Bankruptcy Primer

Services for Real Estate Pros with Law Offices of Louis J. Esbin

1.  The Automatic Stay of a Foreclosure:  The filing of a bankruptcy case, whether Chapter 7, 11 or 13, gives rise to an automatic stay that will put a stop to a pending foreclosure or any other collection efforts, with some exceptions.


2.  Lien Stripping:  This is a commonly used term to describe when a bankruptcy court values real property for the purpose of determining if the first is partially undersecured and the second or third wholly undersecured.  If the value of the residential property is less than the amount owing on the first, any other liens recorded against the real property will be "stripped" or removed from title when the debtor gets a discharge.  This remedy is only available in a Chapter 11 or 13 case.


3.  Short Sales:  A short sale may be done in a Chapter 13 or 11 case with the consent of the lenders (the first and second and any other junior liens), and if there is no consent through a more complex proceeding prescribed by the bankruptcy code.  In a Chapter 7 case, a short sale is accomplished after the discharge has been issued and the Chapter 7 trustee has issued a no asset report and preferably after the case has closed.  If the debtor's income exceeds the Means Test median income, a short sale may be best accomplished after the case is filed, rather than before.  If a short sale is done before a Chapter 7, it may preclude the filing of a Chapter 7 because there are no mortgage payments to reduce the annualized monthly income.


4.   Court Ordered Loan Modification:  The court has no authority to modify the terms of a first secured only by the residence; i.e., the court has no authority to do a loan modification without the lenders consent.  If a loan modification is negotiated during the course of a Chapter 13, the court will need to approve it as part of the Chapter 13 plan.  If a trial modification is approved and pending, a bankruptcy case must wait, as the filing would likely terminate the trial modification.  A court may, however, through a Chapter 11 plan modify the terms of a loan secured other than by the residence.  This is called a "cramdown."


5.  Bankruptcy Case Choices:  Of the 3 bankruptcy cases that individuals may file, Chapters 7, 11 or 13, which one is chosen will depend upon a myriad of facts, circumstances, priorities, and strategies.  Which one to choose from will also be dictated on whether there is the need to retain property while restructuring debt secured by the property and the amount of secured and unsecured debt.  Generally, an individual filing for reorganization will be forced into a Chapter 11 case if the secured debt exceeds $1,080,000 or unsecured exceeds $360,000.  The twist is that a determination of value finding a second to be wholly undersecured can push a debtor into Chapter 11, rather than Chapter 13, when you add the second to credit card debt, taxes and student loans, such that the total amount of unsecured debt will be over $360,000.


6.  The Right Attorney:  Choosing the right bankruptcy attorney should be based upon experience, reputation and knowledge of the complexities of filing and how each of the bankruptcy Chapters related to one another and the facts.  Just as you would not retain a doctor to perform heart surgery based upon the fees charged, but rather upon the number of surgeries performed or reputation of the doctor, so too, where a person or couple are facing the equivalent of open heart financial surgery, they should focus on the same criteria.  A California State Bar Certified Bankruptcy Specialist is an attorney recognized as having these qualifications.  When experience counts, count on experience!


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