A common misconception when it comes to Chapter 7 bankruptcies is that it is in an option unavailable to you if you are a homeowner.
Our Los Angeles bankruptcy lawyers know that in fact‚ many homeowners still qualify for a “fresh start” filing‚ particularly those continuing to grapple with the mortgage crisis.
In most Chapter 7 bankruptcy filings‚ you will be able to wipe out the majority of your debts‚ while maintaining ownership of things like your retirement savings‚ your vehicle and‚ yes‚ your home.
It’s an amazing opportunity for those trapped in an endless cycle of debt. It got more difficult to obtain‚ though‚ amid sweeping federal changes that passed in 2005. Prior to that‚ a judge was put in charge of determining whether an individual was able to qualify for a Chapter 7 filing. Now‚ there is a two-part means test that a person must meet in order to qualify for Chapter 7.
To start‚ your income will be subject to a formula that will look at expenses‚ such as your rent‚ food‚ child support‚ etc. Based on that‚ the formula will indicate whether you can afford to cover 25 percent of your unsecured debts – things like credit cards and medical bills. Secondly‚ your income is going to be compared to the median income in the state. If you are able to cover 25 percent of those debts and your income is higher than the state median‚ you probably won’t qualify for a Chapter 7 – though there are always some special considerations and a judge may have the final say. (This is where having a skilled bankruptcy attorney can make a world of difference.)
But this brings us to the issue of home ownership. In determining your debt-to-income ratio‚ the question is not so much whether you own a home as how much equity you have in that home. A house is considered “secured debt.” That means if you have equity in your home‚ the courts will look at the possibility of you selling your home in order to pay off the debts you owe.
In the recent housing crisis‚ however‚ a lot of people lost a great deal of their home equity. Being upside down on that property means that selling the home isn’t likely to garner you any revenue with which to pay off your debt. In fact‚ you would probably sell it for less than you owe‚ meaning you’d owe even more money.
In these cases‚ it’s probable you would qualify for a Chapter 7 bankruptcy.
But even homeowners who don’t qualify may consider either filing a special circumstances request or opting instead for a Chapter 13 filing. This will put you on a manageable payment plan to pay back fractions of debt to all or most of your creditors during a set period of time.
In some cases‚ it may actually be desirable to ffor homeowners to file a Chapter 13. For example‚ if you are behind on your payments‚ a Chapter 13 filing will put you on a repayment plan with your mortgage company so you will have an opportunity to catch up and avoid foreclosure.
There are a lot of factors that determine which option is going to be right for you. We’re ready to answer your questions about which one will make the most sense for your current situation.
If you are facing foreclosure in Los Angeles‚ contact Cal West Law to schedule your free consultation. Call (818) 446-1334.