Do You Even Qualify For Chapter 13 In Southern California?

28 Jul Do You Even Qualify For Chapter 13 In Southern California?

Although the recent downturn in real estate is driving thousands to seek chapter 13 bankruptcy relief to save their homes, the same downturn is also having the ironic affect of denying eligibility to debtor for that very relief.

To file for chapter 13, a debtor must meet the qualifications of 11 USC 109.  Essentially, they must have, at present, unsecured debt of $336,900.00 or less, and secured debt of $1,010,650.00.

Unfortunately, many debtors in Southern California can not meet this eligibility criteria due to the real estate they own and the debts associated thereto.  This is because Bankruptcy Courts look to the underlying substance of claims in bankruptcy cases and not to their ordinary classifications. Thus, a second mortgage on a house that is upside down due the first mortgage, is treated as unsecured and not secured. Moreover, even the portion of the first mortgage that is also upside down is treated as unsecured.

For example:  A house worth $500,000, with a first of $600,000, and second of $300,000, technically has $500,000 in secured claims and meets the 109 qualifications, but $400,000 in unsecured claims which exceeds the $336,900 unsecured qualifications.  Hence, they are denied eligability to file for chapter 13 to strip the second mortgage from their home and save their home.  Click here to read the recent Groh decision that was decided by the San Diego Bankruptcy Court in May this year on this very issue.  So what are the options?

One option is to file for Chapter 11 relief.  Such relief usually requires $20k to $50k attorney fees at a minimum and is generally used by wealthier debtors.  Very few debtors file for such relief.  Another option would be to attempt a mortgage modification with the lenders outside the bankruptcy court and be at the lenders complete mercy and discretion.  Good luck!

The final option is simply to walk.  Yes, the Bankruptcy Laws Congress has written now serves to force these debtors to surrender them in foreclosure proceedings.  Imagine that….. Bankruptcy laws now operate to promote foreclosures in Southern California than to prevent them!

Well, if you are considering foreclosure, surrendering the home would probably work best with the filing of a chapter 7 case in light of tax consequences and to extend the final time in the property.

Written by Michael G. Doan

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