Making Over $100,000 and Still Drowning in Debt

Bankruptcy for High Income Earners

One of the most overlooked financial tools available to individuals with high income is Chapter 13 of the Bankruptcy Code.  Unlike a Chapter 7 which can require liquidation of assets and has very strict eligibility requirements, a Chapter 13 has greater flexibility in eligibility and allows individuals to retain their assets while paying back something to their creditors from future income.  Some of the powers of a Chapter 13 Bankruptcy include:

  1. Availability of Bankruptcy to High Income Debtors - A Chapter 13 allows individuals who would otherwise not be eligible for Chapter 7 bankruptcy to repay debts to the extent of their ability through a 3-5 year plan.  In most cases, Debtors repay between 5-10% of their unsecured debts.
  2. Continuing Business Operation - Unlike a Chapter 7 where a trustee can close down a Debtor’s business, a Chapter 13 Debtor has the right to continue operation of the business and has the exclusive right to sell, lease or otherwise use the business assets, in the normal course of operation.
  3. Chapter 13 Plan May Modify Secured Creditor Rights - One of the great advantages of a Chapter 13 bankruptcy at this time is ability to strip a lien on your principal residence that does not attach to any equity.  Here is a common example:  Principal residence has current fair market value of $300,000.  The first mortgage has a balance of $400,000 and the second mortgage has a balance of $100,000.  Because the second mortgage does not attach to any equity in the property, the lien can be avoided or “stripped” in a Chapter 13 thereby removing the balance of $100,000 at the completion of the Chapter 13 case.  In addition, if you have other real property which is not your personal residence, you may reduce the secured claims to the current fair market value if you can pay the fair market value of the real property with the contract rate of interest over the terms of the Chapter 13 Plan which cannot exceed 5 years.  Where this makes most sense is on the small rental property.  On cars, the Debtor can reduce a loan balance to the fair market value except that a reduction is not allowed on cars used by the Debtor for his personal use if it was purchased within 910 days of the bankruptcy filing i.e. you need to have had the car loan for 910 days prior to bankruptcy filing. 
  4. Curing a Default -  A Chapter 13 Plan can cure a default on a loan with no interest being paid in most cases.
  5. Discharge greater than Chapter 7 - A Chapter 13 discharge can encompass many other types of debts which cannot be discharge in a Chapter 7 including criminal matters and taxes.  However, the most frequently used provision is to eliminate debts to a spouse, former spouse or child incurred by the Debtor in the course of marriage dissolution or separation except to the extent those debts constitute “domestic support obligation.”  What this means is that “hold harmless” provisions on real estate obligations and community property settlements obligations can be discharged.     

The above are just some of the advantages of a Chapter 13 bankruptcy case.   If you are a high income earner, a Chapter 13 may be the answer for you.  While it does have some limitations in the amount debt which may be included, there may be flexibility in classification depending on your particular situation.   If you struggling with debt even though you are making a good income, I urge you to seek legal counsel as soon as possible to fully understand the consequences of the decision and the options available.  I see people for a free 30 minute consultation at my offices located in Walnut Creek and Brentwood.



Dues, Assessments, Liens and Foreclosures

Last week, a person came into my office saying he received a letter from his Homeowners Association (“HOA”) offering to rent his house to him. Needless to say, he was not happy. He knew he was behind on HOA dues, but his lender hadn't even started foreclosing on his house.

Welcome to the new frontier of the mortgage crisis in California. The homeowner's HOA had foreclosed on his property before the lender. While this has been common in Hawaii for years, this is relatively new in California. If you are behind on your HOA dues or assessment, here is the California law you need to know.

HOAs are regulated by the California Davis-Stirling Common Interest Development Act in Civil Code Section 1367 et seq. Pursuant to Davis-Stirling, an HOA can levy dues and assessments necessary for the development. A regular or special assessment is a debt of the owner. If an owner is behind on dues or assessments, the HOA can record a lien against the property. At least 30 days prior to recording the lien, the HOA is required to notify the owner by certified mail.

The recording of a lien does not automatically allow a foreclosure by the HOA. Rather, an HOA may not foreclose until the amount of the delinquent dues and assessments secured by the lien, exclusive of any accelerated assessments, late charges, fees and costs of collection, attorney's fees, or interest, equals or exceeds one thousand eight hundred dollars ($1,800) or the assessments secured by the lien are more than 12 months delinquent. In addition, the HOA still maintains its rights to proceed in state court against the owner for delinquent dues and assessments.

If the HOA decides to proceed with a foreclosure of its lien, in most instances it will proceed with a non-judicial foreclosure pursuant to CC 2924 which will require the a Notice of Default and Notice of Sale. If the HOA does foreclose on its lien, the owner still has a 90 day right of redemption and the HOA would still be taking the property subject to any senior liens.

Therefore, if you are behind on your HOA dues and assessments, you need to be aware that the HOA can foreclose before your lender and become your landlord. If you are trying to buy the maximum amount of time in your home prior a foreclosure, it may be better to keep your HOA dues current.

If you are filing bankruptcy or have filed bankruptcy, there are special rules you need to know. First, all dues and assessments which come due prior to the date of filing are included in the bankruptcy discharge. HOWEVER, under 11 USC 523(a) (16), Congress carved out a special exception as to post-petition dues and assessments. Specifically, the owner continues to be responsible for all dues and assessments which came due after the filing of the bankruptcy as “long as the debtor or the trustee has a legal, equitable or possessory ownership interest” in the property i.e. until someone forecloses or buys your property, you are responsible for the HOA dues and assessments. Therefore, if you do not pay your HOA dues or assessments after a bankruptcy filing, do not be surprised to find yourself being sued in state court by your HOA or having your property foreclosed.

In conclusion, beware of the HOA. They know where you live. This is a complicated area of the law and I recommend you to seek legal counsel prior to allowing your HOA dues or assessments to become delinquent. Like everything else in life, there are consequences to actions as well as inaction. In this case, there may be personal liability and tax consequences. I provide a free 30 minute consultation at all of my three offices located in Walnut Creek, Antioch and Brentwood.