Los Angeles Bankruptcy Law Monitor : Los Angeles Bankruptcy Lawyer & Attorney : Christine Wilton Law Firm : Southern California Chapter 13 & Chapter 7 Bankruptcy, Foreclosure

We are all on the edge of our seats, watching the news about the Obama Home Affordable program and how so many trial loan modifications are failing in comparison to the number of applications for mortgage modifications.  We have also stood by and watched Congress shoot down the Mortgage Cramdown Legislation under SB61 that would have given bankruptcy judges the authority to modify mortgages in chapter 13 bankruptcy cases.  While all of this continues to take center stage in the news, there is a quiet storm brewing in the practice of chapter 13 bankruptcy that may modify some residential mortgages.

11 U.S.C. § 1322 (b) (2) is referred to as the 'anti-modification' statute and allows modification of secured loans; however, a bankruptcy court's power to modify loans does not extend to loans secured "only by a security interest in real property that is the debtor's personal residence."  What this means is that most homeowners are precluded from filing a chapter 13 case for the purpose of modifying their mortgages.  However, and here is where it gets flavorful because bankruptcy courts have distinguished some residential loans as not being protected under § 1322 (b) (2).

In re Scarborough, 461 F.3d 406 (3rd Cir. 2006) held that, "based on the plain language of 1322 (b), a creditor does not receive anti-modification protection for a claim secured by real property that includes both the debtor's principal residence and other rental property that is not the debtor's principal residence.  In re Bulson, 327 B.R. 830 (Bankr. W.D. Mich. 2005) allowed modification of a loan secured by an interest in property in which the debtor resided when the property involves multi-unit dwellings.  These two cases point to situations where the residential homeowners both lived in their homes and rented out a portion thereof, or otherwise lived in duplexes or other multi-unit properties.  This may be good news for some residential mortgage holders.

But here is the twist.  The lender must know, or have reason to know that the property was being used as both the principal residence and providing rental income at the time of the loan.  So, if you had a tenant on your property when you took out your loan and used that rental income in part, to qualify for that loan, then you may be able to modify your residential mortgage in a chapter 13 bankruptcy. 

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Nowadays it seems everyone from big business to celebrities is filing for bankruptcy.  While major corporations are getting government bailouts with our tax dollars, wouldn't it seem fair if we could get a bailout too? 

Sure, you can file for bankruptcy and have many of your debts cleared off your books through a bankruptcy discharge.  But, how do you know if you need to file for bankruptcy?  At what point do you throw up the white flag to your creditors and declare bankruptcy?  Here are 10 signs that are strong indicators that you may need to file for bankruptcy:

1.  You've depleted your savings and are considering cashing out your retirement savings to pay your bills;

2.  You're living on credit cards and your debt increases rather than decreases each month;

3.  Your family has given you loans or bought you food;

4.  You're behind on your rent or mortgage, or are in foreclosure;

5.  You're anxious when the phone rings because the only calls you get are from debt collectors;

6.  You can only afford to pay the minimum payments on your debts and have high interest rates;

7.  You're using the legal loan sharks at those payday advance shops to get cash;

8. You know you have a lot of debt, but don't exactly know how much and you're afraid to look;

9.  Your car is about to be repossessed;

10.  You're being sued and you know you cannot afford to pay for any judgment.

If you, or someone you know is experiencing extreme financial hardship during these challenging economic times, it's important to take action sooner rather than later.  The sooner you discuss your situation with a trusted authority, like your local bankruptcy lawyer, the more likely you will be able to have your debts discharged without having to go broke doing it.  This means that you can save your retirement for retirement and still get out of debt.

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We are mesmerized by celebrity here in Los Angeles.  We live, practically next door to some of the nation's wealthiest.  We have Oprah in Santa Barbara and all of Hollywood's elite, hiding up in the hills.  But what happens to those rich and famous when they fall from financial grace and file for bankruptcy?  Do we just like scandal, or can we learn something from these bankruptcies?

 So, what can we learn from the rise and fall of the wealthy and celebrity?  Just ask Carlos Justo, Realtor to the rich and famous in Miami.  Watch his ABC interview on You Tube and you'll see an optimist who learned to focus on one thing and do it well.  Annie Leibovitz avoided bankruptcy in September, when she was able to renegotiate with her creditors, despite earning millions from her photography; much of it for Vanity Fair and Vogue magazines. Ms. Leibovitz, 59, has managed to overstretch herself financially with a taste for lavish living. Nicholas Cage owed millions in back taxes to the IRS and his lavish lifestyle is to blame for bankruptcy.  Do you see a theme here?

The lessons are to live within. No. The lesson is to live below your means.  Create a budget that includes paying yourself first by taking the first 10% of your income and putting it away for retirement.  Create a monthly budget that includes all of your necessary expenses.  As for your debt, pay it off if you have it and if you cannot afford to pay cash, do you really need it anyway?

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Once you've decided that filing personal bankruptcy is the right path toward financial freedom from your debts, you need to know: what is the process? How long does the process last? Do filers have to go to court? Who needs to be informed of the bankruptcy filing?

The process of filing bankruptcy requires that you complete a bankruptcy petition and disclose all of your debts and assets to the bankruptcy court.  Before you file for bankruptcy with the court, you will be required to complete a pre-filing credit counseling course and your certificate of completion of that course must be filed with your bankruptcy petition. 

After you've filed your petition with the bankruptcy court, you must attend a meeting of the creditors as required by 11 U.S.C. 341(a); otherwise known as a 341(a) hearing.  This meeting takes place before your court appointed trustee.  The trustee's job is to verify your identity by viewing your government issued identification card [usually a driver's license] and social security card; and the trustee will ask you some basic questions about your petition.  You must also complete a financial management debtor education course in order to be considered for a discharge of your debts. 

For chapter 7 liquidation cases, the process usually lasts approximately six months with a mandatory meeting of the creditors before the trustees.  Chapter 7 debtors will not see the bankruptcy judge, unless they need a reaffirmation hearing.  Chapter 13 individual debt adjustment cases where a debtor repays a portion of their debts over time, requires considerably more time and expense.  The process for a chapter 13 case lasts between three and five years depending upon the household income and the debtor's ability to repay their debts.  

The fact that you've filed for bankruptcy will appear on your credit report for 10 years if you filed Chapter 7 or Chapter 11 and will appear on your credit report for 7 years if you filed Chapter 13.  Bankruptcy may also affect your ability to lease rental property and find employment; and filing bankruptcy will impact your ability to file again in the future.  

Experiencing extreme financial hardship has emotional costs as well.  That's why it's best to talk to a bankruptcy lawyer so that you can make a well informed decision and lead your family to financial freedom from your debts with a trusted advisor who will inform you of all of your legal rights and remedies available through the bankruptcy process.  

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