Bankruptcy Information

You may need to consider speaking with a bankruptcy attorney about filing Chapter 7 or Chapter 13 bankruptcy.

This website contains over 100 pages of information on bankruptcy and foreclosure. Please visit the sidebar on the right side of this page to learn more about the author, Salinas bankruptcy attorney Ralph O. Thompson. Mr. Thompson works with individuals and small businesses in Monterey County, California.

A workout is not always possible--some homeowners (including those with small businesses) who are behind in their mortgage payments and deeply in debt need to consider bankruptcy. Bankruptcy cannot discharge secured debt to your lender, but it can provide time for you to reorganize your finances.

The loan on your house is secured by the house. When you get a mortgage you take on a personal obligation to pay back the mortgage. The bank gets your promise in the form of a note, and it gets a lien on your house. If you cannot meet that obligation, the lender can go after the house.

Bankruptcy can wipe out your personal obligation, but not the right of the bank (through its lien) to foreclose. If a foreclosure auction does not bring enough money to pay off the mortgage, there is a deficiency . In many cases, this deficiency can be wiped out in bankruptcy. As you may suspect, this general rule is subject to all kinds of caveats and exceptions.

Chapters 7 and 13 of the Bankruptcy Code stop foreclosure (at least for awhile) and protect other assets. The moment that you file a bankruptcy petition with the federal bankruptcy court all debt collection activity is stopped (stayed). The automatic stay prevents your lender from moving forward with foreclosure. It cannot contact you regarding any missed payments nor discuss with you any workout arrangements.

Chapter 7 is a liquidation plan. All your assets, except for certain exempt assets, are liquidated to pay off your creditors, including your mortgage lender. Generally, the lender will be able to continue with its foreclosure after a relatively short period of time (30 to 90 days.)

If you have equity in your property, the bankruptcy judge may stop the foreclosure for a reasonable period of time so you can sell the property and get your equity. This is where Chapter 7 can be really important.

In order to qualify for a Chapter 13 bankruptcy you must be a wage-earner. You can file for Chapter 13 bankruptcy only if you have a relatively steady source of income.

A Chapter 13 bankruptcy establishes a plan for fixed payments over a number of years. This plan effectively refinances your debt and allows you to meet your living expenses before paying off creditors.

The fixed payments are calculated to pay off your pre-bankruptcy debt, including back house payments at an affordable rate. You need to keep up with your regular house payments while you make your plan payments.

The bankruptcy court may allow you three to five years to catch up on your debt. For the plan to work, payments must be kept current or the court protection will be withdrawn and the lender can resume foreclosure proceedings.

Unfortunately, over two-thirds of Chapter 13 filers cannot follow their plans and make their scheduled payments. A missed plan payment might follow an unexpected event, such as a divorce or serious illness.

Which is better for your credit, foreclosure or bankruptcy?

Surprisingly, a foreclosure appearing on your credit report may be worse than a Chapter 13 filing. After successfully completing a Chapter 13 plan, you might be in the position to refinance your home or sell and purchase a new home.

A bankruptcy is not a do it yourself project. You should find a bankruptcy attorney who can develop a plan and file the proper papers. Many caveats and special rules apply to bankruptcy and only an experienced attorney can advise the proper course of action. The cost of an attorney is minimal compared to the cost of losing your home.

Mr. Thompson files bankruptcy petitions for residents of Monterey and parts of Santa Cruz Counties (Salinas, Monterey, Watsonville, Castroville, Gonzales, King City, and Greenfield). Call him today at 831-235-7881 if you need to talk to him about your financial situation.