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What Should I Know About Bankruptcy And The Family Home?

Bankruptcy and Family Law Attorney in Coeur d’Alene

Serving Coeur d’Alene & Kootenai County Areas, including Coeur d’Alene • Hayden

One of the biggest concerns those considering filing for bankruptcy have is whether or not they’ll be able to keep the house. The answer depends on many factors. But one thing to remember is, no matter what chapter of bankruptcy you file for, your creditor/lender isn’t looking to take your house. In general, lenders want money, and, as long as you’re willing to continue making payments, you can keep the house.

A home is probably one of the largest purchases you will make, and, to do so, you will have probably taken out a “purchase money” loan. When you bought the home, it became collateral against the chance that the loan would go into default. In this scenario, the creditor has an interest in the home, which protects the creditor until the payoff date. Because a place to live and way to get to work and other places (the house and the car) are so important to families, those considering bankruptcy are rightly worried about what will happen to those assets in bankruptcy. The rule of thumb in bankruptcy as far as secured debt goes is that liens on such property will not be affected by a bankruptcy or a discharge of debt. While a discharge in bankruptcy will remove your personal liability from the mortgage, the creditor will still have the right to foreclose if the loan agreement is breached. The 2005 bankruptcy amendments removed the stipulation that said that filing for bankruptcy was not a breach of the agreement; however, in most cases, the lender wants you to continue making payments. If you need to keep your house but you are behind on your payments, you might want to consider a Chapter 13 filing.

In a Chapter 7 bankruptcy filing, it important to know whether the equity in your house is exempt. If it is, and you can continue to make payments, you can typically keep the house. If you have exempt equity in your home (which is the value of the home above the secured debt on the property plus the Idaho or federal home exemption plus the cost to sell the home), the trustee most likely will not try to sell the house to pay back your debts. If you have more than a small amount of non-exempt equity in your home, you might want to consider filing for Chapter 13.

If the loan is in default, and you file Chapter 7 bankruptcy protection, the automatic stay will stop the lender from continuing or beginning foreclosure proceedings insofar as three criteria are met: one, the stay is not removed by an order for a relief of the stay; two, that the property belongs to the bankruptcy estate; and three, that you have not yet received a discharge. When one of those things occurs, the lender will be free to pursue the rights it had before the bankruptcy filing. A Chapter 7 filing will buy you some time, but not a real solution.

If your loan is in default and you have filed for Chapter 13 bankruptcy protection, you will have the opportunity to fix the amount outstanding in default. If the value of the house is less than what is owed, you may be able to have the lien stripped to the value of the house when your case began. Bankruptcy law does not permit the stripping of consensual liens such as a mortgage if the loan is only secured by the filer’s residence. Some courts, such as those in Idaho, will allow a mortgage to be stripped if it is not secured by any value. When you file for bankruptcy, an automatic stay goes into place that will prevent all creditors from attempting to collect on their claims, including foreclosure, and, in Chapter 13, this protection lasts for the duration of the plan, as long as it is in good standing.

If you are facing foreclosure, though, you may want to think about whether it really makes sense in your situation to keep the house. If you, like many thousands of homeowners, have multiple mortgages on your house, you should know that the oldest loan has priority. When the oldest creditor finishes foreclosure proceedings, it not only eliminates newer loans, but it gives the newer lenders the right to sue for the amount of those loans. These newer loans can be discharged in bankruptcy.

Foreclosure in Idaho

Most homes in Idaho are secured by a “deed of trust.” This is a security agreement that makes the house the collateral for the loan, and it also entitles whoever holds the deed of trust the right to sell the property in foreclosure. Idaho law has a two-step process a lender must go through before it can sell the foreclosed property. First, the creditor must file what’s known as a “Notice of Default.” This document states the amount in arrears and allows for 90 days from the filing for the debtor to pay the amount outstanding plus the lender’s costs for starting the foreclosure process. Payment of these fees will bring the loan back to good standing. The second step is to give a copy of a document called the “Notice of Sale” to the debtor. This document sets a date that the foreclosure will happen. If the debtor wishes to keep the property, he or she will have to pay the full amount owed or come to some other agreement with the creditor.

When the foreclosure sale takes place, the foreclosing creditor will typically bid the amount owed on the property, and any other potential buyers must outbid the lender. In many cases, the lender will win the bid, and will own the house; regardless, whoever gets the winning bid will take ownership of the house. The new owner can then file an action to evict anyone on the property. The new owner can file a lawsuit to evict occupants, but it is often less expensive for the new owners to pay the occupants a small fee to help with moving expenses. This latter is often what happens. In some cases, the new owner might rent the property to the occupants. Newer loans that might also be on the property are eliminated and lose their liens on the asset.

If a lender sells the house under a deed of trust, that lender cannot then sue the debtor for losses. The creditor can only take the property. Creditors holding newer loans can bring suit against the debtor unless that loan was used to buy the asset.

Another unfortunate side effect of foreclosure is that, the IRS will consider the foreclosure sale as if you received the proceeds of the sale, even though you never got any money. If the foreclosure is on a qualifying home, there is the shelter of the homeowner’s exclusion, which is $250,000 for each spouse on the title. In places such as Idaho, where home and property values have exponentially increased in recent memory, some buyers have taken out home equity lines of credit or refinancing, which remove equity from the home. When this happens and the home is later foreclosed on, there can be enormous taxes due. These taxes may be avoided in a Chapter 7 bankruptcy filing. When a bankruptcy case is filed, a bankruptcy estate is created. The bankruptcy estate becomes a taxpayer itself, completely separate from the person or persons filing. If the house is part of the bankruptcy estate when the foreclosure occurs, the tax will become the responsibility of the bankruptcy estate. If the sale of the house in foreclosure is likely to bring about heavy taxes, it may be worthwhile to consider Chapter 7 bankruptcy. An experienced bankruptcy or family law attorney can help you sort through this complex maze regarding bankruptcy and your home.