Bankruptcy Laws and Seller Financing
- Under Chapter 7 bankruptcy laws, debtors may keep collateral only if all payments are current. If payments are not current, creditors may ask the court for permission to lift the automatic stay and repossess. This general rule applies equally to real estate foreclosures. If choosing to keep collateral, all debtors must clearly state this intention within the official forms filed with the clerk. These forms are public records and are available for a small fee. Debtors may also redeem collateral in Chapter 7 cases by paying the debt in full or by payoff agreement.
- In Chapter 13 cases, all debts must receive at least partial payment according to the plan. Secured debts may or may not receive full payment, depending on the type of collateral involved.
The cram-down provision is unique to Chapter 13 bankruptcy laws. It allows debtors to reduce the amount owed on debts secured by personal property to the current market value of collateral. Personal property is all property other than rights and interests related to real estate. - The cram down provision does not apply to loans secured by real estate. A Chapter 13 homeowner must repay all mortgage payments and seller financing, according to the initial agreements, as a condition of keeping a home.
If the debtor is not current, all past-due payments may be rolled into a Chapter 13 plan. Past-due payments are then repaid over three to five years, according to the plan terms. - To keep collateral, debtors must make all future regular payments. In Chapter 7, make all payments directly to each creditor by check for proof of payment. In Chapter 13, the trustee collects all payments for disbursement to creditors.
To cram down debts to market value, debtors should rely on a professional appraisal. Expect creditors to also have professional appraisals supporting the full amount of the debt claimed. - To insure debts are included within a debtor's schedules, anyone providing seller financing should always file a proof of claim. File the official form with the county clerk's office, including the full amount of all debts owed. Bankruptcy laws require courts to presume the proof of claim form is accurate until successfully disputed in a contested case hearing.
- During the meeting with creditors, debtors must swear to answer all questions fully and honestly. The trustee conducts the meeting, yet creditors may also ask questions while the debtor is under oath. The meeting provides a prime opportunity for sellers to inquire about collateral under trustee supervision. All meetings are recorded and available for two years through the clerk's office.
