I genuinely enjoy practicing bankruptcy law. It is a powerful tool for helping my clients deal with their debts in this difficult economy. It can be used in conjunction with modification to provide a more comprehensive sollution for clients.

I am a member of the National Association of Consumer Bankruptcy Attorneys.

Should You File For Bankruptcy? When? Chapter 7? Chapter 13? Chapter 11?

The Unitied States Constitution authorizes Congress “To establish … uniform Laws on the subject of Bankruptcies throughout the United States.” 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 it. 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. File bankruptcy if you are being sued by credit card companies. File bankruptcy if you are losing your driver’s license because of unpaid tickets.

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. All the credit card companies will all call incessantly. However, after around six months the account may be charged off and sold to a collector. Calls frequency may drop. If you are lucky, they will forget about you, and they may do that if you appear not to be a person with substantial earning power.

Some credit card companies file suit right away. The number one for filing suit is Citibank. Citibank forces many debtors into bankruptcy.

I negotiate credit card modification.

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. New regulations require mortgage companies to allow mortgage modification even if a borrower is in bankruptcy.

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.

Will you file a Chapter 7, Chapter 11, or a Chapter 13 bankruptcy? What is the difference?

Chapter 7 bankruptcy is a “straight bankruptcy.” It is a liquidation, meaning that whatever non-exempt properties you own are sold and the proceeds paid to your creditors. If all your property is exempt, you pay nothing to your creditors.

Exemptions differ from state to state. Under Washington exemptions a debtor can exempt up to $125,000 in equity in a personal residence.

A Chapter 7 bankruptcy can be over and done with in 90 days. However, in order to qualify for Chapter 7, you income must not be too high. You must complete a means test. If you income is below the median income for a family the size of yours, you qualify for Chapter 7. If you exceed median income, you may still qualify because certain expenses may be subtracted. We are talking about passing the means test.

If you fail the means test because your income is too high, you must file Chapter 13 instead of Chapter 7. Even if you pass the means test and could file under Chapter 7, you might still want to file under Chapter 13, and that would be the case if you are behind on your house payments or car payments, or if you owe back child support or traffic tickets and need time to pay them off. Chapter 13 allows you to pay your arrearages over time.

In Chapter 13 you must start making current payments on your secured debts, and you must also make monthly payments toward your arrearages. Depending on how much disposable income you have, you might pay from 0% to 100% of your unsecured debt.

Chapter 13 plans can last for 36 to 60 months. Those with income above the median will be required to stay in bankruptcy for 60 months. Below median income borrowers can stay in bankruptcy for only 36 months. In come cases plans can be shorter. Those who want to spread their payments out in order to lower them may choose to stay in for 60 months.

If you file for bankruptcy you will receive a discharge on your mortgage debts. 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.

A major issue now is how bankruptcy will affect your second mortgage. In Chapter 7 your second mortgage lien will not be expunged, 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 adversary action brought by your bankruptcy attorney.

In his campaign President Obama said he favored giving judges the power to “cram down” mortgage, that is to reduce the balance owing on a mortgage to what the property is worth. Obama failed to push this idea once he was elected. Congress is again debating whether to pass such a law.  If bankruptcy courts had the power to cram down mortgages, then lawyers would be able to negotiate cram downs for their clients without borrowers having to file bankruptcy.

Some people fail the means test and therefore cannot file under Chapter 7. However, there is also a means test of a different sort for Chapter 13.  If your secured debts exceed $1,081,400 or your unsecured debts exceed $360,475, you cannot file under Chapter 13. What is a person to do? File under Chapter 11, which is normally utilitized for business bankruptcies, but which also fills the gap between Chapter 7 and Chapter 13.

Whether you should file for bankruptcy depends on many more factors than I can outline here.

A wealth of information is found at this Western District of Washington Bankruptcy Court website.

You can read the federal bankruptcy rules here.

Western Washington local bankruptcy rules here.

A good source for information about Chapter 13 bankruptcy can be found at the National Academy for Bankruptcy Education website.

Likewise, see the bankruptcy website.

And see the bankruptcy section of the website.

Bankruptcy is complex. Call me at 425-774-6611 and I will give you a free telephone consultation.

You may click here to send me an e-mail.

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