What You Need to Know About Bankruptcy

NOTE: THE INFORMATION CONTAINED IN THIS SECTION IS TO BE CONSIDERED GENERAL LEGAL INFORMATION ONLY. IT IS NOT INTENDED, NOR SHOULD IT BE CONSIDERED, SPECIFIC LEGAL ADVICE ON ANY PARTICULAR ISSUE. THOSE WITH SPECIFIC QUESTIONS, OR THOSE SEEKING LEGAL ADVICE WHICH RELATES TO THEIR SPECIFIC SITUATION SHOULD, OF COURSE, SEEK THE ADVICE OF A COMPETENT LOCAL BANKRUPTCY ATTORNEY. FURTHER, THE INFORMATION CONTAINED IN THE SECTION ON EXEMPTIONS, OR EXEMPT ASSETS, ONLY RELATES TO CALIFORNIA RESIDENTS. FOR THOSE IN OTHER STATES, CONSULT AN ATTORNEY TO LEARN WHICH ASSETS CAN BE PROTECTED IN YOUR STATE.

Scope Note: The Bankruptcy Abuse Prevention and Consumer Protection Act.

On April 20, 2005, President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act. It is referred to in these materials as the “New Law.” It took effect on October 17, 2005. This legislation was designed to eliminate perceived abuses in the bankruptcy system. Among other things, it seeks to require debtors who can pay some, but not all, of their debts, to file Chapter 13 bankruptcy as opposed to discharging their debt in full in a Chapter 7. This was the first substantial change in the Bankruptcy Code since it was enacted 30 years ago.

These materials include the changes made to the United States Bankruptcy Code by the New Law.

The media has reported that the New Law will make debt, or certain types of debt, impossible to discharge. Some have even indicated that the New Law will eliminate the availability of bankruptcy relief for a vast number of people. For the most part, this is just not the case.

The New Law certainly will make filing for bankruptcy tougher and more time-consuming. The Debtor and the Debtor’s attorney have been given additional duties within the system, but the basic system itself remains intact. These additional duties, and risks, will most certainly result in an increase in the effort and cost to get financial relief. How this will all play out remains to be seen.

TABLE OF CONTENTS (Click Title Links to Drop to Info)

  1. Introduction
  2. What Is Bankruptcy?
  3. Is Bankruptcy Right For You?
  4. The Three Types Of Bankruptcy
  5. How To Begin
  6. Pre-Bankruptcy Counseling And Post-Bankruptcy Education
  7. Exemptions
  8. Means Testing
  9. Special Instructions For Homeowners
  10. Debts Not Avoided In Bankruptcy
  11. Transfers Of Property Before Bankruptcy
  12. Assets Acquired After Bankruptcy
  13. Disadvantages Of Bankruptcy
  14. Reaffirmation Agreements
  15. Bank Accounts
  16. Cooperating With The Bankruptcy Court, Keeping Financial Records And Audits
  17. Alternatives To Bankruptcy
  18. Credit Repair
  19. Fair Debt Coll. ACT
  20. Understanding The Foreclosure Process

I. INTRODUCTION

When people come to us seeking advice about bankruptcy, they are usually quite distressed. They may be facing the loss of their home and are being harassed by creditors. Frequently, we find that these financial problems have spilled over into their personal lives and caused problems with their health or disruption of their family relationships. These people are suffering from anxiety about their future.

There is no disgrace in seeking help for financial problems. Many successful and famous people have gone through bankruptcy. We have included a list of some famous people who have filed bankruptcy on our website (ForBankruptcy.com). This list includes such notable persons as the famous Dutch painter Rembrandt, author Mark Twain, actors Mickey Rooney, Debbie Reynolds, and Kim Basinger, entertainer Wayne Newton, and President Harry Truman. It is also interesting to note that even Thomas Jefferson, who was a brilliant individual and helped create an inspired form of government, was chronically in debt and his estate was hopelessly mired in debt when he passed away.

Our financial system is based on the concept of risk. People are encouraged to incur debt to finance business ventures or to purchase goods and services associated with the “good life.” Unfortunately, not all risks work out for the best. Consequently, the Constitution gives each person the right to seek relief under the Bankruptcy Code if they are unable to repay their debts.

If you feel irresponsible, consider the alternative. It’s truly irresponsible to do nothing. These problems do not go away by themselves. The bill collectors will not stop calling. The responsible thing to do is take some action now to resolve these issues. The fact that you are even reading this booklet indicates that you may have already taken the first step to solving these problems and pursuing a fresh start.

 

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II. WHAT IS BANKRUPTCY?

The purpose of the Bankruptcy Code is to give you a “fresh start” with your financial life. When your bankruptcy petition is filed, all of your assets come under the control and protection of the Bankruptcy Court. By law, your creditors are automatically prevented from garnishing your wages, attacking your bank accounts, foreclosing on your property, or otherwise taking any action against you. If a creditor does wish to continue any collection activity, that creditor must first obtain permission from the Bankruptcy Court and give notice to you and your attorney. The Court only gives creditors permission to continue collection activity in a very limited number of situations, such as when you are behind on house or car payments which you plan to keep after your bankruptcy.

During the administration of your bankruptcy, if any of your creditors call to demand payment, attempt to garnish your wages, or in any other way harass you, simply let us know so that we can help you.

 

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III. IS BANKRUPTCY RIGHT FOR YOU?

The decision to file bankruptcy, and which type to file, is a personal one and should only be made after consultation with an experienced bankruptcy attorney. Horror stories abound about people who have unadvisably filed for bankruptcy. Without experienced legal advice, a person can lose their home or other assets in a bankruptcy or even encourage an explosion of legal action against them. Once again, the decision to file bankruptcy is a personal one and should only be made on a case by case basis. However, as a result of our years of experience in this area, we have found it helpful for our clients to at least consider the following issues:

  1. If you are spending more than you make each month, this is a warning sign that some type of corrective action must be taken. This means that you have “negative” cash flow. Negative cash flow, sometimes for only a few months, can cause financial ruin. Something needs to be done to correct the situation at once. Quite simply, expenses must decrease or income must increase. If you have a large amount of debt, bankruptcy can be used to help decrease your monthly expenses.
  2. If you owe more than one year’s salary to unsecured creditors (credit cards, personal loans, judgments, etc.), this is a sign that your debt load is too large. Too large a portion of your monthly income will need to be used to service this debt. Again, bankruptcy can be used to remedy this problem.
  3. If your financial situation is such that it is affecting your health or relationships, it is time to take prompt action.

If any of these situations sound familiar, it may be time to meet with a professional who has experience in helping people solve these types of problems. If bankruptcy is right for you, we can guide you through the process. If it is not, we can point you to resources that may be helpful to you. For example, a realtor, mortgage broker, or credit counseling agency may be able to be of help to you. If you have some income over your expenses, the right credit counseling agency may be able to help you manage your monthly cash flow or negotiate your debts down a bit.

You may be concerned that bankruptcy will adversely affect your credit. However, the fact that you are considering bankruptcy suggests you may already have a poor credit rating. Further, many feel that the need for credit in our society is greatly exaggerated. The Los Angeles Times has reported that many people in our society feel that they live freer, more profitable lives without credit cards. If you really feel the need for credit, we can advise you of possible ways to re-establish credit after your bankruptcy. However, we will advise you to do so very sparingly.

 

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IV. THE THREE TYPES OF BANKRUPTCY

There are three different types of bankruptcy available to most persons. Each is created under a different “chapter” of the Bankruptcy Code. Each type will be discussed to help you understand which is best suited for your needs.

1. Chapter 7

Chapter 7 is often referred to as “straight” bankruptcy and is by far the most common. All exempt assets are retained by you, free from creditors’ claims (except mortgages and secured debts). Assets that cannot be exempted are sold and the proceeds divided among your creditors. Your debts are then discharged (legally terminated), and you are free to start your financial life anew.

2. Chapter 13

Chapter 13 permits you to pay your creditors in monthly installments over three to five years. A formal plan is prepared which allocates how much money will be paid to your creditors each month. This plan is submitted to the Bankruptcy Court and the Chapter 13 Trustee for approval.

Chapter 13 permits you to pay your creditors in monthly installments over three to five years. A formal plan is prepared which allocates how much money will be paid to your creditors each month. This plan is submitted to the Bankruptcy Court and the Chapter 13 Trustee for approval.

To qualify for Chapter 13, your unsecured debts must be less than $336,900 and your secured debts must be less than $1,010,065.

Chapter 13 is most often used when there would be some problem with filing a Chapter 7 bankruptcy. For example, if your mortgage payments are behind and you do not have the ability to bring the payments current in the next few months, you will want to consider Chapter 13. It allows the past due payments to be paid in installments over 36 -60 months. However, trust deed payments that are due after the filing of the Chapter 13 must be kept current or the bankruptcy will be dismissed. Chapter 13 will not work if you cannot keep the trust deed current AND make the monthly plan payments.

If you have considerable assets which could be lost in a Chapter 7, you might consider filing Chapter 13. Chapter 13 permits you to keep all your assets, even if their value exceeds the amount of the allowed exemptions. (Exemptions are discussed later in Section 7.) The reason you can keep these assets is that over time you will be paying your creditors the value of these assets.

Some debts that may not be discharged in Chapter 7 can be made to go away with a Chapter 13. For example, community property equalization payments arising out of a divorce are not dischargeable in Chapter 7. However, they can be discharged in Chapter 13.

If your monthly income is greatly in excess of your monthly expenses, you may need to file a Chapter 13 bankruptcy. The Court will not allow you to file a Chapter 7 if your income exceeds expenses.

Lastly, taxes which are not dischargeable can be repaid over a three-to-five year period while under the protection of the Bankruptcy Court.

3. Chapter 11

Chapter 11 also reorganizes debts by submitting a repayment plan to the court. This chapter is used when debts exceed the dollar limits of a Chapter 13 discussed above. Chapter 11 is more complex but does offer greater flexibility. Businesses usually file under Chapter 11.

Chapter 11 requires extensive accounting reports and records which must be submitted to the Office of the United States Trustee during the bankruptcy. You must retain the services of an accountant to prepare these reports.

 

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V. HOW TO BEGIN

Once you make the decision to file bankruptcy, you will need to provide us with the following information:

  • A full list of all of your creditors, including their names, addresses and the amounts of their claims.
  • All pay stubs for the 60-day period prior to the bankruptcy filing;
  • Bank statements for the past 6 months;
  • A tax return for last year.

Your creditor list should include the name, address, account number, and account balance for each creditor. Bankruptcy may not protect you from debts owed to creditors who are not correctly listed in your bankruptcy documents. Accordingly, you should take great care to be sure your list is complete and that the bankruptcy documents contain all of your creditors.

You may not want to include a particular creditor, such as a relative, friend, or credit card company whose card you want to keep. However, you must include all of your creditors. You are committing fraud if you do not include all persons to whom you owe, or may owe, money.

Incidentally, if you have a credit card that does not have a balance due on it, it need not be listed. Many times, these “zero balance” credit cards can be used after the bankruptcy is over to re-establish credit.

If you wish to pay a discharged debt after your bankruptcy, it is your legal right to do so. You simply “reaffirm” the debt. “Reaffirmation” means that you legally recreate the debt after the bankruptcy is filed.

The bankruptcy documents must also list all your assets. Failing to disclose all your assets is fraud and can be used as grounds to overturn your entire bankruptcy proceeding. It can even lead to criminal prosecution. Most, if not all, your assets are “exempt” anyway which means that you will be allowed to keep them during and after the bankruptcy. Exempt assets frequently include your home, car, personal possessions, some jewelry, and tools used to earn a living.

 

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VI. PRE BANKRUPTCY COUNSELING AND POST BANKRUPTCY EDUCATION

The New Law provides that an individual cannot file a Chapter 7 case unless, during the 180-day period before filing, he or she has received an individual or group briefing from an approved nonprofit budget and credit counseling agency that outlined the opportunities for available credit counseling and assisted the individual in performing a budget analysis. The briefing may be telephonic or on the Internet. At the conclusion of the session, a certificate will be issued which must be filed with the Court.

We will provide you with a list of these agencies which you can contact for “counseling.” We expect the session to be about 90 minutes in length and cost about $50. However, the New Law also provides that they cannot charge you if you cannot afford to pay, so you may wish to discuss this with them in advance.

You must also complete a personal financial management course after filing the petition. Otherwise, it will result in denial of your bankruptcy discharge. We will provide you with a list of these courses as well and expect it to be much like traffic school. Please remember that it is your responsibility to get this done as soon after your case is filed as we will not send out any reminders after we send out the list.

 

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VII. EXEMPTIONS

It is important that you review both sets of exemptions listed below. Exemptions allow you to keep assets after the bankruptcy, free from your creditors’ claims, except for mortgages and secured loans. We help you select the set of exemptions best suited for your needs. You cannot use both. If you are filing as husband and wife, you both must select the same set of exemptions. The set of exemption amounts you select will generally depend upon the nature and extent of your assets.

The Bankruptcy Code now provides that, to be eligible to claim a particular state’s exemptions, you must reside in that state for 2 years preceding the bankruptcy filing. If the you did not reside in any one state for that period, then the laws of the state in which you resided during the 180-day period before the 2-year period applies (or during a longer portion of the 180-day period than in any other place).

You must tell us if you have not resided in California for the past 2 years. Otherwise, we may assume this to be the case and you could lose assets in the bankruptcy proceeding.

EXEMPTIONS-SET NO. 1

1. A HOMESTEAD IN YOUR PRIMARY RESIDENCE

The amount of this exemption is:

  • $75,000 for a single person,
  • $100,000 for a married person OR a head of household,
  • $175,000 for a person 65 years or older OR a disabled person, OR a person 55 years or older with an income of less than $25,000 (or $35,000 if a married couple).

To qualify for the homestead exemption, the property must be the principal residence of the debtor or the debtor’s spouse. The Bankruptcy Code now also requires that a person is only entitled to a maximum homestead of $125,000 until such time as they have lived in that state for approximately 3.4 years. (This will obviously only relate to those claiming the larger $175,000 homestead amount.)

The exemption is for equity in the property. For exemption purposes, equity is determined by taking the fair market value of the property and subtracting the value of any consensual liens (mortgages and deeds of trust).

2. MOTOR VEHICLE

The maximum allowed is $2,725 total equity in motor vehicles.

3. HOUSEHOLD FURNISHINGS AND PERSONAL EFFECTS

All of your household furnishings, personal effects, and appliances are free from your creditors’ claims so long as they are reasonable and necessary. If you have a household item which has unusually high value (such as an extremely rare antique), it may not be exempt.

4. JEWELRY

The maximum exemption is $7,175 in jewelry, heirlooms, and works of art.

5. HEALTH AIDS

Reasonably necessary health aides are exempt.

6. TOOLS OF THE TRADE

You can exempt up to $7,175 in tools, books, equipment, and one commercial motor vehicle if reasonably necessary and actually used in the exercise of your trade, business, or profession. If both you and your spouse are in a trade, business, or profession, this section specifically allows each of you a $7,175 exemption. This may be used to exempt a vehicle so long as it is used for business purposes, up to $4,850.

7. BUILDING MATERIALS

Materials that are to be used to repair or improve your residence are exempt up to $2,875.

8. LIFE INSURANCE

A policy with no cash value is totally exempt. The maximum exemption for the cash value of a policy is $11,475, or $22,950 if you are married. Benefits from matured life insurance or annuity policies are exempt to the extent reasonably necessary for the support of the debtor and his or her spouse or dependents.

9. DISABILITY, UNEMPLOYMENT, AND HEALTH INSURANCE BENEFITS

Payments from these types of insurance are exempt with no dollar limit.

10. PERSONAL INJURY CLAIMS

A lawsuit, or the right to sue someone, is an asset in the eyes of the law. When a personal injury cause of action (the right to sue) has not yet been reduced to a judgment and paid, the entire claim is exempt. When money has been paid as a result of a personal injury accident, the money is exempt, but only to the extent that it is reasonably necessary for the support of you and your dependents. If the award or settlement is payable in installments, each payment is exempt except to the extent that the same amount of earnings would be subject to wage garnishment.

11. WRONGFUL DEATH CLAIMS

A wrongful death claim is exempt to the same extent as a personal injury claim.

12. WORKERS’ COMPENSATION CLAIMS AND AWARDS

A workers’ compensation claim and award is completely exempt without limitation.

13. PUBLIC RETIREMENT BENEFITS

All amounts held for your retirement by a “public entity” are exempt without limitation. “Public entities” are governmental bodies as well as public corporations.

14. PRIVATE RETIREMENT BENEFITS

Benefits payable or paid under private retirement accounts, union retirement plans, and profit-sharing plans designed and used for retirement purposes are exempt in an unlimited amount. This section is intended to exempt only retirement plans established or maintained by private employers or employee organizations, such as unions, not arrangements by individuals to use specified assets for retirement purposes. Funds in self-employment retirement plans and individual retirement annuities and accounts (including IRAs) may be exempt if designed and used principally for retirement purposes. To determine whether an IRA has been designed and used principally for retirement, many factors are relevant including (1) the purpose of any withdrawals from the IRA, (2) whether applicable withdrawal procedures were followed, (3) the frequency of withdrawals, (4) whether the IRA was being used to shield funds from creditors or the court, and (5) whether withdrawals were inconsistent with the purpose of the IRA (to be used for long-term retirement).

Amounts in self-employment retirement plans and IRAs are subject to the further limitation that they are exempt only to the extent necessary for the support of the debtor (and his or her spouse and dependents) at the time of retirement, taking into account all of the resources likely to be available to the debtor when he or she retires. The court is to take into account all resources that are likely to be available for the support of the debtor when the debtor retires.

NOTE: The U.S. Supreme Court has held that any retirement plan which is ERISA qualified or contains a “spendthrift” provision can be kept by a person filing bankruptcy, regardless of the amount in the plan. If you believe you have these types of plans, you should find out whether they meet this requirement before your bankruptcy is filed.

ALSO NOTE: Under the New Law, retirement funds in an account exempt from taxation under IRC §§401, 403, 408, 408A, 414, 457, or 501(a) are exempt irrespective of their treatment under the above state exemption. This new exemption includes IRA accounts up to a maximum of $1,245,475 (as of 4/1/13), although this amount may be increased “if the interests of justice so require.” The New Law has substantially expanded the protection for IRA accounts and removed much of the previous uncertainty.

15. PRE-PETITION WAGES

Wages earned 30 days prior to the bankruptcy are partially exempt. This exemption protects 75 percent of the amount you received during this period. If these wages were subject to garnishment, all of these funds are exempt. (Of course, all wages you receive after the bankruptcy is filed are free of creditors’ claims).

16. PRISONER’S FUND

The maximum exemption is $1,425

17. CHARITABLE AID, STUDENT LOANS, AND RELOCATION BENEFITS

Any funds received for these purposes are exempt.

18. CEMETERY PLOT

Any cemetery plot you own is exempt.

19. DEPOSIT ACCOUNTS

If a bank account can be shown to receive Social Security payments by direct deposit, it is protected up to $4,300 for an individual and up to $4,050 for a couple.

EXEMPTIONS-SET NO. 2

1. REAL PROPERTY

A $22,075 exemption in real property (including a mobile home) is allowed if used as a primary residence or burial plot.

2. WILD CARD

We call this exemption the “wild card” because it can exempt $1,280, plus any unused portion of the $24,060 exemption listed in paragraph number 1 above, in any asset. In other words, if you do not claim an exemption in a residence, you have a $25,340 exemption that you can claim in any assets. This can be used to protect cash, savings accounts, vehicles, or just about any other asset you may own.

3. MOTOR VEHICLE

The maximum allowed is $4,800 in one or more motor vehicles.

4. HOUSEHOLD FURNISHINGS AND PERSONAL EFFECTS

An unlimited exemption is allowed in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, which are held primarily for personal, family, or household use, so long as no single item is worth more than $600.

5. JEWELRY

The maximum exemption is $1,425 in jewelry held primarily for personal, family, or household use.

6. TOOLS OF THE TRADE

A $7,175 exemption is allowed for professional books or tools of your trade.

7. LIFE INSURANCE

An exemption is allowed in any immature life insurance policy with no cash value. If the policy has cash value, $12, 860 is exempt.

8. HEALTH AIDS

An unlimited amount is allowed for health aids.

9. BENEFITS PAYMENTS

A total exemption is allowed for social security benefits, unemployment compensation, veteran’s, disability, or unemployment benefits. Alimony or support payments are also exempt, but only to the extent that they are reasonably necessary for your support and support of any dependents.

10. PENSION PLANS

An exemption is allowed for any payment under a stock, bonus, pension, profit-sharing, annuity, or similar plan on account of illness, death, disability, age, or length of service, to the extent reasonably necessary for the support of the debtor, his or her spouse and any dependents. This exemption applies to IRA accounts which are exempt to the extent required for the debtor’s support at retirement. Courts have ruled that what is reasonably necessary for the support of the debtor should be sufficient to sustain basic needs, and not related to the debtor’s former status in society or lifestyle to which he or she is accustomed.

NOTE: The U.S. Supreme Court has held that any retirement plan which is ERISA qualified or contains a “spendthrift” provision can be kept by a person filing bankruptcy regardless of the amount in the plan. If you believe you have these types of plans, you should find out whether they meet this requirement before your bankruptcy is filed.

ALSO NOTE: Under the New Law, retirement funds in an account exempt from taxation under IRC §§401, 403, 408, 408A, 414, 457, or 501(a) are exempt irrespective of their treatment under the above state exemption. This new exemption includes IRA accounts up to a maximum of $1,245,475 (as of 4/1/13), although this amount may be increased “if the interests of justice so require.” The New Law has substantially expanded the protection for IRA accounts and removed much of the previous uncertainty.

11. MISCELLANEOUS PAYMENTS

Exemptions are allowed for (1) any payments under a crime victims’ reparation law, and (2) any payments on account of the wrongful death of a person of whom the debtor was a dependent or on account of a life insurance contract, but only to the extent reasonably necessary for the support of the debtor and his or her dependents.

12. PERSONAL INJURY CLAIMS

Any payment on account of a personal injury lawsuit is exempt up to $24,060. Compensation for loss of future earnings is exempt to the extent reasonably necessary for your support or the support of your dependents.

 

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VIII. MEANS TESTING

Means testing is perhaps the most controversial portion of the New Law. It was designed to force debtors to file Chapter 13 repayment plans if they had some means to do so. The old law addressed this issue on a case-by-case basis. If a judge found that there was sufficient income over expenses to show a “substantial abuse,” a case would be dismissed.

This case-by-case analysis, in which the Court had broad discretion, has now been replaced by “means testing.” This is a very mechanical analysis of a debtor’s monthly income and expenses. If there is a prescribed amount of excess income each month, a “presumption of abuse” arises and the case must be dismissed.

Essentially, everyone will need to provide a statement of monthly income and expenses. If you make more than the median income each year ($47,433 for a single person, $61,752 for a household of 2, $66,034 for a household of 3 and $74,122 for a household of 4 in California) then you will need to also file a means test analysis. This analysis will measure your income as an average for the six-month period prior to the bankruptcy filing. You will then deduct your actual monthly mortgage and car payments. You will then deduct payments for priority debt (usually past due taxes and support). Finally, you will be allowed to deduct other normal living expenses as defined by the tables the IRS when collecting taxes. (There are several other allowed deductions such as charitable contributions and a small amount for private schooling.)

If the amount left over is less than $100, things are OK. If the amount left is more than $100, but less than $166, a “presumption of abuse” will arise if this monthly payment over a five-year period would pay at least 25percent of your unsecured debt. If the amount is greater than $166, the presumption of abuse arises regardless.

If the presumption arises, you will need to show some type of exceptional circumstance, otherwise, the case will be dismissed. You will be given the opportunity to convert the case to a Chapter13 bankruptcy and propose a 5-year repayment plan.

If this seems complicated, it is because it is. However, we have studied the New Law and have the latest software to help us get you through this maze.

 

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IX. SPECIAL INSTRUCTIONS FOR HOMEOWNERS

If you do not own a home, you can skip ahead to Section 10. If you do own a home, you will need to know the information in this section.

California law provides an exemption which protects from creditors a specified amount of equity in your family residence. This protection is called the homestead exemption. The homestead exemption protects equity. Equity is determined by subtracting outstanding trust deed obligations and other liens from the fair market value of your home. Equity is thus determined as follows:

Present Fair Market Value
(-)Present Balance of all Trust Deeds & Liens
= Equity

For example, assume your home would sell for $320,000 in today’s real estate market. Further assume that the amount of outstanding obligations on this property consist of two trust deed loans totaling $270,000. The equity in the property is calculated to be $50,000.

Market value $320,000.
Less: Balance of Loans $270,000.
Equity $50,000.

The amount of equity entitled to protection under California law is as follows:

Single person $75,000.
Married or head of household $100,000.
Over age 65 or disabled $175,000.

To qualify for the homestead exemption, you must live in the home as your primary residence and you must have lived in California for 2 years. If you claim a homestead of $175,000, you must also have lived in the home for 3.4 years. The homestead exemption is claimed by recording a “Homestead Declaration” with the County Recorder’s Office before the bankruptcy filing.

1. How to determine the fair value of your home
It is very important that you give us an accurate determination of the fair market value of your home. Your home may be taken and sold at auction if it has more equity than can be protected with the homestead exemption. Consequently, we must determine the exact amount of equity before the bankruptcy is filed. Most Trustees who examine a bankruptcy case are satisfied if you obtain an estimate of the value of your property from several real estate brokers in your area. Most brokers will give you an appraisal free of charge. We suggest that you obtain an opinion from more than one broker.

If you can get a written estimate from the broker, be sure to keep it in case it is needed later. If you cannot get an estimate in writing, keep a record of the name, address, and telephone number of the real estate brokers to whom you talked. You should make notes concerning what they told you. Keep these notes in case they are needed in the future.

The surest way to arrive at the fair market value of your home is to obtain a written appraisal from a professional appraiser. The cost for this is usually nominal, and we recommend that you do this. This is especially true if property values have been increasing lately or if you have owned your home for some time.

If you have any concern that the amount of the equity in your home is beyond the amount we can protect with a homestead exemption, advise your attorney of this fact. This does not necessarily mean that we cannot protect your home. Rather, it means that the issue requires further analysis or filing under another chapter of the Bankruptcy Code.

2. Special procedures to use when a lien is recorded against your residence
Bankruptcy eliminates debts. Under normal circumstances, it does not remove liens from property. Any creditors with judgments against you may have recorded that judgment thus establishing a lien against your residence. Other liens may also have been recorded, such as mechanic’s liens which secure obligations of workmen who have performed work on your residence. These liens will prevent you from selling or refinancing your home without first paying off the lien.

We can file a separate proceeding, or motion, to remove any judgment liens that may have been recorded against your property. However, you must inform us about these liens during the bankruptcy proceeding and you must enter into an additional fee agreement with us to do this additional work. We do not do an independent search for liens on your property. This is your responsibility. A real estate broker or title insurance company can help you obtain a report that shows liens on your property if you have any doubts. Once your case is closed, the liens cannot be removed without reopening your case. This involves additional time and cost.

3. Selling your home
During your bankruptcy, you cannot sell your home without first obtaining permission from the Bankruptcy Court. As a result, it is usually better to wait to sell the property until after the bankruptcy is complete.

A sale can only be accomplished by preparing and filing of a motion with the court. This motion will be served on all of your creditors. We must charge an additional fee for this service. Do not sign any documents to list your home for sale or accept any offers until you first consult with us.

4. Refinancing your home
During your bankruptcy, you cannot refinance your home without first obtaining permission from the bankruptcy court. Refinancing requires that we prepare a motion to be filed with the court. Do not attempt to refinance your home during your bankruptcy until you consult with your attorney first.

 

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X. DEBTS NOT AVOIDED IN BANKRUPTCY

You will receive a discharge (termination of debts) so long as you disclose all assets and debts, follow our instructions, and do not commit any fraud. However, if you have committed fraud, obtained assets by the use of a false financial statement, failed to maintain adequate records of how your assets have been expended, or engaged in other types of improper conduct, your debts may not be discharged. If you are concerned that a creditor may challenge your bankruptcy on any of these grounds, you should discuss the situation with us so we can properly advise you.

Examples of debts that may not be discharged in bankruptcy are:

1. Debts incurred shortly before filing bankruptcy.

Debts incurred within 60 days of filing the bankruptcy for “luxury goods or services” are not dischargeable. “Luxury goods or services” can include any type of spending for “non-essentials” which might appear inappropriate considering your current financial circumstances. Cash advances obtained within 60 days of the bankruptcy filing are not dischargeable. Also, incurring debts at any time which you knew, or should have known, you could not pay constitutes fraud. It is improper to incur debt when you know you cannot repay the debt or that you are going to file bankruptcy. These debts can be held nondischargeable.

2. Taxes

(a.) Income Taxes Taxes owed to the United States or any state, county, or other governmental entity are normally nondischargeable. However, income taxes will discharge if all of the following criteria are met:

(1) the taxes are more than three years old at the time the bankruptcy was filed. (The three-year period begins to run from the time the returns were due, plus any periods of extension.);

(2) if the return was not filed on time, more than two years has expired since the return was filed;

(3) if there was an assessment, more than 240 days have expired from the date of the assessment;

(4) there is no lien on any property which you own;

(5) there has been no fraud.

(b.) Employment Taxes

(1) Trust Fund Taxes. A trust fund tax includes income taxes which an employer is required to withhold from the pay of his or her employees, the employees’ share of social security and railroad retirement taxes, and also federal unemployment insurance. Trust fund taxes are never dischargeable.

(2) Employer’s taxes. An employment tax is the employer’s contribution required to be paid in addition to the amount withheld from the employee’s paycheck. An employment tax is dischargeable provided the date the last return was due, including extensions, is within three years before the filing date.

(c.) Excise taxes. Excise taxes include sales taxes (in some states), estate and gift taxes, gasoline taxes, and other federal, state or local taxes. To be dischargeable, the transaction giving rise to the tax must have occurred more than three years before the filing of the petition. If a return needs to be filed, three years must have elapsed since the return was due, including any extensions.

(d.) Sales taxes. The Bankruptcy Code does not specifically address the dischargeability of sales taxes. In California and Hawaii, excise taxes are imposed on the retailer for the privilege of doing business. Thus, sales tax in these states appear to be more of an excise tax and are dischargeable if more than three years have elapsed from the filing of the return, or if no return is necessary, three years from the date of transaction give rise to the tax.

(e.) Property taxes. Property taxes assessed and payable within one year before the petition is filed are nondischargeable.

If you intend to discharge taxes with your bankruptcy filing, we recommend that you obtain a complete history of your tax obligations from the I.R.S. and consult a tax professional before filing the bankruptcy.

  1. Support payments
    Alimony and child support are not dischargeable in bankruptcy. Support obligations created by a Family Law Judgment are nondischargeable.
  2. Wrongful acts
    Liabilities arising from a wrongful act, such as a judgment for fraud, assault, conversion, or embezzlement, can be held nondischargeable.
  3. Wages
    Wages owed to others and which were incurred within three months prior to the bankruptcy can be held nondischargeable.
  4. Penalties or fines
    A penalty or fine, usually assessed by a Court or the Government, is nondischargeable. Traffic tickets won’t go away!
  5. Student loans
    In October 1998, then-President Clinton signed the Higher Education Amendments Act of 1998. It now provides that all student loans, regardless of age, are nondischargeable. This replaces the seven-year requirement which had been in effect for many years. The Ninth Circuit has now adopted a more formal test to determine whether a student loan could be discharged due to undue hardship. A debtor must show: (1) that they cannot maintain, based on current income and expenses, a minimal standard of living for themselves and their dependents if forced to pay the loans, (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment of the student loan, and (3) that they have made a good faith effort to repay the loans.
  6. Unlisted debts
    If you fail to list, or list incorrectly, any debt in your bankruptcy schedules, the debt may not be discharged. Unlisted debts are not the problem they were in years past; however, it is still a good idea to be sure all debts are listed. For example, a debt incurred intentionally or fraudulently will automatically survive a bankruptcy if not properly listed. Thus, it is extremely important that you carefully review your bankruptcy schedules to ensure that all debts are listed. If you are uncertain about whether you owe a creditor, but believe that creditor might make a claim against you, that creditor should be listed as a precautionary measure. You must also make certain that you provide the correct address, including zip code, balance due, and account number for each of your creditors.
  7. Debts incurred in connection with a divorce
    The New Law provides that any debt incurred in connection with a divorce or separation, which is payable to the ex-spouse, is nondischargeable in a Chapter 7 filing. This usually applies to obligations to a former spouse to equalize the division of community property. It may also apply to other obligations such as the obligation to hold a former spouse harmless on debts or to pay his or her attorney’s fees. If you have any debts such as this, you should discuss them with your attorney before the bankruptcy is filed and show them the dissolution documents.
  8. Secured debts Bankruptcy will not discharge debts that are “secured.” Secured debts are where you pledged some type of collateral to ensure the repayment of a debt. Obviously, a bankruptcy would not allow you to stop making payments on your car and still keep the vehicle. The same holds true with “purchase money security interests” on household goods. If you pledged a refrigerator or a sofa as collateral for the repayment of a debt, you cannot keep the item and not make the payments. However, you do have the option to return the item and pay nothing. This decision is yours to make. When a situation such as this arises, consult us. We will advise you on what to do. Many times, it can be arranged so that you can keep the item and make payments at a reduced rate. Each retailer handles their security interests differently so it is important that you rely on our experience to guide you through this area.

 

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XI. TRANSFERS OF PROPERTY BEFORE BANKRUPTCY

Certain transactions can be set aside as fraudulent. If you transfer assets to a friend or relative without receiving a fair price or consideration in return, the transaction is voidable as a fraud. It is improper to transfer assets to others prior to filing bankruptcy so as to deprive your creditors of their

right to satisfy their claims out of your assets. However, you are entitled to transfer assets into “exempt property” which you may keep free of creditors’ claims. You should discuss any transfers of assets with us before your bankruptcy is filed.

Also, payments to creditors which favor one creditor at the expense of the others may be voided as a “preference.” The Bankruptcy Code mandates that all similar type creditors should be treated equally. Accordingly, any type of preferential payment can be recovered by the Court. By way of example, you cannot pay off an unsecured debt to your uncle a few months before filing bankruptcy because your other unsecured creditors can complain that the payment is a preference payment.

 

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XII. ASSETS ACQUIRED AFTER BANKRUPTCY

Generally speaking, all of your assets become the property of the bankruptcy estate upon the filing of your bankruptcy petition. These assets are then administered by the U.S. Trustee. For most persons, there is usually nothing for the Trustee to administer. This is because most, if not all, of your assets will be protected by one of the sets of exemptions discussed above.

Again, generally speaking, all assets which you receive after your bankruptcy petition is filed are yours to keep. This includes income you earn after the filing.

There are three types of property which can be included in your bankruptcy estate if they are acquired within 180 days after the filing of your bankruptcy. They are:

  1. Property acquired through bequest, devise, or inheritance;
  2. Property acquired as a result of a property settlement with your spouse; or
  3. Property acquired as a result of being a beneficiary of a life insurance policy or death benefit plan.

Many times proper planning can eliminate these types of property being included in your bankruptcy estate. If any of these issues relate to you, please be sure to discuss them with us.

 

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XIII. DISADVANTAGES OF BANKRUPTCY

The advantages to bankruptcy seem so great that sometimes clients have a hard time believing that it’s all true. There are, however, some disadvantages to bankruptcy which must be taken into consideration.

First, a bankruptcy filing can remain on your credit report from 7 to 10 years. While this is something to consider, most clients find that it is not insurmountable. Many clients are surprised to receive new credit within a few years after they filed bankruptcy.

Second, you cannot file another Chapter 7 bankruptcy for six years. While this means that you give up your financial “safety net” for this period of time, few people require a second bankruptcy. If additional problems arise, you may still file a Chapter 13 bankruptcy anytime after the Chapter 7 proceeding is concluded.

Third, it may be difficult to purchase a home or rent a new apartment for a few years. Real estate brokers and lenders tell us that after this period of time buyers can qualify for real estate loans once again. This is especially true if they have a sizeable down payment and a good payment history after the bankruptcy. As you can see, there are some negatives to consider when contemplating bankruptcy. However, they can be quite small when compared to the substantial advantages offered.

 

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XIV. REAFFIRMATION AGREEMENTS

A reaffirmation is a contract that you sign to recreate a debt listed in your bankruptcy. Congress knew that creditors would try to pressure debtors to sign these types of agreements, so there are many formalities which must be followed in order for a reaffirmation agreement to be valid. For example, the reaffirmation agreement must contain very specific protective language, be signed by the debtor’s attorney and be filed with the court. We will usually sign a reaffirmation agreement if you request it. However, we very rarely recommend that you do so.

  1. Unsecured Debt

Usually, there is no reason to recreate a debt if you have just gone through a bankruptcy to discharge it. You certainly can informally repay anyone you want after the bankruptcy proceeding. However, to legally recreate that debt very rarely makes any sense. If you want us to sign a reaffirmation agreement, we will, but usually only after we give you a letter indicating that it is our advice not to do so.

  1. Debts by your residence or other real estate

Debts that are secured by your house require a different analysis. If you want to keep the real estate, you can and continue to informally make the monthly payments. If you cannot keep up the payments in the future, the most that the creditor can do is foreclose. They cannot sue you for any unpaid balance. Creditors like this option the least. It allows you to keep the property with no penalty, other than foreclosure, in the event you cannot pay in the future. Because creditors do not like this option, they may not send you a monthly statement. You must be very sure that you make the monthly payments on these types of debts even if you do not receive a monthly bill. Further, some creditors will not report these informal payments on your credit report. Again, they want to do everything that they can to “encourage” you to sign a reaffirmation agreement.

If you sign a reaffirmation agreement, the creditor will be pleased. However, once again, in the event you cannot pay on this reaffirmed debt, they may be able to repossess the asset and sue you on any unpaid portion of the obligation. For this reason, we do not usually recommend that people sign a reaffirmation agreement on real estate loans.

  1. Debt secured by your car other personal property

Debts that are secured by your car, or any other personal property, require yet another analysis. If you want to keep the asset with secured debt against it, you must either redeem, reaffirm, or surrender the asset. This decision should be made and the agreement signed within 30 days of the 341(a) hearing or the creditor will be allowed to repossess the asset. Redeem means that you buy the asset for a one time cash payment equal to the market value of the asset. This is rarely done as most debtors do not have this much cash available when they file. can and continue to informally make the monthly payment.

If you sign a reaffirmation agreement, the creditor will be pleased. However, in the event you cannot pay on this reaffirmed debt, they will be able to repossess the asset and sue you on any unpaid portion of the obligation.

Of course, if you give the asset back in the bankruptcy, there is no reason to sign the reaffirmation agreement at all.

  1. Leases

With a leased vehicle or other asset, you have choices similar in Section 3 above. However, it involves a slightly different analysis. If you have any leased assets, you should consult with us.

 

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XV. BANK ACCOUNTS

Clients often ask whether it will be necessary to close their checking or other bank accounts before or after the bankruptcy. The answer is that it is not necessary but may be advisable. If you have a credit card with a bank or credit union and also have some money in an account with them, they can use their right of “offset” and remove all funds that you have with them on the day that you file to cover their loss on the credit card. However, they can only remove the amount of money that was in the account on the day the bankruptcy was filed. Thus, it is usually safe to deposit new funds in your bank account a week or so after the bankruptcy is filed. However, many do not wish to ever have to argue with a bank about how much money was on deposit on the date of filing or worry about their funds being wrongfully removed after the Bankruptcy. In this case, these clients simply open up a new account at another bank.

 

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XVI. COOPERATING WITH THE BANKRUPTCY COURT AND KEEPING FINANCIAL RECORDS AND AUDITS

The Bankruptcy Code requires that you cooperate with the Bankruptcy Court and its officers. This means appearing at any scheduled hearing (usually only one) and providing any requested information. If you fail to cooperate, the Court can dismiss your case and take away the protection of the Bankruptcy Code. Of course, we will assist you in dealing with the Court but can only do so with your cooperation.

Further, all information provided with a petition and thereafter is required to be complete, accurate, and truthful; all assets and all liabilities are required to be completely and accurately disclosed in the documents filed in the case, the replacement value of each asset must be stated in those documents after reasonable inquiry to establish such value; and current monthly income and the amounts specified in Bankruptcy Code Section 707(b)(2), are required to be stated after “reasonable inquiry.” The term “reasonable inquiry” is from the New Law and has got to be interpreted or explained by the Courts.

The U.S. Trustee’s Office is now required to periodically audit bankruptcy case filings. Further, the law has been modified so that in the event someone does not cooperate with the audit, or discrepancies are found as a result of the audit, their discharge can be revoked significantly later. In fact, there is no deadline by which the audit must be done. The means that an audit can be done, and your discharge revoked, many, many years later.

As a result, it is prudent for you to retain your personal financial records until well after the bankruptcy process is completed. We suggest that you keep your records and all your bankruptcy paperwork for at least 10 years. Destroying records can be used as a reason to dismiss your bankruptcy.

 

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XVII. Alternatives To BK

Obtain Debt Relief Counsel from Merritt, Hagen & Sharf, LLP

Bankruptcy is not right for everyone. Just because you are struggling with seemingly insurmountable debt does not mean that filing for Chapter 7 or Chapter 13 bankruptcy is the only option left for you. When you meet with an experienced and dedicated Woodland Hills bankruptcy lawyer at Merritt, Hagen & Sharf, LLP, we can help you determine whether or not another debt relief option is a better choice for your particular financial situation.

If you are receiving foreclosure notices, you may not have to file for bankruptcy. A mortgage refinance, for example, could help you save your home by replacing your mortgage with a new mortgage that you can repay. You could also take out a home equity loan that acts as a second mortgage, open a home equity line of credit, or offer a deed in lieu of foreclosure. An attorney with experience in the field of bankruptcy law can help you assess your options. In addition, if your main goal is to end harassing creditor contact, you can do so without filing for bankruptcy. The Fair Debt Collection Practices Act is a federal law that asserts your rights as a consumer, and creditors are required to observe those rights. You can learn more about consumer protections in the act by consulting our firm.

In some cases, debt reorganization, debt consolidation, or debt settlement may be able to help you reach an agreement on your loans directly with your creditors. In today’s tough economy, many debt collection agencies are willing to settle for a lesser amount or a manageable repayment schedule rather than risk losing the entirety of the loan altogether. Talk to a bankruptcy lawyer who is a skilled negotiator and has the ability to help you settle your loans. A variety of bankruptcy alternatives are available to you, so it is important to retain a legal representative with the skill and familiarity necessary to help you select the option that is right for you.

 

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XVIII. CREDIT REPAIR

Credit repair clinics claim that they can remove bad credit and bankruptcies from your credit report. Do not believe it! Most of these operations are scams. Many clinics simply take your money and perform no valuable service for you.

A bankruptcy filing appears on your credit report from 7 to 10 years. However, a bankruptcy on your credit report does not necessarily mean financial ruin. Lenders may still qualify you for loans. For example, many banks or savings and loans will qualify people for home loans two years after a bankruptcy.

One way to improve your credit rating after a bankruptcy is by making timely payments on any remaining or new debts. This creates a good payment history which will have a positive effect on your credit rating.

Another way to develop credit after bankruptcy is by re-establishing a credit relationship with a previous creditor. You can do this by paying off any credit cards on which you owe very little prior to the bankruptcy. Credit cards or other debts with zero balances do not need to be listed on your bankruptcy at all. These “zero balance” accounts can many times be used after the bankruptcy proceeding is complete. Obviously, we cannot guarantee that any particular creditor will continue to allow you to have credit with them in the future. Some banks and department stores occasionally learn of the bankruptcy filing even though they were not listed in the schedules. However, we have found from our years of experience that many times this is the best way to re-establish credit accounts.

We have found that many can rehabilitate their financial condition in as short as two years. This usually involves a careful analysis of one’s cash flow and a systematic plan to accumulate funds. There are many good books available which discuss this as well, several of which are best sellers. We will send you a list of these books at the conclusion of your bankruptcy proceeding.

Some banks offer “secured” credit cards. The bank provides you with a VISA or MasterCard when you maintain a specified savings account balance with them. In effect, your own funds secure the payment of all charges. This is an excellent way to immediately obtain new credit.

We can help you reestablish your credit score!

It needs to be made extremely clear that there is a difference between “credit repair” and what we call “credit rehabilitation.” Credit repair is something routinely done by credit repair agencies and others. It involves untruthfully denying truthful credit reporting information, creating multiple credit reporting files, using another person’s Social Security Number, and other questionable, and quite frankly, fraudulent or illegal practices. “Credit rehabilitation” is the process of removing any untruthful information from a person’s credit report and then deliberately placing good, new credit on a person’s report to create a “rehabilitated” file.

Our Woodland Hills bankruptcy attorneys know how important it is to rebuild a credit score, particularly after filing for bankruptcy. The methods we use are backed by integrity and efficiency, designed to give our clients the favorable outcome they need and deserve. We have had immense success on behalf of our clients and would be honored to do the same for you.

There are two simple steps to clean up a person’s credit report:

  1. Remove any erroneous or incomplete information.
  2. Place new, good credit on the credit report by effectively using your credit over a period of time.

Once these two processes are complete, a person’s credit report will be rehabilitated. Using these techniques, we have had people tell us that they qualified to purchase a home, with A-credit, in as little as 2 years after a bankruptcy filing!

Get Started Today with a Woodland Hills Bankruptcy Lawyer

This process cannot be done overnight. In fact, it can take as much as a year or two to complete the process. Once again, it is not complicated. Rather, it just takes a bit of perseverance to stay at the process. When you retain our firm, you can have confidence that we will remain by your side until your case has been successfully resolved.

We have prepared a booklet that discusses how to perform these two procedures in greater detail. Our materials tell you who to write for credit reports, what to look for, and where you can look for new credit. It even has form letters that you can use if incorrect information is on your report. This booklet is available for free to clients and former clients as part of our “alumni” program (See the ” For Clients Only ” button on this site).

 

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XIX. Fair Debt Coll. ACT

Debt Defense Attorney Protects Your Consumer Rights

If you are being harassed by a creditor about your outstanding debt, then obtain representation from a Woodland Hills debt defense attorney at Merritt, Hagen & Sharf, LLP. Under the Fair Debt Collection Practices Act (FDCPA), consumers have protection against collectors who are engaging in unfair practices. Merritt, Hagen & Sharf, LLP can identify the illegal action and aggressively litigate on your behalf, so that you can obtain restitution for the damages.

Creditor Violations under the FDCPA

The FDCPA was created in 1978 in order to safeguard consumer rights. Debt collectors are prohibited from a number of actions, including, but not limited to the following:

Abusive Language or Communication

  • Threats
  • Crude language
  • Insults
  • Calling you before 8am or after 9pm
  • Contacting you at your workplace or on your mobile phone without permission
  • Repeated calls

Deceptive Practices

  • Falsely claiming to be government officials, attorneys, or a credit bureau
  • Charging more than the owed amount or distorting the owed amount in conversations
  • Failing to identify themselves in their contact with you
  • Threatening wage garnishment or frozen bank accounts without a court judgment

Degrading Your Reputation

  • Contacting friends or coworkers about your debt
  • Falsifying your information to a credit bureau
  • Publicly issuing a list of debtors

 

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XX. Understanding The Foreclosure Process

Are you in danger of losing your home?

Foreclosure is the process whereby your mortgage company sells your home to pay off the loan it made to you. Without foreclosure, it could take the bank many months, even years, to obtain a judgment and force the sale of your home. Accordingly, California law provides for an expedited procedure through which a bank can get paid in the event a mortgage is not kept current.

This report will discuss the typical foreclosure proceedings on a residence in California ONLY. If your mortgage was not a standard transaction, or if the foreclosure proceeding does not relate to your residence, or if your property is located in a state other than California, you should consult an attorney for advice as this report may not apply to you.

In order to purchase your home, you borrowed a large sum of money and signed a promissory note. To ensure repayment, you (the “mortgagor”) posted your home as collateral to ensure payment of the debt to the bank (the “beneficiary”). This is done by signing a Deed of Trust which allows a third party (a “trustee”) to hold a security interest in the home pending full payment of the promissory note. When the note is paid in full, the beneficiary sends a notice to the trustee instructing the trustee to file a reconveyance of the security interest. If the note is not paid off, or the payments become delinquent, the trustee is sent instructions to foreclose.

The Law

The process for foreclosure is contained in the California Civil Code, starting at Section 2920 . Further, there have been many, many appellate court cases which have explained some of the terms in this section of the Code.

The Foreclosure Process

A mortgage can be “in default” any time a payment is not made on a timely basis. Most lenders will wait until a mortgage is several months late before starting foreclosure. Most mortgages contain grace periods. However, any time a mortgage is in default, the bank can foreclose. At that time, the beneficiary (the bank) instructs the trustee (the third party) to initiate foreclosure proceedings.

The foreclosure procedure takes a minimum of 111 days.

The first step is for the trustee to file a Notice of Default. This is typically called the “NOD.” The NOD is recorded and remains in place for 90 days. If the loan is not brought current or some resolution made, the trustee then files a Notice of Sale. This is called the “NOS.” The NOS sets a sale date, or auction date, for the property.

The sale date must be at least 21 days from the date of the filing of the NOS. This is why it takes at least 111 days (90 days + 21 days) to completely foreclose on property. The sale is publicized and the public is invited to show up and bid on your property. If there are no successful bidders, the bank will then take the property back and own it at that time. The result is that you end up living in property you no longer own. Normally, the new owner will then begin eviction proceedings against you. When they obtain a judgment, which can take as little as 2-3 weeks, a Marshall or Sheriff can come to the house and remove you and your possessions.

Because the NOD and NOS are recorded with the County Recorder, they are a matter of public record. This is why people going through foreclosure get so many letters in the mail. Many individuals and businesses obtain this public information and send out solicitation letters offering help. Be wary of the many solicitations which are sent to you. While many of these are sent to you by well-meaning attorneys, Relators, or mortgage brokers, many are scams. If something seems too good to be true, it probably is. The newspapers are full of stories about scam artists who prey upon people going through a difficult time in foreclosure.

What are the implications of foreclosure?

  1. Credit Reporting. The foreclosure proceeding (even the NOD) will be reported on your credit report. A foreclosure is among the worst things that a person can have on their credit report. A foreclosure will make it difficult for a person to get loans or even rent a house for several years. Clearly, it is not impossible to obtain these kinds of loans or rent property. There are thousands and thousands of people that go through foreclosure in Los Angeles County alone on a yearly basis. All of these people have gone on to very productive and rewarding lives. However, a foreclosure does make it more difficult.
  2. Deficiency Liability. California law provides that a bank that forecloses using its private power of sale (that is not exercising its foreclosure remedies through the courts) cannot seek anything more against the former homeowner than ownership of the property. That is, in a traditional scenario, there is no such thing in California as “deficiency” liability. This is not the rule, however, for a “sold out” junior mortgage. For example, if the holder of a second deed of trust forecloses, they sell the property at their foreclosure sale subject to, or including, the first deed of trust. This means that the buyer of the property must also take over the first mortgage. However, if the first mortgage holder sells the property at a foreclosure sale, the second mortgage holder is “cut off” or “sold out.” As such, they no longer have a security interest against the house. Unfortunately, they do have the right sue the former property owner for repayment of the debt.
  3. Tax implications. There are also potential tax ramifications arising out of the foreclosure. The realization of capital gains is an issue which should be discussed with your accountant, although recent changes in the tax laws have made this less of an issue. Also, there may be some issues which arise as a result of the foreclosure relating to forgiveness of indebtedness and forgiveness of indebtedness income. Be sure to discuss these issues with your tax advisor prior to a foreclosure sale occurring.

How can I get out of my foreclosure?

There are many ways to attempt to resolve a potential foreclosure situation. However, it cannot be emphasized enough that any of these actions need to be taken early on in the process. The deeper into the foreclosure process one gets, the fewer options they have.

  1. Pay the delinquent amount. The first solution is, obviously, to repay the delinquent portion of the loan. The California Civil Code provides that the total amount which is delinquent can be paid at any time up to five business day s prior to the date first scheduled for the foreclosure sale. Many lenders will even accept payment during that last five-day period, but don’t rely on it. The amounts which must be repaid is all of the delinquent payments, plus late fees, plus any interest due, plus any foreclosure fees and associated costs. You can contact the trustee who will tell you the full amount necessary to cure the default.
  2. Negotiate. Another alternative is to attempt to negotiate some type of repayment with the lender. Sometimes, a payment or two can be put on the back of the loan. However, any negotiation is solely at the discretion of the lender. Many people ask whether a lender will reduce the total amount due or permanently reduce the monthly payments. While anything is possible, these are the least likely things that a lender is typically inclined to do. However, in light of the recent downturn in the economy and falling property values, lenders might be more inclined to discuss a modification of the mortgage.
  3. Sell. Another solution is to sell the property. If escrow is closed on the property prior to the foreclosure, no foreclosure can occur because a closed escrow means that the loan has been paid in full. If you have equity in the property, this may be a good solution as it will allow you to get your equity out of the property and put it in your pocket. If the property is upside down (that is, more is owed than the property is worth), you still may be able to sell the property by doing a “short sale.” This means that the lender voluntarily agrees to accept less than the full amount due. A lender may agree to go along with a short sale as it is usually better for them to have their money now as opposed to going through foreclosure and then reselling the property as this could take many months. If you choose this solution, you should choose a real estate agent who has experience in short sales. If you like, we can certainly recommend one or two Relators to you. Choosing a Relator experienced in short sales will return and some dividends later on down the line.
  4. Chapter 7 bankruptcy. Many think that another alternative is to file a Chapter 7 bankruptcy. Chapter 7 involves a total liquidation of a person’s unsecured debts. However, a Chapter 7 bankruptcy will not solve a foreclosure problem. Rather, it will only serve to stall it for a short period of time. We very rarely recommend Chapter 7 in a situation where a property is in foreclosure and the homeowner wants to keep the property.
  5. Chapter 13 bankruptcy. Another alternative is to file Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, any delinquent amounts can be repaid over a three or five year period. The lender has no choice but to accept this repayment plan. Of course, any mortgage payments which become due after the filing of the Chapter 13 bankruptcy proceeding must also be paid. If a person has the financial ability, this is a wonderful way to require a lender to take a repayment over period of time.
  6. Let it go. Lastly, you can simply choose to let the property go to foreclosure. You have the opportunity to live in the property, free of charge, up to the time of the foreclosure sale. This is because you own the property up to that point in time. After the foreclosure sale, you may be facing eviction proceedings and could be charged a reasonable rate of rent during that period of time. It is for this reason that we usually advise clients to vacate the house about the time of the sale, if it is their choice to let it go.

 

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