After a Bankruptcy: Discharged Debts and Selling Assets
When a homeowner is forced into bankruptcy in order to keep their home from being foreclosed on, Chapter 13 proceedings are typically used to allow them to repay the past due amounts on a mortgage over time. For a homeowner who has more than one mortgage, the bankruptcy court may allow them to change their 2nd mortgage from a secured debt (e.g., tied to the property) to an unsecured debt. This is commonly done when the value of the home exceeds the amount that is owed between the mortgages. One word of warning about this, liens must be discharged after the bankruptcy court orders the change from a secured to an unsecured debt. This will help ensure that the debt is liquidated as part of the bankruptcy plan.
Chapter 13 bankruptcies are designed to allow a debtor to repay late payments and restructure the debt that is owed. In many cases, the bankruptcy trustee will work with the filer to help them negotiate lower payoff amounts with unsecured debt (credit cards for example) so that they can prepare a plan that works and allows them to pay off debt successfully. With a bankruptcy repayment plan, debts are paid back over time, typically for 3 to 5 years. During this time, the debtor must keep all payments current and report any changes (increases or decreases) in income to the bankruptcy trustee. When the Chapter 13 terms have been met, the court will then discharge the bankruptcy and the debtor can begin their lives after bankruptcy.
For a homeowner who has a discharged Chapter 13 bankruptcy, selling the home may be the next plan of action to prevent future financial challenges. This type of plan is one that is generally not undertaken lightly. Fortunately, there are no legal reasons for not taking this step, in fact, some may find it is the best financial move for their future.
Timing Sale of Assets and Bankruptcy
The reason that a homeowner may consider selling a home after a bankruptcy is discharged, is that selling it beforehand could create financial challenges. The reason for this is that debts that are discharged in a bankruptcy are not taxable, whereas selling a home prior to or selling a home during bankruptcy for less than what is owed could result in the mortgage holder (or holders) requesting a judgment for the amounts that were not paid through the sale of the home.
Chapter 13 bankruptcy generally forces debtors to live within a very strict budget in order to make their required payments in a timely manner. Debtors who feel this restriction is overwhelming may decide that they need more breathing room than these plans allow. While the discharge does provide the debtor with some financial relief, the debtor still owns their home. For most debtors, their home is the largest debt that they pay on a regular basis.
Debtors who have an adjustable rate mortgage who are concerned about rising interest rates may decide that selling their home is the best way to combat rising mortgage payments. There are other good reasons to sell a home after bankruptcy including lowering monthly obligations, having more money to save for retirement or to find more affordable housing options. There are currently no restrictions that prevent this type of sale. For the homeowner who has had a recent Chapter 13 discharge, discussing any potential problems with their bankruptcy attorney should be considered as the laws do change from time to time.
References and Resources
- Nolo Law for all: How Chapter 13 can stop foreclosure: https://www.nolo.com/legal-encyclopedia/free-books/foreclosure-book/chapter5-1.html
Reeds Bankruptcy Attorney Blog:
- Avoiding a Bankruptcy Discharge Revocation: https://www.allmandandlee.com/bankruptcy_blog/chapter_7_bankruptcy/avoiding-a-bankruptcy-discharge-revocation/
- Seven Benefits of Chapter 13 Bankruptcy: https://www.allmandandlee.com/bankruptcy_blog/chapter_7_bankruptcy/seven-benefits-of-chapter-13-bankruptcy/
- Post-Bankruptcy Survival: Can You Really Afford To Own Your Home?: https://www.allmandandlee.com/bankruptcy_blog/dallas_bankruptcy/post-bankruptcy-survival-can-you-really-afford-to-own-your-home/