Can Bankruptcy Help Stop or Avoid a Foreclosure in California?
Get Advice from Experienced San Jose Chapter 13 Attorneys at the Law Offices of Jon G. Brooks
Given the current mortgage crisis in California and nationwide, this is one of the questions we are most frequently asked during a typical free bankruptcy consultation. The answer depends greatly on which chapter of bankruptcy the debtor is eligible to file. Prospective clients ask us every day whether bankruptcy can save their San Jose home. As we have discussed elsewhere, secured debt is treated very differently in bankruptcy from unsecured debt. In simplest terms, while unsecured debts may be discharged in bankruptcy (either at the end of a short, three-month Chapter 7 case, or at the end of a 3 or 5 year long Chapter 13 payment plan), secured debts require repayment in full (with very limited exceptions) as long as the debtor keeps the property securing the loan. Put bluntly: if you want to keep a house or a car, you've got to pay for it.
Chapter 13 bankruptcy, on the other hand, can help avoid foreclosure in California and save a home under some circumstances, by allowing the debtor to pay off his or her pre-bankruptcy arrearages on the mortgage loan over a 3 or 5 year Chapter 13 payment plan. However, this only works in the long run if the debtor has sufficient monthly income to (1) make all regular monthly mortgage payments outside of the Chapter 13 plan, and additionally (2) make monthly payments into the Chapter 13 payment plan sufficient to pay off all pre-bankruptcy arrearages on the home mortgage loan through the duration of the payment plan. In other words, if the debtor has enough monthly income to keep making regular mortgage installments as well as additional income (after all other necessary living expenses) to put into the payment plan, then Chapter 13 can help the debtor bring the mortgage loan current. Chapter 13 can help a debtor “reinstate” a mortgage loan that was in default when the bankruptcy case was filed, but again, this can only succeed if the debtor has sufficient income.
Perhaps the most powerful tool in bankruptcy for avoiding foreclosure and keeping a home is “lien stripping.” As we explain in greater detail in our Lien Stripping article, Chapter 13 bankruptcy provides a procedure for stripping off second mortgages or other junior liens such as Home Equity Lines of Credit (HELOCs) from the property that secured them and thus converting these junior liens into unsecured debt. Unfortunately, lien stripping is not available in Chapter 7, and is only possible in very specific, limited circumstances in Chapter 13 bankruptcy cases. Lien stripping also requires overcoming multiple procedural hurdles. At the outset of the Chapter 13 case—typically before the Chapter 13 plan has been confirmed by the Bankruptcy Court—the debtor must file a motion (the San Jose Division Bankruptcy Court’s local rules call for lien stripping be done by motion) with the bankruptcy court to establish the present value of the home. If the Bankruptcy Court finds that the home has depreciated so much that the present value of the property is LESS than the principle balance owed on the FIRST mortgage loan (effectively leaving no equity at securing the second mortgage or junior lien) then that second loan is treated as unsecured debt in the Chapter 13 bankruptcy. Provided that the debtor successfully finishes the 3 or 5 year Chapter 13 payment plan, making all plan payments, then at the end of the case, he or she may file another motion with the Bankruptcy Court to void that second mortgage or deed of trust. This court order may then be recorded in the debtor's county recorder office to forever “strip” or remove that second loan from the property. The debtor then emerges from Chapter 13 bankruptcy owning the home free of that second loan or deed of trust.
As we have discussed above, Bankruptcy may, in limited circumstances help to avoid foreclosure. However, this depends on several factors, including which chapter of bankruptcy the homeowner files and whether he or she can afford to continue making regular mortgage payments. Contact us for a free bankruptcy consultation with one of our bankruptcy attorneys to see whether we can help you avoid foreclosure.
To further discuss whether we can help you avoid foreclosure and to schedule a free consultation with one of our experienced bankruptcy attorneys at the Law Offices of Jon Brooks in San Jose, CA, please call us at 408.286.2766. Prior to your appointment, we ask that you download our Personal Bankruptcy Questionnaire, fill it out to the best of your ability, and bring this information with you to your meeting with us.