BK?
Should You File For Bankruptcy? When? Chapter 7 or 13?
The Unitied States Constitution authorizes Congress to establish a “bankrupt court.” Congress has chosen to do so. Therefore, you have a constitutional right to file bankruptcy. We do now allow debtor’s prison in the United States. If you must file bankruptcy to protect yourself and your family, do so. There is no disgrace in doing so.
Nevertheless, I recommend that you avoid bankruptcy if it is reasonably possible to do so.
File for bankruptcy if you are a few weeks away from having your home foreclosed. File for bankruptcy if your creditors are garnishing your paycheck or your bank account.
Otherwise, do not file bankruptcy. Try to work out a forbearance agreement, a payment plan, or a modification. Many people stop paying their credit cards and find that the credit card companies just forget about them.
If you cannot pay your credit cards, stop paying them and try to negotiate a modification. Yes, I negotiate credit card modification. Certain credit card companies are agressive about suing, but most do not sue to collect, particularly if your debts are large and your assets are few. However, they will all ring your telephone off the wall.
If you cannot pay your first mortgage in full, pay what you can. This shows good faith and will help delay initiation of foreclosure.
If you can pay your first mortgage but are having trouble paying your second mortgages, pay your first mortgage and stop paying your second mortgage or reduce your payments on the second and pay what you can.
If you have to file bankruptcy to stop garnishments or foreclosure, you can still work on a modification from within the protection of the bankruptcy stay, although it is more complex, and any settlement reached will require court approval. Generally speaking, you will have more leverage in obtaining a mortgage modification, particularly on your second mortgage, if you are in bankrutcy or have completed a bankruptcy.
Bankruptcy is complex. You may earn too much to qualify for Chapter 7 straight bankruptcy. A Chapter 7 bankruptcy is done in three months. However, you may have non-dischargeable debts such as taxes, student loans, or child support. So you may have to file under Chapter 13 for a personal reorganization, and you will be in bankruptcy for three to five years, during which time you will pay from zero to ten percent of what you owe on your unsecured debt.
If you file for bankruptcy you will receive a discharge on your mortgage debt. However, that does not mean you will receive a release on of the mortgage liens. That means that the lender will not be able to sue you for the debt. You will be free to walk away from the property with no further consequences. You will be free to continue making payments on your mortgages. But your first and second mortgage liens will still attach to the property, and your lenders may later foreclose one or the other if you fail to pay.
This major issue is how bankruptcy will affect your second mortgage. In Chapter 7 your second mortgage lien will not be released, even if there is not enough equity in your property to secure the second mortgage. However, in Chapter 13, if there is less equity in the property than what you owe on your first mortgage, the second mortgage is therefore unsecured and the court can strip away the second mortgage. This may require an appraisal and a special motion by your bankruptcy attorney.
In his campaign President Obama said he favored giving judges the power to “cram down” a mortgage, that is to reduce the balance owing on a mortgage to what the property is worth. Congress is again debating whether to pass such a law.
Whether you should file for bankruptcy depends on many more factors than I can outline here. I will tell you what I know and what I do not know about bankruptcy, and I may refer you to one of my favorite bankruptcy attorneys.
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