Small Businesses when they get into financial trouble often elect to file a Chapter 7 or wind up the business and close it out. Why? Small Businesses do not take advantage of the opportunities available to them and their owners in a Chapter 11 to reorganize. I know most people think that Chapter 11 cases are reserved for big companies like Hostess or US Air. Reality is that is there are several layers of a Chapter 11 case and they are not just reserved for Hostess or US Air size corporations.
If you have a small business that is struggling to pay all its vendors, utilities, lease agreements and etc., a Chapter 11 case might be the right solution for you. The gut instinct for small business owners when a company is struggling with getting the right amount of cash flow each month to meet their monthly bills is to get more debt with a bank or business lender. This gut instinct and the results that stem thereof are simply the wrong way to go.
Life and business is about balance. The business must make enough money to pay for its debt each month. So if more debt is not the answer, what is? The answer is getting back to balance in business. The company must find a way to get back to the balance of income in and debt paid each month without a struggle.
Some factors that cause the imbalance are the following:
1. Expenses are too high for the income of the business. If this is the case, you cut back on expenses.
2. Outstanding Accounts receivable are impacting your bottom line. If this is the case, you’ve got to get them paid.
These are the two main reasons businesses fail especially for Small Businesses. Small Businesses are too busy just trying to get what they can in each month and meet all its customers’ needs that owners do not stop and take the time to ensure that these two factors are not destroying their business. When owners finally take the time to understand that their business is not in balance, it is often too late.
Chapter 11 cases are designed to help all sizes of business to come back to balance. The whole process is designed to get a business relief from debts that they simply will not be able to pay and allow the business to run within its income ability. The truth is that a Chapter 11 case can save a Small Business from complete destruction.
The cost to do a Chapter 11 case can vary but if you seek out a small business Chapter 11 attorney, the fees will be reasonable and will cost you a lot less than that loan for more debt which will ultimately close your doors forever. So, if you are a small business owner, do not give up the ship or weigh down the ship with more debt. You have options just like a Hostess, General Motors or US Air. You need to seek advice for a reorganization of your company and bring it back to balance.
When a Debtor files for personal bankruptcy, there are many schedules and statements that they are required to complete. One such statement is something called the statement of financial affairs. On this form, there are two questions that relate to gambling activity, one relative to winnings and one relative to losses. More specifically, question #8 asks the Debtor to list all losses from fire, theft, other casualty or gambling for the period of one year immediately preceding the filing of the Debtor’s bankruptcy case.
Question #2 on the statement of financial affairs requires a debtor to state the amount of income received by the debtor other than from their job during the two years immediately preceding the commencement of the bankruptcy case. On its face, this question requires the disclosure of all income of the debtor other than from an occupation. Not surprisingly, bankruptcy courts have routinely construed the expansive language of Question #2 as requiring the disclosure of income from gambling and have punished debtors who failed to disclose such income.
Regardless of whether a debtor has generated a significant portion of their income from gambling activity, or their losses in many cases due to serious addictions can result in a line of questioning during a debtor’s Section 341, Meeting of Creditors by the Bankruptcy Trustee. This is the Trustee’s opportunity to dig a little into the real reason for the bankruptcy filing, or whether there are assets that can be administered for the estate to pay off creditors.
With respect to winnings in a casino, dog or horse track, or other gaming venues, those winnings play a large part in how the bankruptcy case moves forward. When a debtor either fails or refuses to properly disclose information to the Bankruptcy Court, it can lead to their case being challenged under the good-faith requirement and may even lead to a denial of a discharge order and in the most egregious matters even criminal prosecution for hiding assets from creditors and the bankruptcy Trustee. For example, if a Debtor were to win $50,000 at a casino, but fail to disclose the cash, most of which can not be exempted then concealing his or her gambling income, would hinder the bankruptcy trustee and buy the debtor time to spend the winnings. This could lead to the filing a complaint for non-dischargeability or even criminal charges. If a creditor or Trustee demonstrates by a preponderance of the evidence that the debtor actually intended to hinder, delay, or defraud a creditor, the court can deny the discharge. The intent to defraud must be actual and cannot be constructive; however, because it is unlikely that the debtor will admit actual fraud, the intent may be established by circumstantial evidence, such as failing to list income generated from a casino. However, the problem that arises for Trustee’s in many situations with frequent gamblers is proving a substantial amount of money won at a casino or several casinos. Large gains are not a problem when derived from single “hits”: A casino has an obligation to provide a form1099 for that longed-for but seldom realized experience or a large win. It is the pattern of the ebb and flow of a gambling addiction, and the documents required to record hat tide, that are at issue. Moreover, if a debtor is playing table games, and they win $1,000 here, $500 there, but over the course of a few months or even a year, generate a large portion of their income from gambling activity, they must tell the Trustee of this.
Where this becomes especially interesting is in a Chapter 13 reorganization. The reason for this is that a Debtor has a duty to propose a plan payment based upon 100% of their disposable income. The 2005 Amendments to the Bankruptcy Code changed the definition of “disposable income”. Congress changed the definition of “disposable income” by tying it to a new term, “current monthly income,” and adding the definition of “current monthly income” that in relevant part, as noted above, looks at the debtor’s six-month pre-petition income. The result is that a Chapter 13 plan payment will no longer be determined on disposable income as of the date of filing the Chapter 13 case but on all income as of the date of filing and any “projected disposable income”. What does all this mean? The Trustee and the courts in dealing with a Chapter 13 case have awoken up to the fact that they can and will require a Chapter 13 Debtor to provide for and hand over any and all project income that they anticipate receiving in the life of the plan. If a debtor generates a significant income from the use of post petition income based on winnings, then the bankruptcy estate may be allowed to benefit from this windfall and unsecured creditors can receive a higher dividend. Carrying this approach forward, a Chapter 13 plan design must include tax returns, bonuses, raises, personal injury settlements, inheritances and etc. A debtor as well as their counsel must consider all of these factors in deciding to file a Chapter 13 case.
Certainly, Congress did not intend for debtors who experience a substantially improved financial condition after confirmation to avoid paying more to their creditors. Rather, unanticipated windfalls should inure to the benefit of the creditors, not the debtor. It is not the design of the Bankruptcy laws to allow the debtor to lead the life of Riley while his creditors suffer on his behalf. The Debtors’ use of post-confirmation income to gamble for personal entertainment while claiming that they cannot dedicate an additional funds per month in repayment of their creditors does not comport with the Court’s understanding of the philosophy of Chapter 13 reorganization.
The purpose of bankruptcy is to provide equitable distribution of the debtor’s assets to the creditors and “to relieve the honest debtor from the weight of oppressive indebtedness and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.” Williams v. United States Fid. & Guar. Co., 236 U.S. 549, 554-55, (1915) If a debtor does not disclose his or her winnings, a court could find that debtors’ failure to identify the gambling winnings and losses that they incurred in the appropriate periods leading up to their bankruptcy filing was knowing and fraudulent for purposes of § 727(a)(4)(A). Moreover, the fact the gambling winnings are not disclosed can be taken as evidence by a court that the debtor intended to defraud his creditors.
Certain people who like to gamble go into the casino with a specific amount of money that they believed before-hand would be all they would use to play. However, for one reason or another, they make the ill-fated decision to request a credit line from the casino called a “Marker”. Casino markers are lines of credit that allow frequent gambling clientele easy access to substantial sums of money to use at the table games or slots in a casino. Casino markers are short-term, interest-free loans. However, repayment must be prompt or the patron faces high interest fees and possible criminal charges.
In general, a player will apply for casino credit by completing a standard form setting forth the name of the applicant, his or her address, the name of the applicant’s bank, and the bank account number. Casino personnel approve the applications pending verification of the basic bank information, including the average balance of the applicant’s account. A marker is a gambling credit instrument that allows a gambler to receive all or part of the credit line the casino has approved for him, based on the gambler’s prior credit application with the casino. Once the gambler and a casino representative sign the marker, the gambler may exchange the marker for gambling tokens, or chips. If the gambler does not pay the marker when he has finished gambling, the marker is outstanding and the casino may later submit the marker, like a check, to the gambler’s bank for payment.
If the marker remains outstanding, casino personnel attempt to notify the customer and, after a specified period of time, submit the marker to the applicant’s bank for collection. If the bank account does not have sufficient funds, the casino will again attempt contact the customer and make demand for payment. If payment is not forthcoming, the casino has the option to refer the customer for possible criminal prosecution, similar to passing a bad check. However, it should be noted that so long as you file for bankruptcy before any criminal complaint is made, the automatic stay would stop the claim from commencing, as the Bankruptcy code stays any attempt to collect a prepetition debt during the course of a bankruptcy, pursuant to 11 U.S.C. §362(a).
Many pathological gamblers will seek to discharge the over extended marker or credit lines they have obtained in a casino just like a cash advance at the ATM in the casino through a Chapter 7 bankruptcy filing. However, in some situations, a casino will challenge the ability to discharge the credit line through an adversary proceeding due to false pretenses, or if the debt exceeded $750 with in 90 days of the bankruptcy filing, pursuant to 11 U.S.C. §523(a). Relative to casino markers, as with a cash advance, the key question is did the gambler have the intent to repay the debt at the time they took out the marker?
Since a casino marker is generally charged against a future check from the Debtor’s bank account, a casino may argue fraudulent misrepresentation to the casino of the Debtor’s ability to repay the loan, if they did not have the money in their bank account at the time they took out the marker. However, the terms “false pretenses” and “false representation” are equivalent to “actual fraud,” as these terms are used in 11 U.S.C. § 523(a)(2)(A) A debt based solely on an unpaid check is nondischargeable (if at all) only as a debt arising from willful and malicious injury under 11 U.S.C. § 523(a)(6). Moreover, a creditor casino has the burden to prove that the debtor intended to injure or harm the casino when taking the marker in order to obtain an order for non dischargeability.
Many people who visit a casino’s go in with simple intentions of only gambling a certain amount of money. For example, they say to themselves, “I will take $500 with me and if I loose it, I will stop gambling? Unfortunately, their addiction to gambling takes over when they start loosing and their pathological gambling takes over. What happens next? They go to the ATM machine and put in a credit card to take a cash advance, as their bank account does not have enough money to gamble based upon the desire to “win back” their losses. The great tragedy is that this type of transaction typically occurs numerous times in a given night or even over several days and many credit cards have $600, $1,000 or even more debited from the credit lines, which more likely then not, will be lost to the dealers and pit bosses running the games.
When a Debtor finally makes the decision to file for bankruptcy, and they review their credit reports, the question needs to be asked, can they discharge the debt on the credit cards for those past cash advances just the same as if they had purchased a product or service using the credit card? The second question to ask is if they can discharge the cash advance, do they need to wait a certain period of time to do so.
When cash advances aggregating to more than $925 obtained by debtor within 70 days of filing for bankruptcy, the debt may be deemed non dischargeable, but the creditor has to prove to the court that there was no intent to pay back the debt or that the debt was incurred as a result of false pretenses at the time the cash was withdrawn from the ATM. In light of recent case law, such a demonstration is more difficult then it use to be due to the fact that the creditor has to show subjective intent and not just an inability to pay. An easier way to look at this is to consider that all cash advances are dischargeable unless a creditor objects to them in an adversary proceeding, which can be very expensive for the Creditor. Years ago, casinos and credit card companies often sought to object to discharging extensions of credit given to debtors at the casino. However, in light of recent case law and the extensive cost of protracted litigation this does not happen nearly as often any longer.
Some bankruptcy courts have adopted an “implied representation” theory, under which the use of a credit card is an implied representation to the issuer of the holder’s intent and/or ability to pay. GM Card v. Cox, 182 B.R. 626, 633 (Bankr. D. Mass. 1995). Other courts have adopted an “assumption of the risk” theory, which provides for the discharge of credit card debt incurred before the issuer communicates to the holder that it is revoking the card . Still other courts have adopted a “totality of the circumstances” test, sometimes in conjunction with an implied representation theory. &
It should be noted, that many bankruptcy attorneys will ask the question, when was the last time you took a cash advance? If the answer is with in 70 days, many attorneys will advise their clients to simply wait out the look back period before filing. This does become problematic when the Debtor is facing a foreclosure, wage garnishment or other serious legal consequence that requires the automatic stay to prevent a judicial proceeding from moving forward.
Debt is a stress in life that will never go away until you decide that it will. The power is all in your hands and not in the power of outside sources. You must decide what steps you need to take to get debt free and start living a financial healthy life style.
It is hard to take the plunge into dealing with debt due to the crazy life style this economy has put us all in. Most people live in fear of not knowing that they will have a job tomorrow or if they will find a job tomorrow that will afford them of paying off their debt. These fears only paralyze a person from ultimately dealing with the debt issue immediately which means that the stress of debt will linger for years and not months or days.
The tragic outcome for most people who are paralyze with debt and do nothing is a lifetime of debt issues that a person may not be able to shake. These are tax liens, tax levies, judgments, judgment liens, garnishments or student loan defaults. Many people deal with debt when it is a little too late and as a result the fore mention become reality which limits your ability to have a full recovery of debt and have financial health.
So what should you do if you plan to be debt free in 2014? The first step is planning how to deal with your debt. A lot of people say to me that they do not what to file bankruptcy because their life will be over. I am not sure why anyone would think that is the case because that statement is totally untrue. However, bankruptcy is not the only way to deal with your debt. It is the best solution for a quick and clean way of getting the financial health you seek.
If not bankruptcy, you can consider working out your debt by debt settlement. If you have credit card debt only, you might be able to resolve your debt by settling the outstanding balance with your credit card company for less than you owe. Another option is if you owe tax debt, you might consider an offer in compromise, like debt settlement, the IRS or state may settle your tax debt for less than you owe.
Irrespective of any of these choices, the key to success is making a plan to accomplish your goals in 2014. You should start today and not wait until January 2014 to make a plan for you want to be debt free in 2014 and not 2015. Any of these choices you chose to deal with your debt will take time to prepare and to save to pay for. Each one of these steps will cost you some money to execute but the amount for the service will be minimiumal compare to the amount of debt you need to resolve.
I know this all sounds great but those fears are creeping in and you like to put off planning. I will give you one demonstration why you need make a plan to deal with debt. If you owe $15,000.00 on credit card debt and your interest is 10%, each month you are losing $125.00 a month of your income. We all know that 10% is a low interest rate for credit cards with a balance of $15,000.00 but you get the point. The longer you wait to deal with debt the more money you will lose over time.
So do not let your fear paralyze you and stop you from making a plan. Remember plans do not have to be completed in a day or two but can be completed over months. I would suggest that you meet with an attorney to discuss your options and develop a plan to deal with your debt. Attorneys who have the proper experience will be able to help you with any type of debt issue or options. I do not recommend an attorney or a nonprofit debt settlement company that only can provide you with one of the options to consider. Your time is limited and you want a professional that can see your entire debt stress and give you all the options in one location. Besides, attorneys with one ability or a debt settlement company with one option will push you into the direction of their limited ability because that is all they know. Understandable but your financial health needs the proper attention.
So, start getting your plan for 2014 and begin living a financially healthy life style for your future.
When a creditor sues you for not paying on a debt and then obtains a judgment, they have the right to try to collect on that judgment, by asking the Court to take some of your things away and give the Creditor the right to sell them in order to recoup part or all of their financial losses.
In order for a creditor to come after you assets, the creditor must instruct the Sheriff in the county where you assets are being held to levy an execution on your items. However, prior to being able to do so, certain things you own under Massachusetts state law are protected or in legal terms, “exempt” from the levy. What this really means is that you get to hold a big stop sign up and say to your creditors, “back off!” The law does protect you so that a creditor can not simply come and take everything away from you. Perhaps most importantly, in Massachusetts, if you had filed a Declaration of Homestead on your property before you were sued, they you can protect up to $500,000 in equity of your home. Even if you did not file the proper paperwork, as of March, 2012, $125,000 of equity in your home is protected from unsecured creditors. That is the good news. The bad news is that if you sell your home and reduce the equity to cash in a bank account, the bank account only has limited protection. You can also protect up to $7,500 in equity in your car. So even if you are driving a Lexus that is worth $40,000 and you owe $35,000 on it, you can keep that luxury vehicle.
With respect to things you may have in your home that are necessary to live, you can protect your clothing, beds and bedding for you and your family, 1 heating unit, 1 stove, 1 refrigerator, 1 freezer and 1 hot water heater used primarily for the personal, family or household use. You are also allowed to protect the first $500 worth of income so that you can purchase utilities. With respect to the furniture in your home, you can protect everything so long as the yard sale value of it is less then $15,000.
In the event you are self employed or need to have your own tools for work, you are allowed to protect up to $5,000 worth of tools and equipment. You can even protect books, and educational materials valued at up to $500. It should be noted that the value is based upon a liquidation value, so that means what would you get for it if you held a garage sale or a booth at a flee market. The law goes so far as to protect up to $600 in value for groceries to be held in your home for emergencies. The law even protects burial plots that you have previously purchased for yourself.
With respect to actual funds and money, you are allowed to have up to $2,500 in the bank. The Courts do not want you to stop working, however, they do allow a Creditor to demand a certain amount of your pay from your employer, but that is limited to only $15%.
With this said, it should still be noted, that if a Creditor does come after these items, you as a Debtor have the burden to inform the court that your property is exempt and the Creditor is over reaching.
The Internal Revenue Service can take a tax refund for the year that you filed if you have not received the refund before you filed your case. The Good News Is That They Cannot Keep It. Many people file a Chapter 13 bankruptcy case to deal with outstanding tax issues. Therefore, the Debtor is often prepared for the IRS to take the refund as a set off for their past due taxes owed.
However, the IRS might have a right to set off but they do not have a right to keep the set off if several circumstances are met or several steps are not taken by the IRS. In these situations, it is best to go right to the source on what they can or cannot do. The IRS regulaitons provide the following:
Setoff: Under BAPCPA, the automatic stay does not prohibit the IRS from setting off prepetition income tax refunds against prepetition income tax liabilities. 11 USC § 362(b)(26). Where the automatic stay prohibits other types of setoffs, the IRS can temporarily retain a refund to preserve its setoff rights. In those cases, the IRS should seek relief from the stay before permanently offsetting refunds. See Citizens Bank v. Strumpf, 516 U.S. 16 (1995). After confirmation of the Chapter 13 plan, and where the plan fully provides for the IRS claims, retaining the refund indefinitely may be considered a violation of the automatic stay.
So what does all this mean to a person who has had their tax refund set off by the IRS in a Chapter 13 case? It means that the IRS can take the refund for a setoff but it can only be temporarily retained. The IRS cannot bully you into accepting that the tax refund is to be setoff and end of story. Rather this special provision of the automatic stay only allows them to hold the refund until either the Chapter 13 plan is confirm that provides for the IRS claim. The IRS must give it back if the confirmed plan provides for the tax claim.
Additionally, if the IRS tries to keep the refund even after the confirmed plan, the IRS is required to file a Motion for Lift Stay in order to actually be entitled to a setoff. You see the IRS cannot just freely take the funds and do what it pleases. The IRS must follow the rules also pursuant to Title 11. The setoff must be justified due to the fact that the Debtor is not providing for the IRS through their plan. There has to be cause for the IRS to be allow to setoff the refund.
Keep in mind that a setoff might not be such a bad thing for a Debtor. The setoff might actually be agreed to and noted in a Chapter 13 plan for it benefits the Debtor. The only way to understand whether a setoff is better returned or better to agree to a setoff is to review this matter with your attorney.
When an individual files for bankruptcy, he or she is allowed to keep certain personal property without the bankruptcy trustee being able to liquidate that property and pay off creditors with the proceeds. The idea behind this is that bankruptcy is meant to be a way to rebuild your credit and obtain a fresh start on your finances, rather then simply a punishment for not being able to repay all of your debts. In order to achieve this goal, a Debtor (the person filing for bankruptcy) is allowed to keep certain things to help reestablish themselves such as equity in your home and vehicle, household goods, clothing, etc. In addition to these life necessities, a Debtor is generally allowed to keep the money that they have put away and saved for retirement so long as that money is kept in a qualified retirement plan, such as an IRA, 401K, pension or other such ERISA protected account, pursuant to 11 U.S.C §522(D)(10) and 11 U.S.C. §522(b)(3)(C).
Just like if there was no bankruptcy in place, your creditors would have no right to go after any money held in an ERISA protected account even if they had a judgment against you, in a bankruptcy, the Trustee who stands in the shoes of your creditors can not pierce the protection provided by the tax code, and no state law can over ride the Federal exemption relative to ERISA accounts. In fact the statute is so powerful that even the IRS or your state department of revenue can not force a liquidation of a protected retirement account even to pay a tax lien.
There is one major exception to the protection of a qualified retirement plan though and that is if Debtors promised his or her retirement account against specific indebtedness, when the specific account is promised against an anticipated debt, thereby creating a secured relationship between the account and a debt. Recently the bankruptcy Court heard a case on point with this issue, In re Daley, and held that the promise against future debt made the ERISA account non-exemptable. However, both the bankruptcy Court and the Tax Court have held that simply promising the account as security against a future debt is not enough, and that there must be an actual debt the account is promised to cure in order to loose its tax exempt and bankruptcy exempt status.
It is tough enough to deal with your injuries that you suffer from daily, let alone deal with collection agencies that continue to remind you that you cannot pay your bills due to your medical condition. So, what should you do?
Dealing with an mental or physical disability that qualifies you for social security benefits is life altering. What does it mean? It means that your life as you knew it before will never be the same. You may have to deal with daily pain and the reality that you physically will not be able to do things that you could before your injury. That is the physical change you have to deal with; however, there is the financial restrictions you will need to get use to also. Your financial ability to make money is now minimized and no longer likely to increase unless social security provides you with a raise.
There are two ways of dealing with your debt while you wait for Social Security Disability Benefits:
1. Workout Debt
You can call your creditors and inform them of your condition. Many creditors provide programs that allow a forbearance of payments if you are dealing with an injury. You can try to maximize these opportunities so to buy as much time as you can for your benefits might take up to a year to begin to receive.
If these forbearances are not available to you, contact the creditors but this time the conversation might be about trying to settle the debts for less than you owe. This call probably is best to be made once you know what the amount of your benefits will be.
The reality is that bankruptcy might be your best option. It is hard to face the fact that your physical being is never going to be the same which causes your financial health to be damaged. You worked so hard in your life and did all the right things with your credit by paying your bills. It does not seem fair. However, bankruptcy should be looked upon as another Federal program like Social Security Administration to help people like you in this type of situation.
It is likely you would consider filing a Chapter 7 bankruptcy case if you are not receiving any income at this time or receiving the last of worker’s compensation or temporarily disability insurance. Your income level is most likely qualify you for a Chapter 7 case. This is a very good thing because you can receive a discharge of all your debts with one process.
You will get a clean slate and be able to start your new life with disability benefits as well as a new financial life. Yes, debt issues do effect negatively on your credit report but a bankruptcy case, it stops the negative reporting and allows you to begin working on positive reporting again. There are myths that debt consolidation companies and modification companies tell people such as you will never get a credit card again or a car loan—these are all untrue.
Like your physical injuries, your financial health will take time to heal but unlike your physical condition, your financial health will get better over time with a bankruptcy case.
We know firsthand from past clients on how hard it is for people living in this between state of your former life and your new life. Some of our clients waited until they got their benefits to deal with their debt and some began the process while they waited for their benefits in order to ensure they could pay what was important with their limited income such as the mortgage payment or car payments.
We recommend whatever makes you feel right. However, we wrote this blog so that you can know of some ways to deal with your circumstances and that you do have power to deal with your circumstances. More importantly, in time, you will be alright even if you are not the same as you were before—maybe even better.
Many homeowners have found themselves with negative equity in their property. As such, they have made the decision not to pay their second mortgages or home equity loans. They do this with the expectation that the junior lien holder will not foreclose due to their status as a second position lien holder. Often these same people will file a bankruptcy case. When such a Debtor files a Chapter 13 case, the homeowner has the right to file a Motion with the Court and ask that the lien itself be classified as unsecured debt and that at the conclusion of their bankruptcy case, not only the debt be discharged, but that the lien that secures any interest the bank may have in the property be stripped or removed. When this happens, the junior lien holder has no right to foreclose down the road when the homeowner does not pay their second mortgage. However, the lien holder may challenge the Debtor’s motion in Court, and represent that the does have some equity to secure the junior lien. The key is that the Debtor must prove that if the property were to be sold at foreclosure there would be no money after paying the senior lien holder to pay the second mortgage.
When a junior lien holder’s rights change a bit though is when the Debtor files a Chapter 7 case. With a Chapter 7 discharge, a secured creditor can seek some limited recourse against the property, but not against the Debtor personally. After the bankruptcy discharge, the homeowner cannot be held personally responsible for any debt owed to the bank. They would have receive a fresh start under the bankruptcy. However, the lien against the property still remains intact, and the bank can foreclose. The risk though that the bank takes is that they must first pay the senior lien holder all the money they are owed before the junior lien holder can take anything.
In some situations though, a creditor may have already brought a law suit against the homeowner prior to filing the bankruptcy. Once the bankruptcy case is filed, the automatic stay stops any law suit for money debt against the Debtor. A foreclosure would be stopped as well pursuant to 11 U.S.C. s. 362(a). However, the Debtor must take certain steps to protect themselves and ensure everyone including the state court is aware of their bankruptcy filing and subsequent discharge order. The Debtor muse ensure both the court and the creditor’s attorney has a copy of the Notice of Bankruptcy (a legal notice called a suggestion of stay). Once the Debtor receives their Notice of Discharge, provide a copy of that too. This will ensure that a judgment against the Debtor is not inadvertently entered and more motions to vacate a judgment need be filed.
Finally, it should be noted that if the homeowner falls behind on their payments in a Chapter 13 case without stripping the lien, or in a Chapter 7 case, simply by being behind, the creditor may get permission of the court to go after the property while the case is active, by filing a Motion with the bankruptcy Court to lift the automatic stay. In these cases, you will need to consult with an experienced bankruptcy attorney to challenge such a Motion.