Q: I came home from work yesterday to find a paper taped on our front door. It says the house will be sold at a foreclosure sale in Vallejo in about three weeks. Friends have told us that we can save our home by filing bankruptcy. Is that true? Is that something you advise people to do?
A: First, no I don’t advise people to file for bankruptcy, at least not without talking with a bankruptcy attorney first.
My expertise is in real estate. Six years ago, I knew next to nothing about bankruptcy. But, tragically, the events over the past four to five years have made it necessary for anyone dealing with real estate law to become knowledgeable about bankruptcy, since real estate issues are without doubt the leading cause of bankruptcies nowadays.
First, you have to understand what bankruptcy is, and what it isn’t.
We all know that bankruptcy is designed for someone who has more monthly bills than they can pay. We also know that bankruptcy can eliminate many of those debts, leaving them unpaid and the debtor off of the hook.
But it’s commonly believed by those considering bankruptcy that it’s a type of smorgasbord in which you can decide what bills you want to get rid of and which you’re willing to keep.
The truth is that the minute your attorney pushes the “send” button on his or her computer, everything you own, right down to your underwear, isn’t owned by you anymore. At least, from a practical perspective, that’s temporarily true.
Within 24 hours of filing for bankruptcy protection, a bankruptcy trustee will be appointed by the court to take legal possession of everything you own.
That doesn’t mean a truck pulls up to haul away your stuff. But the trustee now has the ability to analyze everything you own and try to figure out what, if anything, the law will permit him to seize and sell in order to help pay your creditors.
Of course, the reality is that most people who file for bankruptcy don’t have anything a good bankruptcy lawyer can’t protect. But still, that’s the technical way it works.
So your house will be in play, whether or not you want it to be.
If you have equity in your home, the trustee will be interested in investigating further to see if they can take the house and sell it. That determination is based upon technical law and beyond the scope of this column.
But let’s assume you have no equity.
The very act of filing for bankruptcy is considered a breach of the terms of your mortgage.
When the economy was normal, you could bet the bank would get the court’s permission to foreclose as quickly as possible.
Fast forward to today. Most banks aren’t interest in foreclosing upon any property that the owner is willing to keep making payments on.
So here’s where it gets interesting.
If you go through a Chapter 7 bankruptcy, any liability you had for the mortgage will disappear. But if you are willing to make payments, the bank may be more than happy to let you stay in the house and hopefully refinance or pay it off some day.
Sometimes they’re even willing to talk about a loan modification.
But to get to your question directly; yes, your bankruptcy will at least delay the foreclosure.
The very moment you file for bankruptcy there is something called an “automatic stay” that goes into place. The stay is a legal order from the court stopping any and all collection actions against you. That includes foreclosures.
In fact, all phone calls and nasty letters from any creditors will cease.
But if you can’t work out a deal with the bank, your mortgage holder will likely simply wait until you received a “discharge of debts” at the end of your bankruptcy and then complete the foreclosure.
So, at a minimum, a bankruptcy will buy you some time.
At best, you come out of the bankruptcy with some deal with the bank that will let you make payments and stay.
At worse, you lose the house six months from now.
Believe me when I tell you that all of this is nothing but a quick flyover of Chapter 7 bankruptcy law.
If bankruptcy is something you wish to consider you need to get in and see a bankruptcy attorney in the next two weeks, before the sale.
Tim Jones is a real estate attorney in Fairfield. If you have any real estate questions you would like answered in this column you can contact him at [email protected]