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Bankruptcy Basics: Discharge of Most Debts.

The primary goal of most consumer bankruptcies is to provide the debtor with relief from creditor collection actions and an opportunity for a fresh start. This goal is accomplished through a discharge of most, if not all, of the debtor’s debts. The discharge entered in a bankruptcy case under section 524 serves as an injunction barring collection of all discharged debts.

Bankruptcy Basics: Automatic Stay.

Section 362 provides that most creditor actions (including repossessions, garnishments, foreclosures, utility shut-offs, and evictions) against the debtor and property of the debtor must stop immediately upon the filing of the bankruptcy petition. The protection of this automatic stay generally extends for the entire period the bankruptcy case is pending. The automatic stay is replaced by the discharge injunction as to dischargeable debts when the case is closed, providing permanent protection to the debtor.

Bankruptcy Basics: Right to Cure Defaults.

Despite certain protections afforded secured creditors under the Code, a chapter 13 debtor is given the opportunity to cure prepetition defaults on secured and unsecured debts under section 1322(b)(5), even if such a right does not exist under state law. A default may be cured even if the creditor has given notice of acceleration and initiated the foreclosure process before the chapter 13 case is filed, as long as the foreclosure process has not yet been completed under state law. 11 U.S.C. § 1322(c).

Bankruptcy Basics: Modification of Certain Secured Debts.

With some limitations, secured claims may be modified in a chapter 13 case under sections 1322 and 1325. The modification may permit the debtor to pay less than the full amount claimed to be owed by the creditor on the secured claim (based on the value of the collateral), and to modify the contract interest rate and timing of payments.

Bankruptcy Basics: Protection of Exempt Property from Judgment Creditors.

In keeping with the “fresh start” purpose of bankruptcy relief, debtors are permitted to claim certain property as exempt in the bankruptcy process and are allowed to retain this property after bankruptcy free from creditors’ claims. In addition, a chapter 7 or chapter 13 bankruptcy may protect the debtor’s exempt property from collection actions of a judgment creditor by providing for the avoidance of judgment liens under section 522(f), to the extent such liens impair the debtor’s exemptions.

Bankruptcy Basics: Litigation in Bankruptcy Court.

Bankruptcy court may be an appropriate forum for a debtor to assert consumer defenses and claims as part of the claims allowance process, most often in chapter 13 cases. Such claims and defenses may be brought in the form of an “adversary proceeding” in response to a creditor’s proof of claim, and may be based on federal consumer protection statutes or state lending laws. Proceedings of this kind normally fall within the bankruptcy court’s jurisdiction under 28 U.S.C. § 1334(b), and may be treated as a “core proceeding” under 28 U.S.C. § 157(b).

Bankruptcy Basics: Nondischargeability of Some Debts.

While the general discharge provides a valuable benefit for most consumers, there are certain debts that may not be discharged in a bankruptcy case, such as most student loans, alimony and child support, debts obtained by fraud (if the fraud is proven), restitution obligations and criminal fines, and debts incurred after the bankruptcy case is filed. Exceptions to the general discharge are provided in sections 523(a) and 1328(a).

Bankruptcy Basics: Possible Loss of Property.

The debtor may have equity in certain property beyond the allowed exemption amount and therefore filing a chapter 7 case would result in liquidation of the property. A chapter 13 case may not be feasible for a debtor in this situation because unsecured creditors generally may not be treated worse in chapter 13 than in chapter 7 and, therefore, the debtor may be compelled to make plan payments which are simply unaffordable. 11 U.S.C. § 1325(a)(4). Even in this situation a debtor may elect to file bankruptcy so as to gain the protection of the court while attempting to sell property.

Bankruptcy Basics: Inability to Provide for Secured Obligations.

A chapter 7 bankruptcy case may not assist a debtor in retaining property that serves as security for certain debts, such as home mortgages or car loans. Even though the debtor’s underlying personal obligation on the secured debt will be discharged, security interests on property generally pass through a bankruptcy unaffected if not dealt with in the bankruptcy.

Bankruptcy Basics: Barriers to Recovering Repossessed Vehicles.

If a vehicle has already been repossessed but not yet disposed of by sale or otherwise, the Bankruptcy Code provides a means for the debtor to get it back. However, doing so will usually require filing an adversary proceeding, a mini-lawsuit within the bankruptcy case. The creditor will also likely demand assurances that the vehicle is insured and that the debtor is immediately able to make some form of payment as a condition for returning the car.

Bankruptcy Basics: Impact on Credit Rating.

Under the Fair Credit Reporting Act, information about a bankruptcy filing can be reported on a consumer’s credit report for a period of ten years after the case is filed, rather than the normal seven years allowed for other credit information. 15 U.S.C. § 1681c(a)(1). Still, many consumers are able to obtain credit after filing bankruptcy, though it may pose a problem in getting approved for a conventional home mortgage.

Bankruptcy Basics: Moral Obligations.

Most people want to pay their debts and make every effort to do so if payment is possible. Some debtors also have a strong feeling of moral obligation to pay their bills or may be concerned about the stigma associated with bankruptcy. These debtors may be opposed to any suggestion that they should file bankruptcy. Debtors may have been advised by a credit counselor or collection agent that bankruptcy should be avoided at all costs. By consulting with an attorney, debtors can at least obtain objective information about their legal rights.

Bankruptcy Basics: Possible Discrimination.

Debtors may also be concerned that they may be discriminated against for having filed bankruptcy. However, in most cases, section 525(a) provides that “governmental units” are not permitted to discriminate on this basis. In addition private employers may not terminate employment, or discriminate with respect to employment (though this may not apply to hiring decisions), based upon a bankruptcy filing or discharged debts. 11 U.S.C. § 525(b).

Bankruptcy Basics: Concern About Future Debt.

For certain debtors it may be advisable to wait before filing bankruptcy. If the debtor is currently “judgment proof,” there may be little advantage to filing at a time when creditor action will not result in the loss of the debtor’s property or income. Moreover, if the problems causing the debtor’s financial situation have not been resolved, or if a bankruptcy is filed at a time when the debtor does not have adequate automobile or health insurance, the debtor may be worse off if substantial obligations are incurred after filing.

Bankruptcy Basics: Workout Options

A workout agreement enables the homeowner to address either a temporary financial hardship or a long-term or permanent reduction in income. While there are a variety of workout options (also known as loss mitigation options), three common examples are a repayment plan, a forbearance plan, and loan modification.

Consumer Credit Regulation: 1.3.3 The Development of “Special” Usury Laws

Consumer credit as we know it today did not exist, for practical purposes, prior to the twentieth century.33 Pawn broking, of course, had been around for millennia, and personal loans secured by real estate were not unknown. Yet the vast majority of credit transactions were commercial. The total amount of credit available in the nineteenth century United States was limited, and most of it was directed towards industrial development where the profits available were higher and the risks lower than for individual loans.

Consumer Credit Regulation: 12.2.4.1 Alabama

The Alabama Supreme Court has interpreted the state’s pawn statute as applying to auto title lending.59 Pawnbrokers in Alabama are permitted to charge 25% of the principal amount advanced in the transaction per month for an effective APR of 300%.60 Any fees or charges in excess of the amount statutorily allowed are deemed uncollectable and void the auto title transaction.61 The Alabama statute places several limitations upon pawnbrokers.

Home Foreclosures: 9.3.7.9 Stays Pending Appeal

It is important to remember that once the automatic stay is terminated by order of the court or otherwise, if an appeal is contemplated, it may be essential to obtain a stay pending appeal.

Home Foreclosures: 9.4.1 Generally

At some point after default, some homeowners resolve their financial problems and are able to resume making their monthly mortgage payments. Others may be able to reprioritize their debts and ongoing expenses in order to free up sufficient funds to make payments. However, a big hurdle for low- and moderate-income homeowners is that most cannot afford to pay their accumulated mortgage arrears in a lump sum.

Home Foreclosures: 9.4.2.3 Cure Rights When the Sale Process Is Not Yet Completed Under State Law

Some courts have found that a debtor retains an interest in foreclosed property under state law until the appropriate person (in most states, the mortgage holder, the trustee, the sheriff or another public official) executes a deed to the foreclosure sale purchaser (or similar memorandum that satisfies the statute of frauds),283 and the consideration (purchase price) has been paid,284 or the sale has not been confirmed by the court when confirmation is required.

Home Foreclosures: 9.6.5 Short-Term and Reverse Mortgages

Section 1322(c)(2) provides that, notwithstanding section 1322(b)(2), in a case in which the last payment on the original payment schedule for a claim secured only by a mortgage on the debtor’s principal residence is due before the due date of the final plan payment, the plan may modify the creditor’s rights pursuant to Code section 1325(a)(5).

Home Foreclosures: 15.3.3.4.4 Using bankruptcy to prevent foreclosure

After the death of the homeowner, heirs may want to keep the home, but may not have sufficient cash on hand, or qualify for a refinance, to pay the large lump sum payment due, even within six months of the homeowner’s death.184 For homes with little to no equity remaining, refinancing in a tight credit market may be impossible. Similarly, in a soft real estate market, heirs may have difficulty selling the property within the six-month window, or additional time as approved by HUD (up to a year with two possible ninety-day extensions).

Home Foreclosures: 9.4.1b Debtor May Cure Even If No Personal Liability

An owner that is not personally liable on the loan note generally has the right to cure a default on the property under section 1322(b)(5). This is because the creditor continues to have a claim, and a “claim against the debtor” is defined to include a claim against property of the debtor.266 This issue arises when property is transferred from the person who obtained the mortgage to another person that files bankruptcy.