Category Archives: Chapter 13

Chapter 13 Does Not Require You to be Naked and Bored

boredom-154308-mBy Jeff Curl, San Mateo Bankruptcy Attorney

If you have been reading up on Chapter 13 bankruptcy, you know that you have to make a monthly payment for a period of time. Once you complete your plan payments, the remaining amount owed to your unsecured creditors is discharged. Sometimes you pay them 0%, 100% or usually something in between. This number varies by each case.

The number one question I am asked about filing for Chapter 13 is “How much will my monthly payment be?”

This depends on a lot of things, including your income, expenses and assets for starters. The most common way a Chapter 13 payment is calculated is by taking your income and subtracting your expenses, yielding a monthly payment. It’s actually much more complex than that, but that is the gist of it.

This leads to the implied question in Chapter 13 and your monthly payment, i.e., what expenses are allowed and appropriate. Most of my clients will understate expenses, often stating little to zero is spent on clothing and entertainment. While there is some sense of austerity that comes with filing Chapter 13, you are not expected to go without clothing and catching a movie or visiting a museum.

That’s right, Chapter 13 does not make nudity and boredom mandatory.

There is a concern by my clients that they will be placed on the stand in the courtroom and crucified for every dollar they spent. It just does not work that way. That said, your budget must be reasonable. $1,000 a month for entertainment is not going to fly. And there are conventional truisms such as never driving a car nicer than the judge. I don’t know which car most judges drive, so that’s difficult to measure. But you get the idea.

But if you have a housecleaner, a nanny, a finely manicured topiary, weekly haircuts, and you are not willing to sacrifice any of these costs, Chapter 13 may not be for you. While you are not required to eat rice and beans, eating at Michelin rated restaurants with regularity is probably not going to happen.

The sacrifice you have to make is actually pretty reasonable: live within your means. Chapter 13 is essentially a structured economic environment designed to keep your finances in order so that you succeed.

So while some reasonableness is required to file and succeed in Chapter 13, starvation and nudity is not.

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Should I File for Chapter 7 or Chapter 13 Bankruptcy?

moneyBy Jeena Cho

There are pros and cons to most decisions. Bankruptcy is no exception. We have many different types of bankruptcy because the law recognizes that there are many different types of debt problems.

When does Chapter 7 make sense?

Chapter 7 is best suited for debt problems where you’ve had enough and you’re ready to walk away. Both individuals and corporations can file for Chapter 7 bankruptcy. It’s known as “liquidation bankruptcy” because the trustee will liquidate non-exempt assets. Whatever money the trustee can recover from liquidation will be used to pay your creditors.

What is liquidation? Will I lose everything?

The word “liquidation” sounds scary. You might be asking “but how will I survive if the trustee takes everything?” In a personal bankruptcy, also known as “individual bankruptcy” there are exemptions that allow you to protect a certain amount of assets. California has very generous exemptions and in most Chapter 7 cases, the debtor (person filing bankruptcy) gets to keep all of his or her assets and walk away from the debt.

What’s the difference between a personal and corporate Chapter 7 bankruptcy?

In a corporate Chapter 7, there are no exemptions and the trustee will step in to liquidate the assets of the company (if any) in an orderly fashion. This can be beneficial in situations where the owner(s) of the corporation do not want to liquidate the assets themselves. It can also protect the owners from claims of fraudulent transfer from its creditors.

What if there aren’t enough exemptions to protect all of my assets?

If we can’t protect all of your assets, there are three options. 1. File for Chapter 7 bankruptcy and let the trustee sell the unexempt asset. 2. File for Chapter 7 and work out a deal with the trustee for you to buy back the unexempt asset. 3. File for Chapter 13 bankruptcy.

How does Chapter 13 work?

In a Chapter 13 bankruptcy, instead of the trustee taking the asset, you make a monthly payment that’s equivalent to the unexempt asset. So, let’s suppose you have a vehicle that’s worth $12,000. Let’s also assume that in a Chapter 7, the trustee would be entitled to sell or “liquidate” the vehicle. Instead of having the trustee take the car, you can file for Chapter 13 and pay $200 per month for 60 months ($200×60=$12,000).

Chapter 13 monthly payments can also be determined by taking your current income and subtracting your expenses.

Do I earn too much money to file for Chapter 7?

The other circumstances where you may need to file for Chapter 13 bankruptcy is if your income is too high. How much income is too high? That depends on your particular situation and what expenses we can use to offset your income.

Some examples of offsets:

1. Your family size - the more people that depend on your income, the higher the allowance

2. Mortgage - mortgage payments can be used to offset your income. So, in many circumstances, it’s possible to have a fairly high income and still qualify for Chapter 7 due to mortgage payments

3. Car payments - similar to mortgage payments, your car payments and operation expenses can be used to offset your income

4. Medical expenses - medical and dental expenses can help qualify you for Chapter 7 bankruptcy

5. Insurance - term life insurance, medical insurance and some other insurances

6. Charitable contribution - being generous can actually help you qualify for Chapter 7

7. Taxes - owe back taxes? Owing Uncle Sam may make it easier to qualify for bankruptcy

There are many others. So, as you can see, it’s not enough to know how much you earn but we also need to carefully evaluate your situation to determine what offsets we can use to qualify you for Chapter 7 bankruptcy. These same offsets may be used to reduce your Chapter 13 payments.

Some strategic reasons for filing Chapter 13

In some cases, it makes more sense to file for Chapter 13 (even if you qualify for Chapter 7) for strategic reasons. Here are some circumstances:

1. You’re behind on car/mortgage payments - If you want to keep your car and/or home and you’re behind on payments, Chapter 13 gives you up to 60 months to make up or “cure” the missed payments.

2. Reduce interest rate on your car - If you have very high interest rate on your vehicle, Chapter 13 may be advantageous since we can usually reduce the interest rate to around 4 - 5%.

3. Taxes - similar to missed mortgage payments, you’ll be given up to 60 months to repay the IRS/FTB.

4. Student loans - in general, you’ll still be responsible for your student loans even after bankruptcy. However, in a Chapter 13, we can propose a monthly payment that you can reasonably afford for the duration of the Chapter 13. This can be a strategic way to deal with aggressive collection efforts.

5. Continue operation of a business - this is a very complicated area but in some circumstances, the trustee may demand that you stop operating our business if you file for Chapter 7 bankruptcy. If continuing to operate your business is critical, it may make sense to file for Chapter 13.

The word “bankruptcy” can feel very scary and overwhelming. However, bankruptcy law is designed to give good people a second chance at living debt free. There are many strategic ways to use the bankruptcy law to achieve your goals - living debt free, saving your assets from creditors, and of course, gain some peace of mind. Chapter 7 of Chapter 13 may provide this much needed relief.

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Bankruptcy Alphabet: V is for Valuation

By Jeff Curl, San Mateo bankruptcy attorney

In bankruptcy, we talk a lot about valuing assets. How do you value your home in bankruptcy? How about your car? How about your personal property or the “stuff” you own?

Valuation is the price assigned to something. This can be critical for determining whether you can exempt and protect certain assets like homes and cars.

Valuation of Homes

letter vThe valuation of homes matters for a couple of reasons. First, we want to know the value of your home, minus the mortgage liens to determine its equity, if any, for purposes of exempting the home. For example, if your home is worth $700,000 and you have $600,000 in mortgages, you have $100,000 in ostensible equity. I say ostensible because expenses such as a realtor’s commission count against the equity. A full appraisal by a neutral party that understands the market is usually the best choice.

In California, a family can exempt $100,000 in equity in their home. Therefore, if the home has $100,000 in ostensible equity, and really around $50,000 in equity if you calculate the realtor and trustee commissions, we know that we can exempt and protect the home

A second reason for determining these values is for determining a possible lien strip in Chapter 13. Assume your home is worth $500,000 and has two loans. The first loan is a mortgage for $550,000. The second loan is a home equity line of credit (HELOC) for $75,000. Since the first loan absorbs all of the equity and then some, the HELCO is unsecured. A proper valuation of the home let’s us know that we can “strip” the mortgage in a Chapter 13 bankruptcy.

Valuation of Vehicles

A valuation of vehicles is similar to that of home. We want to know what it is worth, subtract the liens, and determine its value. Cars are trickier in some regards because there is the market itself, appraisers, and the different guides such as Kelly Blue Book (KBB) or NADA that will each assign different values to the same vehicles. Even our local judges have differed on what is most reliable. It does seem, however, that judges all carefully evaluate the credibility of an appraiser. If it is someone with experience, who actually examined the vehicle, such appraisers are given more credence for their valuations.

Valuation of Personal Property

Vehicles are a type of personal property, but what about your other stuff? You have clothes, kitchenware, art, jewelry, electronics and other items found in your house. You have to make a good faith effort to determine what your personal belongings are worth in their used condition. Frankly, most of our common household goods just aren’t worth much. But, maybe you collected something like art or jewelry, or your great aunt gave you a potentially valuable family heirloom. Such items should be investigated and appraised where necessary. You do not want to find a trustee attempting to take something or accusing you of concealing an asset’s value because you did not take the time to properly determine its value.

Valuation is really about disclosure, and disclosure is how you make sure you have the smoothest ride through the bankruptcy process.

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What Happens If I Stop Paying on My Second Mortgage?

second mortgageTwo questions clients commonly ask me are:

 

If you are delinquent on your first mortgage, soon or later, your mortgage company will initiate a foreclosure process. How long you can live in your home after you stop paying your mortgage varies greatly from lender to lender, your geographical location and other factors. I’ve seen clients not receive the Notice of Sale (this is the notice letting you know the location, time and date when your home will be sold) for years in certain cases. I suspect that as housing prices recover, especially in the San Francisco Bay Area, banks won’t wait around as long to foreclose.

What happens if I stop paying on the second mortgage? Second Mortgage Can Initiate Foreclosure!

Some clients mistakenly believe that only the first mortgage can foreclose on the property. Not so! Both the first and the second mortgage can foreclose if you miss payments. However, even if the second mortgage forecloses, it will only get paid after the first mortgage.

Let’s take an example:
You have two mortgages on your home with the following balances:
1st: $700,000
2nd: $100,000

Now, let’s suppose the second initiates the foreclosure and your home sells at auction for $600,000. The second lender will get nothing because the first mortgage is first in line to get paid. Since the sale price wasn’t sufficient to cover the first mortgage, the second gets $0. For this reason, it is less likely that the second mortgage will foreclose if your home is underwater.

However, let’s suppose your home is worth $900,000. In this case, the second is a lot more likely to foreclose since it would recover all of its money.

Can Chapter 13 Get Rid of Second Mortgage?

Chapter 13 is a viable way to save a home in many foreclosure situations. In Chapter 13, you propose a Chapter 13 plan where you repay your mortgage arrearages (missed payments) over up to a five year period. For example, if you owe $30,000 in back mortgage payments, you would propose to repay $500 per month ($30,000/60 months) in order to get caught up on your mortgage.

Chapter 13 may also allow you to get rid of your second mortgage once and for all through a process known as “lien strip.” Chapter 13 lien strip is only allowed in the following situation:
Your second mortgage is unsecured. In general, this means that the fair market value of your home is worth less than the first mortgage balance. For example, your home is worth $500,000 and your first mortgage balance is $650,000. This would make your second mortgage “unsecured” no matter how much your second mortgage loan amount because the first mortgage absorbs all value and leaves nothing for the second.

In this situation, we can file a Motion to “strip” your second mortgage. In order to do the lien strip, you must a) file Chapter 13 (not a Chapter 7) and b) make all of your Chapter 13 plan payments. In general, a Chapter 13 plan will last for 3 or 5 years.

As the housing prices continue to rise in San Francisco Bay Area, it will certainly become harder to lien strip since more second mortgages will be secured. In order to strip the second mortgage, the entire second mortgage balance must be unsecured. So, if you owe $600,000 on your first mortgage and your home is worth $600,001, you’re out of luck.

Of course, valuing your home to the exact dollar is difficult, especially in this market but that’s a topic for another post.
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Can I Keep My House in Chapter 7?

Keep My House in Chapter 7

Keep My House in Chapter 7? | JC Law Group PC

Can I Keep My House in Chapter 7?

Frequently, I get calls from clients who has a “quick question” - Can I keep my house in Chapter 7? What I find to be curious is that for most folks, their home is their most significant asset. It’s where you live, sleep at night, your children grow up, yet, they want to resolve whether they can keep the house in Chapter 7 over a 2 minute telephone call.

Will I Lose My Home in Chapter 7? Short Question - Long Answer

In bankruptcy, you are entitled to keep certain amount of assets known as “exemptions.” Any property that is not exempted is subject to liquidation in Chapter 7. Liquidation means that the trustee can take unexempt property, sell it to pay your creditors.

You may have heard that you can keep one house in bankruptcy. Not true! Each state has its own exemptions and in California, you are entitled to keep the following amount of equity.

$75,000 for single person
$100,000 for family unit
$175,000 for senior, disabled or over 55 years old with limited income.

It’s important to remember that these amounts are equity in your home. So, if your home is worth $700,000 and you have a mortgage of $650,000, there is ostensibly $50,000 in equity. However, costs associated with the sale such realtor commissions and capital gains can deplete all or part of the equity.

The housing market is picking up in the Bay Area, and because of the high value of most Bay Area homes, the equity exemption doesn’t always go very far.

How Does the Trustee Value My House?

I always cringe whenever a client tells me that their home is worth $x based on zillow.com. Don’t get me wrong, zillow.com is fine for an estimate but incorrectly valuing your home can lead to the trustee selling your house! So, it’s important to get a recent full appraisal for your home from a reputable appraiser who is familiar with your area.

Even if your appraiser values your home at a certain dollar amount, the trustee is not bound by that number. The trustee will frequently send out his or her own real estate agent to your house to value it.

How Does the Trustee Decide if There’s Excess Equity?

The important thing to know is that the trustee can list your home for sale and let the market dictate the value.

Let’s take an example:

Suppose your appraiser says your home is worth $900,000. You have $800,000 in mortgage, leaving $100,000 in equity, which you protect using your exemption.

However, the trustee’s real estate agent thinks he can sell your home for $1,100,000. The trustee can simply list your home for sale and see what the going rate is! He can market the house, sit on it for 6 months, wait for the right buyer and sell it. If the trustee does sell your home, you would be entitled to the first $100,000 (the exemption amount), the mortgage lender gets its $800,000, and the realtor and trustee get their expenses/commission. Anything left over goes to the unsecured creditors.

Ways to Protect Your Home in Bankruptcy

There are several things you can do to protect your home through bankruptcy.

1. Only file Chapter 7 if your home is well under exemption amount. Don’t file for Chapter 7 if [mortgage + exemption] is too close to the fair market value. Home values are rising so quickly that it’s not unusual for the home to appreciate significantly over a short period of time.

2. File Chapter 13. If the numbers are close or if there’s any concern about the trustee selling the home, file Chapter 13. In Chapter 13, instead of the trustee liquidating (selling) your unexempt assets, you repay that amount over 60 months. So, for example, if there’s $30,000 of unexempt equity, you would repay $500 per month for 60 months ($500 x 60 = $30,000). *
*For the purposes of this post, I am totally oversimplifying this but that’s the general idea.

Final Thoughts

Unfortunately, in the past 6 months or so, I’ve been getting calls from panicked debtors who filed for Chapter 7 without realizing that they may lose the home in bankruptcy! Some were represented by inexperienced counsel, others were pro per. It’s always easier to plan for ways to protect the home before filing for bankruptcy. Imagine Chapter 7 like a door that you walk through. The door closes and locks behind you. There’s no un-do or reset button in Chapter 7.

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