Chapter 7 New York bankruptcy is often offered as an option for stopping a foreclosure. However, debtors should ask why it’s worth the trouble if they think they will lose their homes anyway. It’s a fair point: Debtors who are behind on their mortgages might not keep their homes in chapter 7. Ultimately, the answer depends on the debtor’s circumstances and objectives.
Without a doubt, one thing chapter 7 does for households facing foreclosure is delay the foreclosure sale to the debtor’s advantage via the automatic stay. Sometimes debtors have a plan B that has some chance of success, like money from some other source that will allow them to repay some of their mortgage arrears and get back on track. As long as the delay is not for spiteful reasons, it can accomplish a debtor’s objective. Just be warned that creditors can always move the bankruptcy court to lift the automatic stay and go forward with the foreclosure.
More importantly, bankruptcy courts in districts covering Brooklyn, Queens, Staten Island, Manhattan, Bronx, and Westchester counties permit debtors to compel their mortgage lenders to enter into New York’s loss mitigation program. Its purpose is to help the parties agree on a loan modification, refinancing, forbearance, short sale, or a deed-in-lieu-of-foreclosure agreement. Taking advantage of loss mitigation is a valid objective of a chapter 7 New York bankruptcy. (Chapter 13 debtors can use it too, so a lawyer can help debtors decide which chapter is best for loss mitigation.)
What other reasons might debtors choose chapter 7 before a foreclosure? Sometimes debtors are underwater on junior mortgages and are struggling to pay the senior lender. Discharging the debts owed to the junior mortgagees frees debtors from the liability for such debts—but not their liens on the homes—and debtors could then use this income to stay current on the senior mortgage. So long as the senior lienholder stands to gain all the benefits of a foreclosure auction, junior lenders probably won’t bother foreclosing themselves. (One exception might be a homeowners association foreclosure.) Of course, if the home appreciates in value to the point that the discharged junior lienholder has a stake in foreclosing, then the chapter 7 might not work.
Along the same vein, a homeowner near foreclosure can file chapter 7 to discharge other unsecured debts that inhibit payments to secured creditors. As with the junior-mortgage situation, the debtor is shifting debt payments to the more senior creditor. Both of these circumstances assume that the debtor wants to keep the home.
Debtors might also want to “sell” their homes via bankruptcy rather than foreclosure, especially when a short sale or similar alternative is unavailable. In some respects, foreclosure is similar to bankruptcy: Both processes auction the debtor’s non-exempt secured assets and transfer the proceeds to the creditors in a specific order. Some debtors may recognize that while the foreclosure is inevitable, a bankruptcy might be too. Thus, debtors can go through one process rather than both. The trustee sells the home, the mortgagee is repaid, and the remaining unsecured debts are discharged. The added bonus is that a bankruptcy looks a lot better on a credit score than a foreclosure (along with a bankruptcy).
Most of the time, though, debtors nearing foreclosure who want to keep their homes (and have some capacity to do so) are better off filing in chapter 13. I can think of at least five advantages chapter 13 provides homeowners. If you are behind on your mortgage payments, then discussing your situation with an experienced New York bankruptcy lawyer can help you assess your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.