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Bankruptcy Overview


New Jersey Bankruptcy –
A Bankruptcy Overview


How Foreclosure Works

by Attorney Stephen R. Elias

How foreclosure procedures work, in both judicial and non-judicial foreclosure states.

Foreclosure happens when you fall behind on your house payments and your lender uses state procedures to sell your house. Foreclosure works
differently in different states. In some states, the lender has to file a lawsuit to foreclose (judicial foreclosure), while in others, it can foreclose without going to court (non-judicial foreclosure).

Here’is a rundown of the basic procedures for each type of foreclosure.

Judicial Foreclosure

In a judicial foreclosure, the lender must go to court to get the foreclosure started. A judicial foreclosure typically takes several months or more,
giving you time to look for another place to live, and to save some money for the future. Another advantage is that you can raise in court any legal defenses you may have to the foreclosure (without having to file your own lawsuit).

States Using Judicial Foreclosure

With some exceptions, foreclosures go through court in these states:

Arizona   New Jersey
Delaware   New Mexico
Florida   New York
Hawaii   North Dakota
Illinois   Ohio
Indiana   Oklahoma 
Iowa   Pennsylvania
Kansas   South Carolina
Kentucky   South Dakota
Louisiana   Vermont
Maine   West Virginia
Nebraska   Wisconsin

Procedures in a Judicial Foreclosure

Here’is how a typical judicial foreclosure might proceed.

You get behind in your mortgage payments.
 mortgage holder can begin foreclosure procedures if you miss just one payment, but usually will wait longer -- much longer in many states.

The lender sends a notice of intent to begin foreclosure.
In many states, the lender sends a ten-day notice of intent tobegin foreclosure proceedings. The notice informs you that the proceedings can be avoided if you make up the missed payments, plus costs and interest.

The lender files a lawsuit.
If you don't make up the missed payments, the lender will then go to court and file a lawsuit.

The lender gives you notice of the lawsuit.
The lender does this by delivering a Summons and Complaint to you (called “serving you with a Summons and Complaint in legalese).

You have a chance to respond.
The Summons and Complaint give you a period of time within which you must respond if you choose to contest or argue the lawsuit (usually
between 15 and 30 days). Whether or not you file a response is up to you. Either way, your lender will have the burden of proving to the judge that the foreclosure is justified under the terms of the mortgage.

  • If you don’t respond, the chances are excellent that the foreclosure will go through. The court will issue a default judgment that authorizes the lender to sell your home.
  • If you do respond, you’ll have the opportunity to tell a judge just why you think you have a legal right to keep your house and that
    foreclosure is not warranted. The better your defenses, the longer the process will drag out in court. Even if you win, however, it may be a temporary victory if the lender can fix whatever problem caused it to lose this time.

The lender sends a notice of intent to sell.
Once the judge issues a judgment, the lender typically will send you a ten-day notice of intent to sell the property. At this point, in many states you can avoid the foreclosure sale if somehow you can redeem”the mortgage (pay it off in full, as well as the foreclosure costs and attorney's fees).

The auction is held.
If no one buys your home at the auction, ownership goes to the lender. Up to this point, the entire process, from the first
notice to the auction, typically takes three months -- more, if you file a response to the Summons and Complaint.

You are allowed to stay or get evicted.
Even when you lose ownership of your home, most state laws don’t require you to move out right away. The lender may just let the house sit, waiting for the market to improve. You can remain in the home payment-free until you receive an official, written eviction notice.

Non-Judicial Foreclosures

If you live in a non-judicial foreclosure state, your lender does not have to go to court in order to foreclose on your home. This means that the
foreclosure can proceed more quickly.

If your property is in one of these states, you most likely signed two core documents when you bought or refinanced your home: a promissory note and a deed of trust. The deed of trust turns the promissory note into a debt secured by a lien (legal claim) on your home. The deed of trust authorizes the lender to foreclose on the property if you default. The deed of trust typically allows the foreclosure to proceed outside of court, under state law.

States Using Non-Judicial Foreclosure

Alabama   Nevada
Alaska   New Hampshire
Arizona (sometimes)   New Mexico (sometimes)
Arkansas   North Carolina
California   Oklahoma (unless
homeowner requests judicial forclosure)
Colorado   Oregon
District of Columbia   Rhode Island
Georgia   South Dakota (unless
homeowner requests judicial foreclosure)
Idaho   Tennessee
Maryland   Texas
Massachusetts   Utah
Michigan   Vermont (sometimes)
Minnesota   Virginia
Mississippi   Washington
Missouri   West Virginia
Montana   Wyoming

The Non-Judicial Foreclosure Process

Your state’s law sets out the specifics of the foreclosure procedure, including how much notice you get, how the property will be sold (typically at a
public auction), and what rights (if any) you have to reinstate the loan before the foreclosure date or recover title to the
property after it’s sold.

Time may be short.
You have to be on your toes when a foreclosure looms in a non-judicial state. That’s because you'll be given very little notice of the foreclosure sale, and once it happens, you may be permanently out of luck.

Notice of sale.
In most states, your first notice of the proceeding will be the notice of sale. Depending on the state, this notice will be either served on you personally, published in the local newspaper, posted in the courthouse and on the property itself, or by some combination of the above.

Notice of default and notice of sale.
Some states provide you with two notices -- a formal written notice that you are in default (usually about 30 days, but sometimes more and sometimes less) and another formal notice that your house will be sold at auction (again, usually about a month, but it can be as little as 15 days -- in Georgia, for example, and a few other states).

Right to reinstate.
Between the notice of default and notice of sale, you typically are allowed to reinstate the mortgage by paying off what you owe, plus fees and costs (which can be very high). With a couple of exceptions, however, once the sale occurs, your house is gone.

The auction is held.
If you don’t reinstate the mortgage, the home will be sold at auction. As with judicial foreclosures, if no one meets the
minimum bid, the property goes to the lender.

Right to redeem.
A few states give you some time after the foreclosure auction to redeem the property (to recover ownership of the property by paying off the successful bidder).

Challenging a Non-Judicial Foreclosure in Court

Because you don’t have the opportunity to raise defenses to the foreclosure in a non-judicial foreclosure, if you wish to contest the foreclosure, you will have to file a lawsuit yourself. When you do this, you ask the court to temporarily stop the foreclosure so that you can resolve the legal issues in court (and possibly at trial). Once you are in court, you can raise the same defenses you would have raised in a judicial foreclosure proceeding.

In these lawsuits, you typically ask the court for three things, in the following order:

  • a temporary restraining order (which lasts about ten days)
  • a preliminary injunction (which, in foreclosure actions, will last until the court decides the case), and
  • a permanent injunction (which will be issued if the judge decides in your favor).

To learn more about the ins and outs of foreclosure, both judicial and non-judicial, see Nolo's Bankruptcy and Foreclosure Blog or the bestselling Foreclosure Survival Guide, now available online at no charge. Both are written by practicing attorney Stephen R. Elias, president of
the National Bankruptcy Law Project.

How Bankruptcy Can Help With Foreclosure

by Attorney Stephen R. Elias

Avoid or delay foreclosure of your home by seeking bankruptcy protection.

If you are facing foreclosure and cannot work out a deal or other alternative with the lender, bankruptcy may help.

If you get behind on your mortgage payments, a lender may take steps to foreclose—that is, enforce the terms of the loan by selling the house at a public auction and taking payment of your loan out of the auction.

This won’t happen overnight. The foreclosure process typically starts after you fall behind on your payments for at least two months, and often
three or four. That gives you time to try some alternate measures, such as loan forbearance, a short sale, or a deed in lieu of foreclosure.

But if you've already tried and failed with these measures, now is a good time to consider bankruptcy as a possibility for avoiding or stalling
foreclosure. Here are some ways that filing for bankruptcy can help you.

The Automatic Stay: Delaying Foreclosure

When you file either a Chapter 13 or Chapter 7 bankruptcy, the court automatically issues an order (called the Order for Relief) that includes a
wonderful thing known as the “automatic stay.” The automatic stay directs your creditors to cease their collection activities immediately, no excuses. If your home is scheduled for a foreclosure sale, the sale will be legally postponed while the bankruptcy is pending—typically for three to four months. However, there are two exceptions to this general rule:

Motion to lift the stay.
If the lender obtains the bankruptcy court’s permission to proceed with the sale (by filing a “motion to lift the stay”), you may not get the full three to four months. But even then, the bankruptcy will typically postpone the sale by at least two months, or even more if the lender is slow in pursuing the motion to lift the automatic stay.

Foreclosure notice already filed.
Unfortunately, bankruptcy’s automatic stay won’t stop the clock on the advance notice that most states require before a foreclosure sale can be held (or a motion to lift the stay can be filed). For example, before selling a home in California , a lender has to give the owner at least three months notice. If you receive a three-month notice of default, and then file for bankruptcy after two months have passed, the three-month period
would elapse after you’d been in bankruptcy for only one month. At that time the lender could file a motion to lift the stay and ask the court for permission to schedule the foreclosure sale.

How Chapter 13 Bankruptcy Can Help

Many people will do whatever they can to stay in their home for the indefinite future. If that describes you, and you’re behind on your mortgage payments with no feasible way to get current, the only way to keep your home is to file a Chapter 13 bankruptcy.

How Chapter 13 works.
Chapter 13 bankruptcy lets you pay off the “arrearage” (late, unpaid payments) over the length of a repayment plan you propose—five years in some cases. But you’ll need enough income to at least meet your current mortgage payment at the same time you’re paying off the arrearage. Assuming you make all the required payments up to the end of the repayment plan, you’ll avoid foreclosure and keep your home.

2nd and 3rd mortgage payments.
Chapter 13 may also help you eliminate the payments on your second or third mortgage. That’s because, if your first mortgage is secured by the entire value of your home (which is possible if the home has dropped in value), you may no longer have any equity with which to secure the later mortgages. That allows the Chapter 13 court to “strip off” the second and third mortgages and recategorize them as unsecured debt —which, under Chapter 13, takes last priority and often does not have to be paid back at all.

Canceling debt.
Chapter 7 bankruptcy will also cancel all the debt that is secured by your home, including the mortgage, as well as any second mortgages and home equity loans.

Canceling tax liability for certain property loans.
Thanks to a new law, you no longer face tax liability for losses your mortgage or home-improvement lender incurs as a result of your default, whether you file for bankruptcy or not. This new law applies to the 2007 tax year and the following two years.

However, the new tax law doesn’t shield you from tax liability for losses the lender incurs after the foreclosure sale if:

  • the loan is not a mortgage or was not used for home improvements (such as a home equity loan used to pay for a car or vacation), or
  • the mortgage or home equity loan is secured by property other than your principal residence (for example, a vacation home or rental property).

This is where Chapter 7 bankruptcy helps. It will exempt you from tax liability on losses the lender incurs if you default on these other loans.

Chapter 7 Cannot Cancel the Foreclosure

With all this debt being cancelled, you may be wondering why the foreclosure on your home won’t be cancelled too. The trouble is, when you bought your home you probably signed two documents (at least)—a promissory note to repay the mortgage loan, and a security agreement that
could be recorded as a lien to enforce performance on the promissory note.

Chapter 7 bankruptcy gets rid of your personal liability under the promissory note, but it doesn’t remove the lien. That’s the way Chapter 7 works. It gets rid of debt but not liens—you’ll still probably have to give up the house under the lien since that’s what provided collateral
for the loan.

Chapter 7 Bankruptcy May Not Be Right For You

Not everyone can or should use Chapter 7 bankruptcy. Here’s why:

You could lose property you want to keep.
Chapter 7 might cause you to lose property you don’t want to give up. As an example, if your wedding ring is particularly valuable, it may exceed the dollar amount of jewelry you’re allowed to keep in a bankruptcy (under something called the "jewelry exemption"). In that case, the bankruptcy trustee could order you to turn the ring over to be sold for the benefit of your creditors.

You may not be eligible.
Even if Chapter 7 bankruptcy would work for you, you may not be eligible. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, you are not eligible if your average gross income for the six-month period preceding the bankruptcy filing exceeds the state median income for the same size household. Nor are you eligible if your current income provides enough excess over your living expenses to fund a reasonable
Chapter 13 repayment plan.

Bankruptcy’s Effect on Your Credit Score

Both bankruptcy and foreclosure will damage your credit score. However, sometimes bankruptcy is the preferable option when trying to rebuild
credit. Here’s why:

A foreclosure will damage your credit score for many years, will not get rid of your other debt, and is particularly harmful if you are house shopping.

In contrast, discharging your debts in bankruptcy will harm your credit score, but can help you rebuild your score quicker than after a foreclosure.
This is because bankruptcy will leave you solvent and debt-free—and therefore able to start rebuilding good credit sooner.

Keep in mind that the current mortgage meltdown and credit crunch (which are prevalent at the time this article is being written) may change the way bankruptcy and foreclosure affect credit ratings.

If All Else Fails: Relief From Debt and Tax Liability

If you’re certain you won’t be able to propose a Chapter 13 repayment plan that a bankruptcy judge will approve, and Chapter 7 will provide only a temporary delay from the foreclosure sale, then what’s the point of either?

If you have to lose your home—a bitter result to be sure, but sometimes unavoidable—you can at least view bankruptcy as the best way to get out from under your mortgage debt and tax liability. Bankruptcy also offers a way to save some money, which will help you find new shelter and weather the psychological and economic shocks that lie ahead.

To learn more about Chapter 13 bankruptcy and how it can help you avoid foreclosure, get  Chapter 13 Bankruptcy: Repay Your Debts, by Robin Leonard and Stephen Elias (Nolo). For information on Chapter 7 bankruptcy, including forms and instructions for filing yourself, get How to File for Chapter 7 Bankruptcy, by Stephen R. Elias, Albin Renauer, and Robin Leonard (Nolo).

If you're having trouble making your mortgage payments or already in jeopardy of foreclosure, see Nolo's Bankruptcy and Foreclosure Blog or the
bestselling Foreclosure Survival Guide, now available online at no charge. Both are written by practicing attorney Stephen R. Elias, president of the National Bankruptcy Law Project.


Tax Consequences When a Creditor Writes Off or Settles a Debt

The IRS may count a debt written off or settled by your creditor as taxable income to you.

If you settle a debt with a creditor for less than the full amount, or a creditor writes off a debt you owe, you may owe money to the IRS. The IRS treats the forgiven debt as income, on which you may owe income taxes.

Why the IRS Can Assess Taxes on Forgiven Debts

Here's how it works.
Creditors often write off debts after a set period of time -- for example, one, two, or three years after you default. The creditor stops its collection efforts, declares the debt uncollectible, and reports it to the IRS as lost income to reduce its tax burden. The same is true when you negotiate a
debt reduction. The creditor will report the amount you didn't pay as lost income to the IRS.

Of course, the IRS still wants to collect tax on this money, and it will turn to you for payment. Because you no longer have to pay the full amount of
the debt, the IRS treats the forgiven amount as gained income, for which you should pay income taxes.

Foreclosures and property repossessions.
This rule applies even to debts you owe after a house foreclosure or property repossession. In this situation, the law can seem especially cruel: Not only have you lost your property, but you'll also have to pay income tax on the difference between what you originally owed the lender and what it was able to sell your property for (called the "deficiency").

However, the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) changed this for certain loans partially or wholly forigiven during 2007 through 2012. The law provides tax relief if your deficiency stems from the sale of your primary residence (the home that you live in).
Here are the rules: 

  • Loans for your primary residence.
    If the loan was secured by your primary residence and was used to buy or improve that house, you may generally exclude up to $2 million in forgiven debt. This means you don’t have to pay tax on the deficiency.
  • Loans on other real estate.
    If you default on a mortgage that’s secured by property that isn’t your primary residence (for example, a loan on your vacation home), you’ll owe tax on any deficiency.
  • Loans secured by but not used to improve primary residence.
    If you take out a loan, secured by your primary residence, but use it to take a vacation or send your child to college, you will owe tax on any deficiency.  

If you don’t qualify for an exception under the Mortgage Forgiveness Debt Relief Act, you might still qualify for tax relief. If you can prove you were
legally insolvent, you won’t be liable for paying tax on the deficiency. See "Exceptions on Reporting Income," below, for details on the insolvency exception.

IRS Reporting

Any financial institution that forgives or writes off $600 or more of a debt's principal (the amount not attributable to interest or fees) must send you
and the IRS a Form 1099-C at the end of the tax year. These forms are for reporting income, which means that when you file your tax return for the tax year in which your debt was settled or written off, the IRS will make sure that you report the amount on the Form 1099-C as income.

Even if you don't get a Form 1099-C from a creditor, the creditor may very well have submitted one to the IRS. If you haven't listed the income on
your tax return and the creditor has provided the information to the IRS, you could get a tax bill or, worse, an audit notice. This could end up costing you more (in IRS interest and penalties) in the long run.

Exceptions to Reporting Income

There are several reporting exceptions stated in the Internal Revenue Code. For example, if the financial institution issues a Form 1099-C, you do not have to report the income on your tax return if:

  • the debt was a nonbusiness debt and was canceled before 2007 as a result of Hurricane Katrina
  • a student loan was canceled because you worked in a profession and for an employer as promised when you took out the loan
  • the canceled debt would have been deductible if you had paid it
  • the cancellation or write off of the debt is intended as a gift (this would be unusual)
  • you discharge the debt in Chapter 11 bankruptcy, or
  • you were insolvent before the creditor agreed to settle or write off the debt.

Insolvency means that your debts exceed the value of your assets. To figure out whether or not you were insolvent, you will have to total up your assets and your debts, including the debt that was settled or written off.

Example 1:
Your assets are worth $35,000 and your debts total $45,000, so you are insolvent to the tune of $10,000. You settle a debt with a creditor who agrees to forgive $8,500. You do not have to report any of that money as income on your tax return.

Example 2:
Your assets are worth $35,000 and your debts still total $45,000, but the creditor writes off a $14,000 debt. You don't have to report $10,000 of the income, but you will have to report $4,000 on your tax return.

If you conclude that your debts exceed the value of your assets, include IRS Form 982 with your tax return. You can download the form off the IRS's website at

If you are suffering from debt troubles, get help from Solve Your Money Troubles: Get Debt Collectors Off Your Back & Regain Financial Freedom by
Robin Leonard (Nolo).

How Bankruptcy Stops Your Creditors: The Automatic Stay

After you file for bankruptcy, the automatic stay offers potent legal protection against bill collectors.

When you file for
bankruptcy, something called the automatic stay immediately
stops any lawsuit filed against you and most actions against
your property by a creditor, collection agency, or government
entity. Especially if you are at risk of being evicted, being
foreclosed on, being found in contempt for failure to pay child
support, or losing such basic resources as utility services,
welfare, unemployment benefits, or your job (because of a raft
of wage garnishments), the automatic stay may provide a powerful
reason to file for bankruptcy.

What the Automatic Stay Can

Here is how the automatic
stay affects some common emergencies:

  • Utility
    you're behind on a utility bill and the company is
    threatening to disconnect your water, electric, gas, or
    telephone service, the automatic stay will prevent the
    disconnection for at least 20 days. Although the amount of a
    utility bill itself rarely justifies a bankruptcy filing,
    preventing electrical service cutoff in January in New
    England might be justification enough.
  • Foreclosure.
    If your home mortgage is being foreclosed on, the automatic
    stay temporarily stops the proceedings, but the creditor
    will often be able to proceed with the foreclosure sooner or
    later. If you are facing foreclosure, Chapter 13 bankruptcy
    is usually a better remedy than Chapter 7 bankruptcy, if you
    want to keep your house.
  • Eviction.
    If you are being evicted from your home, the automatic stay
    may provide some help -- but the new bankruptcy law makes it
    easier for landlords to proceed with evictions. If your
    landlord already has a judgment of possession against you
    when you file, the automatic stay won't affect these
    eviction proceedings; the landlord can continue just as if
    you hadn't filed for bankruptcy. And if the landlord alleges
    that you've been endangering the property or using
    controlled substances there, the automatic stay won't do you
    much good, either. In other cases, the automatic stay might
    buy you a few days or weeks, but the landlord will probably
    ask the court to lift the stay and allow the eviction -- and
    the court will probably agree to do so.
  • Collection of
    overpayments of public benefits.

    If you receive public benefits and were overpaid, normally
    the agency is entitled to collect the overpayment out of
    your future checks. The automatic stay prevents this
    collection. However, if you become ineligible for benefits,
    the automatic stay doesn't prevent the agency from denying
    or terminating benefits for that reason.
  • Multiple wage

    Filing for bankruptcy stops garnishments dead in their
    tracks. (And not only will you take home a full salary, but
    you also may be able to discharge the debt in bankruptcy.)
    Although no more than 25% of your wages may be taken to
    satisfy court judgments (up to 50% for child support and
    alimony), many people file for bankruptcy if more than one
    wage garnishment is threatened.

What the Automatic Stay
Cannot Prevent

In a few instances, the
automatic stay won't help you.

  • Certain tax
    IRS can still audit you, issue a tax deficiency notice,
    demand a tax return (which often leads to an audit), issue a
    tax assessment, or demand payment of such an assessment.
    However, the automatic stay does stop the IRS from issuing a
    tax lien or seizing your property or income.
  • Support actions.
    A lawsuit against you seeking to establish paternity or to
    establish, modify, or collect child support or alimony isn't
    stopped by your filing for bankruptcy.
  • Criminal
    criminal proceeding that can be broken down into criminal
    and debt components will be divided, and the criminal
    component won't be stopped by the automatic stay. For
    example, if you were convicted of writing a bad check,
    sentenced to community service, and ordered to pay a fine,
    your obligation to do community service won't be stopped by
    your filing for bankruptcy.
  • Loans from a

    Despite the automatic stay, money can be withheld from your
    income to repay a loan from certain types of pensions
    (including most job-related pensions and IRAs).
  • Multiple
    you had a bankruptcy case pending during the previous year,
    then the stay will automatically terminate after 30 days
    unless you, the trustee, the U.S. Trustee, or a creditor
    asks for the stay to continue and proves that the current
    case was filed in good faith. If a creditor had a motion to
    lift the stay pending during the previous case, the court
    will presume that you acted in bad faith, and you'll have to
    overcome this presumption to get the protection of the stay
    in your current case.

How Creditors Can Get
Around the Automatic Stay

Usually, a creditor can get
around the automatic stay by asking the bankruptcy court to
remove ("lift") the stay, if it is not serving its intended
purpose. For example, say you file for bankruptcy the day before
your house is to be sold in foreclosure. You have no equity in
the house, you can't pay your mortgage arrears, and you have no
way of keeping the property. The foreclosing creditor is apt to
go to court soon after you file for bankruptcy and ask for
permission to proceed with the foreclosure -- and that
permission is likely to be granted.

For More Information

For more information on the
automatic stay and how it might apply in your situation, see
The New Bankruptcy: Will It Work for You?
, by
attorney Stephen Elias.


Filing Bankruptcy?
Disclose Everything, Hide Nothing


Hiding property from a
bankruptcy court could come back to haunt you.

Your bankruptcy papers are
signed under penalty of perjury, so you are swearing that
everything in them is true. One of the things you're swearing to
is that your forms are complete, because the forms ask you to
list "all" property, income, and debts. Filing incomplete or
inaccurate bankruptcy forms can lead to your case being
dismissed -- or worse, if the court thinks you omitted
information or made false statements intentionally.

The law is not supposed to
punish those who make one or two honest mistakes. If you
accidentally leave something off your papers or misstate
something on your forms, you can usually correct your papers or
explain the mistake to the trustee. But if you leave out so much
that it appears that you were careless, the court can find that
your actions demonstrate an indifference to the truth and can
dismiss your case on that basis.

If you deliberately attempt
to hide assets or use a false Social Security number, it will
probably come back to haunt you more profoundly than your
current debt crisis.

List Every Creditor

Bankruptcy can't help you
if you hide information. If you fail to list creditors, the
debts you owe them may not be wiped out by your bankruptcy
discharge. So, be sure to list every person who claims that you
owe them money -- even if you don’t think you owe them a cent.
In this situation, you can indicate that the debt is "disputed."
If the debt is already the subject of a pending lawsuit, the
debt can be listed as "contingent" -- that is, it depends on how
the lawsuit comes out.

When your bankruptcy is
finished, you will no longer owe any debts that have been
discharged. If a disputed debt is discharged, the entire dispute
will be irrelevant. The creditor will be legally barred from
collecting anything more from you regardless of who is right.

Don't Omit Creditors Just
Because You Like Them

Some filers consider
omitting creditors whom they like -- such as a relative or a
friendly local business person -- to avoid having that debt
wiped out. This is a bad idea, no matter how honorable your
intentions. Bankruptcy doesn't allow you to play favorites. In
fact, a central purpose of bankruptcy is to make sure that all
of your creditors get their fair share of what you have, and
that certain obligations (like child support) are not
shortchanged. If the bankruptcy trustee learns that you've
omitted creditors from your list, you'll have to add them, and
it will raise suspicion about other statements on your forms.

Include Money You May Have
Coming to You

When you list your property
on the bankruptcy forms, you must include not only property you
have when you file, but also property that you may have coming
to you. Here are some examples:

  • an inheritance from a
    recently deceased relative that you have not yet received
  • stock options, trust
    funds, or tax refunds
  • pensions, retirement
    funds, annuities, and life insurance, and
  • judgments from
    lawsuits you've filed or could file, arising from a personal
    injury or other matter.

All of these are examples
of property that you must list on your forms. You may get to
keep some or all of this property by claiming it as exempt, but
you must list it so that the trustee has a complete picture of
all of your finances.

Don't Deliberately Hide
Assets or Other Financial Details

If you deliberately fail to
disclose property, omit material information about your
financial affairs, or use a false Social Security number to hide
your identity as a prior filer, and the court discovers your
action, your case will be dismissed and you may be prosecuted
for fraud. The punishment for fraud is serious: Jail time is not
unusual for those who try to hide property from the court and
get caught.


What Happens to Your Car
in Chapter 7 Bankruptcy?

by Attorney Stephen R.



Chapter 7 bankruptcy
allows you to keep or surrender your car or truck.

People often wonder how
Chapter 7 bankruptcy will affect their ability to keep their
car. If you aren't making payments on a car, then you'll be able
to keep it if its value falls under your state's vehicle
exemption amount. However, if you are making payments on your
car, it's not so simple. During your bankruptcy, you'll need to
decide whether you want to surrender the vehicle or keep it by
continuing to make payments. You let the bankruptcy court know
what you want to do by filing an official form called the
Statement of Intention (SOI) with your other bankruptcy papers,
as well as mailing a separate copy of the SOI to your vehicle
lender. Similarly, if you are leasing your car, you can either
reject the lease on your SOI or can keep the car by assuming the

Walking Away From the Car

If you want to walk away
from the car, you list the lender on your SOI and state that you
intend to surrender the vehicle -- that is, turn it in to the
lender. This will clear you of any further liability on the debt
after your bankruptcy. If you are leasing your car, you can get
out of the lease by rejecting the lease on your SOI.

Keeping a Car You're Still
Paying For

If you want to keep a car
you are making payments on, no matter what else is going on in
your bankruptcy, you should continue to make your payments as
scheduled. You do have a choice, however, on how to keep the
car: You can either pay the lender a lump sum to purchase the
car at its current value (called redemption ), or enter into a new contract (called a reaffirmation agreement), which lets you keep your car under much the same
terms as your original car's promissory note (although this is

Sometimes your lender will
let you keep the car without entering into a reaffirmation
agreement, by simply allowing you to continue to make the
payments under the old agreement (this is called the
ride-through option). If your lender has been accepting your
payments, it's a sign that you may be able to retain the vehicle
and continue making payments without entering into a new
reaffirmation agreement.

Negotiating With the Lender
to Keep the Car

To find out whether your
lender will require a new contract, call them and ask for the
bankruptcy or loss mitigation department. Explain that you
intend to file for bankruptcy and ask whether you need to
reaffirm the promissory note or can instead retain the car and
continue making payments without reaffirming.

If the lender agrees to let
you retain the car and pay according to the old agreement, the
lender will still have a lien and can repossess the car if you default on your payments. But if the car is repossessed (or if you
decide to give it back), you won't have to worry about still
owing a deficiency on the car (the amount of the loan minus what
the lender can sell the car for) -- that will be wiped out after
your bankruptcy case is over. 

If the lender requires you
to reaffirm the promissory note and you do reaffirm it, consider
carefully whether you want to do this. The lender will have a
right to repossess the car if you default on your payments
you will owe any deficiency that remains on your loan
if that happens. If you want to reaffirm your loan, you'll take
the following steps.

Negotiate the Reaffirmation

First, you'll state on your
Statement of Intention that you intend to reaffirm the
promissory note. Then, the lender will send you an agreement
setting out the same or similar terms as your old agreement. At
this point you should consider negotiating the terms more to
your advantage. You do have some leverage here, because the
lender knows that bankruptcy gives you the option of
surrendering the car and canceling all liability. Lenders lose a
lot of money on repossessions, so they have an incentive to cut
you a better deal, such as reducing the principal of the loan to
the car's current value. Don't be afraid to attempt to negotiate
for this. All the lender can do is say "No." If the lender does
say "No," you may want to consider surrendering the car at this
point, and let the bankruptcy erase your liability for the
remaining payments on the loan.

Have the Court Review the
Reaffirmation Agreement

Once you and the lender
have agreed on the terms of the reaffirmation agreement, you'll
sign the agreement and file it with the court. At the "discharge
hearing," near the end of your bankruptcy, the judge will decide
whether the agreement should be enforced. After considering your
income, the amount you owe on the car, and its value, the judge
may decide that the reaffirmation will create an undue hardship
for you or be against your best interests. If you still owe much
more than the car's value, a judge might disallow the

What Happens If the Judge
Approves the Reaffirmation

If the judge approves the
reaffirmation agreement, you will continue to be liable under
its terms after your bankruptcy ends. For instance, if you have
to give the car back due to a loss of income, at a time when you
owe $25,000 under the agreement and your car is worth only
$10,000, you'll be on the hook for the $15,000 deficiency.
Remember that because you can't file another Chapter 7
bankruptcy for eight years, you could be back where you started
before you filed for bankruptcy (another reason why a judge
might not approve the reaffirmation in the first place).

What Happens If the Judge
Disapproves the Reaffirmation

If the judge disapproves
the reaffirmation agreement, you don't necessarily lose the car.
According to several bankruptcy court opinions, you can keep the
car as long as you remain current on your payments. These courts
reason that as long as you do what is required of you by the
bankruptcy code (state your intention to reaffirm, sign and file
the reaffirmation agreement, and attend the discharge hearing),
the fact that judge disapproves the agreement is beyond your
control and should not result in your having to give up your
car. All of this is conditioned, of course, on staying current
on your payments. (See In re Moustafi, 371 Bankruptcy
Reporter 434 (Bankr Ariz 2007).) You can read this case at Paradoxically, if
the judge disapproves the agreement, you will probably be better
off, because you will be left with the practical equivalent of
the ride-through option, meaning that you won't owe a deficiency
should the car have to be surrendered or repossessed.

Where to Go for More

For more information on
redeeming and reaffirming secured property in a Chapter 7
bankruptcy, see How to File for Chapter 7 Bankruptcy (Nolo),
by attorneys Stephen Elias, Albin Renauer, and Robin Leonard.



How do I improve my
credit position after bankruptcy?





I filed for Chapter 7
bankruptcy seven years ago. I've been told that it takes ten
years for a Chapter 7 to "fall off" your record. Is there
anything I can do in the meantime to get a lower rate on my car
loan and credit cards?




There are many things you
can do to improve your credit. First, get a copy of your credit
report and make sure it's accurate. To get lower interest rates,
ask your lenders. Your bankruptcy is old enough now that it
should carry less weight than it did a few years ago. If you
have been making your car and credit card payments on time and
your recent credit looks good, your creditors may very well
lower the rate.

You might also contact your
bank and ask whether you can obtain a personal loan with a lower
interest rate than your car loan. Use the money from the bank
loan to pay off the car loan. You'll still have to pay the bank
loan, of course, but at least you'll have a better interest


Can the Chapter 13
trustee dismiss my case if I've missed a couple of payments?





I've been making payments
on a Chapter 13 repayment plan for more than two years. I
recently fell behind on my payments and my trustee has
petitioned for a dismissal. What can I expect if I go to court?




Once you get through the
courthouse doors, the trustee will likely argue that your plan
is no longer feasible -- that you cannot make the payments and
therefore your creditors aren't getting paid and protected
through bankruptcy.

Your best shot is to
remember that old scout creed about being prepared. You'll have
to show the court that you can get back on track with your plan,
or propose an amended plan with payments that are feasible for
you and provide a sufficient amount to your creditors.

If the court agrees with
the trustee and dismisses your case, you'll owe your creditors
the current balance on your debts -- that is, what you owed at
the start of your bankruptcy case, less the amounts you paid
through your repayment plan -- plus the interest that stopped
accruing while you were in bankruptcy.


Why shouldn't I reaffirm
my credit card debts in bankruptcy?





A lawyer recently
instructed me not to reaffirm any of my creditors in bankruptcy
even though I wanted to and had not been late in my payments
with these creditors. He said that even if I continued to pay
the my credit card bills on time they would cancel my card and I
would be left with nothing but the debt. Can they do that if I
have kept my payments current and stuck to the terms of my
creditor? Also, could they legally increase my interest rate
even if I have kept my payments current?




Your attorney's advice is
on the money. If you file for bankruptcy, your credit card
issuer is likely to kick up your rate or cancel your card, even
though you are current on the account. Though less than
sporting, their actions would be entirely legal.


Can the bank take my car
after I file for Chapter 13 bankruptcy?





I filed a Chapter 13
bankruptcy and have already started paying the court. I sent a
payment to the bank for a note owed on my van, but the check was
returned. They then came and picked up the van. My work material
was in the van along with personal items -- and we have not yet
been notified as to where they are. What legal recourse do we
have against the bank?




When you're trying to get
back on your feet, it seems especially unfair to have the rug

If payment to the bank was
spelled out in your plan -- either outside of bankruptcy or
within -- then the bank's action violates a court order, the
confirmed plan. Sadly, your recourse is to invoke the slow
grinding wheels of justice and sue the bank, within your
bankruptcy case. Talk to the bankruptcy trustee about this.

© 2009 Nolo



the law may change often — contact the office of Bruce C. Truesdale for
help with your bankruptcy in New Jersey.

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