Bankruptcy

[laurafergie]

State laws vary.

That being said; Since the Bankruptcy Laws reform in 2005, you have to take a means test where you disclose your income/debt/expenses and ALL ASSETS. The result so these means test will allow you to either file Chapter 7 (entire discharge of debt) or Chapter 13 in which you reaffirm debt and enter into a payment plan that is administered by the court.

Either way, at the date of bankruptcy, you will lose control of all your assets. You will generally be able to keep most personal items, (jewelery can get sticky) vehicles and tools of trade.

She may be a candidate for Chapter 7, low income, higher debts - but I doubt seriously she'll be able to keep her house.

 

[ameraumi]

I have to ask since it was not mentioned. Is the debt in both names or just his? If it is only in his name then she will not be responsible for the debt. But I am guessing it is in both names.

Everyone else answered about the BK already.

 

[mill4023]

First of all...in either a ch 7 or a ch 13 she will NOT be able to keep the proceeds of the house sale. ch 7 would take the asset (proceeds) and ch 13 would apply it to the plan. either way she will get NO cash in her pocket.
It depends on her income whether she will qualify for 7 or 13 and they will both give her the ability to walk away or pay back some of her debt..but at the loss of her house. She CAN keep her house in a ch 13 but will have to pay debt back over a 3 or 5 yr period. The point of a ch 13 is to protect assets, the ch 7 you lose all assets but don't pay money back and you could keep your house IF you have less value than allowed..but if you have lots of equity...your in trouble...

also...she can absolutely get rid of a 2nd mortgage if she does a ch 13 and her house is worth less than the first mortgage and still keep her house - its called loan stripping and it is another reason to do a ch 13. but again she will not get cash from any of this....but again depends on value of the house

Ch 13 is debt reorganization and payback and keeping your assets such as a car or house, ch 7 is a clean slate with loss of assets.

there is always more to the story....

Chapter 7 does NOT always mean you lose your house. If you own it free and clear, then you will probably have to give it up. But if you have little or no equity (limits are different in each state), you can continue making the payments and keep your house after the Chapter 7.

 

[mill4023]

Which state does she live in?

 

[monkeybug]

Which state does she live in?

She lives in PA.

Thanks everyone for all the replies!

We really wish she would just get a part time job (her only income is social security and it's not much) and pay the debt. It's not much and the payments are low.
It seems a shame for her to lose her house when the equity payment is less than some peoples car payments.
My SIL (who lives with her and is currently paying on the equity loan) is getting married and her and her fiance want to buy a house in a different part of the city. There plan is to have MIL file for bankruptcy, sell the house, and all move into the new house together. When I mentioned that I didn't think she could sell the house and keep the profits after filing bankruptcy (it just didn't sound right), she said she would just let them have the house then.
They all have all sorts of issues, and it's just not a good situation.

 

[goofyernmost]

Chapter 7 does NOT always mean you lose your house. If you own it free and clear, then you will probably have to give it up. But if you have little or no equity (limits are different in each state), you can continue making the payments and keep your house after the Chapter 7.

To my knowledge the only way that you can keep something tangible, such as a car or house that has a lean on it is to not list it in the bankruptcy. However, that means that nothing changes, you still owe on it. Courts are careful about taking away someones domicile or their transportation to work, but to do that the debt remains and is not protected by bankruptcy.

 

[mrsltg]

I don't think so. The loan will be discharged, but the bank that gave her the loan still has a security interest in the home. If she stops making payments on that equity line, they can foreclose.

No, they can't foreclose. The debt is covered under the bankruptcy BUT, as we both pointed out, it must be satisfied at the time of sale WITH accrued interest.

 

[Sweettears]

She can declare BK and wipe out most of her debt. The only way to keep the house would be to reinstate the mortgage with the bank (i.e. continue to pay as agreed). The other debt would disappear. In the event that she stops paying the equity loan, the bank will foreclose, pay-off the bank that has the first mortgage and sell the home. However, with the courts attitude towards banks and their general no need to rush philosophy she could end up staying in the home for 6-8 months without paying a cent.

 

[Sweettears]

No, they can't foreclose. The debt is covered under the bankruptcy BUT, as we both pointed out, it must be satisfied at the time of sale WITH accrued interest.

The bank can absolutely foreclose and will as it is the only way to recoup the $$$ lent to the borrower.

 

[mill4023]

She lives in PA.

Thanks everyone for all the replies!

We really wish she would just get a part time job (her only income is social security and it's not much) and pay the debt. It's not much and the payments are low.
It seems a shame for her to lose her house when the equity payment is less than some peoples car payments.
My SIL (who lives with her and is currently paying on the equity loan) is getting married and her and her fiance want to buy a house in a different part of the city. There plan is to have MIL file for bankruptcy, sell the house, and all move into the new house together. When I mentioned that I didn't think she could sell the house and keep the profits after filing bankruptcy (it just didn't sound right), she said she would just let them have the house then.
They all have all sorts of issues, and it's just not a good situation.

PA has no homestead exemption, but PA allows you to use the federal exemptions, which allow you to exempt up to 21k in equity.

So if she has less than 21k equity in the home, she could file bankruptcy and keep the home and keep her equity. But the bank would still have a lien on the property for the amount of the equity line of credit and they can foreclose if she doesn't keep making the payments.

So no, she cannot simply get rid of the equity loan debt, sell the house, and keep all the money.

So as an example, if the house is worth 100k and she owes 80k on it, she could file bankruptcy, keep the house, and sell it later. But she would have to keep making payments. If she sold the house for 100k shortly after the bankruptcy was complete, she would walk away with 20k.

But if the house is worth 100k and she only owes 50k on it, she will have to forfeit the house if she files a chapter 7 bankrupcty, because she has more equity than the 21k allowed by the federal exemption.

 

[mill4023]

She can declare BK and wipe out most of her debt. The only way to keep the house would be to reinstate the mortgage with the bank (i.e. continue to pay as agreed). The other debt would disappear. In the event that she stops paying the equity loan, the bank will foreclose, pay-off the bank that has the first mortgage and sell the home. However, with the courts attitude towards banks and their general no need to rush philosophy she could end up staying in the home for 6-8 months without paying a cent.

In most cases, there is no need to "reinstate"(reaffirm) the mortgage. She would just need to continue making payments.

Like I said, it's an odd situation, because you don't technically owe the bank any money, but they still have a lien so if you want to keep the house, you have to keep making payments until you've covered the amount of the lien.

 

[Carol NJMB]

I think it is chapter 7 because she plans on having no debt after its done. The 1st mortgage is paid, they owed nothing on the house when they took out the equity loan. She said that because the loan is an equity line of credit and not a mortgage she can keep the house with out having to pay anything on the equity loan. That part doesn't sound right to me. It seems to me that if the house is collateral on the loan, that would have to go during the bankruptcy too.

I hope no attorney gave her this kind of bad information.

A home equity line of credit, a home equity loan, a 2nd mortgage - whatever you want to call it - is tied to the home and bankruptcy is NOT going to just vaporize that debt. It is a "secured" debt. Doesn't matter if she did or didn't have a 1st mortgage.

She will have to pay the balance on that mortgage when the home is sold and she then keeps anything remaining.

 

[barkley]

I have to ask since it was not mentioned. Is the debt in both names or just his? If it is only in his name then she will not be responsible for the debt. But I am guessing it is in both names.

Everyone else answered about the BK already.

even if the debt was just in his name she might still have some responsibility for it depending on what kind of debt it was and what the situation was financialy upon his death.

when mil passed away and we were dealing with trying to figure out her estate we found paperwork dating back to fil's death. he had credit card debt in only his name, but when he died she got notices from the credit card companies (triggered by social security coding him as deceased which is reported to credit agencies) that told her if she wanted to continue to be an authorized user of the cards she was assuming repayment of the debt. she wanted to so she legaly assumed his sole debt.

even if that's not the case, and some of the debt was just the late fil's and she tries to stop paying it, she better have administered his estate correctly because if there were any assets that were solely his, and only passed on to her by surviving spousal rights (not co-owned or p.o.d.) or a will (or she gave assetts/monies previously solely owned by him to the kids or other family members) she was legaly obligated on his death to pay those debts before a penny of those assetts were distributed elsewhere. the creditors can come after her or whoever dealt with the estate (even if an estate is'nt probated you still need to document and keep records of what the person owned/owed and how it was handled cuz their creditors can and do pursue collection).

 

[ameraumi]

even if the debt was just in his name she might still have some responsibility for it depending on what kind of debt it was and what the situation was financialy upon his death.

when mil passed away and we were dealing with trying to figure out her estate we found paperwork dating back to fil's death. he had credit card debt in only his name, but when he died she got notices from the credit card companies (triggered by social security coding him as deceased which is reported to credit agencies) that told her if she wanted to continue to be an authorized user of the cards she was assuming repayment of the debt. she wanted to so she legaly assumed his sole debt.

even if that's not the case, and some of the debt was just the late fil's and she tries to stop paying it, she better have administered his estate correctly because if there were any assets that were solely his, and only passed on to her by surviving spousal rights (not co-owned or p.o.d.) or a will (or she gave assetts/monies previously solely owned by him to the kids or other family members) she was legaly obligated on his death to pay those debts before a penny of those assetts were distributed elsewhere. the creditors can come after her or whoever dealt with the estate (even if an estate is'nt probated you still need to document and keep records of what the person owned/owed and how it was handled cuz their creditors can and do pursue collection).

I just went thru this 1.5 yrs ago, so I am well aware of how it works. DH passed away and I was left trying to figure everything out. The house was in both of our names, as was the cars, and I paid those off with the LI proceeds. The one thing, such as in your IL's case, was DH was the primary acct hold of the Discover card and I was only the authorized user. I thought it was a joint account. I chose to assume the card because I wanted the credit history that went with it, so again I paid off the card.

Yes, if there is an estate (not in our case as everything was held jointly) then all creditors must be paid before any money can be distributed to individuals. However, LI proceeds are not considered into that. That goes to the individual and has no bearing on what debt is owed by the deceased.

 

[manning]

I have to ask since it was not mentioned. Is the debt in both names or just his? If it is only in his name then she will not be responsible for the debt. But I am guessing it is in both names.

Everyone else answered about the BK already.

Not exactly. His estate will pay off all debt before assets are distributed. In other words if the house is his only asset it will be sold and anything left over after debts are paid will be her's.If there isn't enough money to pay off debts then all unpaid debts are forgiven. We are assuming all debts and assets are his only.

Debtors are first in line followed by heirs.

 

[cm8]

From the link I posted earlier:

The first answer is "no" you cannot eliminate a home equity line of credit, or HELOC, that is secured by your home in a Chapter 7 bankruptcy while keeping the house. That line of credit must be paid in order to keep your property.