What is the difference between foreclosure and bankrupcty?

Full Question:

Foreclosure versus bankruptcy
01/26/2012   |   Category: Bankruptcy   |   State: Washington   |   #25603


It is not clear from you submission what about foreclosure and bankruptcy you were inquiring. However, these terms refer to two different legal actions. Sometimes a debtor can find himself facing both at the same time if he/she is in a financial crisis. Though if a foreclosure is started first and then the buyer seeks relief from debt by filing a bankruptcy, typically the foreclosure will be stopped (at least temporarily).

Foreclosure is the procedure by which a party who has loaned money secured by a mortgage or deed of trust on real property (or has an unpaid judgment), forces the sale of the real property to recover the money due, unpaid interest, plus the costs of foreclosure, after the debtor fails to make payment. The lender must serve a notice of default on the debtor after a certain time period from when the payment becomes past due, which varies by state. The notice will give the borrower a certain time period and amount necessary to be paid in order to "cure" the default and avoid foreclosure. If the delinquency and costs of foreclosure are not paid within this time, then the lender (or the trustee in states using deeds of trust) will set a foreclosure date for selling the property at public sale. The property may be redeemed by the borrower by paying all delinquencies and costs, up to the time of sale and in some state, for a period after sale.

There is also judicial foreclosure which is used in several states with the mortgage system or in deed of trust. This procedure is used when the amount due is greater than the equity value of the real property, and the lender wishes to get a deficiency judgment for the amount still due after sale. However, some states give deficiency judgments without filing a lawsuit when the foreclosure is upon the mortgage or deed of trust.

It is suggested that a person in risk of foreclosure try to work with the lender to prevent the foreclosure. The lender may be willing to give the borrower extra time to pay, or may suggest debt counseling to restructure or consolidate the debt. It may be possible to create a trust account to protect the debtor's assets, or rework the loan for an extended period of time to lower the monthly payments. The past due amount could be added into the new loan. A debtor will sometimes sell the home to pay off the delinquent amount. A voluntary foreclosure involves selling the home to the lender. Voluntary foreclosure may be pursued to minimize the damage to the debtor's credit record associated with involuntary foreclosure. In a voluntary foreclosure, the debtor not be held liable if the home sells below the debt amount. Due to the loss of financial control and credit damage involved, bankruptcy is generally viewed as a last resort to avoid foreclosure. In bankruptcy cases, the lender is entitled to apply to the court for relief from the automatic stay to allow it to continue foreclosure proceedings.

After the sheriff sale, the bank will have to request that the court order the former owners and current unlawful occupants to be evicted from the house. Usually all that is required to get an eviction order is proof that the title was transferred on the day of the sheriff sale. Therefore, as the new owner, the lender has the right to determine who lives on the property. After the foreclosure victims have exhausted their options to stop foreclosure with no success, and the sheriff sale has been conducted, the eviction process will typically begin very soon.

Other types of foreclosure include foreclosure by power of sale and strict foreclosure. Foreclosure by power of sale is allowed by many states if a power of sale clause is included in the mortgage. This process involves the sale of the property by the mortgage holder without court supervision. It is generally quicker than foreclosure by judicial sale. Strict foreclosure is a process available in a few states which allows the mortgagee to petition the court for foreclosure, and if granted, the court will require the mortgagor who is behind in payment to make payment within a specified time. If the mortgagor fails to do so, the mortgage holder gains the title to the property with no obligation to sell it. This type of foreclosure is generally available only when the value of the property is less than the debt.

When the lender makes a motion for an eviction order, the foreclosure victims have an opportunity to raise any violations of required procedure in their defense. Procedures vary by jurisdiction, so local law needs to be consulted. The owners will always get a chance to respond to any motion the bank makes in court, and the lender's attorneys often violate some rule of procedure, which include state laws, county rules, and specific court rules. However, the foreclosure victims need to consider whether they want to answer every motion the bank brings and drag out the process, which will increase the legal fees that will eventually be added to the total payoff.

Bankruptcy law provides for the development of a plan that allows a debtor, who is unable to pay his creditors, to resolve his debts through the division of his assets among his creditors.The philosophy behind the law is to allow the debtor to make a fresh start, not to be punished for inability to pay debts. Bankruptcy law allows certain debtors to be discharged of the financial obligations they have accumulated, after their assets are distributed, even if their debts have not been paid in full. Some bankruptcy proceedings allow a debtor to stay in business and use business income to pay his or her debts.

Bankruptcy law is federal statutory law contained in Title 11 of the United States Code. Congress passed the Bankruptcy Code under its Constitutional grant of authority to "establish. . . uniform laws on the subject of Bankruptcy throughout the United States." See U.S. Constitution Article I, Section 8. States may not regulate bankruptcy though they may pass laws that govern other aspects of the debtor-creditor relationship. A number of sections of Title 11 incorporate the debtor-creditor law of the individual states.

Bankruptcy proceedings are conducted in the United States Bankruptcy Courts. These courts are a branch of the District Courts of The United States. The United States Trustees were established by Congress to handle many of the supervisory and administrative duties of bankruptcy proceedings. Proceedings in bankruptcy courts are governed by the Bankruptcy Rules which were promulgated by the Supreme Court under the authority of Congress.

A bankruptcy proceeding can either be entered into voluntarily by a debtor or initiated by creditors. After a bankruptcy proceeding is filed, creditors generally may not seek to collect their debts outside of the proceeding. The debtor is not allowed to transfer property that has been declared part of the estate subject to proceedings. Furthermore, certain pre-proceeding transfers of property, secured interests, and liens may be delayed or invalidated. Various provisions of the Bankruptcy Code also establish the priority of creditors' interests.

There are two basic types of Bankruptcy proceedings. A filing under Chapter 7 is called liquidation. It is the most common type of bankruptcy proceeding. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors. Not dischargeable in bankruptcy are alimony and child support, taxes, and fraudulent transactions. Filing a bankruptcy petition automatically suspends all existing legal actions and is often used to forestall foreclosure or imposition of judgment. After 45 or more days a creditor with a debt secured by real or personal property can petition the court to have the "automatic stay" of legal rights removed and a foreclosure to proceed. When the court formally declares a party as a bankrupt, a party cannot file for bankruptcy again for nine years.

Chapter 11 bankruptcy allows a business to reorganize and refinance to be able to prevent final insolvency. Often there is no trustee, but a "debtor in possession," and considerable time to present a plan of reorganization. The final plan often requires creditors to take only a small percentage of the debts owed them or to take payment over a long period of time. Chapter 13 is similar to Chapter 11, but is for individuals to work out payment schedules.

Under Bankruptcy Rules Rule 7001, an adversary proceeding may be filed in a debtor's bankruptcy action for certain specific reasons. An adversary proceeding may be filed to recover money or property of a debtor, for the sale of a debtor's property by a co-owner, to object or revoke a discharge, to revoke the confirmation of a reorganization plan, to determine the dischargeability of a debt, to obtain an injunction or other equitable relief, and for other matters.

Creditors also may initiate adversary proceedings to determine the validity or priority of a lien, to determine the validity of a debt, to obtain an injunction, or to subordinate a claim of another creditor. The debtor in possession may institute an adversary proceeding to recover money or property for the estate. A creditors' committee may be authorized by the bankruptcy court to pursue certain actions which the debtor has failed to pursue.

The bankruptcy rules consist of nine distinct parts with Part VII governing adversary proceedings and Part VIII governing appeals. The court that will hear an appeal and the appropriate standard of review depends on which court issued the order or judgment that is appealed. Appeals of final judgments, orders, and decrees of the bankruptcy court are taken to the district court or the bankruptcy appellate panel established by the district court.14 Final decisions, orders, and decrees of the district court, as well as appellate decisions rendered under 28 USC 158(a) are heard by the court of appeals.