If you have experienced financial hardship, you know that dealing with debt can be challenging. Fortunately, bankruptcy offers a way out for many debtors. Generally, bankruptcy is a court procedure under federal law that helps businesses and consumers to repay their creditors and eliminate their debts. As a debtor, bankruptcy gives you a fresh financial start by wiping out most of your debts at once. If you can demonstrate that you qualify for bankruptcy, the court will offer you protection during the bankruptcy proceedings. However, filing for bankruptcy is an arduous task. Receiving a debt discharge will typically require you to make significant sacrifices, such as forfeiting a portion of your income or liquidating your assets.
You must understand the real meaning of declaring bankruptcy and its consequences. Through court orders, the process fundamentally releases you from personal responsibility for particular debts. The release further forbids collection agencies and creditors from contacting you. However, declaring bankruptcy will expose you to scrutiny, especially if you want to retain a little more than the basics. The court will scrutinize your finances and inspect your investments carefully. Declaring bankruptcy will also damage your credit rating significantly and severely reduce your financial options.
Bankruptcy procedures are complex. Therefore, having legal assistance is crucial. You will need a skilled, knowledgeable advocate who is conversant with bankruptcy and investment properties. A San Diego Bankruptcy Attorney will guide you in making sound financial decisions regarding bankruptcy and your property. You can count on our lawyers’ experience in handling bankruptcy cases in San Diego, CA, and its surrounding areas. The attorney will negotiate on your behalf and represent you during court proceedings. With their help, you can begin taking steps to secure your financial future.
Types of Bankruptcy
The U.S. Bankruptcy Code allows genuine, diligent people to wipe away or discharge their debt to get a fresh start. Generally, your bankruptcy can be either a liquidation or reorganization. The most common bankruptcy proceedings for businesses and individuals are Chapters 7 and 13. Chapter 7 is a type of liquidation, meaning you might have to sell your property to repay your debts. Chapter 13 is a form of reorganization. You might retain your assets, but you must develop and adhere to a repayment schedule to repay all or some of your debts in three to a five-year maximum.
Chapter 7 Bankruptcy
Protection under Chapter 7 bankruptcy allows you to eliminate your debts and begin anew. Also known as “straight bankruptcy” or “liquidation,” the sale of your assets will enable you to repay your creditors and free you from your debts. Both businesses and individuals - but not corporations, can petition for bankruptcy under Chapter 7 of the bankruptcy code. Bankruptcy trustees may seize and sell some of your property to offset all or some of your debts. The advantage of Chapter 7 bankruptcy is that the court will wipe out your unsecured debts. Also, some specific types of property, such as your clothes, car, or home, cannot be sold to clear your debts. The downside of Chapter 7 bankruptcy is a depressed credit score and loss of your property.
To pay off your secured debt, you have two choices. First, you can allow the creditor to repossess the property that serves as collateral for your liabilities and continue making payments to the creditors. The second option is to pay the creditor an amount equivalent to the collateral’s replacement value. Also, it is possible to have some secured debts wiped out in your Chapter 7 bankruptcy petition.
Eligibility for chapter 7 bankruptcy and rules will vary depending on the kind of case you wish to file. You must meet several conditions, which include the “means test” to show that your income is not enough to sustain a repayment schedule under Chapter 13 bankruptcy. If you do not meet the conditions, the court can convert your application to a Chapter 13 petition. An exception is if you are a disabled veteran filing to eliminate debts you incurred during active duty, or if your liability is primarily from operating your business.
Although Chapter 7 bankruptcy wipes out unsecured debt, you still must pay some debts even after the discharge. These include:
- Recent local, state, or federal taxes
- Court fees
- Alimony and child support
- Student loans except when repayment will cause an undue hardship to you or your dependents
- Government-imposed penalties, fines, and restitution
- Debts from wrongful death or personal injury damages due to DUI
- Dues not in the schedule you file at the beginning of the case
- Debts you owe to some pension plans
- Non-dischargeable debts in a previous bankruptcy
- Non-dischargeable debts from an earlier bankruptcy due to your fraudulent activities
- Debts you owe for condominium fees
Chapter 7 Bankruptcy Exemptions
The other name for Chapter 7 bankruptcy is a liquidation bankruptcy. You gather all your assets or property and sell them to pay as much of your debt as you can before the balance can be eliminated or discharged. However, bankruptcy law protects some property types from being disposed of to settle debts. Exempt property includes specific personal property, automobiles, residential property, and wildcard exclusions, a term that describes a property that does not fit into any particular category.
California requires that you use state exemptions as opposed to federal exemptions. Fortunately, you can choose either of the two available state exemption systems. However, you can only select one system. You pick the option that suits you best depending on whether you have substantial home equity, or other valuable property except for home equity. In addition to state exemptions, you can also use other applicable federal bankruptcy exemptions.
When you file for Chapter 7 bankruptcy, some of your property cannot be exempt from liquidation. Such assets include:
- A second truck or car
- Bank accounts
- Bonds, stocks and other stakes
- A vacation home
- Stamp collections, coins, and other valuables
- Costly musical instruments except if you are a professional musician
- Family heirlooms
Chapter 7 Bankruptcy and Your Investment Properties
In your Chapter 7 petition, you notify the bankruptcy court that your income can only cover your living expenses. Therefore, it is impossible to service your existing debts. The court’s trustee can legally enter any of your properties and take possession of non-exempt assets. The trustee will sell these assets and use the funds to offset a section of your debts. The trustee will also take over your investment properties that have substantial equity for liquidation to pay your creditors. The sale will happen even if the assets are earning revenue for the whole of your estate.
Filing for bankruptcy under Chapter 7 will prevent you from keeping the equity from your rental property if it exceeds the bankruptcy exemption limits. While the state exempts the value of your home equity, the exemption applies only to your primary residence. The exceptions usually do not permit you to have a lot of equity in rental properties. If your rental property has significant value, you have to turn it over. Bankruptcy law considers it an asset that you can use to repay the money you owe.
If you pay for your rental property on time without falling behind schedule, the court may allow you to keep that property. However, If you have pending payments, you may have to surrender the property, and your lender has the discretion to decide whether to foreclose that rental property. Whether to keep or surrender the property must be in the best interest of your creditors.
Chapter 13 Bankruptcy
This bankruptcy is a form of reorganization for people whose source of income is reliable and is most suitable if your income exceeds Chapter 7 bankruptcy limits. Instead of selling your assets to repay your debts, you can file for bankruptcy under chapter 13. It will enable you to develop a repayment plan to use your income to eliminate part or all of your debts gradually. You use a court-approved plan to pay your creditors in installments for between three and five years. The payment will depend on your income, your total debt, and the amount that your unsecured debt creditors would have got under a Chapter 7 bankruptcy.
Only married couples or individuals qualify for Chapter 13 debt reorganization. Also, you must demonstrate that your debt is under the filing limits. If your debt exceeds the limits, you cannot get Chapter 13 protection. Chapter 7 bankruptcy allows you to discharge a portion of your dues after you pay part of the debt with proceeds from the sale of non-exempt property. In contrast, you can keep your property under Chapter 13.
The Chapter 13 bankruptcy process begins when you file a petition in a bankruptcy court within the area where you reside. You then propose a payment strategy to the bankruptcy court to pay off your debt in 36 to 60 months. If your gross income falls below the state median, you will submit a 36-month schedule. However, you will propose a 60-month plan if your gross income is above the state median. If you are late on your secured debt payments, Chapter 13 bankruptcy will enable you to repay without having the creditor repossess the property that serves as security for your debt. You can include your past dues in the repayment plan and keep paying them off over several years. As long as you make regular payments, you will keep creditors at bay.
When filing for Chapter 13 bankruptcy, you have some legal obligations including:
- Filing the necessary documents and forms with your local bankruptcy court
- Paying the filing fee
- Making payments according to the proposed repayment plan
- Sticking to the payment plan
After a discharge under Chapter 13 bankruptcy, you still have to pay some debts in full such as:
- Child support
- DUI liabilities
- Educational loans
- Restitution obligations and criminal fines
- Particular long-term commitments that last beyond the repayment term, such as a home mortgage
- Debts not included in your wage-earner plan
Chapter 13 Bankruptcy and Your Investment Properties
If the court views your investment properties as a positive, it may allow you to keep them. However, if the court decides that your investments are detrimental, you will have to sell them off. Filing for bankruptcy under Chapter 13 will allow you to keep your property if you can pay for it. You may also be able to get a mortgage cram down depending on the kind of investment property and the mortgage type. A cram down means reducing the value of the credit you owe to the real value of that property. The outstanding balance is considered unsecured debt, and it becomes part of your repayment plan.
Under Chapter 13 bankruptcy guidelines, investment properties such as apartment buildings and rental houses are separate from your primary residence. Therefore, you have a chance to cram down your dues to the fair market value. To cram down means, you readjust the principal balance to show the actual and current market value of the rental property. Your bankruptcy attorney will negotiate the terms with the bankruptcy trustee and creditors.
In general, though not always, Chapter 13 bankruptcy is a better option if you own investment properties. If you pay for your rental property on time, you may keep the property if your attorney proposes a feasible payment plan, and the court approves it. If your payments are behind schedule, your attorney can recommend a payment plan that includes the amounts due, and you retain your property. However, the court must also approve of the strategy.
Under chapter 13 guidelines, whether you can retain that property or not is dependent on the cash flow from the property and your willingness to use the property income to pay the bankruptcy trustee. If the investment is profitable, you can agree to combine all or part of the profit with your disposable income, then channel it to debt repayment. With this arrangement, it will be in the best interest of the creditors that you retain your rental property in bankruptcy.
If the property is netting losses that you expect to last the entire bankruptcy period, you will have to give up that property as part of your repayment plan. This scenario usually happens when you borrow funds to purchase the asset, but the return is insufficient to repay the borrowed funds. A bankruptcy court will generally consider any investment with negative cash flow as a money-losing property. Therefore, the judge will not allow you to keep a property that is losing money at the expense of creditors to whom you could pay more.
Even after you propose to surrender your loss-making investment property, the bankruptcy trustees might have no interest in a property that cannot pay creditors. Consequently, despite your proposal to sell the property, you might eventually have full control of the asset and decide to either sell it, short sale it, or rent it. If the investment is wholly yours, the probability that you will keep it is higher. If it is a currently unoccupied real estate property, the trustee will let you keep it. However, they will not allow you to spend money on mortgage payments, refurbishments, or maintenance.
In addition to cash flow, bankruptcy courts also use the good faith test to determine whether to allow you to keep your unprofitable property. Bankruptcy courts serve as courts of equity as well as courts of law. Therefore, they exercise their powers of fairness to act justly and assist honest but unfortunate debtors. Your attorney must demonstrate that keeping your rental property will be beneficial to your creditors. Often, when you apply the good-faith test to your loss-making property, the court will likely determine that you are a genuine debtor. Therefore, you will use your disposable income to repay your debts instead of spending it on an unprofitable investment.
Other Types of Bankruptcy
Apart from Chapter 13, there are two more forms of reorganization bankruptcy. They are:
This type of bankruptcy mostly applies to businesses that are on the verge of collapsing, as a way of helping them to reorganize their affairs and pay off all outstanding debts. You can also petition for bankruptcy under Chapter 11 as an individual if you have substantial earning potential, but your debts exceed both Chapter 7 and Chapter 13 limits. You can also file for Chapter 11 bankruptcy if you own significant quantities of non-exempt assets, such as multiple homes. It allows you to propose a post-bankruptcy plan that includes seeking alternative sources of income and reducing costs, while you temporarily hold creditors at bay. However, in comparison with Chapter 13, filing for Chapter 11 bankruptcy is more time consuming and expensive.
This category of bankruptcy is specifically for family fishers or family farmers who have a regular annual income. It allows you to propose and execute a repayment plan for all or part of your debts. The regular income requirement ensures that your yearly income is stable enough to sustain monthly payments according to your Chapter 12 repayment plan. Chapter 12 also contains provisions for circumstances in which your fishing or farming income is seasonal. You can propose a plan to pay your creditors in installments for three to five years. The proposition should not extend beyond three years except with the court’s approval, and even then, it should not exceed five years. It must also include all your disposable income.
Contact a San Diego Bankruptcy Attorney Near Me
Bankruptcy laws are quite confusing, and it can be challenging to determine the form of bankruptcy that will work best for you. For this reason, you need a knowledgeable attorney to assess your circumstances and advise you on the best course of action. If you live in or around San Diego, CA, call us at 619-488-6168 to evaluate your options and help you protect your investment properties.