Bankruptcy can provide a fresh start when life goes wrong, but it may not happen painlessly. Terms like "relief from stay" and "abandonment" sound ominous, particularly when taken together, and they can crop up in the middle of a bankruptcy proceeding. In most cases, they mean you're probably going to lose your real property.
Chapter 7 is the least complicated form of bankruptcy an individual debtor can enter into. When you file for protection, a trustee takes legal possession of your non-exempt assets. He liquidates them, turning the sales proceeds over to your creditors. Your creditors may be paid most of what you owe, next to nothing, or – if you have no non-exempt assets – nothing at all. The court discharges any debts that remain unpaid. You no longer owe them. Your creditors can no longer try to collect from you.
Relief From Stay
Your creditors must usually stop trying to collect from you even before the court discharges your debts. As soon as you file your bankruptcy petition, an automatic stay goes into effect. This stay makes it illegal for your creditors to do anything to try to get you to pay them while your bankruptcy is in progress. There's a way around this rule for creditors, however – they can file a motion with the court for relief from the stay. This doesn't necessarily mean the court will agree to the request, but in the case of secured lenders – such as the bank that holds a mortgage against your real estate – the court will often lift the stay if you're behind with your payments. Lifting the stay allows your mortgage company to resume or begin foreclosure proceedings to reclaim its collateral: your house.
Abandonment by Trustee
If your bankruptcy trustee abandons your property, this can have the same effect as your lender receiving relief from the automatic stay. Abandonment and relief from stay can occur simultaneously, but more often than not, one or the other occurs. Your trustee will likely abandon your real estate, declining to include it in your bankruptcy estate for liquidation, if its fair market value isn't much more than the loan against it, plus your homestead exemption. A homestead exemption allows you to protect a certain amount of equity in your home, exempting it from the bankruptcy proceedings. If the property is worth $300,000 and your mortgage is $275,000, and if you have a $25,000 homestead exemption, there's no sense in the trustee selling the property – it won't result in any proceeds to give to your other creditors. If you're current with your mortgage payments, you'd typically get to keep your home in this situation. If you're not current, or if you owe more on your mortgage than the property is worth, the trustee might abandon or relinquish your property to your lender. This allows your lender to resume or begin foreclosure proceedings.
"Reaffirmation" is another word often associated with bankruptcy proceedings. It involves signing a document with your lender, agreeing that you still owe the mortgage and that the debt will not be discharged in your bankruptcy.The court must approve reaffirmation agreements. If you stay current with your mortgage payments throughout your Chapter 7 proceeding, your lender may not require you to reaffirm the note. If you don't reaffirm, however, your lender won't send you monthly statements or report to the credit agencies when you pay on time. If your trustee abandons your property back to you, check with an attorney to find out if reaffirming the note is a good option for you, because there are pros and cons.
Real property is usually not at stake in a Chapter 13 bankruptcy. The trustee doesn't gather and sell your assets in this type of proceeding. You must propose a plan to the court to pay your unsecured creditors with your disposable income over time, and in exchange for these payments, the law lets you keep your property. In this scenario, your lender would have no reason to request relief from the bankruptcy stay, and your trustee wouldn't have cause to abandon the property.
- Nolo: When Will a Trustee Abandon Property in a Chapter 7 Proceeding?
- Nolo: When a Creditor Tries to Lift (Remove) the Automatic Stay
- Bankrate.com: Reaffirming a Mortgage
- United States Courts: Chapter 7 – Liquidation Under the Bankruptcy Code
- Bankrate.com: Behind in Mortgage in Bankruptcy – What Now?
- United States Courts: Chapter 13 – Individual Debt Adjustment
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.