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Bankruptcy and Foreclosure


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This presentation talks about bankruptcy and foreclosure in Ohio.

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Bankruptcy and Foreclosure

  2. 2. Can Bankruptcy Stop a Foreclosure?  2 For most people, owning a home remains the American dream. Once you have realized that dream, if a financial crisis threatens the future of the dream it can be emotionally devastating. The recent national financial crisis has led to a record number of foreclosures across the country as well as a significant increase in the number of bankruptcy petitions filed in recent years. If you have been notified by your lender that foreclosure proceedings are forthcoming, filing for protection under the U.S. Bankruptcy Code may be a solution; however, it is not an automatic fix for all homeowners facing foreclosure. UNDERSTANDING THE FORECLOSURE PROCESS IN OHIO Most borrowers depend on financing to purchase a home. When you take out a mortgage loan to finance the purchase of your home you agree to pay that loan back in monthly payments. You also secure the debt with your home, meaning that the lender has a legal right to foreclose on your property should you default on the loan. Contrary to what many people believe, a borrower defaults on a loan when he or she is a day late on a payment. Most lenders, however, do not even consider foreclosure proceedings until a borrower is two to four months behind on the payments. In Ohio, a lender usually files a foreclosure Complaint after a borrower has missed three or more payments. A borrower then has 28 days to file an Answer to the Complaint. Failing to file an Answer can lead to a rapid Summary Judgment against the borrower and subsequent sheriff’s sale of the property. If an Answer is filed the borrower may be granted additional time to try and work out a resolution with the lender. Eventually, if no resolution is forthcoming the court will grant the foreclosure and the lender will schedule the property for Sheriff’s sale. After the sale there is a redemption period during which the borrower has the right to redeem, or
  3. 3. Can Bankruptcy Stop a Foreclosure?  3 buy back the property. Once the redemption period has expired the borrower must vacate the property. HOW DOES FILING BANKRUPTCY HALT THE FORECLOSURE PROCESS? When you file a bankruptcy petition the court orders an automatic stay as soon as the petition is filed. An automatic stay is an order from the court which is sent to all creditors ordering them to cease and desists all efforts to collect on the debt owed to them. As long as your lender is listed on the schedule of creditors the notice of automatic stay will be served on the lender. At that point, the foreclosure process must stop. There are a limited number of exceptions to the automatic stay. For example, you cannot repeatedly file and dismiss bankruptcy in an attempt to drag out the foreclosure process indefinitely; however, in most cases the automatic stay halts the foreclosure proceedings for 30 days. At the end of the 30 day time period the lender may request the bankruptcy court lift the automatic stay so that the foreclosure proceedings may resume. CHAPTER 7 BANKRUPTCY EXEMPTIONS As mentioned previously, the initial filing of a bankruptcy petition halts the foreclosure process but it may resume in 30 days if nothing else is done to resolve the default. In a chapter 7 bankruptcy, also known as a liquidation bankruptcy, a debtor’s non-exempt assets may be sold to pay debts owed by the debtor. Ohio, however, has a very liberal homestead exemption which allows a debtor to exempt up to $132,900 in real property. This exemption though does not protect the home from sale through a foreclosure proceeding. The exemption only protects the home from sale through the trustee as part of the bankruptcy. Filing bankruptcy, however, can free up money by discharging other debts which may allow the debtor to catch up with the mortgage. At the end of a chapter 7 bankruptcy, with
  4. 4. Can Bankruptcy Stop a Foreclosure?  4 few exceptions for debts that cannot be discharged, all debts are discharged, meaning the debtor no longer owes the debt. A BRIEF OVERVIEW OF CHAPTER 13 BANKRUPTCY In a chapter 13 bankruptcy, commonly known as a “wage-earners” bankruptcy, the debtor is required to develop a plan to repay the majority of his or her debts over an extended period of time -- usually three to five years. In a chapter 13 bankruptcy, even non-exempt assets can typically be protected as long as the debtor successfully completes the repayment plan. Debts remaining after the successful conclusion of the repayment period are discharged. RESOLVING THE DEBT Whether a debtor files a chapter 7 or chapter 13 bankruptcy, the underlying debt to the lender must be resolved to avoid foreclosure. The automatic stay can be looked at as an immediate “stop gap” measure to buy a debtor time; however, it is not a permanent solution to foreclosure. If you foresee a change in circumstances in the very immediate future, a chapter 7 bankruptcy may provide you with enough time to catch up your payments as well as may free up income by discharging other debts. Many debtors who wish to save a home that is in foreclosure, however, turn to chapter 13. In a chapter 13, your attorney, along with the court, may be able to assist you to work out a loan modification or reduced payments as part of the repayment plan. Often, filing bankruptcy prompts a lender to try and work out a solution that does not result in foreclosure. SECOND MORTGAGES AND DEFICIENCY JUDGMENTS If you have a second mortgage on your home, and your home is now worth less than the amount owed on the first mortgage, your second mortgage may now be considered an unsecured debt and may be subject to discharge through a chapter 13 bankruptcy. Becomes home values
  5. 5. Can Bankruptcy Stop a Foreclosure?  5 plummeted in recent years, this is not an uncommon scenario. The reduced value of your home though could be beneficial in bankruptcy if you are able to discharge a second mortgage. Another way that bankruptcy may be able to help is if you owe a deficiency judgment after your home is foreclosed on and sold. Borrowers frequently are unaware that this is possible. Imagine, for example, that you owe $150,000 on your mortgage and the lender forecloses on the loan. The home is subsequently sold through a sheriff’s sale for $120,000. You may legally be responsible for the remaining $30,000 owed to the lender. This deficiency amount can be discharged through bankruptcy. Each foreclosure scenario presents a unique set of facts and circumstances. Be sure to consult with an experienced Ohio bankruptcy attorney immediately if you receive a notice of foreclosure or if you are concerned that you are headed toward foreclosure because you are behind on your mortgage payments. Save the Dream Ohio, Understanding the Foreclosure Process Ohio Attorney General, Foreclosure Frequently Asked Questions Pine Tree Legal Assistance, Bankruptcy: Is It the Right Choice for You CNN Money, Bankruptcy Can Save Your House from Foreclosure
  6. 6. Can Bankruptcy Stop a Foreclosure?  6 About the Author Scott R. Needleman Every associate at The Needleman Law Office is committed to handling your case in both a personal fashion and in a professional manner. In other words, we treat you the way we would want to be treated. We will take a personal interest in your situation, making sure you understand exactly what is happening and what options you may have. Then we’ll fight to ensure the best possible outcome for your situation. The Needleman Law Office 5300 E. Main, Suite 109 Columbus, OH 43213 614-575-1188