Is there a way a Chapter 13 Bankruptcy can help with your real property during/ after these times of COVID-19?
The decision to file bankruptcy is not action one should take lightly. That said, sometimes a bankruptcy reorganization makes financial sense. A chapter 13 bankruptcy generally allows individuals and small businesses the opportunity to reorganize and resolve their financial woes by allowing them to adjust their debts in lieu of liquidating their assets—which more traditionally accompanies a Chapter 7 Bankruptcy filing.
This begs the question – how can a reorganization of debts help you with a Chapter 13 Bankruptcy? Here are just a few of the ways a reorganization under Chapter 13 can help you.
Curing Mortgage/Deed of Trust Loan Defaults: One way that a Chapter 13 bankruptcy reorganization can help you is by allowing a defaulting borrower to cure defaults on loan (mortgage) payments and allow the payments to be made over the life of the loan. Obviously, before filing bankruptcy the borrower should talk to their lender to see if there are alternative payment options the lender may be willing to agree to in light of the current COVID-19 crisis. Many lenders are allowing deferment of loan payments and other terms.
Lien Stripping: A more complicated tool is to “lien strip”. This is the process through which the bankruptcy court may be able to help a debtor to redo or alter the terms of loans. This can be done, in limited circumstances, where a portion of the secured debt (the deed of trust or mortgage) is reduced to the present value of the real property, while the balance of the secured loan is converted to unsecured debt. The difference between secured and unsecured debt is that the lender creditor is only able to initiate foreclosure proceedings on secured debt—debt secured by a deed of trust against the property. Ultimately, lien stripping can reduce the amount of encumbrances burdening the property. Whether lien stripping is available is fact specific determination that depends in large part on the fair market value of the property as compared to the liens encumbering the property.
Discharging debt due to hardship: Another way a Chapter 13 bankruptcy can help you with your real property is by way of a hardship discharge. A hardship discharge is the concept whereby a debtor who pays its plan debts may be granted a further discharge due to hardship if the debtor meets certain other requirements. These requirements will be discussed in a future blog post on hardship discharge. The general concept is to reduce the debtor’s overall liabilities due to hardship which may make more money available to the debtor to pay for real property loans.
There is much more involved in Chapter 13 Bankruptcy proceedings. These types of bankruptcy reorganizations can provide a lifeline to borrowers and debtors suffering from the financial consequences of COVID-19 as it impacts the real estate world. For help with a Chapter 13 planning or determining whether a Chapter 13 makes financial sense for you, please contact us today.