5 Positive Things That Filing Bankruptcy Can Do For You

I am often asked about the pros and cons of filing for bankruptcy protection.  I tell them simply that I can name 5 positive things right off the top of my head that bankruptcy can do.  Of course there are more and this list is not exclusive:

1. The Automatic Stay – Hands down the leading benefit of  filing for bankruptcy protection is the automatic stay, which immediately stops most creditors and collection actions in their tracks. 

2. Debt Relief – A key goal of a bankruptcy filing is often to obtain a Discharge from one’s debts.  A Discharge acts as an injunction to prevent a creditor (or most any other debt collector) from attempting to collect on any dischargeable debt included in the bankruptcy.

3. Stripping a Second Mortgage from One’s Home – The process of “lien stripping” is reserved for Chapter 13 cases – although a recent decision by the 11th Circuit Court of Appeals may pave the way for stripping second mortgages in Chapter 7 bankruptcies as well.

4. Repay Creditors Over Time – Chapter 13 bankruptcy allows debtors the opportunity to repay all or some portion of their debts in a reasonable fashion.  Typically, the Chapter 13 payment is equal to the debtor’s disposable monthly income. 

5. Rebuild Credit – Yes, bankruptcy can actually improve one’s credit worthiness.  Many people may be surprised to learn that obtaining credit after a bankruptcy is easier to obtain than shortly before the filing.  Why? The answer is simple.  First, one may file bankruptcy to discharge debt only once every 8 years (4 years following a Chapter 13 discharge).  As such, a creditor making immediately after a bankruptcy discharge stands a much better chance getting paid in full.  Second, bankruptcy sheds the debtors of overburdening debt, thereby freeing up disposable income to pay new obligations.  Bankruptcy is often the financially responsible step to take and can be a key part of building a strong financial future.

Call us today to learn more about the bankruptcy process.

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MODIFICATION, FORECLOSURE AND BANKRUPTCY MYTHS

In my Bankruptcy practice, I see people every day in the midst of a homeowner’s dilemma. Should one try to save the house, walk away from the home, file bankruptcy, do a modification, or something else?  When I first meet a new client, I often spend considerable time simply dispelling myths.

Here are some of my favorites:

1.    Modification is a federal program – they have to give me one.  Wrong.  The statistics are daunting, fewer than 30% of applications for modification are granted!   And under the best of circumstances, the path to a loan modification is an arduous process, often lasting many months.

2.    Modification will reduce the principal amount owed on the home.  Wrong.  Occasionally, the bank will reduce the principal owed - but it is very rare.  That said, there appears to be some  good news on the horizon though as more lenders appear willing to consider a principal reduction to avoid foreclosure.

3.    I will not be able to modify my loan if I file bankruptcy.  Wrong.  We often see loan modifications given to those in an active bankruptcy or port-Chapter 7.  In fact there are federal laws that typically make loan modifications inside a bankruptcy easier to obtain than outside a bankruptcy.   Moreover, eliminating credit card or other unsecured debt typically helps the loan modification process since it frees income to be used for house payments.

4.    Applying for a modification will stop a foreclosure.  Wrong.   The foreclosure process will usually continue while a modification application is being considered.  Sometimes the sale date will be postponed, but the process will go forward unless the modification is granted,.  Filing bankruptcy always stops (or at least postpones) a foreclosure.

5.    A modification will get eliminate missed payments.  Wrong.  Generally, missed payments will be added on to the loan balance and paid at the end of the term.  Depending on the circumstances, bankruptcy may get rid of or reduce some of the money owed on a house.

6.    Filing bankruptcy causes more damage to one’s credit than foreclosure or shot-sale.  Wrong.  It’s usually just the opposite – a foreclosure or short-sale is worse for your credit score than filing bankruptcy.

7.    If the house is foreclosed, I will have to pay the bank the money that I owed that they didn’t receive when they sold the house.  Wrong.  California has an anti-deficiency statutes, meaning that the bank that holds the first mortgage cannot come after the homeowner post foreclosure.  Many states do not have these statutes, but filing bankruptcy will get rid of anything owed the bank.

Give us a call to arrange a time to have a substantive conversation with an experience bankruptcy and real estate attorney.

ON GOING 401K CONTRIBUTIONS NOT PERMITTED IN CHAPTER 13 BANKRUPTCY

A chapter 13 debtor cannot continue payroll deductions for a voluntary retirement account, such as a 401(k), during a chapter 13 case, according to a recent appeals court ruling.  In re Parks, No. 11-60050 (9th Cir. BAP Aug. 6, 2012), also ruled that 401(k) loan repayments could, however, continue during a chapter 13 plan.  While In re Parks shows that courts around the nation continue to be split on the chapter 13 voluntary retirement account contribution question, Parks also preserves the unanimity among courts that retirement account loans can continue to be repaid during a chapter case.
The debtor in the Parks case had included in his “means test,” or Form B22C, and also on his Schedule I, a monthly deduction of $318.00 for ongoing contribution to his 401(k) plan.  This deduction left him with a negative $40.04 on the means test, but with a positive $886.97 on his Schedules I and J.  He proposed a monthly chapter 13 payment of $475.03.
The chapter 13 trustee objected, arguing that sections 541(b)(7)(A) and 1306 of the bankruptcy code should read together to forbid a debtor from continuing to make voluntary retirement account contributions while in chapter 13.  The trustee asked the court to rule that such contributions should instead be paid into the chapter 13 plan, in order to make additional payments to creditors of the debtor.
The appeals court agreed with the trustee.  It noted that although section 541(b)(7)(A) excludes retirement account contributions from the bankruptcy estate, and excludes such contributions from section 1325′s definition of disposable income, the exclusion only applies to funds already contributed to the retirement account on the date of the filing of the chapter 13 case.  Thus, ongoing retirement account contributions were not within the scope of section 541(b)(7)(A) and were forbidden.
The appeals court also found it persuasive that while section 1322(f) specifically allows for the repayment of retirement account loans during chapter 13, section 1322(f) is silent on the subject of ongoing retirement account contributions.  The court therefore ruled that although Congress had chosen to allow repayments of retirement loans during chapter 13, the omission of ongoing payments into retirement accounts from section 1325 demonstrated that Congress had chosen not to allow them.