If you fail to pay your mortgage payments, your creditor will most likely alert you that they are foreclosing on your home. The lender should give you time to clear the default loan amount. If the matter isn't resolved or you fail to respond, the creditor will send you a letter indicating the total loan amount, and the sale of the home has been scheduled. Los Angeles Bankruptcy Attorney helps thousands of people stop foreclosure and keep their house by filing bankruptcy. Usually, this is realized by filing a Chapter 13 Bankruptcy, which endorses an automatic stay that stops creditors from selling the property.
What is a Chapter 13 Bankruptcy?
When your debt becomes overwhelming, you can seek either of the two kinds of bankruptcy relief options, depending on your needs and income. If you have a stable income or want to save a valuable asset like your home, you can file for Chapter 13 bankruptcy.
Here are the requirements, you need to know as far as eligibility is concerned:
- Steady income- for the bankruptcy court to confirm your repayment plan, you should prove that you can afford to pay the repayment plan as well as meeting the monthly household responsibilities.
- Not a business- Chapter 13 is not available to firms. That means only an individual may file this option. Nonetheless, a business-related debt that you are personally accountable for can be included in the plan. Sole proprietorships could benefit from Chapter 13.
Filing a Chapter 13 case is more complicated compared to Chapter 7. Discussed below is a summary of the filing process.
- Compulsory Courses and Filing Fee
When filing bankruptcy forms with a court clerk, you will submit a certificate showing that you underwent a compulsory counseling program as well as pay a filing fee. The counseling session assists assess whether you've adequate income to repay the creditors. On top of that, you will take another course after filing the case.
- Repayment Plan
The primary purpose of chapter 13 bankruptcy is a repayment plan which you will suggest to the court and your creditors. The plan should put all your debts into consideration.
The bankruptcy trustee and the creditor will oppose the plan. If you can amend the plan to every party's satisfaction, the bankruptcy court will approve the plan during the confirmation hearing.
You don't have to wait until the plan is approved to begin making the monthly payments.
What Happens if You Fail to Complete Your Plan?
Although financial changes can take place during your plan, that does not mean you are automatically out of the repayment plan.
If your income goes down, you can modify the amount paid to unsecured lenders. However, if you cannot pay the debt, the bankruptcy court could allow you to discharge the debt as a result of hardship. If none of the options is practical, you can convert to chapter 7 bankruptcy.
Keeping Your Home in Chapter 13 Bankruptcy
Chapter 13 can offer you opportunities to prevent or delay foreclosure and pay off back debt on your mortgage. Moreover, it can remove the amount of your second and third mortgages. It can be instrumental if you are behind in a mortgage payment and require time to become current on your payment so that you can keep your home indefinitely.
Here is a summary of how filing Chapter 13 can stop foreclosure:
Saving your House
If you're behind on the mortgage payment, and can't get current filing, Chapter 13 could be an effective method to keep your property. Chapter 13 permits you to pay some or all of the debt over time using your repayment plan. It allows you to clear the mortgage arrearage throughout your repayment plan. Typically, the length is between three (3) and five (5) years hinging on the duration you will take to satisfy all the repayment plan requirements as well as your income.
For this chapter to work, you will require adequate income that meets your mortgage payments, among your other necessary expenses. If you pay the entire amount to your repayment plan's end, you will stop foreclosure and ultimately keep your property.
Eradicating Second and Third Mortgage
If your house's value has gone down since you purchased it, filing this option can assist stop the foreclosure by getting rid of second and third mortgages. The process is known as lien stripping.
Through this process, a bankruptcy court takes the second mortgage (it's a secured debt that your creditor can foreclosure on your home if you fail to make the payments) and turns the mortgage to unsecured debt. It is done by ordering your creditor to remove their lien from your home.
How Lien Stripping Works
You can strip a second mortgage or any other junior liens if your senior lien amount on your asset is above the market value of your property. For instance, if you've first and second mortgages on the asset, the first mortgage amount should be above the value of your house before getting rid of the second mortgage.
And if a homeowner has 3 mortgages, they can strip the second and third mortgage if the initial mortgage is higher than the house's value. Nevertheless, if the house's value is more than the first mortgage but less than first and second mortgages combined, then the homeowner can only eradicate the third mortgage.
Assuming your home is worth three hundred thousand dollars and you have a three hundred and fifty thousand dollars first mortgage and a forty thousand dollars second mortgage. Because the initial mortgage is above your house worth, you could strip the second mortgage. Likewise, if you have a third mortgage in the previous example, you can also eliminate the third mortgage.
If your property is worth three hundred and eighty thousand dollars, you can't get rid of the second mortgage. However, because the joint balance of the first and second mortgage (three hundred and ninety thousand dollars) is higher than three hundred and eighty thousand dollars, you can eliminate the third mortgage.
Your second mortgage or any other junior lien stripped are considered nonpriority unsecured debt once you file bankruptcy. You are not required to make a payment on the debt out of the bankruptcy. Rather you should pay part of the unsecured debt through the Chapter 13 plan. Once you finish the repayment plan, anything left on your mortgage is wiped out.
That means if you file a Chapter 13, you will not pay the second mortgage. Nonetheless, the lien won't be taken from your home until you finish paying the plan and be awarded a discharge. Should the case be dismissed before finishing the plan, the second mortgage lien won't be eradicated.
Keeping Your Home with Automatic Stay
Once you file your Chapter 13 petition, foreclosure proceedings should stop until the court approves a repayment plan. It is known as an automatic stay. In case the repayment plan consists of provisions for clearing the mortgage arrearages after the judge approves the plan, your plan binds your creditor from proceeding with the foreclosure (presuming you continue paying your bankruptcy plan payment mortgage and mortgage).
However, if the repayment plan doesn't include paying off the mortgage arrears provisions, then after the bankruptcy court confirms your repayment plan, your lender can proceed with the foreclosure proceeding. And if you do not want to save your home, filing for this bankruptcy option gives you an amnesty from the foreclosure of a couple of months, during which you can be living in the property.
Moreover, since the bankruptcy judge will allow you to recommend a viable repayment plan, the confirmation process will take longer. It will give you a more extended break from the foreclosure.
Modification of Mortgage
Chapter 13 lets a court alter a debt secured by the home if your loan is higher than the worth of your assets. The debt amount equivalent to the property equity remains secured. In other words, collateral may be used to clear the debts should you fail to make your payments. The remaining part of your debt becomes an unsecured debt. It is considered a nonpriority debt. That means you'll pay less or none of the debt in the repayment plan. It is referred to as cramdown.
Assuming your total loan is two hundred and thirty thousand dollars, and your home is worth one hundred and fifty thousand dollars. If your loan qualifies for a cramdown, one hundred and fifty thousand dollars becomes secured by your home, and the outstanding eighty thousand dollars is the unsecured debt.
It is worth noting that as a homeowner, you can't cram down your residence mortgage. Nevertheless, cramdowns are permitted if:
- Your mortgage is for multi-unit buildings
- Your loan is for other assets that aren't part of the residence, such as a farm
- Your loan isn't secured solely by the residence (For instance your loan is secured by both business property and the residence)
- Your loan is for your mobile house that is deemed to be a personal asset
Short Sales and Deeds in Lieu of Foreclosure
If you intend to give up your house but want to stop foreclosure, you could consider a deed in place of foreclosure or short sale. In this option, you ask your mortgage lender for permission to dispose of your home at an amount that does not cover the loan.
The advantage of a short sale is that you can get out of the mortgage without deficiency liability. A deficiency happens when the amount of money you owe your lender exceeds the proceeds from your auction or sale. It also helps you avoid having bankruptcy or foreclosure on your record.
So, what happens if you have more than one loan? In this case, all lenders should agree to the short sale. However, in most cases, this is impossible because those creditors will not benefit from the short sale.
The great recession hit home equity hard, and since then, the value of homes has gone up. Therefore, a filer should carefully take into consideration the capacity to entirely protect with the homestead exemption.
Your home equity is an asset in bankruptcy. It lets you protect the asset you will require to maintain employment and household.
The bankruptcy chapter you choose will decide what will occur to the house in case you cannot protect all the home equity. A Chapter 13 Trustee will not dispose of your home. Rather, you will keep the property at a cost. You should pay an amount equivalent to the nonexempt share through your repayment plan. Making the necessary payment could be overwhelming if you've numerous nonexempt equity in your house. The court will most likely fail to approve your repayment plan if you do not have an income.
California Homestead Exemption Amount
Unlike other states, California uses a state system rather than a federal bankruptcy exemption system. You should use either:
- California System 1
In this system, a single homeowner who does not live with a disability can exempt a maximum of seventy-five thousand dollars of home equity or any other asset covered by the homestead exemption. The homeowner can exempt:
- One hundred thousand dollars if they live with family members
- One hundred and seventy-five thousand dollars if they are mentally or physically disabled or above 65 years of age
- One hundred and seventy-five thousand dollars if they are above 55 years, single, low-earners and lenders seek to foreclosure their home
In case you are married but separated, you can claim the exemption in community property your spouse occupies.
- California System 2
You can exempt a maximum of $29,275 of your home equity.
To get the value of your homestead exemption in the state of California, you should have owned the home for more than 1,215 days before filing the bankruptcy.
Contest Your Home Foreclosure
You may fight a foreclosure whether you file for bankruptcy or not. However, if you file a chapter 13, you could ask the court to determine if the circumstances upon which the foreclosure is based are inaccurate.
For instance, assuming you contest a foreclosure on the basis that the mortgage creditor failed to credit the payments correctly. A bankruptcy judge verdict in your favor could get rid of the foreclosure grounds in case you later drop the case. Remember, you cannot be confronted with foreclosure after filing Chapter 13 unless your creditor seeks and obtains court permission to lift your stay.
How Filing Bankruptcy Affects the Credit Score
In case you are contemplating filing bankruptcy, most likely, you have struggled with debt for a while, and it has already affected the credit score. Bankruptcy won't reduce the score a lot. However, if the score is fair when you file, the filing could have a significant effect.
For instance, if you're struggling to keep up with payments for a while, and the score has fallen to 550. A 550-credit score is deemed poor. Once you file bankruptcy, the score is not going to drop a lot. And if the score is 650, which is fair, the score will most likely go down to 550.
Please note choosing Chapter 13 over Chapter 7 does not offer you a lot of benefits if you want to preserve the credit score. It is difficult to tell the effect since firms which produce credit scores do not release the formulas used.
Generally, you cannot acquire new credit after filing a Chapter 13 bankruptcy. That could make your life hard, particularly if you require to replace a major appliance or your vehicle while making payment on your repayment plan.
The court knows that this can disrupt your effort to make Chapter 13 bankruptcy payment and that the new credit could mean a lot between case dismissal and successful repayment plan. In case you find yourself requiring a new loan, your lawyer may assist you in finding a considerate lender. You could also bring a court motion requesting consent to take responsibility.
Once the bankruptcy case is closed and you get a discharge, obtaining credit is not hard even with a Chapter 13 case on the credit report, provided you can pay higher interest rates for the first few years. If you handle credit responsibly, do not take more than what you can afford and pay timely, both the interest rate and credit score will gradually improve.
Finally, make sure you analyze credit bureau reports. Be sure the reports indicate a bankruptcy discharge (not dismissal). All the debts should show ''included in bankruptcy'' lest creditors think the debt was not discharged and is unpaid. It could hurt the creditworthiness.
Find a Los Angeles Bankruptcy Attorney Near Me
If you're facing a foreclosure and think that your lender is acting unfairly, you can want to challenge the creditor. Or you can want to convince the creditor to allow you to sell the home in a short sale at whatever the market will offer and then consider the debt paid. You may also want to file Chapter 13 bankruptcy or even negotiate with the mortgage creditor for your loan modification. Engaging an experienced bankruptcy attorney can help you decide on the most beneficial option. The attorney could also reveal an error or irregularity in the mortgage that can offer new ammunition in the foreclosure fight. The legal team at Los Angeles Bankruptcy Attorney is ready to take the necessary care and time and listen to your concerns as well as come up with a feasible strategy. Contact us today at 424-285-5525 to book your initial consultation.