Wednesday, July 25, 2012

How New Bankruptcy Laws Affect Forbearance in Bankruptcy

Forbearance in bankruptcy is a unique situation that often requires legal counsel. Forbearance agreements are sometimes offered to borrowers who have defaulted on secured loans. Banks grant borrowers permission to skip a few loan payments and agree to not move forward with foreclosure proceedings.

Forbearance in bankruptcy can have serious ramifications because lenders may render the bankruptcy petition as a direct violation of the forbearance contract. If this occurs, lenders have the right to commence with foreclosure and repossess the property.

Once debtors file a petition through the court an automatic stay is entered which prevents creditors from engaging in collection activities. People often turn to personal bankruptcy as a way to stop foreclosure, but in the case of forbearance this strategy could backfire.

When mortgage forbearance plans are in place lenders have the right to file a motion seeking removal of the automatic stay. If the presiding judge grants authorization lenders can repossess the property. In essence, filing bankruptcy can cause more harm than good.

Debtors should carefully weigh the pros and cons of bankruptcy when real estate is involved. The consequences can result in loss of property as well as substantial financial harm.

Many debtors are unaware of the Bankruptcy Abuse Prevention and Consumer Protection Act enacted by Congress in 2005. These new bankruptcy laws forever changed the way debtors can obtain debt relief.

The majority of debtors are required to petition the court under Chapter 13. This bankruptcy chapter requires debtors to establish a payment plan to repay debts over an extended period of time. During the Chapter 13 payment plan debtors are prohibited from incurring new debt without court authorization.

If debtors are incapable of complying with their payment plan one of two things will happen. Either creditors can request the court dismiss the bankruptcy or the judge can transfer the case into Chapter 7.

Chapter 7 requires debtors to relinquish property used as collateral to secure financing. Certain types of property are exempt and debtors do have the option of reaffirming debts, but lenders do not have to accept the option. Under Chapter 7 there is a strong possibility that debtors will lose their home, automobile, and other assets that have been financed.

If courts do not transfer the case into Chapter 7 and debtors fail out of bankruptcy they will lose protection through the court. Creditors can repossess collateral property and obtain deficiency judgments which hold debtors financially responsible for the difference between the loan balance and amount the repossessed property was sold for. In the case of real estate this can amount to several thousand dollars.

Creditors can collect on deficiency judgments via wage garnishment or by placing liens against owned titled property. Liens must be paid in full before the property can be sold to another.

Debtors who have entered into forbearance in bankruptcy and default on Chapter 13 payments are almost always destined for foreclosure. This will cause substantial harm to credit ratings that will take years to recover from.

Personal bankruptcy and foreclosure is reflected on credit reports for up to 10 years. This combo destroys FICO scores and will prevent debtors from obtaining financing of any kind for at least 2 or 3 years.

Although bankruptcy can cause serious harm there are times when it must be done. It is strongly recommended to obtain legal counsel prior to filing a bankruptcy petition, but even more so when forbearance in bankruptcy is involved.

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