Will Bankruptcy Stop Foreclosure?

This is a question that is asked frequently, and the short answer is, yes, filing bankruptcy will stop foreclosure, at least temporarily. The more important questions are, for how long, and will I be able to keep my house. The answers to those questions are maybe.

If you file Chapter 7, the bankruptcy will stop foreclosure only until the creditor gets relief from the automatic stay, which is a court order saying it can continue the foreclosure process. If you have equity in the house, the trustee will likely sell the house and use the equity to pay your creditors. Either way, unless you redeem the house (pay the equity to the trustee) or work out a repayment with the bank, you will lose the house.

If you file Chapter 13, you can keep your house as long as (1) you can make all the house payments in the future; and (2) you make up the past due payments in your Chapter 13 plan. For example, let's say you file on September 5, at which time you owe six past due payments, April through September, of $1,000 each. In your plan you must pay that $6,000 back and you must make each payment of $1,000 going forward, beginning with October.

Estate Tax "Patch" Likely

The estate tax is scheduled to disappear in 2010, to be revived in 2011 at 2001 levels, which means a $1 million exemption instead of the 2009 exemption of $3.5 million, along with an increase to 55% tax from the current 45% bracket. However, recent news indicates that it is likely that Congress will extend the 2009 level through 2010, while it seeks a more permanent overhaul of the estate and gift tax code. It's almost a given that Congress will have to re-implement the estate and gift tax for 2010, because its disappearance, even for only a year, is a huge blow to tax revenue. Hopefully, though, when it is made "permanent" (whatever that means), it will not be at the low 2001 level of $1 million.

The 910-day Rule in Bankruptcy

One of the most weird rules to come out of the 2005 amendments to the Bankruptcy Code is what is known as the 910-day rule. This is a rule for confirmation of a Chapter 13 plan. Essentially it says that if a debtor purchased a motor vehicle and financed it by giving the bank title within 910 days of filing bankruptcy, the debtor must pay the debt in full. The usual method of paying a car loan is to look at what the car is worth on the filing date and pay that to the creditor. The balance becomes an unsecured claim that is paid with all other unsecured claims, such as credit cards, doctors' bills, etc., at a few cents on the dollar.

The 910-day rule is a response to what Congress perceived as abuse of the bankruptcy system by a few debtors. Some unscrupulous debtors would buy a new, expensive car for $30,000 or more and then, in a year or two, after the car had depreciated to maybe half of its original value, file bankruptcy and pay only the current value. This practice is known as lien stripping. How Congress came up with 910 days is anybody's guess, but that is the law.