When debts become too much for an individual or a business entity, most people opt to file bankruptcy. In California, declaring bankruptcy prevents creditors from coming after you to claim payment. Also, your unsecured debts will be eliminated to give you some time to organize your financial life. However, bankruptcy is not always a good thing, especially for property and homeowners. After your bankruptcy petition is granted, you will lose all your property that is not exempt from the bankruptcy trustee.
Fortunately, bankruptcy is not the only way to help you organize your personal or business finances. If you are a property owner on the verge of bankruptcy, but you fear its repercussions, you should consult us at the Los Angeles Bankruptcy Attorney. We will guide you through the ways of avoiding bankruptcy and other alternatives to your situation.
Overview of Bankruptcy in California
When debts become too much to pay, and creditors are all over your case claiming payments, most people will opt to declare bankruptcy. Filing for bankruptcy prevents creditors from contacting you to seek compensation. Therefore, you get an opportunity to have your personal or business finances in check. Based on the type of bankruptcy you declare; your assets will be sold to pay your debts or creditors will allow you to make a repayment plan.
There is no question that filing bankruptcy gives you relief for your debts. However, the state of bankruptcy affects your credit score and the ability to take a loan in the future. Also, losing your hard-earned properties could be quite tricky. Sometimes when you file for bankruptcy, you will have nothing else to run to when things worsen. This is because there is a qualification criterion for each type of bankruptcy, and there is a time limit within which you can file bankruptcy again.
If you are a property owner who is considering bankruptcy as an option to rearrange your financial life, it is crucial to seek guidance from a bankruptcy attorney. A competent lawyer will take you through the options to ensure you do what is best.
Effects of Bankruptcy on Property Ownership
Suppose you are an owner of a rental property such as houses, rental apartments, or commercial space. In that case, you need to consider how bankruptcy will affect your decision before deciding to file. Whether you will retain ownership of your property or not will depend on the category of bankruptcy you choose. However, bankruptcy, regardless of the type, will affect your creditworthiness and reputation in general.
If you file chapter 7 bankruptcy, you can only keep the secured property. California law will only allow you to keep your home, but the rental properties may be liquidated to cover the mortgage loans. This is because these properties, even when used as residential, are not exempt liquidation by the bankruptcy trustee. However, the trustee will liquidate non-exempt property if the sale proceeds will be more than the cost of taking it. In most cases, the trustee will take away property for which you have the most equity.
If you file chapter 13 bankruptcy, you may be allowed to keep your property. However, you have to make a three to five-year plan to repay your loans. When you make a repayment plan, you will end up paying more than you owe to keep your rental property. If you have rental property and are on the verge of bankruptcy, you should consult a bankruptcy attorney for guidance.
How Can I Avoid Bankruptcy?
Declaring bankruptcy is viewed as a quick and easy method to get rid of debts. While some people get rid of these debts quickly, unexpected emergencies and job loss could prompt you to declare bankruptcy. Some steps that can help you avoid getting into bankruptcy include:
- Maximize income. Most people get into huge debts when they are unable to finance their lifestyle. By maximizing your income, you can earn enough to pay for your living expenses and save for an emergency. You can maximize your income by obtaining a second or third job if you already have one. If you are already on the verge of bankruptcy, you can start to pay your debts by selling things you do not need. If these steps keep you away from bankruptcy, they are worth it.
- Cut expenditure by making a budget. The first step you need to take for change is by identifying your expenses and what makes you take loans. You can then create a budget on your expenditure. This helps you identify the unnecessary costs and cut them down. If you are unable to manage your lifestyle, you should consider downsizing. You can do this by moving to a cheaper house or skip a vacation.
- Prioritize your debts. Mostly, being in debt is what is likely to push you into bankruptcy. If you feel your finances are not in order and you are considering bankruptcy, it would be wise to focus on the debts you owe.
- Seek financial counseling. When you are facing financial difficulties and cannot cover your debts, it can be very devastating. If you are heading to the point of bankruptcy, you should consider seeking financial counseling. The counselor can help you learn better management of finances so you can get back on your feet.
Alternatives to Bankruptcy in California
Bankruptcy may be the easiest way to get creditors off your back. However, it is not the only way to rearrange your business and personal finances. The following are common alternatives to bankruptcy that could help you maintain ownership of your property:
Debt consolidation is when you take a new loan to pay already existing debts. Several debts will be combined to form a single debt that has better terms. The favorable terms will include lower interest and low monthly payments. You can use debt consolidation as an alternative to bankruptcy to cover credit card loans. However, it is crucial to understand that debt consolidation will not eliminate your debts, but your loan terms are changed.
When you are overwhelmed by various debts, you can apply for a loan to consolidate the debts into one liability. You will then pay the single debt until you are done with it. Mostly, you will be required to apply for debt consolidation through your bank or credit union. If you have a good credit score and payment history, it will be easy to receive debt consolidation. Consolidation increases the possibility of a creditor to collect from a debtor. Therefore creditors will not be against your attempts.
Besides taking a loan to consolidate our debts, you can combine all your credit card debts into one card. This may allow you to pay the debt with little or no interest. Also, you can get the Home equity loans. The interest for these loans can be deducted from some taxpayers. Before embarking on debt consolidation, it is crucial to have legal guidance.
Types of Debt Consolidation
There are two main categories of debt consolidation, including:
- Secured loans. A secured loan is often backed by one of your assets, which works as collateral. Some of the items you can use as collateral for a secure loan are vehicles or houses.
- Unsecured loans. These loans do not require collateral and are more challenging to get. Unsecured loans often have a higher interest rate, and you can only qualify for a low amount. When you get a loan to consolidate your debts, the interest rate is fixed and doesn’t increase with time.
Importance of Debt Consolidation
Debt consolidation dramatically benefits individuals who have multiple debts and fear losing their assets and credit score in bankruptcy. By combining all the debts, you can make one monkey payment, which reduces the struggle of juggling different payments. Undergoing debt consolidation helps reduce calls from various creditors claiming payment. If you are consistent in making monkey payments for the combined debt, your credit score may rise significantly.
Even though debt consolidation offers better terms for loan repayment, it is crucial to be keen on the payment schedule. By having a shorter repayment period, you will not have to pay more than you owe.
Not all individuals can qualify for debt consolidation. A borrower should be creditworthy and have a steady income to qualify. A letter of employment and your credit statements may be a requirement when you are applying for consolidation. When the consolidation is granted, your lenders may have to decide the creditor to be paid first. You will move to other creditors until all the debt is paid. Debt consolidation helps you avoid all the consequences that accompany bankruptcy status.
Debt settlement, commonly known as relief, is offering payment of your debts in a lump sum. The process of debt relief allows you to make payments less than what you owe the creditors. An offer for the relief could range between 10% and 50% of your debts. When you choose debt settlement as a bankruptcy alternative, you can pay the debt or get a settlement form to settle it for you. However, if you use the settlement form, you will have to pay the service fees. The firm will charge you the fee after they have settled your debt as agreed with the creditors.
In California, debt settlement could include taxes. The forgiven debt is treated as taxable income by the IRS. However, you can convince them that your liabilities exceed the assets and escape tax payment for the discharged debts.
If you have not been making payments for your debts, it will be easier to negotiate a debt settlement death than a person who has been paying. If you want to try out debt relief instead of declaring bankruptcy, you should stop. Your credit scores could suffer during a debt relief process since you may pay significantly less than you owe. However, the scores do recover eventually.
Mostly, creditors will continuously call you and threaten to file a lawsuit for failure to pay the loans. Therefore, if you have the money, it would be wise to cover the debt. There is no guarantee that your creditors will accept to receive an amount less than your debt as payment.
When the debt relief process works as planned, everyone involved could benefit from the arrangement. As a debtor, you can get rid of the debts, and creditors get the payment that they could lose if you opted for Chapter 7 bankruptcy. When you are in too much debt, it could be challenging to get yourself a bankruptcy attorney. Therefore, making a plan to pay your debt could be an excellent alternative to bankruptcy for any property owner.
Restructuring is a process through which a company could avoid the risk of default on its debts. If you are on the verge of bankruptcy, you can use this process to restructure your financial life by managing your debts. By restructuring your debts, you give priority to some loans. Your creditors could also alter the terms of your loans. The restructuring process involves the reduction of interest rates on your existing loans or extending the repayment time. Such steps will help you manage your debts and avoid getting into bankruptcy.
Mostly debt restructuring is a better option for all involved parties as compared to bankruptcy. This is because you will avoid the repercussions of declaring bankruptcy, and the lenders receive more than they would from bankruptcy proceedings. Sometimes creditors opt for a debt-equity swap where they cancel some of your debts, and in return, you give them equity to property used as collateral for the debts.
If you seek to restructure your debts, you can negotiate with the bondholders to write off a portion of your loans’ interest. Debt restructuring is a less expensive alternative to bankruptcy. Legal guidance is crucial when you are weighing your options during financial difficulties.
A loan modification program will allow you to communicate with your lenders to discuss your mortgage terms' modification. A third party is appointed to track your communications, and the creditor will participate willingly. A loan modification proves it is tiresome and lengthy. There is an eligibility criterion that one has to meet before entering the LLM program.
During a loan modification, your lenders will change your mortgage's terms to a more favorable one. Loan modification helps you get affordable monthly payments and a more extended payment period. This will allow you some time to put your finances in check and avoid getting into bankruptcy. If you want to get a loan modification, you will be required to apply through your vendor. However, you will need to establish your problematic financial status to qualify.
A short sale is when a homeowner is in financial distress, and they decide to sell the property for an amount less than its value. The property is sold to a third party, and the proceeds go into paying the creditors. Depending on your agreement with the lender, they can forgive the balance or require you to cover it at a lower rate. Before the short sale process starts, the lender is required to sign a pre-foreclosure. Documentation indicating the necessity of short sale will be necessary.
A short sale should be a lengthy and complicated process that could take up to one year. However, this process will not affect your credit score as much as a foreclosure. A short sale will not always negate your mortgage debt after you sell the property. There are two parts of a mortgage that uses the property as collateral to the loan and gives a lender right over the property. This section of the mortgage agreement is waived when you decide to go through with a short sale.
The second portion of mortgage agreements is your promise to pay back the loan. Even after a short sale, the creditors could come after you to demand the deficiency. After undergoing a short sale, you may be allowed to purchase another home almost immediately. A foreclosure stays in your record for up to seven years. Therefore, short sales would be better than foreclosure for individuals who invest in property.
Find a Bankruptcy Attorney Near Me
Being unable to pay your debt and manage your finances can be devastating. This is because creditors will continuously be calling you to demand payment for their loans. Most people end up declaring bankruptcy to get rid of their debts or find a way to make payments without pressure from the creditors. Unfortunately, property owners are likely to lose some of their properties in bankruptcy since they are sold to cover debts. Besides bankruptcy, there are other options, such as informal settlement, debt consolidation, and debt repayment, among others that you can use to rearrange your finances.
For a better understanding of ways to avoid falling into bankruptcy, you should seek legal guidance. At Los Angeles Bankruptcy Attorney, we will guide you into making the right decisions to help you retain ownership of your property during the tough times. Contact us from anywhere in Los Angeles at 424-285-5525.