Bankruptcy is not a way to exempt a house from foreclosure. Bankruptcy only delays foreclosure.

Bankruptcy is a federal procedure to protect a debtor from his or her creditors. It puts a stay on all collections while the court sifts out your solvency.

The two most common types of bankruptcy are chapter 13 and chapter 7.

Chapter 13 is intended for a wage earner who just needs help restructuring debt. The intention is that the creditors will be paid off. The court does have leeway to reduce the debt load.

How it starts for someone is to contact a lawyer (you can do it yourself, but it is not recommended) who will have to fill out extensive paper work. This paperwork will go into minute detail about every single debt owed. Even that 15 dollars owed to the library is itemized, or the loan from a brother-in-law.

If this is your bankruptcy, your lawyer adds up all your debt and makes a plan for repayment. It can include just the secured debt or both secured and unsecured. When it is submitted to the bankruptcy court a trustee must accept it. If you have the income to support the plan, your plan will most likely be accepted. If the trustee does not agree, it will be rejected.

The structure of repayment is based on a three-year or five-year plan.

During that time you can not borrow ANY money. You can not use a credit card or apply for a loan. So a chapter 13 is a long process.

With a Chapter 13, you may have to re-establish utility accounts. The utilities cannot demand you pay the back payments, but they can demand a deposit before they will keep your service going. You will need to weigh the outstanding balance versus a deposit to decide which works best for you.

Just an odd footnote, in some states, if your car insurance is not up to date, it might be a loophole for your car loan creditor to reclaim your car.

A Chapter 7 bankruptcy is quite different from a Chapter 13. In a Chapter 7 you are asking the court to settle with your creditors and they are given what you own. There is no repayment schedule and once the Chapter 7 is accepted, it is done. It does not drag out 3 to 5 years.

With the Chapter 7, of course, the disadvantage is that you are surrendering everything you own.

There are a lot of exceptions called "allowances" that you can take. They vary from state to state. For instance, in some states, if your house payments are current, other creditors can not "attack" your house to get their money.

In other states you might be allowed to keep a certain amount of equity in your house. Example: if your state allows you to keep up to $30,000 in equity in your house it means that as long as you have less than $30,000 of equity your house will not be sold to satisfy creditors other than the home lender.

Equity is the difference between the value of your house and what you owe.

Now let¡¯s say you own your house free and clear but you are up to your eyeballs in debt; in some states, your house can be taken to satisfy those debts.

There is one misconception that you need to make sure you understand. If your outstanding debt is to a secured creditor, you will lose your possession unless you work out a deal with that lender. Bankruptcy does NOT wipe out secured debt. That goes for even those states where a house can not be foreclosed on from a creditor other than the lender.

This is just a brief overview to acquaint you with the aspects of both kinds of bankruptcy. Since investors often come in contact with property that is in bankruptcy or under consideration for bankruptcy, awareness is essential.

free articles and resources on www.AAREIT.com

 

Do you own real estate articles or stories and want to share with other investors? 
You have chance to win $100 Amazon Gift Certificates. We will give away 3 prizes for top authors each month!

Email your articles or stories to:  articles@buyincomeproperties.com

 

© Copyright 2001 - 2010 by BuyIncomeProperties.com               

 

 

Visit Real Estate Forums for every real estate investing topics!  Enter Here

    

Top of Page