Foreclosure Sales and Bankruptcy
When a person is behind on a home loan, it is very common to think a foreclosure sale will solve all their problems with regards to the home. However, all too often, a foreclosure sale is just the start of the problems. In some cases, the cause of the problem is a junior lien which starts collecting. In other cases, it is an unexpected tax bill as a result of the foreclosure sale which the borrower was unaware.
In many cases, a bankruptcy filing prior to the foreclosure sale would have discharged the liability on any additional loans on the property, avoided the tax liability completely and allowed the person to stay in the property several additional months. Additionally, a foreclosure sale prior to a bankruptcy filing may cause a person not to qualify for a Chapter 7 bankruptcy leaving a person in a Chapter 13 bankruptcy for 3-5 years. What should a person consider prior to allowing a property to be sold at a foreclosure sale?
First, prior to allowing a property to be sold through a foreclosure sale, (1) determine the affect of the foreclosure sale on your credit, (2) is there any personal liability on a lien after the foreclosure sale which could be discharged in a bankruptcy filing and (3) is there any tax liability which could be discharged through a bankruptcy filing prior to the foreclosure sale.
Second, could a Chapter 13 bankruptcy filing avoid a junior lien on your principal residence which would have allowed you to retain the real property? Under the Bankruptcy law, a junior lien on a person’s principal residence which does not attach to equity in the real property, can be avoided through a Chapter 13 Plan. For example, if the current fair market value of a principal residence is $250,000 and the balance on the first deed of trust is $300,000, then a junior lien could be avoided through the Chapter 13 Plan. A Chapter 13 also allows a person to cure a default on a home loan over time which may be all that is necessary to avoid a foreclosure sale.
Third, are there any other reasons that a bankruptcy filing may be appropriate prior to a foreclosure sale. The most common reason is that there is significant unsecured debt which can be discharged in the bankruptcy. In addition, a bankruptcy filing will allow a person to remain in the property additional time.
In conclusion, a foreclosure sale of real property without a bankruptcy filing may be the right decision. However, a foreclosure sale may have serious personal liability and tax consequences which should be analyzed by a bankruptcy or real estate attorney prior to the foreclosure sale. This is a complicated area of the law, but a bankruptcy or real estate attorney should be able to make to an analysis of your particular situation fairly quickly. I see people for a free 30 minute consultation at my offices in Walnut Creek, Antioch and Brentwood.
WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE FOR BANKRUPTCY. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.
© 2010 Joan Grimes