Whether due to injuries from an accident, a layoff at work or factors related to the current economy, many people across Southern California and especially the Inland Empire are facing mounting credit card debts or mortgage payments they can no longer afford. Already stressed over accruing stacks of bills, consumers in debt may be confused about the many debt-relief options available to them. They may wonder whether they are eligible to file for bankruptcy and, if so, which type of bankruptcy. They may also be considering their bankruptcy alternatives, including the viability of a loan modification (a.k.a. loan mod), debt settlement and short sale through an experienced financial solutions attorney.
Chapter 7 Bankruptcy
Chapter 7 bankruptcies are sometimes called liquidation bankruptcies. The filer has the option of reaffirming debts and continuing his or her payments on those reaffirmed obligations (mainly home and auto loans). One common fear in a Chapter 7 bankruptcy is that the filer's belongings are sold, or liquidated, to raise money and pay the filer's debts. This is uncommon and can mostly be avoided with the help of an experienced bankruptcy attorney.
By using an attorney who focuses on bankruptcy, your property may become exempted from seizure by the bankruptcy trustee — that is, exempt from liquidation. Common exemptions include certain equity the debtor has accumulated in his or her home or vehicle(s) of primary use; most, if not all, of your household goods and personal property can also be exempted, including money invested in 401(k), IRA and other retirement accounts. There is even a "wild card" exemption that can be applied to any other assets you may have (up to the exemption limit).
Of course, child support arrearages, student loan debts and tax liens are nearly always nondischargeable. That means the debts will survive the bankruptcy and the consumer must continue paying them.
Garnishments, bank account levies and many other court-ordered actions taken by creditors CAN be stopped and included in the Chapter 7 bankruptcy, which can greatly increase your household income and prevent further loss.
Not everyone qualifies to file for Chapter 7 bankruptcy. Debtors who have income or assets sufficient to pay their creditors will probably have to proceed with a payment plan bankruptcy, also known as Chapter 13. A standard means test determines eligibility for Chapter 7. This is normally conducted during the initial consultation to see what chapter of bankruptcy the client qualifies and is best suited for.
Chapter 13 Bankruptcy
In Chapter 13 bankruptcies, the filer has the option of reaffirming debts and entering into a payment plan to pay those reaffirmed obligations. Under Chapter 13, consumers have the option of reaffirming debts for nonexempt property. Debtors get to keep property on which they have reaffirmed debts provided that they make payments as required under a repayment plan for up to five years. As long as the debtor makes the payments as agreed, at the end of the repayment plan period, all dischargeable debts are discharged.
Just as in Chapter 7 bankruptcies, arrearages for child support, student loans and tax liens are infrequently dischargeable in bankruptcy. There is no means test that debtors must pass in order to file for Chapter 13 bankruptcy.
Chapter 11 Bankruptcy
Another option for some individuals or businesses with large amounts of outstanding debts is to file Chapter 11 bankruptcy, which is sometimes called reorganization. This is a very specialized and intricate chapter of the Bankruptcy Code and usually handled only by a select few attorneys at a VERY considerable cost to the debtor. The reason to file for this specific chapter is because the other chapters (7 and 13) are not available or the debtor or business entity does not qualify.
For many who want to avoid filing for bankruptcy or don't qualify for bankruptcy, debt settlement offers a viable solution. A lawyer may be able to negotiate with creditors to accept less than the outstanding balance (settle), to lower interest payments or to extend the time in which to pay. This is typically done by the client paying monthly into a specialized trust account that will allow the availability of funds when the settlement agreement is reached with each individual creditor. Although a large portion of the total amount owed is paid to the creditors (typically in the range of 25 to 40 percent), bankruptcy can be avoided and the payments are much lower than the standard minimum currently owed. Debt settlement is mainly for those who either can't file bankruptcy because they don't qualify or their employer prohibits them from filing (i.e., security guard at a casino).
Additionally, for-profit companies solicit debtors with advertisements touting elimination of credit card debt for mere fractions of what is owed. However, USA Today reports that these companies frequently charge upfront fees and advise consumers to stop paying their bills. If the consumer feels that the company has not served his or her best interests during the debt settlement process, he or she has little recourse against the company.
Homeowners who are upside down on their mortgages may also wish to speak to an experienced debt-relief attorney to negotiate lower mortgage payments through a loan modification, or loan mod. A loan mod will typically reduce the interest rate charged on the home loan, which can greatly reduce mortgage payments. Loan mods almost always convert any nonfixed rate (ARM) loans into fixed rate loans, and they sometimes come with either a principal reduction or principal deferment due at the end of the loan.
Much has been said, both good and bad, about the loan modification process. While some try to blame the attorneys who represent their clients in receiving a loan mod, much of the blame lies with the lenders who are so overloaded with loan modification requests; the process has bogged down to taking several months or even a year or longer. This is one especially good reason to hire a professional loan modification attorney who has experience and know-how in negotiating the very best loan modification possible.
A short sale occurs when the bank agrees to accept less than the full balance of the loan and essentially forgive the difference, freeing homeowners to sell at lower prices. A short sale costs nothing to the debtor, as all fees are paid directly by the lender. The negotiations can sometimes even approve the debtor to receive funds through a cash-for-keys program. The goal of a short sale is to remove liability for any deficiency balance that results from taking the difference between the balance owed and the final sales price of the home. The lender releases the debtor from the mortgage, thereby preventing foreclosure.
Short sales are mainly for those who owe MUCH more than their home is worth and just want to be released from further liability to their home or mortgage balance. Another reason is if they were turned down for a loan mod. Unlike for-profit companies that offer similar services, an attorney who represents a client in debt settlement has a duty to work in the best interests of the client.
No matter the situation, the ultimate decision lies with the one facing the overpowering debt. By choosing an attorney who offers MULTIPLE options for relieving and removing that debt, consumers can start to reclaim their life again and stop worrying every time the phone rings or they check the mail.
Determining which debt reduction or elimination option involves careful consideration of all options. Speaking with a bankruptcy attorney about options empowers consumers to make educated decisions about their financial future.