A major concern for homeowners who are contemplating the filing of a bankruptcy petition is the question of whether or not they can keep their home in a Chapter 7 bankruptcy filing.
Debtors who consider the filing of a bankruptcy petition do so as they can no longer afford to continue paying all their debts. The major components of a typical debtor’s obligation would consist of the home mortgage, the car loan and the credit card bills. In the past, the debtor may have been able to afford the monthly carrying cost of these obligations. However, with the economic downturn, many debtors have lost their jobs, suffered reduction in working hours, or, just have been unable to pay off their credit card balances monthly such that the balances have steadily increased and are now at levels that are unaffordable.
In many cases that I have encountered with financially troubled clients, the typical homeowner owns a home with has a negative or zero equity. The client would also have a car loan which is still unpaid; and, have credit card bills in the 5 or 6-figure range which has kept on increasing monthly due to interest and penalties accruing. In these cases, the debtor may be able to afford paying for one or two of these debts (the home mortgage and the car loan, for example) but would not have enough earnings to be able to afford paying for the third obligation (credit card debts, for example). Would the filing of a chapter 7 bankruptcy petition be a solution to this debtor’s problem?
Many debtors are hesitant to consider bankruptcy as an alternative due to the concern that they will loose their home in a bankruptcy filing. This is not so. In a bankruptcy filing, the homeowner would have the option to keep the home. Hence, in a Chapter 7 filing as long as the homeowner has no equity (or the equity in the house is exempt) and the homeowner continues to keep making the monthly mortgage payments, the homeowner does not have to loose the home. In bankruptcy court, the homeowner can “affirm” the home loan obligation; and, as long he continues to make the monthly mortgage payments, the homeowner gets to keep the home.
This is also the same with a debtor’s cars. Almost all of us need a vehicle to get to and from work. If a debtor decides to keep the car, he/she may likewise do so in a bankruptcy filing. Same as the home loan, the debtor may also “affirm” the car loan and continue making monthly payments and keep the car.
The credit card obligations, on the other hand, are a different matter. Debtor normally would not want to “affirm” these credit card obligations. Financially troubled debtors would normally want these credit card bills wiped out. Credit card obligations being an unsecured obligation, the debtor can have these debts discharged in a Chapter 7 bankruptcy filing. In fact, in the many clients I have encountered, most of them would have immediate financial relief as they are now able to continue paying their home mortgage and car loan obligations without the additional burden of also paying their credit card bills.
Thus, a bankruptcy petition should be considered as a viable option for some homeowners who want to keep their homes. A Chapter 7 bankruptcy petition gives them the flexibility to wipe out their unsecured obligations but still gives them the option to keep their homes.
(DISCLAIMER: material presented above is intended for informational purposes only. It is not intended as professional advice and should not be construed as such. Rey Tancinco is a partner at Tancinco Law Offices, a professional corporation with offices in San Francisco, Vallejo, and Manila. The law office website is at: tancinco.weareph.com/old. Rey Tancinco can be contacted at (800) 999-9096 or (415) 397-0808 or via email at: attyrey@tancinco.com
