Filing for Bankruptcy Won’t Always Save Your House
“Stop Foreclosures,” “Protect Your Home” and “Get the Fresh Start You Deserve.”
These are but a sampling of the ads for bankruptcy attorneys and paralegal services that have run recently in The Times, other newspapers, and on radio and TV.
Personal bankruptcy is a painful process and rarely turns out to be a way for people to save their homes. Filing for bankruptcy protection can buy some homeowners enough time to sell their homes before a lender completes foreclosure. And, in some cases, a bankruptcy can help homeowners keep their property. Most of the time, however, staying in a home after a bankruptcy turns out to be untenable.
Homeowners in the San Fernando Valley and Ventura County who are contemplating a bankruptcy filing--especially after damage from the January earthquake--should do their homework before entering bankruptcy court.
“I think people are being misled by many of the bankruptcy ads,” said Marjorie Erickson, assistant U. S. trustee in Los Angeles with the Justice Department’s Office of the U. S. Trustee, which administers the bankruptcy system and serves as a watchdog over bankruptcy court proceedings. Bankruptcy won’t necessarily stop foreclosure, she said. Often, it just delays the inevitable.
“If there is no equity in the home, debtors in a Chapter 7 (liquidation) bankruptcy may buy themselves one or two more months in the home,” Erickson said. If there is equity, she added, the owner may have time to sell the home and avoid foreclosure, or perhaps the financial situation will improve and the debtor can get current on the loan and start paying on time again. The latter, Erickson acknowledged, is relatively rare.
If you do file for bankruptcy, it can remain on your credit report for seven to 10 years. This makes getting new credit cards and other credit more difficult--but not impossible. Some credit card companies offer cards to people who have recently filed for bankruptcy protection, and many loan brokers report that a would-be borrower can get a mortgage about two years after a bankruptcy if the borrower has two good tax returns to show a lender.
Filing for bankruptcy also costs money. There are lawyers or paralegal services charging as little as $150 for filing a Chapter 13 bankruptcy, plus some minor court costs. Expect to pay about twice this much in most cases, though. A simple Chapter 13 bankruptcy usually ranges from $500 to $800. More complicated estates will cost $1,000 and up. All fees to the lawyers are paid upfront, of course.
The U. S. Bankruptcy Code is the basis for bankruptcy law administered by federal bankruptcy courts and the U. S. trustee. Common to all forms of bankruptcy protection is the so-called automatic stay, which freezes enforcement proceedings, service of legal process, enforcement of liens and even attempts over the phone to collect debts. Some things aren’t stayed, including criminal proceedings, alimony, child support and enforcement of a governmental, police or regulatory power. Also, a secured creditor can request what’s known as relief from stay, whereby that creditor may be able to still reach the debtor’s assets in bankruptcy.
Chapter 7 is the most frequently employed form of personal bankruptcy. Also known as “straight” or “liquidation bankruptcy,” Chapter 7 is a way for debtors to wipe out most of their unsecured debts. In this process, most homeowners will end up having to either quickly sell their homes, or the lender will be allowed to proceed with a foreclosure if the homeowner has no equity left in the property.
It is very hard for most homeowners to keep their house for any length of time after filing for bankruptcy protection, said Kenneth B. Rodman, an attorney in Westlake Village. In Chapter 7 cases, a homeowner may be able to hold on if there is equity in the home. “But in today’s market, most owners don’t have any equity,” he said.
Debtors who choose to liquidate their assets through a Chapter 7 bankruptcy can hold on to certain assets. This includes household furnishings, $1,200 for a motor vehicle for personal use, up to $2,500 in jewelry and artwork, up to $2,500 and a motor vehicle used for business, and disability and retirement benefits, plus some of the equity in a home.
Chapter 13 is a form of personal financial reorganization in which a debtor has three to five years to implement a debt repayment plan. This protection is available to debtors with less than $100,000 in unsecured debts and $350,000 in secured debts.
Chapter 13, most attorneys say, is the best bet for homeowners who want to keep their homes. But only about 15% of Chapter 13 filers are able to complete their debt reorganization plan.
“Making it though Chapter 13 is a very tough road,” said David R. Hagen, a partner in the bankruptcy law firm Merritt & Hagen in Woodland Hills. A Chapter 13 filer also needs to keep paying his or her mortgage on time and make additional monthly payments to make up past debts. That’s a heavy burden, Hagen conceded.
Hagen recently worked with one client in West Hills to develop a Chapter 13 reorganization plan aimed at helping the client keep his home. The residence is worth about $200,000 today, and the owner owes $189,000 on two mortgages. His two other assets are a small pension plan and two older cars. As part of the deal with the bankruptcy court and with his creditors, Hagen’s client has to keep paying his two mortgages and an additional $700 a month for the next 36 months to make up for a whopping $21,000 in back payments owed on one of the mortgages. “He thinks he can do it,” Hagen said, “but it won’t be easy.”
Chapter 11 is a form of reorganization used by businesses or individuals with large debts. This chapter is very complex and requires extensive accounting records that must be submitted to a trustee. These reports generally require the services of an accountant.
A homestead declaration protects the equity in your primary residence from being tapped by an unsecured creditor who either wants to force the sale of your home or wants to collect the profits made on the sale of your home. Although some homestead protection is automatic under a state law passed in 1983, many lawyers still advise that it’s best to file a “Declaration of Homestead” with a county recorder’s office.
Homestead protection for singles is $50,000. For the member of a family, the protection is $75,000. And, for homeowners who are 65 years old or older, disabled or low-income earners 55 years old or older, the protection totals $100,000.
Homeowners should know that a homestead declaration won’t always stop the forced sale of a home. A homestead only protects an owner’s equity up to certain dollar amounts, and a homestead declaration will not protect you from a secured creditor.
Chapter 13 has no exemptions of any sort because the point of this bankruptcy approach is that the debtor gets to keep all of his or her assets as long as the bills continue to be paid.
Consumers who are contemplating a bankruptcy filing can save money on attorney fees by doing their own paperwork or perhaps hiring a paralegal service instead of a law firm to handle simple cases, said Robin Leonard, a Berkeley attorney who authored “Money Troubles: Legal Strategies to Cope With Your Debts” and “How to File for Bankruptcy.”
There are a lot of forms, and people have to gather all sorts of information to complete a bankruptcy petition, Leonard said, “but Chapter 7 and Chapter 13 instructions are fairly self-explanatory.”
Leonard’s books can be ordered by calling Nolo Press in Berkeley at (800) 992-6656.
