Bankruptcy
& Real Estate

Chapter 7 — liquidation

• Debtor surrenders non-exempt assets to trustee
• Trustee liquidates, distributes to creditors
• Unsecured debt discharged
• Secured debt (mortgage): debtor can reaffirm (keep) or surrender
• Investment real estate with no equity: trustee abandons to secured lender
• Investment real estate with equity: trustee sells to realize for creditors
• Homestead equity protected up to state exemption limit
• Typical duration: 4–6 months from filing to discharge

Chapter 13 — reorganization

• Debtor proposes 3–5 year repayment plan
• Income-qualifying: must have regular income
• Debt limits: secured ≤ $1,395,875, unsecured ≤ $465,275 (2024, adjusted)
• Arrears on mortgage cured through plan while maintaining current payments
• Cramdown on investment property: reduce secured claim to current property value
• Nobelman v American Savings Bank (1993): NO cramdown on primary residence
• Lien stripping on wholly underwater junior mortgages (investment property)
• Typical duration: 36–60 month plan plus post-plan discharge

Chapter 11 — business reorganization

Used by businesses and high-asset individuals. Debtor retains possession (debtor-in-possession) and operates while restructuring debt. Plan of reorganization negotiated with creditors, confirmed by court. Cramdown, absolute priority rule, feasibility test. Complex; typical fees $100k–$2M+. Subchapter V (small business) streamlined for debts < $7.5M.

Automatic stay (11 USC §362)

Filing BK petition triggers immediate automatic stay halting all collection:

• Foreclosure paused (trustee sale, judicial proceedings halted)
• Eviction paused (with limited carve-outs)
• Wage garnishment halted
• Bank levies halted
• Lawsuit prosecution halted
• Utility shutoffs prevented for 20 days

Violation of stay = sanctions + damages. Creditor must seek relief from stay to proceed. Typical 30-day hearing on motion.

Motion for relief from stay

Lender files motion to resume foreclosure. Arguments: (1) no equity in property plus inadequate protection, (2) property not needed for effective reorganization (Ch 13/11), (3) lack of good faith filing. Borrower has 30 days to object. Typical hearing 30–60 days after filing. Granted if lender shows no equity + borrower unable to cure.

Homestead exemption in BK

• Florida, Texas, Oklahoma, Iowa, Kansas, South Dakota — unlimited (subject to federal cap on recently acquired)
• Federal BK §522(p): $189,050 cap if homestead acquired within 1,215 days of filing
• Nevada: $605,000
• Rhode Island, Massachusetts: $500k+
• California, New York, New Jersey: $300k–600k depending on household
• Most other states: $15k–100k

Homestead exemption protects equity in primary residence from trustee liquidation. Investment property has no homestead protection.

Reaffirmation

In Chapter 7, debtor can reaffirm secured debt — agree to remain personally liable post-discharge in exchange for keeping collateral. Mortgage reaffirmation common on primary residence the debtor wants to keep. Court scrutiny for undue hardship. Failure to reaffirm = mortgage is "ride-through" status; borrower keeps property as long as payments current.

Post-BK mortgage qualification

• FHA: 2 years post-Ch 7 discharge, 1 year Ch 13 seasoning with 12 on-time
• VA: 2 years post-Ch 7, 1 year Ch 13 seasoning
• Conventional Fannie: 4 years post-Ch 7 / Ch 11, 2 years post-Ch 13 discharge
• Non-QM: 1+ year post-discharge possible
• Letter of explanation and re-established credit required

Fraudulent transfers and preferences

• Fraudulent transfer (§548). Trustee can claw back transfers within 2 years (10 years for DAPTs) made with intent to hinder creditors or for less than reasonably equivalent value.
• Preference (§547). Trustee can claw back payments to creditors within 90 days of filing (1 year for insiders).

Investor strategies

• §363 sale from trustee. Trustee sells property free-and-clear of liens, court approval required. Investor acquires at auction or negotiated sale.
• Plan objection. Creditor investor objects to plan terms (valuation, interest rate, feasibility) to improve recovery.
• Cramdown mitigation. Secured creditor on investment property faces cramdown risk. Argue valuation, provide appraisal.
• Stay relief motion. Lender with no-equity property seeks prompt relief to resume foreclosure.

Common pitfalls

• Pre-petition transfers. Transferring assets to family or to DAPT before BK = fraudulent transfer. Clawed back by trustee + criminal exposure.
• Strategic serial filing. Borrower files BK to stall foreclosure, dismisses, re-files. Courts impose in rem orders preventing future BK-stay protection for same property.
• Homestead stacking. Moving state pre-BK to capture unlimited homestead exemption. Federal §522(p) 1,215-day cap limits recently-acquired homestead.
• Non-exempt equity exposed. Investment property has equity; trustee liquidates. Borrower lost property and still owes unsecured.
• Dismissal during Ch 13. Plan fails, dismissed. Back to pre-BK creditor position without discharge. Foreclosure resumes.
• Creditor stay violation. Investor inadvertently continues collection after BK filing. Sanctions + damages.
• Reaffirmation trap. Borrower reaffirms mortgage, then defaults post-discharge. Full personal liability remains. Ride-through often safer.
• Tax consequences. Discharged debt in BK = excluded from COD income (§108(a)(1)(A)). BK often preferable to short sale from tax perspective.