The Unsecured Debt Limit for Chapter 13 Eligibility: Do Unsecured Junior Liens Count?

Yes. To be eligible to file a Chapter 13 bankruptcy, your unsecured debts (debts not tied to property) must be less than $336,900 and your secured debts (debts providing the creditor the right to take certain property if you default) must be less than $1,010,650.

Distressed homeowners often file Chapter 13 bankruptcies to set up a payment plans that allow them to make up their missed mortgage payments and cancel any junior deed of trust liens that the home no longer secures because of a drop in the home’s value.

But if your primary residence is significantly underwater (the amount you owe is much more than your home is worth), the unsecured debt limit may make you ineligible to file a Chapter 13. This is because when the value of the home has decreased so a foreclosure would leave nothing for a junior deed of trust holder after senior claims are paid, the bankruptcy court treats the claim as unsecured for eligibility purposes.

Partially secured first deeds of trust, however, are treated as secured and are subject to the much less restrictive debt limit. So, for example, if your primary residence is worth $400,000 and you owe $500,000 on your first deed of trust, and $200,000 on your second deed of trust, the first lien is partially secured by the $400,000 value in your home. The remaining $100,000 does not count as unsecured for eligibility purposes because part of the lien is secured. The second lien, however, is completely unsecured and the $200,000 counts toward the $336,900 unsecured debt limit. If your remaining unsecured debt (i.e. credit cards or other unsecured junior liens) exceeds $136,900, you are ineligible to file a Chapter 13 to save your home. (It is more difficult to save your home in a Chapter 7 bankruptcy).

In a recent 9th Circuit decision, a California Bankruptcy Court acknowledged the unfairness the unsecured debt limit causes for many middle class homeowners. Chapter 13 debts limits are too low for a large number of people, mainly because plummeting home values have left so many homeowners with large amounts of unsecured debt. The debt limits and the treatment of unsecured junior liens for eligibility purposes prevents many financially distressed homeowner from access to a Chapter 13 bankruptcy, thereby forcing them into a much more expensive Chapter 11 bankruptcy, or a Chapter 7 bankruptcy in which it may be much more difficult to save their home.

You may, however, be able to get eligible for a Chapter 13 bankruptcy by discharging unsecured claims in a Chapter 7. Contact a Seattle Bankruptcy Attorney for more information.

Weitz Law Firm, PLLC
520 Kirkland Way, Ste 103
Kirkland, WA 98033
425.889.9300

How can I rebuild my credit score after filing bankruptcy?

There are several steps you can take to get back on the road to good credit immediately after filing bankruptcy.

1. Apply for a new credit card. If you cannot get an unsecured card, you may be able to get a secured card. Secured credit cards are a great way to restablish credit. A secured card requires a cash collateral deposit that becomes the credit line for the account. So if you put $500 in the account; you can only charge up to $500. You may be able to add to the deposit to get more credit, or sometimes a bank will reward you for good payment and add to your credit line. Make sure the credit card reports to credit reporting agencies so that they effect your credit score.

2. Get a copy of your credit report after you are discharged. Make sure every debt that was included in your bankruptcy and discharged reflects a zero balance – not a late payment or chargeoff. Creditors often fail to report information consistent with forgiveness of the debt. Report any errors to credit agencies.

3. Use the credit cards and make all payments on time.

4. Get a co-signor. Banks will be much more willing to extend credit and you will still be the primary account holder.

5. Avoiding further credit reversals.  This include actions like foreclosures, judgments, collection actions, evictions, and tax liens.

Rebuilding your credit is an important step toward reaching financial stability. For more information, contact a Seattle Bankruptcy Lawyer.

Weitz Law Firm, PLLC
520 Kirkland Way, Ste 103
Kirkland, WA 98033
425.889.9300

 

 

Will bankruptcy affect my credit score?

Yes. A bankruptcy will remain on your credit report for up to 10 years from the date of the filing. Your credit score will probably decrease by somewhere between 150 and 250 points. This is a big drop and it may make getting a loan difficult right after you emerge from bankruptcy.

But if you are in a position where you are contemplating bankrtupcy, the hit to your credit score is very likely worth it. Letting your debt mount and incurring late fees and charges may be just as harmful to your credit score, if not worse. In fact, depending on your situation, filing for bankruptcy might even increase your credit score.

 Although, it may initially be difficult to get loans without a co-signer for major purchases like houses and cars, most people are able to obtain new credit immediately after filing because creditors know they will not be able to file a Chapter 7 bankruptcy (which wipes most or all unsecured debt) again for 8 years. About two years after filing for bankruptcy, most consumers are able to seek credit on normal terms. This is because all or most of their debt has been wiped clean, and they are now living on a budget they can afford. Outstanding balances, late payments, and records of unpaid debt are removed from your report and marked as “Included in Bankruptcy.” This notation will typically be removed from your credit score after 7-10 years. By opening new credit accounts and making prompt payments, your score could be back in the 700s within 2-3 years.

If you are considering bankruptcy, your credit score should be low on your list of concerns. If, like most people in your situation, you are deep in credit card debt, your credit score is already hurting. Filing bankruptcy can help you get the fresh start and protection you need to get control of your debt, and rebuild your score.

For more information, contact a Seattle bankruptcy lawyer.

Weitz Law Firm, PLLC
520 Kirkland Way, Ste 103
Kirkland, WA 98033
425.889.9300

Can I get rid of my child support or alimony payments in bankruptcy?

No. The Bankruptcy Code specifically excepts from discharge any “domestic support obligations.” This means you can’t erase past due payments for child support, maintenance, alimony, or any other family support by filing Chapter 7 or 13. An experienced bankruptcy attorney can help you discharge most or all of your unsecured debt so you can catch up on your domestic support obligations.
 
Weitz Law Firm, PLLC
520 Kirkland Way, Ste 103
Kirkland, WA 98033
425.889.9300

What type of bankruptcy should I file?

Most people have one of two options for debt relief through bankruptcy- a Chapter 7 or Chapter 13 petition. In a Chapter 7 bankruptcy, almost all your debts are discharged. In exchange for this discharge, the bankruptcy trustee can take any property you own that is not exempt from collection, sell it, and distribute the proceeds to your creditors. What property is exempt from collection depends primarily on state law. Typically, exemptions include some equity in your home and car, retirement funds, public benefits, and most household goods, furniture, furnishings, clothing, appliances, books, and musical instruments. A Chapter 7 bankruptcy petition is much faster and can be completed within four months. To be eligible to file a Chapter 7 bankruptcy, you must pass an income means test- your income (averaged over the last 6 months) must be less than the state median income. But an income above the state median will not automatically disqualify you. If you are close to the state median income, you may be able to deduct certain expenses to reduce your income to the state median.

A Chapter 13 bankruptcy petition requires a repayment plan that lasts for a minimum of 3 years. It allows you to keep your home and possibly strip back second mortgages if your home is underwater.

Types of Bankruptcy Cases

Will my creditors stop calling if I file bankruptcy?

Yes. One of the great benefits of bankruptcy is that once your case is filed,  all your creditors must cease all harassment and collection activities – including phone calls, letters, lawsuits, garnishments, evictions, and foreclosures. This bar is called the automatic stay and is designed to give you breathing room while you work through the bankruptcy process. There are very serious consequences for creditors who violate the automatic stay. If a creditor contacts you, repossesses your car, or forecloses on your property without the court’s permission, they are considered to be in contempt of court and you may be able to recover actual damages that result (including attorneys’ fees paid to enforce the stay). Any action taken in violation of the stay is void.  So if your lender sells your house at a foreclosure sale while the stay is in place, the sale is void- even if the creditor had no notice of the stay.

Once a debt is discharged in the bankruptcy, the creditor will not be able to come after you for repayment even after the automatic stay is lifted upon conclusion of the bankruptcy because you will no longer owe the debt.

Violations of the automatic stay are common. An experienced bankruptcy lawyer can help you enforce your rights under the automatic stay.

Weitz Law Firm, PLLC
520 Kirkland Way, Ste 103
Kirkland, WA 98033
425.889.933

Can I get rid of my 2nd mortgage in bankruptcy?

Only if your property is underwater (the mortgage exceeds the value of the house). Generally, both first and second mortgages are secured debt. Secured debt cannot be eliminated in bankruptcy. But if your first mortgage is more than the value of your home, your second mortgage (and any other junior mortgages) is considered unsecured. This is because if your primary mortgage holder forecloses on your home, there will be no funds left from the sale of the home to pay the second mortgage holder, meaning the second mortgage is not secured by the property. This process of removing your second mortgage from your house is called lien stripping.

Example. Let’s say your house is worth $200,000 and you have a $250,000 first mortgage and a $50,000 second mortgage.  Since your first mortgage is more than your house is worth, you can strip your second mortgage.  (If you also had a third mortgage, then you could get rid of that too).  But if your house was worth $280,000, then you have $30,000 of equity above the first mortgage so you cannot strip your second mortgage.

Similarly, if the home is worth less than the outstanding principle on the first mortgage, the court may cram down (reduce) the mortgage principle to reflect its current market value. The excess debt is then unsecured and  can be eliminated.

For more information or help with getting rid of a junior mortgage, reducing a first mortgage, or advice on dealing with underwater property, contact a Seattle Bankruptcy Attorney.

Weitz Law Firm, PLLC
520 Kirkland Way, Ste 103
Kirkland, WA 98033
425.889.933

What happens after I file bankruptcy?

After the bankruptcy petition is filed, the court will appoint a trustee and call a meeting of all your creditors. The trustee and your creditors can ask you about your assets, income, and expenses.

In a Chapter 7, the trustee will determine what assets, if any, the court can take possession of and sell. But almost all your assets will be exempted (protected). Once the trustee determines that there are no assets available for liquidation, almost all your outstanding debts are discharged.

In a Chapter 13, you must include a repayment plan that provides for monthly payments to creditors in your petition. Your creditors may question your income and expenses to try to obtain a larger monthly payment amount. Once the repayment plan is confirmed, you must make the payments for the required time period or your bankruptcy may be dismissed.

Can bankruptcy get rid of my student loans?

Only in extremely rare cases. In a Chapter 7 bankruptcy, all debt is discharged (cancelled) at the end of your bankruptcy unless the bankruptcy code specifically prohibits it. (In a Chapter 13 bankruptcy, you may have to pay off a portion of your unsecured debt through your repayment plan).

This year, total student loan debt in the United States reached $1 trillion – more than credit cards and any other type of consumer debt. At the same time, college graduates’ earnings have declined. More and more students are declaring bankruptcy to help get out from under a mountain of student loan debt. But because of a 2005 reform law, unlike most debt, student loans cannot almost never be discharged in bankruptcy.

To discharge a student loan, you must show that paying it back would be an undue hardship on you or your dependents.  To do this, you must file an adversary proceeding with the court. Specifically, you will have to prove that:

(1) You cannot maintain, based on current income and expenses, a “minimal” standard of living for yourself and your dependents if you are required to repay the loans;

(2) Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period; and

(3) That you have made good faith efforts to repay the loans.

For more information on dealing with student loan debt, consider contacting a Seattle Bankruptcy Attorney.

Weitz Law Firm, PLLC
5400 Carillon Point, Building 5000
Kirkland, WA 98033
(425) 889-9300