What Happens to Your Home After Bankruptcy in California?

When you are weighed down by crushing debt and unable to keep up with bills, it is understandable that you would consider all possible options to resolve your financial struggles. Bankruptcy in California may be a solution for many debtors, and there are numerous benefits that could support your goals. When you discharge eligible debt, you get a fresh start, easing your stress and opening the door to new opportunities. You can accomplish your goals through either Chapter 7 or Chapter 13, whichever type of bankruptcy suits your circumstances. For many debtors in California, ‘Home After Bankruptcy’ emerges as a critical consideration

A home is often one of the most valuable assets in a bankruptcy case, and the mortgage behind it is also one of the highest debts a person may owe. Because of these unique characteristics and the nature of a home loan, the rules are complicated. You can count on a California bankruptcy lawyer to advise you on what happens to your home after bankruptcy, but some general information is useful.

Types of Debt in Bankruptcy Cases

There are crucial points to know about Chapter 7 and Chapter 13, but you should first become familiar with how debts are treated in the bankruptcy process. Clarifying the terminology is helpful.

An unsecured debt is one in which there is no asset acting as collateral for the loan. Examples are credit cards, personal loans, medical bills, and lines of credit.
Secured debts are those that have some asset acting as collateral, which is the case when you have a mortgage on your home. Your lender has a security interest in the home, giving it the authority to take legal action to satisfy the loan if necessary.
Dischargeable debt refers to balances that you are allowed to eliminate in bankruptcy. There are some types of debt you cannot wipe out, such as alimony, child support, and judgments from certain lawsuits.

Chapter 7 Bankruptcy Summary

Under US bankruptcy laws, individuals can discharge qualifying debt under Chapter 7 if they meet the eligibility requirements. You automatically qualify if your take-home pay exceeds the state median income level. If your earnings exceed this amount, you may still be eligible under the Means Test. With this assessment, your income is reduced by the amount of designated expenditures, potentially enabling you to qualify for Chapter 7.

Through the bankruptcy process under Chapter 7, your unsecured debts will be wiped out. However, your home is a secured debt. If you do not pay the amount due, the lender can always resort to its primary remedy of foreclosure. Plus, the bankruptcy trustee can liquidate your assets in Chapter 7. Your home could be sold to satisfy your debt to creditors unless you take advantage of options to protect assets.

Background on Chapter 13

With a Chapter 13 bankruptcy case, the eligibility rules are relaxed. There is only one requirement, and it is that you must have a job and a source of income. This criteria is critical for the main component of a Chapter 13 case, which is a debt repayment plan. With this arrangement, your debts are combined into a single monthly payment that you can afford on your salary. You make payments for 3 to 5 years, at which point your Chapter 13 case ends. Your dischargeable debts are eliminated.

The bankruptcy trustee does not have the power to liquidate assets in Chapter 13. The way you pay creditors a percentage of what you owe is through the debt repayment plan. At the same time, you cannot discharge your mortgage through Chapter 13 bankruptcy because of its status as a secured debt.

How the Bankruptcy Automatic Stay Affects Your Home in California

With both Chapter 7 and Chapter 13 bankruptcy, there is a benefit that kicks in right away. The US bankruptcy court will impose an automatic stay on creditor efforts to collect the debt that you owe. For the duration of the case, creditors are prohibited from:

Contacting or communicating with you;
Filing a debt collection lawsuit;
Attaching property or filing liens;
Garnishing your wages; and,
Foreclosing on your home.

However, you should note a key exception to the automatic stay. Lenders with a secured debt through the mortgage on their home can request that the court lift or terminate the ban on its collecting efforts. This means the bank could start or continue with foreclosure proceedings if you do not pay the mortgage, late fees, interest, and other arrearages.

Options for Protecting Your Home in California

With both types of bankruptcy, the most effective way to keep your home is to continue paying the underlying mortgage amount after you file and throughout the duration of your case. When you keep up with payments, you can take better advantage of the strategies to protect your home.

With Chapter 7, you have two goals with respect to what happens to your home. On the one hand, you want to prevent the bankruptcy trustee from liquidating it. On the other, you need to avoid foreclosure by the bank. As you continue to pay the mortgage amount, you can also take advantage of exemptions. Under System 1 of California’s structure for bankruptcy exemptions, you could protect up to $600,000 in equity in your home.
There are also helpful ways to protect your home in Chapter 13, which are based on the presumption that you will pay the mortgage the entire time your case is pending. With this type of bankruptcy, you can roll arrearages into your debt repayment plan. All the interest and fees become part of your monthly payment, which is discharged when the case ends in 3 to 5 years.

How a California Bankruptcy Attorney Can Help

The most crucial tasks for your lawyer will be consulting with you about goals and advising you on whether Chapter 7 or Chapter 13 is suitable for your situation. You can also count on assistance with:

Collecting and organizing financial documents;
Preparing and filing your bankruptcy petition;
Helping you develop the Chapter 13 debt repayment plan;
Advocating on your behalf at the meeting of creditors; and,
Concluding your bankruptcy case and obtaining the discharge order.

Speak to a California Bankruptcy Attorney About Strategy

Your home is important from a financial and personal standpoint, so you must know what to expect when filing for bankruptcy in California. For additional details about your home in Chapter 7 and Chapter 13, please contact Kostopoulos Bankruptcy Law. We can set up a consultation with a California bankruptcy lawyer who will explain how the laws work.