August 11, 2009
Bankruptcy Remedies For Foreclosure
Bankruptcy affords two broad remedies to foreclosure by: (1) discharging mortgage deficiencies; or (2) restructuring mortgage debt.
Chapter 7 bankruptcy permits a debtor to discharge certain debts. If a property is lost through foreclosure, any resulting mortgage deficiency can be discharged in Chapter 7. In the alternative, either a homestead residence, or other property with no equity, may be retained in Chapter 7 so long as the mortgage payments are kept current. Chapter 7 also discharges unsecured debt, such as credit cards, thus freeing up funds to keep the mortgage payments current.
Chapter 13 bankruptcy allows a debtor to restructure debt through a monthly payment plan which lasts 3 to 5 years. Any mortgage arrearages can be cured through the Plan. A mortgage on an investment property can be “crammed down” and “stripped off.” This means that the mortgage amount is lowered to the value of the property with just a portion of the stripped off balance being paid over the life of the Plan. This Chapter 13 mechanism cannot be applied to a first mortgage on a residence. However, it can be applied to a wholly unsecured second mortgage on a residence.
