Some years ago there were a lot of foreclosures. But not all foreclosures are over yet. Some borrowers are still struggling with loans that are “adjusting” or “re-setting” after an initial “teaser” period. Some of these loans offer an initial term of five years with a low interest rate that’s fixed. At the expiration of that initial term, the loan “re-sets” to an adjustable loan that is amortized over 20 or 30 years. However, when the loan “re-sets” the borrowers are often unable to pay the higher payment amounts that result from the re-setting of the loan. Some of these borrowers intended to refinance their loans when the re-setting occurred. But with the decline in the real estate market, these borrowers often find they can’t refinance their loan because the property is worth less than the amount of the loan. A refinance in such situations is impossible, because any new lender would have to lend more money than the property is worth. As a result, such borrowers find themselves unable to refinance unless they pay down their loans to a level below the value of the property.
Borrowers unable to make their loan payments often want to know if bankruptcy is an option. The answer is that the attractiveness of bankruptcy usually depends on the borrower’s individual situation. Bankrutpcy is not a “cure-all” and it is now more difficult to qualify for Chapter 7 discharge than it was years ago. In a Chapter 7 proceeding, most or all of a debtors debts can be discharged by the Bankruptcy Court. However, many or most of the debtor’s assets in such a bankruptcy will be liquidated and paid over to creditors. As noted in one court opinion, the principal purpose of the Bankruptcy Code is to grant a fresh start to the honest but unfortunate debtor. Hersh v. U.S. ex rel. Mukasey, 555 F. 3d 743 (2008).
Some debtors don’t necessarily need to liquidate their assets and have their debts discharged in order to get a “fresh start.” These debtors might have valuable assets, but they might be short of cash with which to pay their debts. Sometimes creditors press such debtors, and if these debtors had some time or “breathing room” then they would be able to sell or liquidate assets and pay the creditors. These debtors assets are often worth preserving, and the value of their assets typically exceeds their debts. However, the debtors can have problems meeting their ongoing monthly payment obligations, and if their creditors are pressing them, then these debtors can risk losing assets that are worth far more than their debts. Some of these debtors elect to file a Chapter 13 Bankruptcy proceeding. In these proceedings, the debtor proposes a plan for paying off creditors. The law provides an “automatic stay” of enforcement proceedings against such debtors, thereby giving such debtors some time or “breathing space” to re-organize their financial situations. Chapter 13 is generally used by individuals seeking some “breathing space.” Corporations or businesses that need such “breathing space” often file a petition in a “Chapter 11″ bankruptcy.