Bankruptcy may be an option when a person’s homeownership interest is threatened. Subsections (A) and (B) present an abbreviated overview of Chapter 7 and Chapter 13 bankruptcies, the two basic forms of bankruptcy for individuals.1 Subsection (C) sets forth the process for filing a notice of bankruptcy proceeding under 11 USC 101 et seq.
A.Chapter 7 Liquidation (Straight Bankruptcy)
Chapter 7 liquidation (also referred to as straight bankruptcy), 11 USC 701–11 USC 727, “requires an individual to give up property which is not ‘exempt’ under the law, so the property can be sold to pay creditors.” National Consumer Law Center, Answers to Common Bankruptcy Questions. In a Chapter 7 case, the petitioner’s debts, subject to some exceptions, are discharged after a bankruptcy trustee sells the individual’s nonexempt assets and distributes the proceeds to the individual’s creditors. Legal Information Institute, Bankruptcy: An Overview. By exercising the right of redemption, the debtor can “redeem [certain] tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt[.]” 11 USC 722. However, “chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take [a debtor’s] property to cover [his or her] debt.” National Consumer Law Center, Answers to Common Bankruptcy Questions.
“Filing a petition under chapter 7 ‘automatically stays’ . . . most collection actions against the debtor or the debtor’s property. United States Courts, Bankruptcy Basics (2011).” See 11 USC 362. No judicial action is necessary to obtain the automatic stay of collection actions; “[t]he stay arises by operation of law[.]” United States Courts, Bankruptcy Basics (2011).
In addition, “[a]mendments to the Bankruptcy Code enacted in . . . the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 [(Public Law No. 109-8, 119 Stat. 23, April 20, 2005)] require the application of a ‘means test’ to determine whether individual consumer debtors qualify for relief under chapter 7. If such a debtor’s income is in excess of certain thresholds, the debtor may not be eligible for chapter 7 relief.” United States Courts, Bankruptcy Basics (2011).2
B.Chapter 13 Reorganization (Adjustment of Debts of an Individual with Regular Income)
Chapter 13 reorganization (formally called Adjustment of Debts of an Individual With Regular Income), 11 USC 1301–11 USC 1330, is available to persons with earned income or unearned income, such as SSI3 and AFDC/FIP4 payments.
Chapter 13 bankruptcy “is a type of ‘reorganization’ used by individuals to pay all or a portion of their debts over a period of years using their current income.” National Consumer Law Center, Answers to Common Bankruptcy Questions. The chapter 13 petitioner files a plan for repaying his or her creditors over a period of time, generally three to five years. United States Courts, Bankruptcy Basics. “The most important thing about a chapter 13 case is that it will allow [the debtor] to keep valuable property—especially [his or her] home and car—which might otherwise be lost, if [the debtor] can make the payments which the bankruptcy law requires to be made to [his or her] creditors.” National Consumer Law Center, Answers to Common Bankruptcy Questions.
“[C]laim[s] [against a debtor for debts] secured only by a security interest in real property that is the debtor’s principal residence” cannot be modified by chapter 13 bankruptcy. 11 USC 1322(b)(2). However, a debtor may challenge a creditor’s claim by initiating an adversary proceeding “to determine the validity, priority, or extent of a lien or other interest in property[.]” See Fed.R.Bankr.P. 7001(2). Chapter 13 allows a debtor to pay (“cure”) the mortgage or land contract arrearage within a “reasonable period of time” when current payments are maintained, and the last payment on the mortgage or land contract debt is due after the Chapter 13 plan ends. 11 USC 1322(b)(5). Where there is a threat of mortgage foreclosure, the bankruptcy petition must be filed before a valid foreclosure sale in order to obtain the benefits of long-term bankruptcy relief. 11 USC 1322(c)(1).
Upon completion of the Chapter 13 plan, the debtor is entitled to a discharge which is broader than that given Chapter 7 debtors. 11 USC 1328. If unforeseen circumstances prevent a debtor from completing the plan, a hardship discharge can be sought. 11 USC 1328(b). If the debtor cannot complete the plan or get a hardship discharge, the case can be voluntarily dismissed. 11 USC 1307(b).
C.Notice of Bankruptcy Proceedings in State Court Action
MCR 2.421 “provides a process for filing notice of a bankruptcy proceeding that affects a state court action.” ADM File No. 2021-50 (staff comment). MCR 2.421 “applies to all state court actions in which a party is a named debtor in a [Chapter 7] bankruptcy proceeding under 11 USC 101 et seq.” MCR 2.421(A). However, MCR 2.421 “does not abridge, enlarge, or in any way modify existing rights and procedures under federal law, including bankruptcy proceedings under 11 USC 101 et seq.” MCR 2.421(F).
A party “who is a named debtor in a bankruptcy proceeding” must “file a notice of the bankruptcy proceeding in the state court action no later than 3 days after becoming subject to” the bankruptcy proceeding and “serve the notice on all other parties in the state court action as provided in MCR 2.107.” MCR 2.421(B)(1)-(2). “If a party to a state court action learns that another party in such action is a named debtor in a bankruptcy proceeding and notice of the bankruptcy proceeding in [MCR 2.421(B)] has not previously been filed and served by the debtor,” that party may “file a notice of the bankruptcy proceeding in the state court action” and “serve the notice on all other parties in the state court action as provided in MCR 2.107.” MCR 2.421(C)(1)-(2). The notice of bankruptcy proceeding must include “the name(s) of the debtor(s),” “the court name and case number(s) of the bankruptcy proceeding(s),” and “if available, the name, telephone number, physical address, and email address for the debtor’s attorney in the bankruptcy proceeding(s).” MCR 2.421(D)(1)-(3).
After a notice of bankruptcy proceeding is filed, “the court may hold in abeyance any further proceedings and may schedule a status conference to consider the administrative closure of all or a portion of the state court action.” MCR 2.421(E). If “all or a portion of the state court action is administratively closed under [MCR 2.421(E)] or otherwise, it may be reopened if, on the motion of a party or on the court’s own initiative, the court determines that the automatic stay has been lifted, removed, or otherwise no longer impairs adjudication of all or a portion of the state court action.” Id.
1 For more information see Legal Information Institute, Bankruptcy: An Overview (2010), at www.law.cornell.edu/wex/bankruptcy; United States Courts, Bankruptcy Basics (2011), at www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics.aspx; and National Consumer Law Center at www.nclc.org/.
2 See www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Process.aspx.
3 Social Security Income.
4 Aid to Families with Dependent Children/Family Independence Program.