New research from the University of North Carolina (UNC) Center for Community Capital and the UNC School of Law suggests that homeowners in foreclosures who file for bankruptcy have a better chance to retain their home.
Specifically, the report, “Bankruptcy During Foreclosure: Home Preservation Through Chapters 7 and 13,” says that filing for Chapter 7 or Chapter 13 bankruptcy reduces the chance of foreclosure by 70 percent. Surprisingly, the study also found that only about 8 percent of homeowners actually file for bankruptcy.
Differences between Chapter 7 and Chapter 13 Bankruptcy
While Chapter 7 relieves unsecured debts, Chapter 13 protects home ownership with a debt repayment plan. Regardless, both types of bankruptcy protection stop foreclosure proceedings.
In general, Chapter 7 liquidates unsecured debt, such as credit cards and medical bills, for those with little or no disposable income. A court-appointed trustee oversees the case. The trustee’s job is to review the filing documents and sell all assets not exempt from the proceedings. The trustee repays the creditors from the money gained.
On the other hand, a Chapter 13 bankruptcy reorganizes rather than liquidates debts. It is for those with a regular income who can repay their debts, but need time and legal protection to do so. It allows homeowners to retain both their exempt and non-exempt assets in exchange for repayment (or partial repayment) of debts.
As in Chapter 7 bankruptcy, Chapter 13 follows similar procedures. After a homeowner files the papers and pays a fee, the court appoints a trustee. Homeowners make a monthly payment to the trustee who repays creditors according to a specified order.
Which bankruptcy a homeowner chooses depends on current income, amount of assets and debts, and desired goals. However, it’s important to note that Chapter 7 generally takes four to six months to complete. Chapter 13 bankruptcy can take up to five years to complete.
Deciding if Bankruptcy is the Right Choice
Before deciding that filing for bankruptcy is the right move, homeowners need to take into account the impact of this action.
First, homeowners should consider if there are alternative actions they might take, such as borrowing from a family member or liquidating an asset instead of waiting for the court to do so.
Next, understand the laws and ramifications. Homeowners need to determine if they are eligible. Additionally, they need to learn which assets (such as pension, car, and home) they will lose and what debts (such as credit card, medical, and loans) the court will forgive.
Finally, homeowners should understand the impact a bankruptcy has on their life. It’s intrusive. The court will review every inch of their financial life. It’s invasive. In Chapter 7, the trustee sells off personal items. It’s long lasting. Chapter 7 bankruptcy stays on the homeowner’s credit record for 10 years. Chapter 13 bankruptcy stays on a credit record for seven years.
While bankruptcy offers homeowners an opportunity to retain their home, there are downsides to consider. It’s important that homeowners understand all angles and talk to an expert before they take action.