The benefit for filing a Chapter 13 is that you may be able to strip your second mortgage. This is called a “lien strip” or “lien avoidance”. This can make a difference between being able to save your home or having it go through foreclosure. Lien Stripping does not necessarily mean your second mortgage is eliminated, but it is converted from a secured debt to an unsecured debt – and, it only occurs in a Chapter 13 bankruptcy. Once your Chapter 13 bankruptcy plan is completed (3 to 5 years), your second mortgage is eliminated much like your credit card debts. By changing its status to unsecured debt, it is treated the same as if it were to be a credit card or medical debt. The unsecured debt (including your second mortgage) will be discharged after your bankruptcy plan is complete, whereas your secured debt must be continued to be paid on (i.e., your first mortgage).

Example for Lien Stripping:

A home in California was purchased for $250,000. The debtor obtained a first mortgage for $200,000 (1st mortgage) secured by a deed of trust, and a 2nd mortgage of $50,000, also secured by a deed of trust. The value of the property has declined because of the economy and it is now only worth $180,000. Because the value of the property is now less then what the 1st mortgage is, the 2nd mortgage has no value, which then becomes unsecured.

In a Chapter 13 Bankruptcy, the owner may now have the second mortgage lien stripped off from the property. This means, it could be treated in the bankruptcy plan as ordinary unsecured debt.

How Lien Stripping Occurs:

During a foreclosure process, the property owner may declare bankruptcy (either a Chapter 7 or Chapter 13). However, in order for a Lien Strip to work, the debtor must file for Chapter 13. Filing bankruptcy freezes a foreclosure (also called an automatic stay). The bankruptcy court than reviews your case. In most Chapter 13 bankruptcies where the second mortgage has no equity, the court may rule the second mortgage as unsecured debt, which is called “lien stripping”.

This is What May Occur:

• The property owner purchases a home by obtaining a first and second mortgage.
• Due to the economy, the property value falls below what the debtor owes on the first mortgage.
• If there is insufficient equity left in the property to cover the second mortgage, the court may strip the second mortgage lien off the property. This means that the debt becomes unsecured debt.
• Filing for bankruptcy may stop a foreclosure from happening.

The process of lien stripping may occur during the bankruptcy process. This not only helps the debtor keep the home, but also eliminates some of the debt owed on the property.

A lien strip is not a typical occurrence in a bankruptcy. It requires extensive research and drafting of court documents. It should be performed by an experienced bankruptcy attorney. Hiring an attorney for this type of case is very important. You may need all the legal advice for this situation to help and ensure the process moves forward efficiently and successfully.

Are you are considering filing for bankruptcy and are overwhelmed with financial stress caused by creditors , or, your bills are piling up and making you lose sleep over what your options are?  California leads the nation in the amount of bankruptcies filed each year according to the AACER (Automated Access to Court Electronic Records.)  Hiring a professional who has the tools to assist you in your rough times with highly trained individuals and compassion for what you are going through is an important step in the recovering process. Our team at the Law Offices of Alon Darvish can help you with making the right choices and steer you back into the path of financial stability. For some, the embarrassment of facing such challenges will result in the decision to go about doing it alone which is a mistake in the long run as such a big decision plays an important part in your future.  The chances of making errors during the bankruptcy process can mean you not being awarded the discharge of your debts and can become another hassle in your life. Here are some examples of why hiring a qualified individual can make the process stress free and beneficial.

Knowledge of the Law

California attorneys are knowledgeable about the California Bankruptcy process and will know the laws that need to be applied for each case.  New Laws  under the Bankruptcy Abuse Prevention & Consumer Prevention Act make it more difficult for individuals to file for bankruptcy by themselves.  Bankruptcy laws vary depending on the state they reside in, therefore having a qualified bankruptcy attorney helps the process along.  One of the advantages of having an attorney is that they understand your situation and can advise you on what is going on so you are not left in the dark during your troubling times.

Paperwork

The process to file for bankruptcy in Los Angeles is time consuming, as the amount of paperwork that needs to be completed is significant.  Making sure the bankruptcy petition has a the correct information is crucial to your bankruptcy as it is the foundation of what needs to be done. 

The process can be cumbersome.  You may have a mountain of paperwork, which you will need in order to file bankruptcy with the court.  Gathering these documents can take time and preparing the petition with incorrect information can cost you more money.  A Los Angeles bankruptcy attorney can assist you with gathering all the proper information needed and they will help you file them accordingly.

Representation

Once you have hired a bankruptcy attorney, they will represent you during your case.  This includes letters sent out to creditors that you have and they will help eliminate the phone calls and collections of property as they are required to contact the attorney, not you.  Your attorney will accompany you to your creditors meeting which is a vital part of the process to file Chapter 7 bankruptcy .  This meeting will determine which property can be taken and sold to repay the debts.  Usually, bankruptcy trustee’s do not take property from the debtor because they are entitled to keep certain assets.  However, in order to determine whether your assets are safe (i.e., your home, car, cash in the bank, etc…), you should speak to a knowledgeable bankruptcy attorney. The trustee will be asking questions which can be intimidating and with an attorney present, they can help you answer them so you avoid costly mistakes in the long run.

Attorneys are legally bound by a code of ethics when representing you and will work diligently on your behalf to either negotiate your debts or advise you whether a bankruptcy is the right choice for your circumstances.  Our firm will not make empty promises as to what we can do for you.  Rather, we will carefully discuss your best options and purse the objective of getting your debts under control, either through bankruptcy or other debt handling means.

Here is a good flowchart for the Bankruptcy Means Test.  See whether you pass:

A bankruptcy is defined as the legal process in which a person or firm declares inability to pay debts. Any available assets are liquidated and the proceeds are distributed to creditors. Upon a court declaration of bankruptcy, a person surrenders assets to a court-appointed trustee, and is relieved from the payment of previous debts. A bankruptcy discharge is an order given by the bankruptcy judge, at the conclusion of all legal steps in processing a bankrupt person’s assets and debts, which forgives those remaining debts which cannot be paid, with certain exceptions. Debts for fraudulent or illegal actions, alimony and child support and taxes are not dischargeable and remain owed.

The fair treatment of creditors and public policy both work to limit the extent of the discharge for debtors. The bankruptcy code was not designed so that debtors can take advantage of creditors for their own profit, and so various provisions of the bankruptcy code limit the debts that are discharged if they were incurred dishonestly or by fraud. This includes debts that were incurred on credit cards where the debtor entered false information on the credit application and also includes major debts for luxury goods that were incurred shortly before filing for bankruptcy. However, a creditor must challenge the discharge of these debts, and the court must notify the debtor and conduct a hearing; otherwise, the debts will be discharged.

There are debts that are discharged and others that are not allowed to be discharged. Most unsecured debts acquired by the debtor in good faith and if they cannot pay them off are allowed to be discharged under a regular Chapter 7 bankruptcy . Debts that are never discharged in a bankruptcy can include:

1. Recent taxes
2. Trust fund taxes
3. Child or family support
4. Criminal fine or restitution
5. Accident claims involving intoxication
6. Debts not scheduled
7. Penalties payable to the government other than tax penalties
8. Student loans
9. Debts listed in prior bankruptcy where debtor was denied a discharge
10. Taxes for years where return unfiled or filed for less than 2 years

Some of the listed debt may be discharged if the debtor can prove hardship to pay them back within a reasonable time frame.
Secured debt that is discharged is a little more difficult as the debtor might want to keep that asset such as a car, or home. The individual debtor can surrender the secured property, pay for it in a lump sum, or sign a Reaffirmation Agreement to keep it. In most cases, only prepetition debts are discharged. In an involuntary Chapter 7 case that is brought by a creditor rather than the debtor, discharged debts also includes debts incurred between when the case was filed and when the actual bankruptcy case commences, if the Chapter 7 bankruptcy is approved by the court.

An automatic stay is put once a bankruptcy process begins, this prohibits the collection of debts by the creditors. If the debtor receives the discharge of the debts, then the injunction succeeds the automatic stay and enjoins any further actions to collect the debts from the debtor. If a creditor violates the injunction and tries to collect the debts, then the courts may issue a civil contempt order. Generally, waivers of certain discharged debts are not enforceable except in specific circumstances. Waivers must be in writing and approved by the court. A reaffirmation agreement, for instance, must satisfy these and other requirements to be enforceable. A debtor may volunteer to pay a debt, but the creditor cannot harass or intimidate the debtor into doing so.

A Chapter 7 discharge is granted to an individual debtor if there have been no challenges, which is usually the case. Creditors have 60 days after the creditors meeting to challenge the discharge of its debt. If there are no challenges and if the debtor did not sign an reaffirmation agreement, then after about 3 months after the creditors meeting, the court sends the debtor the notice of the discharge. If the debtor signed a Reaffirmation Agreement and is not represented by an attorney, then the court requires the debtor to appear before it so that it can ascertain whether the debtor understands the Reaffirmation Agreement and that the debt will continue beyond bankruptcy. The debtor can either accept the agreement or cancel the agreement. Regardless, the discharge is granted at this hearing.
A Chapter 7 discharge relieves the debtor of the liability of most prepetition debts and some post petition debts, such as the claims resulting from the rejection of executory contracts or the avoidance of a transfer.

Everyone is overwhelmed with debts and responsibilities, especially in the fast hustle and bustle of Los Angeles. Make it easy with knowing what to expect with your bankruptcy filing. First, make sure you have a well qualified attorney like the Law Offices of Alon Darvish who can better guide you thru this crazy process and help you to fresh start. Here are ways to help you with your bankruptcy filing process:

1. Have your taxes filed and in proper order with the IRS. If you do not have prior tax papers you can easily receive them by contacting the IRS at (800)829-1040.
2. Organize all your credit card information and bills including any collection notices and if you have any pending lawsuits regarding that debt.
3. Have your monthly pay stubs in order for the last six months from your employers.
4. Stop using any payday loans, any personal lines of credit or any unnecessary credit card usage.
5. If you have a credit card from your bank and are in debt from it, close your checking account with good standings and open another one with a different bank.
6. Organize all your monthly expenses including your utilities, mortgages or rent, and car payments.
7. If you are involved in any lawsuits, ask for advice from your attorney on what you need to do next.
8. Continue to pay for the items that you wish to keep such as your mortgage payments or your car payments.
9. Attend Credit Counseling with an agency such as www.PioneerCredit.com.
10. Keep track of your credit score throughout the whole process and verify that all your credit information is correct and belongs to you.

Having everything in order by creating a folder will keep you better informed and help with the bankruptcy filing process through your difficult times. Having everything ready for your attorney will only speed things up and get you closer to the finishing line.