Chapter 7 Bankruptcy

Chapter 7 Bankruptcy is a process by which a consumer petitions the court to Eliminate or otherwise, “discharge” their unsecured debt.  The general idea behind chapter 7 is that a consumer will “liquidate” his/her assets to pay for his/ her debts.   Often times, however, a consumer does not have sufficient assets to liquidate.  Other times the assets that the consumer does have are “exempt” and therefore the consumer ends up keeping his or her assets, and at the same time is allowed to discharge their unsecured debt.  Once a consumer files for bankruptcy, an “Automatic Stay” goes into effect, which Stops All Collections Activity immediately.  This is a very powerful tool, and anyone who is seriously struggling with their debt should consider what filing for chapter 7 bankruptcy can do for them.  In addition to “Eliminating Your Debt” chapter 7 bankruptcy can also include the following benefits to a consumer:

Stop Wage Garnishment-  If you are behind on your credit card payments, and your creditor has filed a lawsuit against you, you may be facing or have already received a wage garnishment.  Wage garnishments are serious actions because the creditor has taken legal action against you in order to regain their losses from your inability to continue to pay them.  Wage garnishments can take up to 25% of your net income for that pay period, which for many clients is not something that can be tolerated.  If you are experiencing a wage garnishment you may benefit from filing for bankruptcy, and it is recommend that you seek assistance with respect to this.

Stop Bank Levy-  Similar to wage garnishments, if you are delinquent on your credit card payments, the creditor may have already sued you to recover the debt owed to them.  Suing you and obtaining a judgment allows the creditor to also “levy” or “freeze” your bank account, and remove the funds you have in your account.  However, some creditors need not sue you first, and can therefore place a levy on your bank account without giving notice to you!  This can be devastating to a consumer who is struggling with their debt.  Bankruptcy can assist with this as well, and stop future bank account restraint.

Stop Harassing Phone Calls Immediately- If you are like many consumers who are struggling with their debt, you are probably receiving harassing phone calls from your creditors.  Once you file for bankruptcy, the Automatic Stay stops all phone calls immediately, and if a creditor violates this, they are subject to penalties.

End Lawsuits-  One effect of not paying your creditors is that they can begin filing a collections lawsuit against you, and as discussed above, these actions can result in wage garnishments, bank account restrains and property liens.  If you file bankruptcy, not only will it stop the wage garnishment and bank account levy, it can also stop the lawsuit from maturing into a judgment, which is what the creditor then uses to execute the wage garnishment or bank account levy.  If you have been sued by your creditor, you should know that it’s only a matter of time before they obtain a judgment and start trying to enforce that judgment against you.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a “Reorganization” of a consumer’s debt under chapter 13 of the bankruptcy code, which requires that a consumer make a regular monthly payment, based upon their disposable income, for all of their enrolled debt.  Unlike chapter 7, which requires a consumer to pass what’s called a “means test” and meet income requirements in order to qualify for that chapter of bankruptcy, chapter 13 does not have income requirements in order to file.  However, it does have requirements for the total debt size and a consumer will need to have stable income in order to be eligible to afford monthly payments in a chapter 13 plan.  You should consult with an attorney if you are considering filing for bankruptcy because there are several potential complexities that should be considered before you file.  Some of the benefits of chapter 13 include the following:

Stop Foreclosure – Filing bankruptcy in general, whether a chapter 7 or chapter 13, allows an “Automatic Stay” to take effect immediately, prohibiting all collections activity from the moment you file.  Since Foreclosure is considered collections activity, filing bankruptcy will STOP the foreclosure process as well as the foreclosure sale.  In a chapter 13, the consumer stops foreclosure, and is allowed to include his/her past due mortgage payments into the chapter 13 bankruptcy plan.   This will allow the consumer to continue making regular mortgage payments on their existing mortgage and pay the past due amount without having to come up with a large sum of money to bring your mortgage account current and save your home.

Remove a 2^nd Lien on home-  Many homeowners are facing lack of equity in their property.  As the value of your property declines, the security interest your lien has in the property becomes obsolete.  Therefore, you may find yourself without any equity in your property to cover the second mortgage.  If this is the case, you may be eligible to “Lien Strip” the second mortgage or lien on your property, and include this into your chapter 13 plan.  This is an incredibly beneficial tool for homeowners because it can substantially decrease the amount of debt you owe on your home.  Once the plan is complete, whatever has not been paid on your second lien, will be discharged, and you no longer have a second mortgage.

Consolidate Student Loans-  While it is mainly true that student loans cannot be dischargeable in bankruptcy, chapter 13 can allow you to include your student loans into the bankruptcy plan, and therefore allow you to make a single payment to all of your creditors each month (based upon what you can afford given your disposable income), instead of having to make multiple payments to your creditors.  Including your student loans into your chapter 13 bankruptcy can allow you to take advantage of this.

Save your Car-  Similar to foreclosure, chapter 13 can allow you to save your car from repossession because like all chapters of bankruptcy, when you file, an automatic stay goes into effect, which will stop your car from being taken back from you.  It will then allow you to include the past due amounts into the bankruptcy plan and, similar to your student loans, also allow you to include your car payment into the monthly payment you make each month into the ch 13 bankruptcy plan.  This allows you to keep your car, avoid repossession, arrange for the past due amounts to be paid and also continue making your car payment as part of the bankruptcy plan.

Loan Workouts & Bankruptcy- Your Mortgage and Your Bankruptcy

It should be noted that while bankruptcy can offer very good options for homeowners, it does not always meet the needs of a specific homeowner’s situation.  For example, while a chapter 13 allows a homeowner to avoid foreclosure and make payments to the past due amount as well as their regular mortgage payment, it does NOT change your existing loan program type.  Therefore, if you are in need of a payment relief, or if your existing mortgage is no longer affordable to you, then attempting to file a chapter 13 to get yourself caught up on your past due mortgage payments may not be in your best interest.

In such cases, what may be recommended is to attempt to negotiate a loan workout with your mortgage lender, in an effort to change your interest rate, term or general loan program (ie: attempting to convert an adjustable rate, interest only mortgage into a fixed rate, principal and interest payment).   This can be done in conjunction with a bankruptcy filing, but unlike bankruptcy, which is subject to the Court’s or Trustee’s approval, a loan workout with your lender is a private negotiation which is not governed by the Court or Trustee.  Therefore, while the lenders are mandated to comply with a chapter 13 repayment plan of the past due mortgage amounts, they are NOT mandated to alter or change the terms of your existing mortgage through a loan workout.

What then causes lenders to be willing to negotiate a loan workout?  For one, there may be programs that a lender is participating in that can allow for changes to the mortgage terms.  Secondly, the investor, even though not participating in a specific program, may be open to negotiations depending upon the individual circumstances and how the loan workout is proposed.  Regardless, of what the case may be, if you are in need of something to change with respect to your mortgage and want to keep your home, the key here is in knowing how to approach the lenders and propose a mutually beneficial solution.  Only an experienced attorney in both real property loan workouts and bankruptcies can offer the most reliable advice as to which combination of services is most appropriate for your situation and help you obtain your goal.

FAQ’s

Q:   Are unpaid income taxes dischargeable in bankruptcy?
A:   In order for income tax debt to be discharged in bankruptcy the following criterion must be met: 1-you filed a tax return for the tax years in question – substitutions for returns don’t count   2- the liability or debt that you wish to discharge is for a return that you actually filed at least two years before your bankruptcy filing; 3-the tax return for the debt you wish to discharge was first due at least 3 years before you filed for bankruptcy; and  4-the IRS has not assessed your liability for the taxes within 240 days before you file for bankruptcy.  Assuming you can meet these elements, your tax debt may be dischargeable.
Q:    What will happen during a bankruptcy if I am not paying my mortgage?
A:     It depends on what kind of bankruptcy you are filing.  If you filed a chapter 7, then that won’t help protect you against foreclosure if you’re behind on your payments and therefore you can risk losing your home in the end.   A ch. 13 repayment plan would allow you to keep your home and file bankruptcy at the same time, but you need to have an income and be able to afford to make payments.  If you are in a ch. 7 and behind on your mortgage payments, you should consider a loan workout to try and rectify the past due amount and possibly get you into a different loan program.  I don’t know all of the details of your situation or if your mortgage payment was affordable to you but you just fell behind because of a temporary income situation or if it’s not affordable to you and you need something to change with respect to your payment.  Either way though, it’s probably worth it to have an experienced attorney review your situation and let you know if you have modification options.  Otherwise, if modification isn’t an option, bk 13 may be the only way to prevent losing your property in foreclosure.
Q:   What should I do if my home is in foreclosure?
A:    There may be a number of options available to you.  One option is a to file a ch. 13 bankruptcy, which would allow you to take all of the past due mortgage arrearages and place them into a repayment plan over a 3-5 year period.  This would require that you have a sufficient income in order to make payments into the ch. 13.  While you are in a ch. 13 and making payments, the bank cannot foreclosure on your home and is required to comply with the 13.  It’s important to note that this option would not alter your mortgage payment at all.  Instead it only helps you with the past due amount but does not provide any payment relief and does not change your mortgage terms.  If your mortgage is no longer affordable to you due to the loss of income you are experiencing, and you still have some income to work with each month, then you may be able to qualify for a loan modification, maybe even one that is through the MHA or HAMP program (government loan modification programs).  I would highly recommend that you contact us or someone who is very experienced in these areas and who can provide a free initial assessment of options to you upon reviewing your overall financial situation.  It may be the case that some kind of combination of loan workout and bankruptcy may be the best way to go, but I would recommend contacting someone who has the experience and knowledge you need.
Q:  Should I file for bankruptcy if my wages are being garnished?
A:   Yes, having your wages garnished is a reason why someone would file bankruptcy, because once you file bankruptcy all collections activity stops, which includes wage garnishment.   Filing bankruptcy ch. 7 (if you can qualify for it) would not allow the creditor to obtain any more from you and therefore the balance would be discharged or wiped out in the bankruptcy giving you a fresh start. I don’t know your entire situation, how much other debt you have or what your income or assets are like, but filing over one credit may not make sense for you, unless the amount owed is truly substantial compared to your income and overall financial situation.  Nevertheless, if your wages are being garnished now at this point, you certainly need relief.  I would definitely consider filing, start adding up the rest of my debts, and evaluate my income to see if I can qualify for a ch. 7.  I would recommend speaking with an attorney prior to filing to have your situation evaluated first.

Q:  What happens if I get married after my fiancé files for bankruptcy?

A:   CA is a community property state, therefore any property (or debt) acquired during marriage is community property, and property/ debt acquired prior to marriage or during marriage as a result of inheritance is considered to be separate property.  Because your fiancé filed for bankruptcy prior to your marriage to her, that makes all of her debt and income incorporated into her bankruptcy a “separate” matter from your marriage.  Therefore, her bankruptcy prior to your marriage to her should not have an impact to your credit, assets, or income.
Q:  Can my wife and I file for bankruptcy jointly?
A:   Generally married couples have the option to file a joint or separate bankruptcy petition.  Being able to file for a ch. 7 bankruptcy depends upon what your income level is for both you and your wife.  In order to qualify for a ch. 7 discharge, you must meet the income requirements for the state of CA, which would require you to earn less than the median income for two people in the state of CA or pass the means test.  Also, generally speaking, if only one spouse files bankruptcy, the other spouse may be able to get the benefit of what’s called a “community discharge”, which means all community debts (debts acquired during marriage) will be discharged as to both of you, even if only one of you files for bankruptcy.  Any debt acquired prior to marriage is considered separate debt, and is not debt of the community so a community discharge wouldn’t help a non-filing spouse in this situation.  You may want to discuss your case with a bankruptcy attorney to determine what, if any assets you have, how those would be protected in a ch. 7 bankruptcy, and what is the best strategy – to file a joint or separate petition.

Q:  What are the deficiency judgment laws with respect to secured debt under CA law?

A:   Deficiency judgment occurs when you had a secured loan, such as a mortgage or auto payment, you default on the loan and property is repossessed or foreclosed upon.  That lender can sometimes still have the authority to pursue a deficiency judgment against you for the unpaid part of the loan.  In CA, if the mortgage is purchase money, then a deficiency judgment cannot be obtained.  Furthermore, if a lender uses non judicial foreclosure to foreclose on the property then they cannot also pursue a deficiency judgment as well.  If there are two mortgages on a property and only the first forecloses, then the second may be able to obtain a deficiency judgment because they weren’t paid and they didn’t foreclose.  However, the law has recently changed, in that if a property is sold as a result of a short sale, whether non owner occupied or owner occupied property, neither mortgage lenders (not the first and on the second mortgage holder) can obtain a deficiency judgment.

Q:  Can I be fired from my job if I file for bankruptcy:

A:   The bankruptcy code prevents private employers from terminating an employee solely on the basis for having filed bankruptcy.