Q: Is it necessary to understand the basics of personal bankruptcy when negotiating a short sale or considering a strategic default?
A: Bankruptcy is a potentially powerful tool for homeowners in financial difficulty, so yes, it is invaluable to at least know the basics of personal bankruptcy. Of course, as each homeowner’s particular situation may be unique and as the bankruptcy laws are complex, it is strongly recommended that an experienced bankruptcy and real estate attorney be consulted to provide comprehensive guidance and advice.
Q: Can you give an example where knowledge of the basics of bankruptcy could help when negotiating a short sale?
A: Yes. It is extremely important in those situations where a homeowner has a second mortgage such as a home equity loan. Because of Arizona’s anti-deficiency laws, there is the possibility that upon the foreclosure of a first mortgage, the homeowner will not be personally responsible for any deficiency left on the first mortgage. However, even though the lien of the second mortgage will be extinguished due to the foreclosure of the first mortgage, the homeowner will still remain personally responsible for the amount owed on the second mortgage. Homeowners will discover that when negotiating a short sale, it may be difficult to obtain the consent of the second mortgage holder because the first mortgage holder will demand most of the short sale proceeds, leaving the second mortgage holder with little. The second mortgage holder, however, may be persuaded to take a relatively small amount from a short sale, rather than getting nothing if the homeowner were to file for Chapter 7 bankruptcy and extinguish the second mortgage debt.
Q: You mentioned Chapter 7 bankruptcy. What is Chapter 7 bankruptcy?
A: Briefly, a Chapter 7 bankruptcy is where all of a person’s non-secured debts (credit cards, medical bills, etc.) are completely extinguished, but all of their non-exempt assets (bank accounts, etc.) are used to satisfy these debts. In order to qualify for a Chapter 7 bankruptcy, however, a person must “qualify”, which in Arizona means that a person’s income must not exceed a certain level depending on family size. For example, as of the date of this article, the income for a family of 4 cannot exceed $69,205. If the income exceeds $69,205, then unless a person qualifies under a more complex “means test analysis” involving disposable income, then a debtor would have to file for a Chapter 13 bankruptcy.
Q: What is Ch. 13 bankruptcy?
A: A Chapter 13 bankruptcy is used by people with regular income who have either too many non-exempt assets which would be lost in a Chapter 7 bankruptcy or whose income exceeds the Chapter 7 limits. Under Chapter 13, the debtor’s disposable income is used to pay his debts over a 3 to 5 year period and at the end of such period, the remaining balance of the unpaid debts are extinguished. The current bankruptcy laws are complex, so it is imperative that homeowners discuss their personal situation with an experienced bankruptcy attorney.
For more information, please contact Stuart Pack or Robert Nagle at (602) 595-6951 or email them directly at info@Naglelaw.com.