Articles Posted in Chapter 7

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The decision to file for either Chapter 7 or Chapter 13 is a big one. This decision is one that requires substantial consideration and expertise. One of the most significant aspects of my work as a Sacramento Bankruptcy Attorney is to advise Sacramento area residents as to whether bankruptcy is a viable decision for him/her to begin with. Many individuals who schedule a consultation with my office are anxious to avoid filing Chapter 7 or Chapter 13 and come to my office in an attempt to explore the options available to them. In some cases, potential clients have specific matters that need to be addressed under their economic circumstances.

The first thing a person considering bankruptcy needs to take into account is the amount of debt the person has looming over his/her shoulders. Chapter 7 or Chapter 13 is really not a wise step to take if your debt to income ratio or debt to assets ratio are relatively low. The Bankruptcy code was revised in 2005, making it more difficult for a person to qualify for Chapter 7 in the first place. Thus, this question of whether bankruptcy can provide a solution to the debtor is often resolved by a simple mathematical equation. If an individual qualifies for Bankruptcy under the revised code, then there is a high probability that the individual has a high debt to income ratio which can be resolved by filing.

A simple way to calculate this ratio is for a person to examine his/her monthly expenses for all your necessary monthly obligations. This means the debtor needs to compile his/her monthly payments for things such as housing, vehicle, and living expenses. Do not include payments for credit cards or other nonessential expenses. Next, the debtor must compare that number with his monthly income. As a general rule, if the debtor cannot pay off his outstanding debts with the balance of his income that exceeds the necessary monthly expenses, over a three year period, bankruptcy may be a good option.

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For those of you living in the Sacramento area that have a second mortgage on your real property which is essentially “unsecured” due to the fact that the value of your house has fallen below the amount secured by your first mortgage may be able to stop the bank from foreclosing and save your home by filing Chapter 7. In the case In Re Lavelle, 2009 Bankr., a bankruptcy judge for the Eastern District of New York allowed debtors to void the second mortgage lien held by the bank against their property by filing Chapter 7 when the value of their home fell below the amount secured by the first mortgage.

Since the case-law has not been settled in the Ninth Circuit, whose rules apply to those of us living in the Sacramento area, a debtor could conceivably prevent foreclosure and save their house so long as they can afford to continue making payments on the first mortgage after all other debts have been discharged in addition to the second mortgage. It makes sense that local judges could be inclined to interpret the bankruptcy code in a similar fashion as the court in the Eastern District of New York since a bank holding an unsecured second mortgage would not see a penny whether the house gets foreclosed on or the debt is stripped-off and voided under Chapter 7. Given the economic “fresh start” principles that Chapter 7 is designed to provide to a debtor, and the number of people that this interpretation of the law could help from losing their homes, I believe judges will become increasingly receptive to the argument. This view rests on a novel interpretation of the bankruptcy code, however, and would probably be an uphill legal battle. Nonetheless, In Re Lavelle shows at least one judge has become sensitive to the current economic situation and there is enough wiggle room in the law to provide a legal basis for making such a claim.

As a Sacramento bankruptcy attorney I have spoken with numerous clients with these types of questions. The only way to know for sure is by locating a debtor who finds himself in this situation to retain a lawyer who is willing to bring the case before a local court and present the argument. This would almost certainly become a drawn out legal process, but the courts would probably allow the debtor to at least remain in the property until all appeals have been exhausted and a final decision, perhaps by the United States Supreme Court, has been made. If you believe that you could benefit from this interpretation of the law it may be in your best interest to consult an attorney familiar on the subject.