How To Stop A Foreclosure Sale by Filing Chapter 13 Bankruptcy
There are two types of bankruptcy proceedings available to individuals: liquidation and reorganization. Chapter 7 bankruptcy is a liquidation proceeding in which nonexempt assets (if any) are sold to pay off creditors. The debtor is then discharged of remaining outstanding debt and relieved of personal liability. For example, debtor’s total credit card debt totals $50,000. The debtor (ie person filing the bankruptcy) does not own a home, leases his vehicle, and has less than $10,000 in his bank account. In his Chapter 7 filing, he will be discharged of his entire credit card debt and can receive a fresh start by becoming debt-free. There are no tax implications, lawsuits, or judgments for the discharge. Unlike debt settlement, where the deficiency is sold to other agencies to pursue further collection efforts, a debt discharged in Chapter 7 is permanent. This is the best proceeding for someone with no assets or assets that are exempt under federal or state law.
Do you Qualify for a Chapter 7 Bankruptcy?
If you own a home outright with no mortgage or have substantial equity in the property (see below), Chapter 7 bankruptcy is probably not for you. To ascertain whether someone qualifies for a Chapter 7 liquidation, one of the first things we ask during a consultation is the client’s annual income. If the income greatly exceeds the median income level for the debtor’s family size, Chapter 13 may be the only option. For the year 2019, Median Family Income by Family Size is as follows:
| State | 1 Person | 2 People | 3 People | 4 People * |
|
New York |
$55,333 |
$71,343 |
$83,887 |
$102,384 |
* Add $9,000 for each individual in excess of 4 people.
Be aware that the above noted figures are not conclusive; there may be exceptions to a particular case filing. Just recently, we qualified a family size of two people with an income of over $100,000 for a Chapter 7 filing. The debtor successfully received a discharge despite being above median income levels. Expenses such as child care, life insurance, health insurance, IRS and New York State back taxes, may help with eligibility.
An equally important qualifying factor is whether the debtor owns nonexempt assets. A homeowner may qualify for Chapter 7 if his equity in the home is less than or equal to the exemption amount for a given year. For the year 2019, the New York homestead exemption is $170,825 for a real property located in Brooklyn, Queens, Bronx, Manhattan, Staten Island and Long Island. This exemption amount is also applicable to homes located in the counties of Rockland, Westchester and Putnam. For example, the debtor owns a home in Brooklyn with a fair market value of $$650,000. His mortgage balance is $500,000. Debtor can protect his home and file a Chapter 7 bankruptcy since his equity in the home is only $150,000 and thus under the exemption amount. For married couples, the exemption amount is doubled. To qualify for the homestead exemption, the subject property must be the debtor’s personal residence, not a seasonal home or investment property.
Stopping a Foreclosure Sale
There are three ways to stop a foreclosure sale: pay the reinstatement balance in full; submit an order to show cause; or file for bankruptcy. Often times, money is tight and debtor cannot afford to cure the mortgage arrears in one lump sum. Arrears are typically tens of thousands of dollars as a result of not paying the mortgage for 2-3 years. Some debtors prefer to take the route of filing an Order to Show Cause as opposed to bankruptcy since they feel the former is less invasive. However, an order to show cause is not guaranteed to stop the sale. Most order to show cause motions asking to stop a home from being sold at an auction are denied by the judge. You must present a compelling reason why the sale should not go forward. Some convincing grounds may be as follows: property is in contract and you need a few extra weeks to close title; you are waiting on a private loan to satisfy the balance; the bank is not responding to your requests for a payoff balance; or that an estate representative must be appointed since the deed holder is now deceased.
Alleging disability or that you have nowhere to go are insufficient grounds to stop a sale via an order to show cause. Another downside is the expense of bringing this proceeding; money is expended on legal fees, leaving no funds for plan B-bankruptcy. Also, most times, this motion is filed a day or two before the sale, leaving the debtor scrambling to find a NY bankruptcy lawyer when the order is denied. Given the short notice, it can be very difficult and expensive to find a bankruptcy lawyer to take a chapter 13 case at the eleventh hour.
Filing bankruptcy immediately stays the foreclosure sale. The foreclosure referee must be given notice of the filing, which can be in person, by phone, email, or fax. Once notice is received, so long as its prior to the sale, all collection/sale activities are stopped.
Do you Qualify for a Chapter 13 Bankruptcy?
Stopping a foreclosure sale via Chapter 13 bankruptcy can be intrusive. The debtor will need to disclose all his financials, including paystubs for a period of sixty days, tax returns for the past two years, lease agreements for income producing property, monthly expenses and all debts. Moreover, the case must be filed in good faith, meaning you are not filing with the intent to delay the sale so you can continue to live rent-free.
The debtor must show that he has disposable income left over every month after paying all necessary and ordinary expenses. Debtor’s debts are lumped into one sum and monthly payments are made to the bankruptcy trustee for a period of 5 years (or 3 years). If debtor fails to keep up with the payments, the case will be dismissed and the home will be up for a public sale again. For illustration, consider the following example.
Example: Jason’s monthly mortgage payment is $2,200. Last year he accrued mortgage arrears in the sum of $30,000, including late fees and bank’s legal fees, due to job loss. His unsecured debt in the form of credit cards and personal loans is $35,000. To qualify for Chapter 13, Jason will have to show that he has enough income to cover his mortgage payment of $2,200, necessary expenses (ie food, utilities, health insurance) and approximately $1,083 each month over five years to satisfy his arrears and unsecured debt (30,000+35,000 = 65,000/60).
Should you Hire a Bankruptcy Lawyer?
Although some debtors may be able to successfully obtain a Chapter 7 discharge without a bankruptcy attorney, Chapter 13 should not be attempted pro-se. This proceeding can be so complicated and involved that not every New York bankruptcy lawyer takes Chapter 13 cases. We have seen hundreds of pro-se debtors in court have their case dismissed because they failed to file necessary forms and understand the procedure.
Our bankruptcy law firm represents debtors in Chapter 13 emergency filings frequently. We can file a few days before the sale, the same day as the sale, and even an hour before the auction. If you need bankruptcy relief, contact us immediately at 646-736-6328 to see if you qualify and how you save your home from a foreclosure.