201711.02
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How Chapter 7 Bankruptcy Can Help With Foreclosure

California was one of the states hit hardest by the housing crisis and resulting wave of foreclosures that began in 2007-08. Statistics support the conclusion that the worst of the crisis had passed by the end of last year, and a study by research firm CoreLogic found that California homeowners gained an average of $26,000 in equity in between 2017 and 2017. By the same token, however, www.consumeraffiars.com reports that more than 19,000 foreclosures were completed California between January and December 2016, still far above pre-crisis numbers.

If you are facing foreclosure of the mortgage or deed of trust on your residence, you may be considering bankruptcy as an alternative. Each family’s situation is unique, and only an experienced bankruptcy attorney can properly advise a struggling homeowner. Here are some general points to consider.

Chapter 7 vs. Chapter 13

This choice is no longer the debtor’s alone, and Chapter 7 eligibility is, therefore, a threshold issue. Individuals wishing to file a liquidation petition under Chapter 7 of the Bankruptcy Code must demonstrate that they lack the financial ability to repay any meaningful portion of their debts. This is determined through a so-called “means test” using the debtor’s income and (in some cases) assets.

Many homeowners with employment or other regular income, who at one time could have opted for a Chapter 7 filing will likely find that they can no longer do so. Instead, homeowners must file a so-called “wage earner” partial repayment plan under Chapter 13. For homeowners who are eligible, however, a Chapter 7 case may provide some benefits not available in a Chapter 13 case:

Saving Money

In most cases, a homeowner and his or her family will be able to remain in the home for a number of months without making mortgage payments. The bankruptcy filing legally stops the foreclosure process until either the end of the case or when the lender secures an order from the court allowing it to proceed.

Eliminating Mortgage Debt

The debtor’s personal liability for the balance of the mortgage debt is legally eliminated.

Avoiding Tax Liability

If a mortgage lender agrees to write off a portion of a loan, that amount may be treated as income for federal tax purposes. However, that is not the case if the debt is entirely eliminated in bankruptcy.

Delaying the Inevitable?

A Chapter 7-eligible debtor may elect to file under Chapter 13. While the Bankruptcy Code allows a Chapter 13 debtor to keep his or her home, it also requires the debtor to adhere to a strict household budget for three (in some cases five) years, a difficult task for even the most committed family. It is therefore probably not surprising to learn that more than half (and perhaps as many as 3 out of 4) of all Chapter 13 cases fail. Once a Chapter 13 case is dismissed, a mortgage lender can resume foreclosure.