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Declaring Bankruptcy Can Affect Your Mortgage, But Filers Can Control How

October 8, 2010

As Rialto consumer bankruptcy lawyers who also handle loan modifications, we get many inquiries from clients who are looking into bankruptcy as a way to handle problems with their homes. A Sept. 30 article from discusses the relationship between the two -- which is real, and can be strong, but not as simple as many people might think. As the first paragraph says, a lot depends on which kind of bankruptcy you choose to file. For most individuals and couples, that means a choice between Chapter 7, a "liquidation" bankruptcy, and Chapter 13, which involves setting up a long-term payment plan. Not every filter is lucky enough to have a choice, but as a rule, Chapter 13 is a better choice for people who wish to keep their homes.

The article starts by noting that filing for bankruptcy puts an automatic stay on your credits. That means creditors can no longer take any legal actions against you -- including foreclosure actions. This is not permanent, but it gives many filers time to breathe while they and the courts decide how to sort out their finances. This is true of both types of bankruptcy. In Chapter 7, you sell off all of your property that is not exempted under state law and use that to pay your creditors. This is relatively fast -- we recently discharged two Chapter 7 bankruptcies in under four months -- but harsh. California's "homestead exemptions" generally allow you to claim less than $100,000 in home equity as exempt. If you have more than the exemption amount in equity, a Chapter 7 trustee could sell your home to "liquidate" the remaining equity. Thus, whether you can keep your home in Chapter 7 depends on your equity and the size of your exemption.

In Chapter 13, you do not sell property -- you set up a plan to pay back what you owe. This protects your home's equity but continues your debt to the mortgage lender. That means you can probably keep the home as long as you can keep up with the payment plan over three to five years. That plan will be designed to be realistic and achievable according to your income, making it a good choice for people who have a steady income but need a court's help to catch up after major financial setbacks. Unemployed people may not be able to use a Chapter 13. Until recently, the 2005 changes to the bankruptcy law made it hard for employed people to qualify for anything other then Chapter 13. But more and more, our Seal Beach personal bankruptcy attorneys are seeing people whose debts are so severe compared to their incomes that either kind of bankruptcy is an option.

Howard Law PC stands by clients throughout the bankruptcy process, from the first meeting to the day your debts are discharged. Not everyone who has some debt is a candidate for bankruptcy, but if you have more debt than you can pay back over several years, we encourage you to contact us to discuss it. Many people put off looking into a bankruptcy for emotional reasons; they believe filing for bankruptcy is something they should be ashamed of. Our Chino Hills individual bankruptcy lawyers believe that bankruptcy can actually be a responsible and rational choice for people in certain financial situations. Rather than saddle your family with decades of debt -- and run through retirement savings or other accounts that could be protected -- you should consider dealing with the debt head-on. In addition to stopping calls from creditors, this allows our clients to make a fresh start unencumbered by huge debts.

If you're tired of unpleasant phone calls from creditors about debts you know you can't handle, you should call Howard Law for help. To tell us about your situation and learn more about our experience, send us a message online or call 1-800-872-5925 today.