Effect of Filing Chapter 13 on Foreclosure: Questions and Answers

Q: I fell behind on the house payments. My bank stopped accepting payments, and I received a letter saying that my mortgage has been “accelerated”, and that the matter has been referred to a lawyer for foreclosure. What does that mean? Will filing Chapter 13 help this situation?

A: “Foreclosure” is the process by which the lender on real estate takes title back from the borrower because of a default, usually by missing payments. There is no minimum number of missed payments that will trigger this action. If payments are not made according to the schedule set out in the note, the bank has the discretion to foreclose.

Until foreclosure takes place, the property belongs to the borrower. After foreclosure takes place, it belongs to the lender. “Referring an account for foreclosure” means that lawyers have been hired to start the process of foreclosure, which takes weeks to accomplish. “Accelerated” means that the whole debt is due so that that just catching up the “arrears” will not satisfy the lender. Neither means that the bank now owns your property.

The procedure by which foreclosure happens is determined by state law. Foreclosure in Georgia is done without any court action. To do this, the lender must advertize in the newspaper in the county where the property is located that a foreclosure “sale” is scheduled for a particular date. The advertizement must run for four consecutive weeks. Afterwards, foreclosure may be “cried” on the courthouse steps at the county courthouse. Foreclosures in Georgia must take place on the first Tuesday of a month, and not otherwise. Thus, it takes a least a month after a mortgage has been “referred for foreclosure” before the foreclosure can take place.

When you file a Chapter 13 bankruptcy, an “automatic stay” goes into effect that instantly freezes the ability of a lender to proceed with foreclosure …whether the lender knows of the bankruptcy filing or not. (If a foreclosure has already taken place, however, a bankruptcy will not retroactively reverse it).

Q: What is the effect of filing a Chapter 13 on foreclosure?

A: A Chapter 13 bankruptcy involves the filing of a “plan” that may propose to “cure” a mortgage default by having the Chapter 13 Trustee catch up “arrearages” over a period of years. In a normal plan, the debtor makes future mortgage payments in the regular amount directly to the lender after the case is filed. In addition, the debtor pays the Chapter 13 Trustee his “plan payments” which are used by the Trustee to catch up mortgage arrearages and pay other debt such as car notes and credit cards. So long as the debtor meets his obligations under the plan (including the obligation to “amend” the plan when circumstances change), creditors must accept the bankruptcy as approved by the Court. Thus, after a case is filed, creditors may not employ state law collection remedies to enforce their contracts. This includes foreclosure.

Thus, debtors have power in Chapter 13 to stop foreclosures permanently. They can keep their property and take years to catch up defaults, whether the lender agrees or not.

Call attorneys H. Brooks Cotten or Gina Karrh at 678-519-4143 to discuss your particular situation, and they can discuss your options with you. 

Does Filing Chapter 13 Have Any Effect on Obligations Arising in Divorce?

It’s common knowledge that you can’t “bankrupt on child support or alimony”. Obligations “in the nature of support” (even if they are labeled something else in the divorce decree) have never been dischargeable in bankruptcy. This means that you can’t get rid of them without payment.

Even so, it is possible to stop (“stay”) a contempt proceeding on past due obligations and catch up those debts over a period of years in Chapter 13. Chapter 13 is often used to avoid going to jail on a contempt proceeding. However, the bankruptcy judge will not rewrite a divorce obligation no matter how unfair it is, and no matter what has changed since the divorce was final. Only the Superior Court can do that. The reason is that a divorce is strictly a matter that is governed by state law in state court (Superior Court), whereas bankruptcies are federal. Federal courts will not interfere in matters that are traditionally the subject of state jurisdiction.

Over the years, this principle has become stronger and stronger. It is no longer possible to discharge a property settlement (as distinct from a support obligation) in Chapter 7. Thus, you should not expect to “fix” a bad result in divorce court by filing a Chapter 7 bankruptcy. It may be possible however, under limited circumstances, to pay property settlement obligations less than in full under a Chapter 13, and still receive a discharge. There is nothing easy or automatic about this, and you would have to discuss your particular situation with a lawyer to be confident about how this would work out for you.

If you are still married and are contemplating a divorce, a joint bankruptcy might make your separate lives easier in the future. Assume that you divorce without filing bankruptcy. If you owe some debts jointly, the divorce decree should direct which of you is supposed to pay each of those debts. If instead the divorce is unclear as to who should pay a debt, cooperation will be necessary for you to maintain the peace. This is often a problem in divorce. It usually works best for each spouse to be totally responsible for paying any given debt.

Moreover, even if the divorce decree clearly assigns each spouse separate debts to pay, that does not affect the right of the creditor to collect from either one of you if both names are on the account. Thus, if the ex is supposed to pay, but does not pay, you can still be sued by the creditor, regardless of what the divorce decree provides. If you are sued, your remedy would be against the ex-spouse, not the creditor. You would have to return to Superior Court to file a Motion for Contempt to make the ex-spouse pay as ordered. Similarly, you may not owe debts jointly with your spouse, but a divorce court still can order you to pay a debt that never was in your name… as part of a “division of marital liabilities”.

When you file for divorce, you want to achieve peace if at all possible. You don’t want to set yourself up for future conflicts either with your ex or with your old creditors. If you file bankruptcy and wipe out these debts, neither one of you will have to pay them in the future, and the divorce decree will not need to address them. This if often the best strategy for avoiding stress and conflict in your future life. Call us at 678-519-4143 to discuss your particular situation with our lawyers. 

Starting the Process of Filing for Bankruptcy

General information is available online, and you can do some research before calling a lawyer. However, in bankruptcy, what happens in an actual case depends on the circumstances of the individual debtor, and to some extent, issues are handled differently depending on which judge or which trustee is assigned. Thus, it is not the case that “one size fits all”. Local knowledge and expertise are important to get the best result for your case. We have that local knowledge and expertise.

Most people prefer to call us first, or even walk into our office to discuss their situation. We can give you informative answers so long as you understand that results depend on all of the facts taken as a whole, and not just on selected facts taken in isolation. You will need to do an in-person interview to actually prepare a case for filing.

When you come into our office, we have simple forms for you to fill out. We answer questions at that time if a question is not clear to you. A paralegal then types your information into an official format. You will have a generous amount of time to talk privately with the lawyer to explore your particular situation and options. We always try to do the job right the first time to reduce worries and uncertainties later on down the line.

In general, any bankruptcy requires that you provide information about your assets and your debts and about your income and your expenses. Information about your “assets” includes values of real estate, cars, and other personal property, whether paid for or not. We often use tax appraisals for values of real estate, and we look up N.A.D.A. values for vehicles. Values assigned to things like household furnishings are more like estimates. We help you with this.

Information about income and expenses is very important. We have to provide copies of “pay advices” (where possible) to back up what is said in your “budget” about your income, and we have to provide the most recently filed tax return. The court can and will require you to file tax returns if you should have filed but did not. The trustees may want proof of other types of income like social security, government assistance, or even support from family members. Sometimes, but not always, we are allowed to use an affidavit (a sworn statement) as “proof” of income where no other proof exists.

Information about expenses is usually clear with regard to the rent or mortgage you pay, or with regard to things like car insurance. Amounts budgeted food and transportation expenses are not so clearly defined, and depend on factors such as household size and how much you drive.

We do not charge fees unless you file the case. If you decide to file, you will need to do “credit counseling”, which is a statutory requirement. This is done in the office by internet, and a secretary guides you through the process. The cost of credit counseling is included with any other fees you pay.

Please call us at 678-519-4143 to discuss your particular situation. With our help, starting the process will be less stressful and easier than what you might think.

Do I Have to Include My Spouse?

Your husband or wife might be opposed to filing bankruptcy with you. The good news is that you are not legally REQUIRED to file a joint case. Many cases are filed singly, regardless of marital status. However, it is often to your advantage to file together to qualify for the benefits that are most important to you. As a practical matter, the benefits that you are seeking might not be achievable any other way.

For example, a bankruptcy discharge will only the cover the person who files the case (the “debtor”). If a debt is owed jointly, the non-filing spouse will not be covered by the debtor’s discharge. Where a debtor and the non-filing spouse owe a joint debt and a Chapter 7 is filed, the debtor would be discharged of the debt. However, the non-filing spouse would continue to owe it, and would continue to be subject to collection activity.

In a Chapter 13 (not Chapter 7), the debtor may protect the non-filing spouse on a jointly-owed consumer debt. The debtor does this by providing in the plan that the debtor will pay the debt in full through the plan. While this protects the non-filing co-obligor, it might make the plan more expensive because plan payments have to be high enough to pay the debt. Otherwise, if the debtor will not pay a joint debt, the court will “grant relief from the automatic stay” to allow the creditor to be paid by the non-filing co-obligor.

Suppose you owe a car note jointly with the non-filing spouse, and you intend to pay for that car through your Chapter 13 (whether the spouse files with you or not). You can do this even if you file by yourself. However, in order to fully protect the other party, you would have to pay the full contract interest on the car. This can make a big difference if the contract interest rate is high. By contrast, if you choose to file a joint case, you may reduce the contract interest rate and receive a discharge without paying that high interest.

Suppose your spouse doesn’t owe any debt, or can handle his or her debt without filing with you. In that case, he or she does not have to file. However, you still have to include the spouse’s income and expenses in your budget. (A non-filing spouse’s name and social security number are not included in the bankruptcy petition, even though the Trustee can and does require “proof of income” from the non-filing spouse. This information is not published publicly). Thus, the bankruptcy should not affect the non-filing spouse’s credit so long as debts are not owed jointly.

The budget includes household income and expenses even in a single filing. If you think about it, your ability to pay debt is very much affected by your spouse’s income, because he or she pays some of the bills. In a Chapter 13, your budget must show that you have the ability to pay what your plan requires you to pay. Otherwise, the plan is “infeasible”. Similarly, in a Chapter 7, your budget must show that you can afford to pay for the debts that you want to “reaffirm”, such as your car or your house. Without your spouse’s income, you probably couldn’t afford to do that.

Please call us at 678-519-4143 to discuss your particular situation with our lawyers.