The most common types of bankruptcy filings are a Chapter 7 bankruptcy and a Chapter 13 bankruptcy. A Chapter 7 bankruptcy is considered a no asset case and it provides a fresh start for individuals, partnerships and corporations and do not involve any form of payment plan.
A Chapter 13 bankruptcy exists for individuals who have significant equity in their homes or other types of property, for individuals who have fallen behind on their mortgage payments or for those whose income requires them to make a payment plan to their creditors. The payment plan lasts three to five years. A Chapter 13 enables a debtor to save their home if they have fallen behind on their mortgage or have been unable to obtain a loan modification.
Real Life Example Case
An individual came to our firm to file a Chapter 13 bankruptcy. The Debtor had owned a residence in California and unfortunately the home went through a trustee sheriff sale in a judicial foreclosure. There was a difference in the amount the home sold for at the sale and the amount due on the home equity line. The difference between what the home sold for and what was owed was approximately$194,000. This meant that the lender took a significant loss when the home was sold at the judicial sale. This difference is called a deficiency. Sometimes, mortgage companies will seek the deficiency amount personally from the mortgage holders and sue them personally in court.
In California, there is a statute of limitations of three (3) months from the date of the sheriff sale for a mortgage company to legally sue to seek the deficiency. The statute of limitations in Pennsylvania is six months.
In this particular case, the mortgage company in California never sued our client to have the $194,000 deficiency paid and the statute of limitations ran out. When we filed the Chapter 13 bankruptcy for the client, the mortgage company from California filed a proof claim as a secured creditor seeking the $194,000 deficiency amount to be paid out in the Chapter 13 payment plan.
A proof of claim is what a creditor files in a Chapter 13 bankruptcy in order to preserve their claim and seek to be paid out of the monthly payments that the Chapter 13 debtor makes to their plan.
We filed an objection to this proof of claim. First, the creditor was NOT a secured creditor because the home had been sold at sheriff sale. Secured creditors are creditors who maintain mortgages on property or on other forms of property such as a car loan. They have some form of security in collateral.
Second, even though there was still $194,000 owed after the judicial sale, the creditor never filed suit against our client. The debt was stale and the creditor was attempting to use the bankruptcy court in order to get repaid on a stale debt. We objected to this proof of claim and the bankruptcy court granted our objection.
The client would not have to pay back the $194,000 in deficiency because the creditor had failed to comply with the statute of limitations in California and could not use the bankruptcy court to be paid back on a stale debt.