If you are burdened with the weight of choking debt, you may be looking into bankruptcy options to ease your financial struggles. Depending on how far you have researched, you might already know that your assets are important for both Chapter 7 and Chapter 13 bankruptcy. For many filers, the residence is the most valuable, significant asset in the case. You will certainly want to know what happens to your house after bankruptcy in California, and the outcome varies depending on your circumstances.
The outcome is also greatly affected by getting solid, knowledgeable legal counsel to represent you in a Chapter 7 or Chapter 13 case. You have an advantage in determining which type of bankruptcy is more beneficial to your situation. Plus, you can gain by using exemptions to protect your home from being taken or sold. A California bankruptcy lawyer will assist with the process and help you reach your goals for a positive financial future. Still, an overview of what happens to your house may be useful.
Basics on Chapter 7 Bankruptcy
Chapter 7 of the US Bankruptcy Code is known as discharge bankruptcy because you can eliminate all qualifying debts through the process. However, there are strict rules to qualify, since discharging debt has such a harmful effect on creditors. Only those who truly need help with debt are eligible, and the main criterion is your income. You qualify if your earnings are less than the state median income for California, but those with higher income may also be eligible through the Means Test. This test takes your earnings and subtracts important monthly expenditures, increasing the potential that you qualify.
An important point about Chapter 7 is that the bankruptcy trustee has the power to sell certain assets that you own to pay back creditors. You can apply exemptions to protect assets, including your home. In practice, the bankruptcy trustee is not likely to liquidate items that would not bring reasonable profit to pay creditors. Many filers are able to keep their assets.
Summary of Chapter 13 Bankruptcy
Under Chapter 13, you can also discharge qualifying debt, but you do so as part of a debt repayment plan. The process involves combining all debts into a lower monthly amount that you can afford. You make monthly payments for 3 to 5 years, and the amount you end up paying will usually be a fraction of what you owe. When the case is over, all eligible debts are eliminated.
You might consider Chapter 13 for two reasons:
- You do not qualify for Chapter 7 bankruptcy because of your income, making Chapter 13 the most suitable option for addressing debt. The primary eligibility rule for Chapter 13 is that you need a job or source of income to keep up with your debt repayment plan.
- You qualify for Chapter 7, but you realize that you could lose many valuable assets through liquidation. With Chapter 13, the bankruptcy trustee cannot sell any of your assets to satisfy your debt to creditors.
Treatment of Your House in Bankruptcy
California has enacted numerous state-based bankruptcy rules, and many of them relate to exemptions such as your home. These can be used to protect your house, and you can choose how you want it treated in Chapter 7:
- System 1: Known as Section 704 exemptions, you can apply the laws to protect the equity you have paid into in your home. You can safeguard up to $600,000 in equity if you own a residence, condo, mobile home, or even a boat you live on.
- System 2: These are Section 703 exemptions, and you might choose this option if you have limited equity in your home. You can only protect up to $31,950 in your house, but System 2 does offer exemptions that are not available under 704.
The bankruptcy trustee cannot liquidate your home at all under Chapter 13, but there are implications. You may include arrearages, late fees, and other mortgage-related charges in your debt repayment plan. What you do not pay in full is discharged with respect to these amounts, but your mortgage is not eliminated. You still need to pay the loan or you could face foreclosure.
Many people are discouraged from filing bankruptcy because of credit report concerns, and it is true that there are consequences. A Chapter 7 case will appear on your credit history for 10 years, and Chapter 13 remains for 7 years. These are critical implications that should not be taken lightly, but you should compare them to the advantages of bankruptcy. You might find that 7 to 10 years is worth the benefits, which include:
- Upon filing a bankruptcy petition, the court imposes an automatic stay on actions by creditors. You will no longer be harassed or have concerns about lawsuits and wage garnishments.
- Both Chapter 7 and Chapter 13 end up with the discharge of secured debts, though you go through a different process with each. You cannot eliminate all debts, but you get rid of a significant portion of what you owe.
- Without bankruptcy, it could take years to pay off debt because of the late fees and interest. You do not make a dent in the amount you owe when your payments go toward these charges.
Basic Bankruptcy Process
Chapter 7 and Chapter 13 are different, but many of the steps in the process are similar. An overview of the proceedings is useful to understand what to expect, though you can trust your California bankruptcy lawyer to handle the relevant tasks:
- Gather the financial paperwork needed to prepare the bankruptcy petition and schedules;
- Work with you to assess the application of System 1 or System 2 exemptions for Chapter 7;
- Helping you develop the Chapter 13 debt repayment plan that will be acceptable to the court and creditors;
- File the bankruptcy petition in court;
- Represent you at the meeting with creditors, in which creditors will ask questions about information on your petition and on the specifics of your Chapter 13 debt repayment plan; and,
- Wrap up your case by obtaining a final discharge of all debt.
Consult with a California Bankruptcy Attorney About Options
A summary on what happens to your house after bankruptcy in California, is useful, but it is no substitute for having skilled representation on your side. You must realize whether Chapter 7 or Chapter 13 is suitable for achieving your goals, and you will need assistance with the legal process. Kostopoulos Bankruptcy Law is prepared to handle all tasks, including protecting your home as necessary. To learn more, please contact us to schedule a consultation with an experienced bankruptcy lawyer.
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