Myths and Truths About Chapter 13 Bankruptcy, Part IV

Myth:  If a house is jointly owned and in foreclosure, both parties on the loan must file Chapter 13 bankruptcy in order to save the house from foreclosure.

Truth:  Both parties on the loan do not need to file bankruptcy in order to save the house from foreclosure. It is very common for a house to be owned jointly, especially by a married couple.  Many people think that because both names are on the loan, both people on the loan need to file bankruptcy in order to save the house from foreclosure.  Actually, as long as one party on the loan files, that is enough to protect the house from foreclosure and implement the automatic stay as long as the bankruptcy is filed before the foreclosure.  It may be beneficial for both parties to file together if they have other debt to include in the bankruptcy.  In some cases, however, the house may be the only debt the parties possess or the additional debt may only be in the filing debtor’s name.  In that case, some people prefer to have only the one party on the loan file in order to preserve the credit of the other person.  If the house is later surrendered through the bankruptcy or foreclosed, the second person on the loan may want to consider filing bankruptcy because they would then be responsible for the deficiency on the property.  Otherwise, only one party would need to file bankruptcy.

Myth:  If the creditor isn’t being paid through the bankruptcy, it is because the Trustee is choosing not to pay them.

Truth:  If a creditor is not being paid through the Chapter 13 bankruptcy, it likely due to reasons outside the Trustee’s control.  When a bankruptcy is filed, the creditors receive notice of the bankruptcy and are given a deadline in order to file a proof of claim.  The proof of claim informs the Trustee of the amount due to the creditor so they know how much should be in the plan to pay them.  Upon review of the proofs of claim, the Trustee makes sure the plan is feasible and pays the creditor a certain amount per month through the life of the plan.  If the creditor does not file a proof of claim, the Trustee cannot pay them.  Therefore, if the creditor is not being paid, there is a good chance there is no proof of claim filed.  In that case, the debtor’s attorney can call the creditor to remind them or file a proof of claim on the creditor’s behalf to guarantee payment by the Trustee. 

If you would like more information, please contact a St. Louis or St. Charles bankruptcy attorney.