Looking for a Los Angeles Bankruptcy Lawyer?

Elena Steers is a highly experienced bankruptcy lawyer in Los Angeles, California who has worked on both sides of the bankruptcy process. Take a moment and read her extensive amount of experience here.

Below we have prepared for you what we call the ultimate guide to California Bankruptcy. There is a lot to understand and every situation is different, so call us today for a free consultation or fill out this free evaluation form.

We service bankruptcy clients in the following counties:

  • Los Angeles County
  • San Fernando Valley
  • Orange County
  • San Bernardino County
  • Riverside County
  • Ventura County
  • Santa Barbara County

The Ultimate Guide to California Bankruptcy


What is bankruptcy?

Bankruptcy is a debt remedy that is governed almost exclusively by federal law. Bankruptcy is largely a remedy sought by debtors, to protect themselves from collection.

What type of bankruptcy is right for me?

When Congress changed the U.S. Bankruptcy Code in 2005, a new process was put into place to help one decide which type of bankruptcy (Chapter 7 or Chapter 13) they are qualified to file. This process utilized what is called the “means” test. The “means” test is an analysis of your income over the past six months with the end result used to determine whether or not you have the “means” to pay back a portion of your bills in a Chapter 13 filing, or whether you should be allowed to proceed in Chapter 7.

What does your attorney need? The attorney inputs data from all sources of income over the six-month period ending on the last day of the month prior to filing. So, if you filed for bankruptcy on May 6, 2015, the attorney will be looking at income from October 2014 through April 2015. After many calculations, a number called Current Monthly Income is arrived at and that number is compared to the state’s median income and debtor’s household size to determine whether or not the debtor belongs in Chapter 7 or Chapter 13.

Income is income, right? Not really. Social security payments or payments that are funded through the social security act (which covers foster care, adoption subsidies, Aid to Children and Families (TANF) etc.) are not considered income. Tax refunds are not income. Pension payments are income. Disability retirement (military or otherwise) is income. Your attorney will need to look at each and every pay-stub, every award letter, and any piece of documentation you get for money received. For self-employed people, the attorney will be looking at income received and expenses going out in order to determine the appropriate income for each month. Gifts from family are not income, but insurance proceeds or payouts are income.

Your attorney needs as much information as they can get from you and then some. The form that Congress mandated for the “means” test is a seven page form and each line involves numerous calculations in order to make sure the right data is put on the form.

Bankruptcy Pros and Cons

Perhaps the single most important financial decision a person will ever make is whether or not to file for bankruptcy. Because of this importance, a decision should always be made with the advice of an experienced bankruptcy attorney. Many attorneys will provide an initial consultation free of charge. The individual can then make an informed decision of whether to file for bankruptcy, so it is critical that the attorney be skilled in gathering the necessary information in order to be able to provide the best professional advice.

Every initial consultation with a prospective client should cover each of the following areas:

  1. Nature of client’s financial problems.
  2. Nature of client’s debts.
  3. Nature of client’s assets.
  4. Client’s current income and earning capacity.
  5. Client’s current expenses.
  6. Review of all pertinent documents.

Once all the information is gathered, the attorney should consider the client’s entire financial picture in making recommendations. Included among those “big picture” considerations are:

  • The nature of the assets the debtor wishes to protect.
  • Whether or not a spouse’s financial interests will be affected.
  • The nature of the exempt assets that can be protected under state law.

What is the biggest disadvantage of bankruptcy?

Perhaps the most well-known disadvantage of bankruptcy is that it remains on a person’s credit history for up to ten years. By the time a client comes in for a consultation, however, his or her credit rating may already be significantly damaged because of a history of late payments, too much debt, reported lawsuits, or judgment liens.

This bankruptcy “disadvantage” on your credit record can turn into an advantage over a short period of time in that an individual’s debt-to-income ratio is substantially improved by bankruptcy, therefore allowing some credit companies to issue secured credit or even unsecured credit again.

Chapter 7 vs Chapter 13

They are called chapters just because those are the chapters of bankruptcy code. It’s just abbreviation of dealing with different vehicles in the bankruptcy world.

Chapter 7 is called liquidation and a lot of people think that if they file for Chapter 7 they’re going to lose all their assets.

On the contrary, bankruptcy is a powerful legal tool and it just gives people a fresh start. In Chapter 7, once you file for bankruptcy, any bankruptcy, the automatic stay immediately stops all creditor collection efforts.

In other words, if a person files for bankruptcy and any of the creditors that were listed in the bankruptcy paperwork continue their collection efforts, such as trying to enforce on a judgment, they can be severely punished by the bankruptcy court. The creditors know the rules and usually they immediately cease all collection efforts. So that’s the most powerful tool of bankruptcy.

When a person files for bankruptcy, most time they are able to keep the house unless there is a large amount of equity in the house. When the person files for bankruptcy they can choose the exemptions, meaning the law does not want people to be homeless just because they file for bankruptcy.

If you qualify for Chapter 7, you have the classic scenario. This includes if you have credit card debt and you don’t have much equity in a house. Then you file for Chapter 7 and you discharge your credit card debt and/or medical bills for example.

In filing for any bankruptcy relief, the bankruptcy trustee looks at your net household income and your expenses.  Sometimes if the disposable income is still high by bankruptcy standards, you don’t qualify for Chapter 7.  Then you have to examine the numbers because you may be suited to file Chapter 13 and still pay just cents on the dollar to the unsecured creditors. It still would be a win-win situation for you in that scenario.

As I said before, if you got behind on your secured debts payments, you can catch up by repaying the arrears in Chapter 13 over the period of 3 to 5 years.  It’s just a matter of timing and it’s the matter of analysis of the particular situation.  The most common example is that if somebody has mortgage arranges, they can repay it through Chapter 13 without their property being foreclosed.

Exemptions Allow Individuals Filing for Chapter 7 Bankruptcy to Retain Assets

Bankruptcy is supposed allow filers to get a fresh start. A lot of people get to keep their house, their car and other assets while discharging (getting rid) their credit card debt, medical bills and other dischargeable debt. That’s a common outcome in a Chapter 7 case.

A Chapter 13 is a reorganization program. A person that got behind on their mortgage payments may face a situation where the bank wants them to either submit the whole delinquent payment amount or lose the house. Let’s say, for example, a person is behind $10,000 and a foreclosure sale has been scheduled. If the person doesn’t have that $10,000 to give the bank right away, they can file for Chapter 13 bankruptcy and repay whatever they got behind on over the period of 3 to 5 years, while resuming the regular monthly mortgage payments.

A Chapter 13 Bankruptcy Allows for a Repayment of Debt over 3 to 5 Years

Chapter 13 can be a very good solution for someone who, for example, owns a house but the homeowner lost their job and that’s why they got behind on their mortgage payments. Then, they regained employment but they don’t have that money to pay the bank right away. A Chapter 13 enables them to repay that debt over the period of 3 to 5 years. It’s the most typical example of Chapter 13 versus Chapter 7 because in Chapter 7 you’re not repaying anything. It’s liquidation rather than reorganization.

Also, in Chapter 13 bankruptcy, a lot of people have a misconception thinking that if they file for Chapter 13 they have to repay their credit card debts in full. That’s usually not the case because not all debts are created equal and there’s a different priority of debts.

Secured Debt Must Be Repaid in a Chapter 13 but Unsecured Debt Balances May Be Reduced or Eliminated in the Plan

For example, past due mortgage payments must be repaid in the Chapter 13 if the person wants to keep their property. But with unsecured debt, the balances may be reduced anywhere from 0 to 100%. That includes credit card debt, medical bills, deficiencies and other general non-priority unsecured debt. So, it is possible to repay the mortgage arrears and at the same time not pay anything to the credit cards if there is not enough disposable income to pay more than what is owed on the arrears over three to five years. In this example, if all plan payments are made per the approved Chapter 13 plan, then the dischargeable debts are wiped out after the plan period ends and the discharge is entered.

Chapter 13 Bankruptcies Allow Homeowners to Retain Their Homes and Become Current on Their Mortgage Payments

In Chapter 13 bankruptcy, if you’re behind on your mortgage payments, it gives you an opportunity to become current on your mortgage over the period of 3 to 5 years.  Let’s say a person is behind on their mortgage payment for $10,000. The bank demands a payment of $10,000 or they will start the foreclosure process.

If this person doesn’t have $10,000 to give right away, under a Chapter 13 they can repay the $10,000 over the period of 3 to 5 years and resume making regular mortgage payments.  In 3 to 5 years, they’ll be current on their mortgage payments.

A Breakdown of the Bankruptcy Process:

Free initial consultation to determine which option is best for them

A person comes in for the first consultation, which is free.  I usually tell them which documents they need to bring: pay stubs for the last 2 months and a copy of the tax returns for the last 2 years.  We basically chat and I gather the information that I need to make the recommendation on whether a bankruptcy case needs to be filed and what chapter is the better option.

We just talk and then once a decision is made to retain my firm’s services, I give the person or couple a checklist.  They then should bring the requested documents and a deposit that we’ve agreed upon.  We then audit the file just like a trustee does because I have had that experience auditing files while working for a Chapter 13 trustee.

My belief is that people should have as few surprises as possible once they hire an attorney.  Once the preliminary audit is done, we meet again with the client.  The client reviews the paperwork and asks me questions if they have any.  I ask them questions if I need any clarifications.  Then we basically finalize the paperwork and file the case electronically once the balance of the pre-filing attorney fees and case costs are paid.

After the Attorney Files the Paperwork, a Hearing Is Scheduled That the Client Will Attend

Once the case is filed and we have the case number, we call the client.  We inform the client of the date of the hearing known as the meeting of creditors where an examination is conducted by the Chapter 7 or Chapter 13 trustee.  We schedule an appointment to prepare the client for the hearing and we provide representation at the hearing.  For the hearing, the client needs to remember to bring their original social security card and driver’s license.

It’s called the meeting of creditors but the creditors rarely attend.

People often think creditors show up and start yelling and screaming at them.  That’s not the purpose of that meeting.  In fact, creditors hardly ever show up to those meetings and when they do, the scope of their questioning is pretty limited.

A Chapter 7 Bankruptcy Is Typically Discharged within Several Months

After the meeting of creditors, if it’s a Chapter 7, in a typical case the trustee files the no asset report if there are no assets to distribute to the creditors.  After approximately 3 to 4 months after the hearing, the person gets a discharge and the case is closed.

Prior to filing for bankruptcy, the client has to take a credit counseling course over the Internet. We guide them through how to do it.

Before a discharge can be received, bankruptcy filers need to take debt management counseling over the Internet.  Again, we help them with instructions for that class if necessary.

The Meeting of the Creditors Is Very Brief and May Be Concluded in Five Minutes

The examination is the main purpose of the meeting of the creditors hearing which is also called a 341(a) hearing.  The trustee checks their original social security card and driver’s license, reviews the bankruptcy paperwork and other documents and asks them several questions under oath.

If they need a translator, a translator is provided at the hearing.  The hearing lasts for an hour to an hour and a half at the most. Most times, a person is just waiting for their turn to be called.  Once they are called for their examination, it takes usually no more than 3 to 5 minutes in the average case.  Then they’re free to go.

Do people just return to their normal life following the meeting?

They lead their normal life and then once the discharge is received in the mail, they receive it and we receive it, so we double check with them that they understood that they received the discharge.  That’s it.  They can resume actually living their normal life as soon as the case is filed because all the creditors’ collection efforts are stopped.

Hiring a Los Angeles Bankruptcy LAwyer

A Bankruptcy Attorney’s Responsibility Is to Use the Law to Protect Your Assets in a Bankruptcy

The legal system can be pretty tricky and complex. Even though bankruptcy, on the surface, looks like just a lot of paperwork, you have to really know the specific issues. If you just fill out the forms and don’t understand how to properly protect your assets you can end up losing your house, your car and other assets.

So you need to get an advice of an attorney who is experienced and who knows how to properly see the issues and how to point out these issues in your particular case and how to properly protect you.

People who plan on filing it themselves think bankruptcy is just a bunch of forms.  That’s how people lose their assets and get into all sorts of problems.  Bankruptcy law is complex and it deals with a lot of issues outside of just bankruptcy law.  It overlaps with family law, with criminal law, with personal injury law, with property law.  Those people who just filed bankruptcy by themselves or go to paralegals who just know how to fill out the forms are doing a disservice to themselves and may put their assets at risk.

It Is Advisable to Be Wary of Firms in LA who Advertise Low Fees

There are some attorneys who advertise with the lower fees but then you come to their office and then they start saying we can do this for you for this price, but you’re going to appear without an attorney.

I had a client who came in yesterday.  He gave me the best analysis because he’s a plumber.  He said, “You get what you pay for and a lot of the contractors, if they’re in the plumbing industry or whatever, they come in at the lower price but then they start racking up the fees.”  That’s what I think may going on with those firms as well.

Plus, the bankruptcy fee to the attorney is typically a one-time fee.  It’s a fixed fee and I think people need to understand that attorneys charge not based on greed, but based on their experience and knowledge, with the goal of trying to ensure the best outcome for the client.

Attorney fees: In a Chapter 7, the Client Pays the Attorney a Flat Fee; in a Chapter 13, the Attorney Fee Is Included in the Monthly Payment Made by the Client

In a Chapter 7,  Attorneys get paid up front.  In the Chapter 13, attorneys get a certain portion up front from the client and the remaining of the balance through the payments to the Chapter 13 Trustee which are built into the Chapter 13 plan.  The court and trustee review the fee disclosures and are aware of how much is being charged.

You Can Expect to Be Treated Respectfully by the Bankruptcy Court

Bankruptcy law is federal law.  Bankruptcy courts are pretty professional and they treat people with courtesy.

Most often, people just go to an administrative hearing where an attorney is present with them.  They don’t even go to the courts because the attorney goes to the bankruptcy court to resolve issues with the trustee and/or the creditors.  Debtors generally just deal with bankruptcy trustees and the bankruptcy trustees are highly professional and their staff is professional.

Documents we will need

 I need pay stubs for least 2 months if the person is working for somebody. If the person is self-employed then we need personal and business bank statement for the last 6 months. We also need a copy of income tax returns. In Chapter 13 cases we request tax returns for the last 4 years, in Chapter 7 cases we ask for the last tax return filed.

If the person has mortgage we need the mortgage statement. If there is a vehicle payment due, we need that statement. We need account numbers and balances. We also run the creditor report so we get all the creditor information from the credit report.

Your attorney will take your creditor’s calls

Once someone retains our services, we will answer the phone calls of the creditors.  All a client has to say is: “I’m in the process of filing for bankruptcy so please call my attorney.” and the creditors will start calling us.  Once the bankruptcy is filed electronically with the bankruptcy court, all the creditors will be notified. They’re going to be precluded from any contact by the automatic stay, which is very strictly enforced by the law.

Basically all the harassment stop.  Foreclosure is stopped.  If the bankruptcy is filed even a day before the foreclosure, the foreclosure stops.  All communications with the debtors stop.  This provides people with valuable peace of mind.

Wage Garnishments Will Be Lifted Once the Bankruptcy Is Filed

Garnishment stops.  We contact the sheriff’s office who gave the order to the employer to garnish.  Often times, after a judgment is obtained, the creditor contacts the sheriff’s office and the sheriff sends an order to the employer.

Once the bankruptcy is filed, it is our job to contact the sheriff, tell them to release the order to the employer, and the employer stops garnishment.  That’s very helpful.

After Bankruptcy Is Filed, Lawsuit Activity Will Cease

If someone has been sued, the lawsuit also stops.  It depends also what the lawsuit is about.  If it’s just a credit card, then it stops.  If, for example, it’s a more complex lawsuit, sometimes the creditor can go to bankruptcy court and ask for permission to continue the lawsuit.  Then we can object to it if appropriate.  Most of the lawsuits stop.

Most Unsecured Debt Is Dischargeable in a Bankruptcy Filing

You can get rid of credit card debt.  You can get rid of medical bills.  Unsecured debt is generally dischargeable unless it was obtained by fraud or something like that.  You can discharge, like I mentioned, IRS debt in certain instances as well. When a home a person lives in is underwater as to the first mortgage, a second mortgage can be “stripped” in Chapter 13 bankruptcy and discharged as well.

Bankruptcy Terminology:

Debtor: A Debtor is a natural or legal person who owes money or another obligation to someone else. For example, a person who borrows money from a bank is a debtor.

Creditor: A creditor is a natural or legal person to whom a debt is owed, in the example of a debtor being the person who borrows money from a bank, the bank is the creditor of the person who has borrowed money. The creditor gives something of value to the debtor and the debtor agrees to repay the creditor according to their agreement.

Generally, the debtor and the creditor voluntarily enter into the transaction creating their respective obligations surrounding the debt. However, some debtor and creditor relationships are created by law. For example, a debtor-creditor relationship is created if a person is the losing defendant in a personal injury action, or a person fails to pay taxes.

Discharge of Debts: One of the reasons people file bankruptcy is to get a “discharge”. A discharge is a court order which states that you do not have to pay most of your debts. Some debts cannot be discharged. For example, you cannot discharge debts for: child support; most taxes; alimony; most student loans; court fines and criminal restitution and personal injury caused by driving drunk or under the influence of drugs.

The discharge only applies to debts that arose before the date you filed. Also, if the Judge finds that you received money or property by fraud, that debt will not be discharged.

Non-dischargeable Debts: The Bankruptcy code recognizes that, for public policy reasons, certain debts should not be capable of being discharged in bankruptcy. Examples of non-dischargeable debts include spousal and child support, student loans, in the absence of “undue hardship”, and certain taxes and penalties.

Bankruptcy Statistics

Unique to the current economic times we’re experiencing, personal bankruptcies are now cutting across every layer of society. On average, those filing today tend to be married, with higher incomes than previously, and are in their mid-40’s. One-third of those filing experienced job loss or job reduction triggering their financial hardships, 20% were adversely affected by overwhelming medical expenses, and 61% filing had no funds in emergency savings when the event occurred that pushed them into bankruptcy.

Bankruptcies Filed by Famous People

Do you think only “down-and-out” individuals are the ones that file for bankruptcy? Think again. Throughout American history starting with some of the Fathers of the Constitution, notably Thomas Jefferson, there have been Presidents and many high profile or celebrity individuals who have filed bankruptcy as a smart remedy to start fresh after facing severe debt challenges. The bankruptcy laws provided them a new financial opportunity, enabling them to regain their financial footing and for most, to become well-off again.

All of these people have filed for bankruptcy:

Donald TrumpWalt DisneyHenry Ford
John WayneUlysees S. GrantWillie Nelson
Larry KingFrancis Ford CoppolaKim Basinger
Tom PettyMeatloafToni Braxton
Tammy WynetteMarvin GayeWayne Newton
Lenny DykstraJohnny UnitasLawrence Taylor
Burt ReynoldsMC HammerAnna Nicole Smith
Perez HiltonLaToya JacksonDebbie Reynolds
Ruben StuddardStephen BaldwinDorothy Hamill
Mike TysonJerry Lee LewisAndy Gibb
Mick FleetwoodCindy LauperMichael Vick

Bankruptcy Warning Signs

  1. You Lose Your Job. When a person is person loses their employment, they need to really look at the situation and may need to seek a consultation with an experienced bankruptcy attorney to see if their situation warrants the filing of bankruptcy to get rid of certain debt. Timing can also be a factor, especially if the person expects to get another job in the future.
  2. You Have Found Out That Your Income Is Less Than Your Expenses. A lot of people don’t take time to go over their budget to get a realistic picture about their finances. And if they see that their income is less than bankruptcy could be a good option for them to get rid of the expenses related to the debt that could be discharged such as credit card debt and medical debt.
  3. Your Wages Are Being Garnished. If your wages are being garnished, bankruptcy could be a good solution in this particular situation. Because even after the wages are garnished – once bankruptcy is filed – the bankruptcy attorney contacts the sheriff, the sheriff sends a release order to the employer and the garnishment is stopped. If the bankruptcy is filed and the employer still garnished the wages then the wage is going to be returned to this person, if it’s done promptly.
  4. Taking Funds from a Retirement Policy. That is usually not a very good idea – to take from your own retirement – to pay off the credit card debt. And often when doing so, you’re not only decreasing your retirement funds but also you’re being taxed or penalized for early withdrawal so you need to look at the situation and have it analyzed by a bankruptcy specialist. It could be possible to discharge certain which would allow a greater likelihood of saving for your retirement.
  5. Pending Medical Expenses. A lot of people go to the emergency room or to other medical providers and have out of pocket costs even though they may have valtrex health insurance. And that really could really make their financial situation a lot worse. Medical bills are a very common reason people file for bankruptcy and they are dischargeable in bankruptcy.
  6. Falling Behind on Mortgage Payments. I always tell my clients that the worst thing you can do is pay minimum payments on your credit card bills at the expense of the mortgage. If you’re making just minimum payments first of all, you’re not going to get rid of the credit card debt, and you’re just getting more and more in debt. But at the same time, you can lose your house if you don’t make mortgage payments. Mortgage payments, car payments, any debts owed to a secured creditor, is of a lot higher priority because you can lose your home or car if you don’t stay current on those payments.
  7. Inability to Repay Debts Despite Making Best Efforts. Because of the high interest that some of the credit card companies are charging, you may be paying your bills regularly but you’re only paying minimum payment – it’s usually 4 percent from the amount of the total debt – so you’re really not going anywhere. And sometimes a good solution could be to get a discharge through bankruptcy of your unsecured debt. So you can move forwards, re-organize, and learn from your mistakes.
  8. Undergoing an Expensive Lawsuit / Legal Proceeding. If you being sued or going through a divorce or some other legal proceeding, you could be paying a lot of money for attorney fees and may be hit with a judgment. If you’re struggling to pay for your mortgage or credit cards, you may have to re-organize through bankruptcy under this particular situation.
  9. Falling Behind on Car Payment. A lot of people are driving expensive vehicles they can’t necessarily afford, and they may not mind to surrender the vehicle but they are afraid that there’s going to be deficiency – meaning that if the car is sold at auction, they’ll still owe money to the creditor because the balance owed is greater. If that’s the situation, they can consider filing for bankruptcy and get a discharge from such a debt.
  10. Taking Money from the Equity Line to Pay other Debts. If somebody has a line of credit, sometimes it gets people in trouble where they wrack up credit card bills and then they’re taking money from the equity line to pay for the credit card bills. By doing so, they’re giving up the equity in their house and get into more debt which they may not be able to repay.

Bankruptcy Alternatives

Credit counseling and debt repayment services

With the explosion of consumer credit in recent years, there has been a proliferation of credit counseling and debt repayment services. Almost all claim to be nonprofit agencies dedicated to helping the public. These services offer to negotiate with each of a debtor’s creditors for a lower monthly payment. The debtor then sends a lump sum each month to the service, which is then distributed among the creditors, usually on a monthly basis.

One disadvantage is that it can be difficult to find a good credit counseling service. Further, approximately 40 percent of debtors using such services fail to complete their debt repayment plans, and usually end up worse off financially than when they started. A debtor’s credit rating may be significantly damaged if the debtor is treated as delinquent over the entire life of the repayment plans. Finally, if less than entire amount of the debt is paid and the remaining amount is forgiven, there could be some negative tax implications.

Debt renegotiation

If a client, for example, has only one small creditor, the client may be able to resolve the problem through negotiation, either by paying a reduced lump sum or by making reduced payments over some period of time. Business creditors tend to be more pragmatic and thus more willing to negotiate. Credit card issuers can be difficult to negotiate with, especially if the client’s account is current.

Bankruptcy Exemption FAQs

When a bankruptcy case is filed, the debtor is entitled to keep certain property which is known as exempt property. Non-exempt properties are the properties that the chapter 7 trustee may liquidate to pay creditors. In chapter 13 bankruptcy, the value of non-exempt property must be repaid to unsecured creditors by the debtor in the form of monthly plan payments. The more you can claim as exempt, the better off you are. Even though bankruptcy is a federal law, each state elects its own exemptions. In California there are two different sets of exemptions known as the 703 series and the 704 series. You cannot combine these. In other words, you must pick either the 703 series of exemptions or the 704 series of exemptions when filing for bankruptcy in California. In each case, it is important to analyze which set of exemptions will be more appropriate for the particular person meaning what is the property that the person has that needs to be protected. When the property is analyzed, then one set of exemptions will usually be more beneficial in each particular situation.

Why Would it Be More Beneficial? In What Kind of Case Would One Set of Exemptions Be More Beneficial than the Other?

One example I like to use when there is a house that is a family’s primary residence and there is equity (i.e. the home is worth more than the mortgage on the house). Let’s say we are talking about a married couple and there is $100,000 in equity in their house. In order to protect the house, they would need to take the 704 set of exemptions which would allow them to protect up to $100,000 in equity in their home. The 703 set of exemptions would provide for protection of a much smaller amount of equity.

Sometimes a person has a lot of miscellaneous property that needs to be protected and the equity in the house in not an issue. Either there is no real property or there is no equity. So If I do not have to worry about protecting the house, then I am going to concentrate on the 703 set of exemptions which allow for the exemption of up to $26,925 in aggregate in various types of real and personal property. This is what is known as the “wild card” exemption. The wild card exemption is allowed under the 703 series but not under the 704 series. Other types of exemptions that may come into play include retirement benefits, personal injury causes of action, personal injury awards, and wrongful death awards. It is very important for someone that is considering filing bankruptcy to consult with an experienced attorney to properly protect their property because if the exemption is not claimed, a person may lose their property or have to repay more to their creditors.

Do the Exemptions Vary With the Type of Bankruptcy You File?

The exemptions are the same. However, in Chapter 13 bankruptcy you get to keep all of your property but you have to repay any non-exempt portion to your unsecured creditors whereas in chapter 7 bankruptcy, if you have non-exempt assets, those may be sold to pay off your creditors if the chapter 7 trustee decides to do that.

Do People Tend to Overlook or Forget About the Exemptions?

If the exemptions are not properly analyzed, the person may lose certain property or have to repay more to their creditors. Exemption planning is one of the most important things that should be done before filing for bankruptcy. Doing so the right way will enable you to keep whatever you can keep and still discharge the debt that can get discharged and so you can get a fresh start.

Bankruptcy Misconceptions Regarding Exemptions

People do not really know about exemptions that much. Basically they have to make sure they list whatever property they have. Then it is my job to point out what I can or cannot protect and if there is something I cannot protect and it is important for them, then I recommend that chapter 7 is not for you or chapter 13 would better or vice versa. That’s really what is important. The most common thing is that when people are dealing with real estate for example, if they undervalue the house that they have. That is why I recommend that they get an appraisal to try to accurately determine the fair market value. Another interesting scenario I have come across is when a person owns a small business with a liquor license. A liquor license is considered personal property so it has to be valued and analyzed properly. In chapter 7 bankruptcy the chapter 7 trustee can request for a person to sell their license for the benefit of creditors if its value exceeds the wild card exemption amount. This is why it is very important to properly dig in and analyze everybody’s situation when it comes to their property and applicable exemptions.

Can People From the 703 and 704 Pick and Choose From Each One of Those?

You can’t combine exemptions from the 703 series and the 704 series. You have to pick one or another. As a bankruptcy attorney, I look at what the person owns and what exemption series best protects what they own in doing my exemption and bankruptcy analysis.

What About Married Couples? Can They Double this Exemption?

In California you cannot really double up on an exemption. If you have a married couple then each one of them cannot claim the same exemption. The homestead exemption does allow for exempting $100,000 in equity in a primary residence as opposed to $75,000 for a single person so there is a benefit to being married in that situation.

What Can I Do to Make My Process Go Smoother in Regards to Exemptions?

You should disclose your interest in any property and provide your attorney with the requested information and documentation before filing for bankruptcy. It is very important to give accurate information. Let’s say you have a life insurance policy with whole value. It would be important to present the statements showing exactly how much you owe or if you have a house it is important to get an appraisal sometimes if there is a dispute with how much equity you actually have. By providing requested items and information to your attorney, you help ensure that the proper exemption planning is done before your bankruptcy case is filed.

What if the Property is Jointly Owned by a Married Couple as Community Property?

If one of the spouses has filed for bankruptcy and the property is community property (i.e. acquired during the marriage), the one filing spouse can still claim the family homestead exemption which is $100,000. A married couple can file a bankruptcy case jointly in which case the $100,000 homestead exemption would still be available.

Which exemptions are best suited for me?

A knowledge bankruptcy attorney can definitely help determine if a person or a couple qualify for certain exemptions. At our office, when someone comes in for a bankruptcy consultation, they are asked to fill out a questionnaire. In this questionnaire they have to list whatever assets they have.

We ask for a specific list of all possible property that a person may have along with any loans and/or liens against a particular property. It is very important to ask the right questions as a bankruptcy attorney so that even a person with no legal experience can understand what they need to provide and point out the right piece of information. Each property is listed and then each property is linked to the exemption schedule that protects this particular property or if it doesn’t protect the property in the entirety, there is this unprotected portion which needs to be analyzed.

The important thing is that the person who will be filing for bankruptcy is given an overview that is as accurate as possible as far as what can and cannot be exempted or protected before their bankruptcy case is filed so that they can make an informed decision.

If I File Bankruptcy for a Second Time, Can I Still Have Exemptions?

Yes you can claim exemptions in bankruptcy that you are entitled to even if you are filing for bankruptcy a second time.

What Is The Most Important Thing That People Need to Know About Exemptions

The most important thing that people need to know is that the appropriate claiming of exemptions can be kind of tricky. Exemptions need to be analyzed by an attorney that is knowledgeable and experienced to analyze a person’s particular situation. People’s assets and liabilities need to be properly analyzed. Exemption and bankruptcy planning can often be useful and appropriate. Sometimes people do not realize that they can convert certain non-exempt property into exempt property.

Are there any drawbacks to the exemption when filing bankruptcy?

Exemptions are necessary because let’s say a person has a paid in full car and it’s worth $10,000. If the person just files a chapter 7 and no exemption is claimed, the bankruptcy trustee will say you have to surrender the car so I can sell it and distribute the money to the creditors. But there is an exemption available of $5,100 to protect equity in cars. If the person who filed bankruptcy is claiming the 703 exemptions, they can protect $5,100 of equity in their car and the remaining $4,900 in remaining equity can be protected using the wildcard exemption which allows for the exemption of $26,925 in equity in various personal and real property. So in this example, the car is totally protected and nobody can take the car away. That’s how the exemption would work. Let’s say there is a house and there is $150,000 in equity.

Under the 704 series of exemptions, a single person can claim a $75,000 homestead exemption in their primary residence. If the person is married, there is a $100,000 homestead exemption and if someone is 65 years or older, disabled, or 55 years or older with limited income, a homestead exemption of $175,000 can be used. Again, these figures refer to the maximum that can be exempted in equity in one’s primary residence under the 704 exemptions in California. If someone’s home is worth more than the exempt maximum, I would never recommend that this person file chapter 7 bankruptcy because they would be at risk of losing their home. Instead, I would recommend that the person file for chapter 13 bankruptcy, where they would have to repay to the creditors the debt amount that is not covered by the exemption but still keep their home in this example.

What Are Some Barriers that People May Face When it Comes to Exemptions?

Sometimes people think that they can exempt certain property when in reality they cannot. For example, if someone owns an investment home, they cannot use the homestead exemption for that property because the homestead exemption can only be used for a person’s primary residence. Many exemptions also have a certain cap or limit in the amount of equity that can be exempted so if a property is worth substantially more than any loans against the property, there could be a portion that is not exempt. This is why proper exemption planning with a knowledgeable bankruptcy attorney is so important.

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Do you have any unusual bankruptcy stories you can share?  Is there something that you were able to accomplish that surprised you and also that benefited the client?

In one case, the client filed for a Chapter 13 and saved his townhouse, avoided the second and third mortgages and discharged the credit card debt.  He did this because the value of his primary residence was less than the balance owed on the first mortgage. You can avoid junior mortgage liens in this scenario through Chapter 13 but not Chapter 7 bankruptcy.  The client, years later, came to my office and was really thankful. By avoiding the second and third mortgages, he all of a sudden was the owner of a townhouse with equity.  He was able to sell it before his retirement and actually have some money for his retirement.

With Chapter 13, during the payment process, could they potentially use their retirement funds for that?

Well, it’s a last resort that I don’t recommend. When I try to qualify clients for Chapter 13, I ask them, can you afford this payment? Sometimes Chapter 13 is not for every person. They may not have enough income for the payment program. But sometimes in Chapter 13 you get to pay as little as $150 per month.

For example, if I have an older couple and they’re struggling with paying their credit card debts and they’re considering cashing their IRA to repay the credit cards. I’m telling them, look, you have problems with your bills. How much is your minimum payment to the credit card companies? They’re saying $2,000 a month. I say, if you file for bankruptcy you actually have $2,000 available to pay for your necessities and at the same time you’re not going to cash out your retirement.

Can The IRS Attach a Lien to a Home If Back Taxes Are Owed?

A person may owe money for taxes that they haven’t paid. If they don’t work with the IRS, before they know it, the IRS can place a lien on the house. A tax lien cannot be avoided in bankruptcy.

If You Filed a Return but Did Not Pay Your Taxes, Some Taxes can Be Discharged in Bankruptcy

If you filed taxes timely but were unable to pay and have IRS debt, income tax debt owed to the IRS can be discharged in some instances. Income tax liability can be discharged in bankruptcy if the following conditions are met:

  • The taxes owed must be at least 3 years old from the “due date” of the return, including extensions.
  • The tax returns must have been filed at least two years before the bankruptcy case is filed.
  • The taxes owed were assessed more than 240 days prior to the filing of the bankruptcy.
  • The tax returns were not filed in a fraudulent manner.
  • The taxes owed are not due to tax evasion.

The Amount of Back Taxes Owed Needs to Be Analyzed before Paying It Back through Bankruptcy or to the IRS Directly.

Let’s say that a person has a tax that is too recent to be dischargeable.  Often times, I have seen that it would be beneficial for clients to repay their tax obligations through Chapter 13 since doing so would allow them to repay the obligations in an orderly fashion over the course of 3 to 5 years without additional penalties and interest.

Can Credit Scores Can Improve Over Time?

People often ask me if bankruptcy will ruin their credit forever. The answer is no. When somebody has $50,000 in credit card debt and they already maxed out all that debt and they’re just making minimum payments, even if they don’t miss a single payment, eventually their credit score is going to drop significantly.

The creditors see that they maxed out their cards and they only make small payments. Sometimes when they file for bankruptcy and they get a discharge of their debt, let’s say it’s Chapter 13 and 3 to 5 years they have a discharge, their credit score will start jumping up because they no longer have the debt that they’re responsible for.

In a year, they may be in a better situation after bankruptcy. Even though the bankruptcy is going to stay on the credit history for a period of time, the credit score should start improving after the discharge.

Can A Bankruptcy Assist Homeowners with Loan Modification Approval?

What I also see quite often is that people are trying to modify their mortgage to make it more manageable. But sometimes they have all this credit card debt. If they file for bankruptcy and discharge their credit card debt and then they ask the bank to modify, the bank may then be more likely to modify. If a creditor knows that the person already discharged all the credit card debt, the creditor can see that all more of the disposable income will go towards repayment of the mortgage.

What’s the foreclosure process, and what would be best recommendation for a homeowner in regards to what chapter they should consider filing?

Which chapter is best depends on the particular situation, but a good example is this: The person got behind on the house payments. The mortgage payment is $2,000 a month. After 3 months the bank usually records a notice of default and then the foreclosure process starts.

After a bank records the Notice of Default, the foreclosure process continues until a foreclosure sale date is set.

A Notice of Trustee Sale is typically recorded 90 days after the Notice of Default. The auction date specified in the Notice of Trustee Sale is typically scheduled 21 days later.

It’s important for someone facing a foreclosure to consult with a knowledgeable bankruptcy attorney if they are unable to pay back their arrears or to convince the bank to modify the loan.

You may file for bankruptcy while in the foreclosure process so it is advisable to consult with a bankruptcy attorney

If a person comes to my office and they say they want to save their house, then we can prepare their case to be filed relatively quickly as long as they provide the required documents to us. Sometimes we have filed cases for people right before the foreclosure sale date. However, we recommend that people don’t wait until the last minute to consult with us to ensure that there is enough time to review the necessary information and documentation.

Usually someone wanting to save their home files for Chapter 13 bankruptcy because Chapter 13 bankruptcy enables them to repay whatever mortgage payments they are behind on. Let’s say they’re behind 3 payments totaling $2,000 a month, so that’s $6,000. They can repay that $6,000 over the period of 3 to 5 years.

Once a person files for Chapter 13, the bank has to accept their ongoing mortgage payments in addition to the debt repayment amount that the person will be sending to bankruptcy trustee. The trustee administering the case will then send the past due amount being repaid to the bank.

What does bankruptcy do for people actually?  Does it just get rid of all their debts?  Does it dispose of only part of their debts?

It gets rid of the dischargeable debts. Credit card debt is generally dischargeable. Income tax liability may be dischargeable. For example, if you have a debt for personal income taxes to the IRS it may be dischargeable if the taxes were due at least three years before the bankruptcy case was filed (including any extensions), the taxes returns were filed at least two years before the bankruptcy case was filed, and there were no assessments in the 240 days before the bankruptcy case was filed.

What about student loans?

Student loans are generally non-dischargeable in bankruptcy at the moment. However, sometimes people have huge student loan balances which they are unable to pay on a monthly basis. They need a breather from the collection efforts of the student loan collection agencies.

What they can do is file for a Chapter 13 where may have to pay only a small amount, based on their disposable net monthly income, to all the creditors including the student loans. Then hopefully, in 3 to 5 years they can get a higher paying job and then they will resume their relationship with the student loan creditors after the Chapter 13 case is over. But generally, student loans are non-dischargeable in bankruptcy unless the debtor proves undue hardship, which can be very difficult to prove to the court.

What would you say is the most difficult part for someone to deal with during this whole time?

People are usually emotional because they sometimes feel like a failure. It can be difficult to get them to understand that they should look at the process as a form of asset protection and not necessarily the end of the world.

How do you help remove the emotional aspect of it all and help them see clearly what needs to be done?

The first I thing I do is to try to put people at ease. Some attorneys may themselves look down at debtors and I don’t think it’s then the right field for them to be practicing in.

An attorney should demonstrate empathy to people and not to judge them. My staff is trained to be very accommodating and very patient and at the same time professional, so they’re trying to take the load off the clients’ shoulders and deal with it in our office. This is because to us it’s a process, we have the knowledge and it’s not as emotional.

What happens if the bankruptcy is dismissed?

In a Chapter 13, you can dismiss it pretty much at any point.  In the Chapter 7, it’s very difficult to get out.   When the person comes to meet with me, I do all this analysis as to what option is better for them. Depending on what’s going on in their life with their debts, sometimes the Chapter 13 is more flexible.

You still can sometimes pay as little as $120 a month and you get to enjoy a lot more flexibility, depending on your circumstances.  In the Chapter 7, once you file, it’s very difficult to dismiss.  Once you file any Chapter, it’s still on your record.

Can You File More Than Once for Bankruptcy?

It depends what chapter you filed.  If you filed a Chapter 7 and got a discharge and it is less than 8 years from the date the first case was filed, you cannot file another Chapter 7 and get a discharge.  If you filed previously for chapter 7 and got a discharge, you are not eligible for a discharge a new Chapter 13 case for four years.  If you got a discharge in previous Chapter 13 and you need to do another one, you can do it after waiting 2 years to be eligible for a discharge.

What happens if your case gets dismissed or you dismiss it, how long until you can refile then?

Chapter 7 bankruptcies rarely are dismissed.  If Chapter 7 gets dismissed, it’s usually bad news.  It may mean some fraud was involved or the person that filed was not eligible for Chapter 7 bankruptcy and the court may impose restrictions on future filings.  Chapter 13’s can be dismissed if you don’t submit plan payments to the trustee or for other reasons.

Most of the time, you can re-file a dismissed case right away.  Sometimes the court may put a restriction and you cannot re-file for 6 months after a case was dismissed.

Can you explain a bit more about the liquidation aspect of a Chapter 7 bankruptcy?

Under Chapter 7, for example, if you have an asset, let’s say you have a house and the value of the house is $600,000. You owe $500,000 on the mortgage on the house and you are a single individual, then you have a homestead exemption that is given to you of $75,000 in California.

In this particular situation, the trustee will do the analysis. If they sell the house, would the unsecured creditors get anything left over after the mortgage is paid? Because let’s say the trustee can sell the house for $600,000 and he has to pay off the mortgage balance of $500,000. The trustee would still need to give the debtor (bankruptcy filer) $75,000 because that’s the homestead exemption in this example. The trustee would also have to incur costs associated with the sale of the house which would probably be at least 6% of the sales price.

In this scenario, most likely, the trustee would choose not to sell the house since the unsecured creditors would not get anything. In such a case, the trustee would file what’s called a “no asset report” with the court which indicates that there are no assets to liquidate. Of course the numbers in this example may still be a little too close for comfort so the option to file Chapter 13 bankruptcy could be the safer option to avoid the possibility of a forced sale.

Homeowners with Non-Exempt Equity in Their Properties May Have the Properties Liquidated in a Chapter 7

Let’s look at the scenario if the house is worth $600,000 but the mortgage is only $300,000. So the trustee would try to have the house sold and pay the non-exempt proceeds after payment to the secured lender and the costs of sale to the unsecured creditors. That’s where good bankruptcy planning comes in. If somebody comes to me and the house may be in jeopardy, I’m going to tell them you don’t want to file for Chapter 7 because then you’re going to lose the house. You’re better off filing for Chapter 13 where you can repay a certain amount but you cannot lose any assets in the Chapter 13.

Now, you may want to ask why it is called liquidation, well that’s exactly why. Sometimes people want to file for bankruptcy when they know they’re going to lose some asset but they’re still going to get a breather from the creditors. For example, I had a client involved in a messy divorce who had several rental properties with his wife and there was an inability to agree on the division of the properties.

The client chose to file for Chapter 7 bankruptcy.  Once a Chapter 7 bankruptcy is filed, the filer’s property becomes property of the estate. So the bankruptcy trustee gets to administer the estate. Part of the estate included those houses that the client and his spouse couldn’t divide. So the trustee was able to resolve all the issues and sell a couple of properties and pay the creditors.

My client was happy for a few reasons—he didn’t have to deal with any of the property division issues any longer and he didn’t have to pay the divorce attorneys huge fees. He just had to pay a fixed fee for the bankruptcy and then let the trustee take over.

What Other Assets Can Be Protected aside from a house?

For example, if a person has a 401K or an IRA, that’s all typically protected. I just filed a case for a client who is 55 years old who had over $1.5 million in his 401K plan. He lost his job so he had to roll it over to his IRA. His income was not high but he had this huge amount of retirement money and it was all protected.

This client is getting closer to the retirement age and now he’s going to have no more unsecured debt with a decent amount of money to enable him to, once he reaches the retirement age, live comfortably.

There are other assets such as equity in a car, money in the bank, personal injury causes of action and awards that can also be exempted or protected depending on the exemptions available to a person or couple in a particular case.

Is It Advisable for People to Learn How to Better Manage Their Finances?

Financial education is a good idea, but nevertheless, often people are not properly educated about their finances. For example, what makes me angry is when credit card companies bombard college students with offers when the students don’t even understand anything about accumulating debt and the risks involved.

They just get a credit card and go shopping or whatever. Then they get out of college not only with student loan debt but also with credit card debt. Then the credit card company starts saying you’re irresponsible. Yes—but why are you giving this card to a 20-year old? I feel that some people could benefit by being more educated about their finances. They would avoid making mistakes that can have long-term effects.

However, with that being said, sometimes people have no choice. Sometimes things just happen. A huge reason for people to file for bankruptcy is due to medical bills. Sometimes some unforeseen illness happens and the insurance doesn’t cover all the medical bills.

Is There an Average Age for People That File for Bankruptcy?

It’s often people between the ages of 35 to 65. Many filers are people with children and they over extend themselves or they lost their job. They didn’t have enough savings and it’s not that easy to accumulate savings when you have a family and a lot of expenses, whether unforeseen or not.

I wish people would make an appointment rather than delay. It’s a free consultation and the attorney will evaluate their situation and then recommend corrective actions in a timely fashion. Sometimes people just don’t want to deal with issues until further problems develop that could have otherwise been avoided.

Can tax debt be eliminated in bankruptcy?

Both Chapter 7 bankruptcy and Chapter 13 bankruptcy allow taxpayers to discharge federal and state income taxes when certain requirements are met.

In order for income taxes to be dischargeable in bankruptcy, the following must be true:

  • The taxes owed must be at least 3 years old from the “due date” of the return, including extensions.
  • The tax returns must have been filed at least two years before the bankruptcy case is filed.
  • The taxes owed were assessed more than 240 days prior to the filing of the bankruptcy.
  • The tax returns were not filed in a fraudulent manner.
  • The taxes owed are not due to tax evasion.

What happens if the taxpayer cannot discharge the taxes owed because of timing issues, i.e. the tax returns were never filed or the amount owed is too recent to be discharged?

Even in such a scenario, bankruptcy can still give the taxpayer relief. Chapter 13 bankruptcy allows the taxpayer to repay non-dischargeable taxes over three to five years without penalties and interest.

Chapter 13 bankruptcy also allows for certain business tax debts to be repaid over three to five years.

It is important to note that even if the taxes owed are dischargeable in either Chapter 7 bankruptcy or Chapter 13 bankruptcy, tax liens already placed against the taxpayer’s property do not get discharged in bankruptcy. However, a tax lien may be released if one or more of the following has occurred:

  • The tax lien was never recorded or was recorded improperly.
  • The tax lien was recorded after the bankruptcy case was already filed and the automatic stay was already in effect.
  • The tax lien is older than ten years.
  • The taxpayer has no assets worth pursuing and the tax debt was discharged in bankruptcy

As the above scenarios demonstrate, whether or not a tax obligation can be discharged in bankruptcy can be a tricky legal area. Accordingly, it is important for taxpayers who owe back taxes to consult with a knowledgeable bankruptcy attorney to see if filing for Chapter 7 bankruptcy or Chapter 13 bankruptcy is the right option.

Does rising student loan debt cause more people to file for bankruptcy?

Increased student loan debt is forcing a larger amount of borrowers and their parents into filing for bankruptcy according to a report recently issued by the National Association of Consumer Bankruptcy Attorneys.

The rise in student debt has been attributed to increasing costs to attend college, budget cutbacks impacting financial aid, and the persistently weak job market that graduates must try to navigate.

Unlike many other forms of personal debt such as credit card debt, student loans are extremely difficult to discharge in bankruptcy, which means that student loan debt often survives the bankruptcy.

In order to discharge student loan debt in bankruptcy, the borrower must show that payment of the debt will impose an undue hardship on the borrower and on his or her dependents.

Many courts require the following to show an undue hardship:

  1. The debtor (i.e., the person who filed for bankruptcy) cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans;
  2. Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
  3. The debtor has made good faith efforts to repay the loans.

One option for student loan borrowers to consider is the Income Contingent Repayment Plan offered by the U.S. Department of Education which allows student loans to be forgiven after 20 to 25 years for certain borrowers.

For the student loan borrower that files for Chapter 13 bankruptcy, student loan payments may be deferred until after the Chapter 13 case is completed, which lasts for a period of 3 to 5 years depending on the circumstances. However, interest on the student loan debt will continue to accrue during this period.

Can filing for bankruptcy improve my credit?

Filing for bankruptcy may actually help to improve a person’s credit score and ability to get credit. Although this may seem counter-intuitive, once a person files for bankruptcy and receives a discharge in Chapter 7 bankruptcy or Chapter 13 bankruptcy, often times many if not most of the debts that person was previously burdened with are wiped out. As a result, this person’s debt to income ratio starts to look much better to lenders.

Lenders also know that once a person receives a discharge in bankruptcy, that person generally is not able to file bankruptcy again and be eligible for a discharge for several more years. As a result, there is less risk for lenders to offer credit to this borrower. This is one interesting example of how the filing for bankruptcy protection can help people to obtain a fresh start.

According to a professional mortgage broker that I recently discussed these issues with, the following guidelines are generally in place for people who wish to obtain home loans after they have filed for bankruptcy:

  • Chapter 7 Bankuptcy – 4 years from the discharge/dismissal date; 2 years with extenuating circumstances.
  • Chapter 13 Bankuptcy – 2 years from the discharge date; 4 years from the dismissal date.
  • Multiple Bankuptcies – Multiple bankruptcies within a 7 year period require a 5 year wait from the last discharge/dismissal date.

In contrast, there are the current wait times in other situations:

  • Foreclosure – 7 years after the foreclosure; 3 years with extenuating circumstances.
  • Deed-In Lieu/Short Sale – 2 years with extenuating circumstances and 20% down payment; 4 to 7 years with a 3 to 10% down payment.

As the above data indicates, it is easier to obtain a home loan after a person files for bankruptcy than after a foreclosure sale takes place against that person’s property. This once again demonstrates how filing for bankruptcy protection can help people to get the fresh starts that they need.

Removing a Second Mortgage/Equity Line in Bankruptcy:

Homeowners with a junior mortgage or equity line can “avoid” or “strip” that junior mortgage in Chapter 13 bankruptcy if certain requirements are met.

Assuming that the person is eligible to be in Chapter 13 bankruptcy, he or she can have the junior mortgage be treated the same as unsecured debt such as credit cards and medical bills.

To avoid the junior mortgage, the property at issue needs to be a person’s primary residence. In addition, the value of the property and the amount owed on each mortgage are extremely important factors. Essentially, the amount owed on the senior mortgage(s) needs to be equal to or greater than what the property is worth. Put another way, the property needs to be equal to or less (preferably less) than what is owed on a senior mortgage or mortgages. Any junior mortgage(s) that come later in priority after the senior mortgage(s) would then be eligible to be avoided in Chapter 13 bankruptcy.

In asking a bankruptcy judge to issue an order avoiding the junior mortgage(s), the proper legal documentation including supporting exhibits need to be filed withe the court for the judge to review. An appraisal report from a certified real estate appraiser needs to be included to show what the fair market value of the property is based on an objective analysis. There should also be documentation showing what is owed on each mortgage on the property and when the mortgages were obtained.

Unlike a senior mortgage, the junior mortgage(s) does not have to be paid directly to the lender by a person once their Chapter 13  bankruptcy is filed. Of course, this assumes that there is valid evidence to establish that the junior mortgage(s) is to be avoided and treated like other unsecured debt. Once a judge signs an order granting the request to have the junior mortgage(s) avoided and treated like other unsecured debt, the junior mortgage lender only receives what the other unsecured creditors receive in the Chapter 13 bankruptcy. This is often pennies on or even zero cents on the dollar.

When a person successfully completes the Chapter 13 bankruptcy and receives a discharge, the junior mortgage can then be removed from title and will no longer encumber the person’s real property.


A home that is a person’s primary residence is worth $300,000. There is a first mortgage with a balance owed of $350,000, and a second junior mortgage/equity line with a balance owed of $100,000. Assuming all applicable requirements are met, the junior mortgage can be avoided and treated like unsecured debt during the person’s Chapter 13 bankruptcy. Upon successful completion of the Chapter 13 bankruptcy, the junior mortgage/equity line can then be removed from title and will no longer encumber the person’s real property.

Many people have asked me if they can force their lender(s) to accept what is the current fair market value of their home.

Cramming down on a mortgage is possible on investment property in Chapter 13 bankruptcy.

Chapter 13 bankruptcy allows homeowners with a junior mortgage or equity lineto “avoid” or “strip” that junior mortgage in Chapter 13 bankruptcy if the property in question is the primary residence of the homeowner and the property is upside down with respect to the senior mortgage(s). The amount owed to the senior lender(s) on a primary residence can not be modified through Chapter 13 bankruptcy.

However, if the property in question is an investment property, i.e. the property is rented out to tenants and the owner does not live there, then Chapter 13 bankruptcy allows the owner to “cram down” the mortgage and/or mortgages on the investment property.

For example. a home that is a person’s investment property is worth $50,000 at the time that person files for Chapter 13 bankruptcy . There is a first mortgage with a balance owed of $150,000, and a second junior mortgage/equity line with a balance owed of $25,000. Assuming all applicable requirements are met, the balance owed on the senior mortgage over $50,000 (in this case $100,000) is “crammed down” as is the junior mortgage balance of $25,000. In this example, the crammed down balance is treated like unsecured debt during the person’s Chapter 13 bankruptcy. Upon successful completion of the Chapter 13 bankruptcy, the crammed down balance of $100,000 on the first mortgage and the entire second mortgage balance of $25,000 is wiped out along with other unsecured debt such as credit card debt. One catch is that the fair market value of the investment property at the time the bankruptcy is filed must be repaid during the course of the Chapter 13 bankruptcy. The minimum repayment period  in Chapter 13 bankruptcy is three years and the maximum repayment period is five years.

Cramming down on an investment property can be a good option for someone who wants to own an investment property free and clear of all liens against the property upon the conclusion of their Chapter 13 bankruptcy and can afford to pay the current fair market value of the property over three to five years.

Which areas do you practice in?

We cover the following counties: Los Angeles, Orange, Riverside, Ventura, and Santa Barbara.

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