For most people, the home is the most valuable asset they have, and the thought of losing it is petrifying. Unfortunately, financial woes can make it challenging to pay off creditors, and filing for bankruptcy is the only recourse. Coming to terms with an impending bankruptcy is hard, and the process is time-consuming. More so, taking this legal measure of eliminating debt exposes you to losing property, and this record stays on your credit report for seven to ten years.
This process entails many legal forms like "the Statement of Financial Affairs" and "Schedules A through J," which are confusing for non-experts in this field. The San Diego Bankruptcy Attorney is experienced in handling bankruptcy cases for clients and helping them retain their homes. We achieve this by having the primary residence exempted as per California or federal laws. We have prepared this guide to help you understand what bankruptcy entails, and how we can help you keep the primary residence.
What are the Different Types of Bankruptcy?
There are three distinct chapters of bankruptcy, offering various strategies for handling debt. These approaches have different legal and financial implications, and we strongly advise you speak to an experienced attorney to help you decide.
- Chapter 7 Bankruptcy
Chapter 7, otherwise known as liquidation bankruptcy, is the most prevalent option, and the process usually takes four to six months to complete. This code is ideal for people whose incomes are lower than the California median income as per the number of people per household. If you have little to no disposable income and your debts are too high to repay after necessities, you are eligible for Chapter 7.
The majority of cases here are "no asset cases," which means you don't give up essentials such as a vehicle, home, or equipment that you need for work. Nonetheless, creditors will be gunning for possessions that are not protected by exemptions. If you wish to keep valuable assets like your home and car, you can reaffirm the debt. This agreement confirms to the bank that you are still responsible for the loan bankruptcy notwithstanding.
You can regain ownership of nonexempt assets by repurchasing them at the price your creditors would have received after the auction. Please note, the law only permits utilizing Chapter 7 once every six years.
- Chapter 11 Bankruptcy
Chapter 11 is a debt relief process aimed at helping small enterprises that are hard-hit by the adverse effects of economic unrests locally and internationally. This filing allows your business to stay afloat during this season of financial distress and immediately after, thus giving you time to recover.
Most business owners prefer restructuring to reduce their payment obligations and determine more favorable terms of payment while balancing income and expenditure. If you offered your residence as collateral for a business loan, pursuing Chapter 11 is a smart move.
- Chapter 13 Bankruptcy
Chapter 13 of bankruptcy or a wage earner's plan helps people with steady incomes to devise repayment plans for all or part of their debt. Many people who fail to qualify for Chapter 7 or are afraid of losing property turn to Chapter 13, so they can retain the home and keep making payments. This code of bankruptcy is a plan that allows you to pay back some or all debts within three to five years. San Diego Bankruptcy Attorney highly recommends filing under this code so you can save your home from foreclosure. Nevertheless, you must keep paying mortgage installments as scheduled.
If you recently lost your job or business, filing for Chapter 13 allows the court to stall the liquidation process until you secure another job. If your income reduces or your bills increase significantly, or both events, this bankruptcy will prevent collection or foreclosures if only for a while. This process can last anywhere between three to five years, but you are free to utilize this option repeatedly.
As you can see, California law has provisions to help people cope with debt. The right bankruptcy option usually depends on the unique circumstances, and this is why you need an experienced bankruptcy. People with liabilities more than 50% of their income, and they cannot pay within five years, are ideal candidates for bankruptcy.
While debt is so pervasive in society, many people are not aware of how bankruptcy can help. The process sounds intimidating, not to mention the stigma attached to the word bankruptcy. Now that you understand the different kinds of bankruptcy codes, you must familiarize yourself with the most common bankruptcy terms.
Exploring Common Bankruptcy Terms
- Lien – this is a legal action that permits a creditor to take ownership or dispose of debtor's real estate to pay for outstanding debts or security purposes.
- Secured debt - this refers to liability that is supported by reclaimable property such as a mortgage for your primary residence or an auto loan. The collateral will secure such obligation, and if you default on the loan, your creditors are legally permitted to seize the collateral.
- Unsecured debt – this is debt for which the creditor does not have rights to tangible collateral like credit cards.
- Bankruptcy trustee – this person or corporation is appointed by the bankruptcy court to represent the creditors' interests during court proceedings. They examine the debtor's petition, overseas property liquidation under Chapter 7 filings, and pays off creditors with the proceeds. The same responsibilities apply under Chapter 13 filings where the trustee manages the debtor's repayment plan and disburses payments to creditors.
- Credit counseling – you must attend a counseling session with a nonprofit budget and credit counseling agency before you can legally file for bankruptcy. The court will also require you to finish a course in personal financial management before the bankruptcy is discharged. One session lasts ninety minutes, and you must follow this up with a two-hour meeting after the process concludes. You will pay an estimated $50 per session, and you can attend in person or through telephone. A judge could waive these requirements under certain circumstances.
- Means test – the federal Bankruptcy Code requires people who wish to pursue Chapter 7 bankruptcy to prove their diminished capacity to repay outstanding debts. This measure ensures that people are not merely abusing this code. The test takes into account your income, assets, expenditure, and unsecured debt to see if you can manage to pay at least a portion of the obligations. Failing the means test can have this request dismissed, or you can be forced to file under Chapter 13 bankruptcy.
- Reaffirmed account – Chapter 7 bankruptcy has the provision to keep paying off debt that could be discharged in the proceedings. Reaffirming the account and your devotion to make payments helps you to retain ownership of a piece of collateral that would otherwise be sold in the bankruptcy process.
- Liquidation – any assets that are not legally considered exempt can be sold so that creditors can be paid with these proceeds. Selling off items helps you to clear some part of the debt so there will be fewer creditors coming after you.
- Discharged bankruptcy – once you have successfully finished bankruptcy proceedings, your debts are considered as released. If you file under Chapter 7, the bankruptcy is discharged after your assets have been auctioned off and creditors paid with the proceeds. Under Chapter 13, debt is released when you complete the court-mandated repayment plan.
- Exempt property – as seen above, bankruptcy may require you to sell assets to repay creditors, but not all property is subject to being auctioned. California law determines what assets you can keep, such as tools of the trade, primary residence, or your family car. Such properties are deemed exempt.
Common Reasons for Filing for Bankruptcy
While living in debt is not atypical, not paying off debt for an extended period exposes you to catastrophic results. Here are the most common reasons people file for bankruptcy in San Diego:
- Medical Bills
Harvard University surmised that 62% of personal bankruptcies are due to medical expenses even for people with some form of insurance. Chronic illness and ailments that require specialized accrue debt that is beyond what most people can manage, so they sink into a cycle of debt.
In spite of more people signing up for the Affordable Care Act, people are still filing for bankruptcy when medical bills pile up, the American Journal of Public Health finds. There is inadequate health insurance which means copays are significant, and without emergency funds, the only recourse is going into debt.
- Before or After Divorce
California is a community property state which means all assets gained during the marriage must be divided equitably between the separating spouses. Divorce is expensive, and the new family arrangement creates additional expenses such as renting another home or buying another car. Alimony and child support are court-ordered expenses that must be honored every month, and this too strains your budget.
San Diego Bankruptcy Attorney advises divorcing couples who are considering filing for bankruptcy to select the most optimal time for this legal action. If your combined income is above the federal threshold for Chapter 7, you can register individually after divorce and eliminate unsecured debt inside three months. Please note, the repayment plan for Chapter 13 applies to both parties.
If the situation warrants addressing the debt issue before the divorce, you must complete bankruptcy proceedings before commencing the disillusionment of marriage. Filing for joint bankruptcy is an excellent choice, so marital debt is addressed together, and neither partner is left with an unnecessary liability.
- Credit Card Liabilities
Credit card debt is yet another major contributor to bankruptcy. Living above your means, not paying utility bills, or being out of work could lead to excessive debt on your credit card. The respective creditors will start calling to collect a loan, and they may even sue.
If your financial situation is unlikely to improve, filing for bankruptcy is a smart move. Nonetheless, you will have to pass the means test to determine eligibility for bankruptcy. If your income is enough to pay credit card debt, you cannot file under Chapter 7, but Chapter 13 is still a feasible option.
Losing your job or not earning enough due to an economic downturn can make it difficult to make mortgage payments. You will be subject to late fees and other extra costs that make repaying these installments harder. Lenders may also demand you pay a lump sum or else they take legal action. Failure to meet their demands leaves you vulnerable, and they could foreclose on the property.
Since mortgages are secured debts, a creditor can seize the property to recover their money, and the easiest way to achieve this aim is auctioning off the house. The sale can happen through judicial and non-judicial methods, where the latter does not require a court process.
Selling the house may not yield enough money to repay mortgage installments, especially when the real estate market is slumping. If you are struggling to service a mortgage, filing for bankruptcy helps to repay the balance and start over without debts plaguing you.
What are the Effects of Filing for Bankruptcy?
One of the most significant consequences of this legal action is losing property that is not exempted by law. You could part with pricey artwork, jewelry, your fleet of vehicles, and other property, as ordered by a California court. Our goal is to help you retain the family home, but you may have to part with vacation homes and other properties. The court will decide based on how much these properties are worth, among other factors.
A bankruptcy discharge is personal, which means creditors can still collect from the other entity involved. Therefore, if you had co-signed on loan with a business associate or your spouse, filing for bankruptcy does not release them from debt. They will have to pay as per the terms of the agreement.
Bankruptcy is a matter of public record, and you will have to disclose your financial issues publicly. You will attend a meeting of creditors which is overseen by the bankruptcy trustee. Holding a public discussion means exposing bad financial habits, income, and assets, and other relevant financial matters. You will field questions in public, but exceptional circumstances may warrant a private discussion. Lying during bankruptcy is a federal offense, so we advise you to be brutally honest to avoid these repercussions.
Having a bankruptcy charge on your credit report does not look great, and lenders may prefer to extend loan facilities. If they do agree to issue a loan, they will charge exorbitant interest rates to cover them should you default. Such creditors will not be open to negating favorable loan terms, and this too will hurt your business. More so, having all or some of your debt discharged will still hurt your credit score. The onus is on you to build up an impressive score for future purposes.
Getting a credit card loan or a business loan will not be forthcoming until your credit score is up again. Make sure you pay off bills on time and refrain from the bad money habits that led you here in the first place. The same conditions apply to mortgages. In the next section, we discuss how San Diego Bankruptcy Attorney can help you retain the family home after filing for bankruptcy.
Can Bankruptcy Take Away all Debts?
The sole purpose of filing for bankruptcy is to eliminate most of the debt, but some liabilities are unforgivable by law. Court-ordered spousal and child support, government fines and penalties, federal tax liens, student loans, etc. cannot be discharged in bankruptcy proceedings. If you have these types of debt, you must devise a workable plan to repay them to avoid the adverse consequences of not paying the government or other creditors.
Please remember, filing for bankruptcy is not cheap, and the process can rack in hundreds or thousands of dollars in legal fees. We advise clients with limited means to petition the court to waive the filing fees. The court will only issue a fee waiver if your income is not greater than 150% of the federal poverty threshold.
Bankruptcy is not synonymous with failure, and neither is it a character flaw. People who utilize this financial remedy well learn the discipline of handling money and being frugal, especially with loans. The government gives people who cannot afford their debt a means to rebuild their lives.
Find a Bankruptcy Attorney Near Me
Living in debt can be crippling, and no matter how hard you try, repaying accumulated debts is insurmountable. You may have lost your livelihood, or your expenses skyrocketed, or both thus necessitating filing for bankruptcy. This decision requires expert advice from qualified attorneys who understand the legal proceedings in San Diego.
Creditors will keep calling and adding late fees, not to mention threatening to auction off your assets. While you may still end up losing property, we can help you retain ownership of your home. Time is of the essence, and you need to make wise decisions from now moving forward. Contact the San Diego Bankruptcy Attorney at 619-488-6168, so we can start helping you exit a bad financial situation.