, and debt incurred through fraudulent means are not subject to elimination.

Eliminating Debt in Chapter 13

A debtor can eliminate debt in Chapter 13, but it will take more time than in Chapter 7. The debtor must first pay back creditors in a repayment plan. The plan will last for three or five years, depending on the debtor’s income. During the plan, the debtor must pay back all priority debts (child support, alimony payments, and non-dischargeable tax debt) and certain secured debts—such as liens—in full over the life of the plan. Unsecured creditors will receive what is left over each month after the debtor pays the other creditors. Once the debtor completes the Chapter 13 plan, the court will eliminate all debt eligible for discharge.

Stopping a Foreclosure

When a debtor files for bankruptcy, either Chapter 7 or Chapter 13, the bankruptcy court will issue an automatic stay. An automatic stay stops all creditors from trying to collect the debt. In both types of bankruptcies, an automatic stay will also stop foreclosure proceedings. However, in the end, Chapter 7 will not protect a home from foreclosure. The creditor can do several things: it may request that the court lift the stay (courts routinely oblige) or it can wait until the debtor’s bankruptcy case becomes final and then initiate foreclosure proceedings.

The best way to stop a foreclosure is to file for Chapter 13. In Chapter 13, the debtor can repay the arrearage, the past due amount, in the repayment plan. The debtor, however, must stay current on the mortgage while in the plan and must be able to repay the entire arrearage in the plan.

When You Should Seek Legal Help

If your debt has become unmanageable or you are facing the foreclosure of your home, contact a bankruptcy attorney as soon as possible. Every case is different, so an attorney can help you decide how to proceed.

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