When Bankruptcy and Foreclosure Go Hand-in-Hand

Earlier this week, a woman asked me whether bankruptcy could help her with her underwater mortgage loan. She lives in California and bought her home a few years ago and the value has since dropped by more than 50%. With the prospect of building no equity in the foreseeable future, she's now essentially renting her home from her lender.

“Are you current on all your payments?” I asked. “Yes,” she replied. “Do you have other debts?” “Not really.”

Since she makes a good income, is able to make her payments, and doesn't have any other debts to speak of, bankruptcy wouldn't likely provide her with any relief. But there are times when bankruptcy can help struggling homeowners get back on their feet.

First, bankruptcy does not likely provide relief if:

You are not earning enough money to continue paying your mortgage. You must be able to pay your mortgage to keep your home – even in bankruptcy.

You are upside down on your home loan but you can afford your payments. Bankruptcy generally does not allow you to “cramdown” your home loan on your primary residence. In other words, you can't reduce the amount you owe to the amount your home is presently worth. (A cramdown may be possible on a vacation or rental home – go figure.)

Here are scenarios where bankruptcy can help you avoid foreclosure:

You have non-mortgage debts which, if wiped out or reduced, would give you enough breathing room to pay your mortgage.

You are underwater, primarily due to a second mortgage or home equity line of credit. If your home is presently worth so much less that the second loan is considered an “unsecured” debt, you may be able to get that equity loan wiped out.

You have put your financial problems behind you but just can’t seem to catch up. You may be able to structure a plan that allows you to catch up on past due mortgage payments.

And if you are going to lose your home to foreclosure, it is vital to talk with a bankruptcy attorney right away. Bankruptcy may allow you to avoid being sued by your lender for a deficiency – the difference between what you owe and the fair market value of your home. Bankruptcy may also help you avoid a scenario where you have to pay taxes on that debt.

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights.

Can you be fired because you file for bankruptcy?

Nearly 150,000 consumer bankruptcy cases were filed in March 2010, the highest monthly consumer filing total since Congress overhauled the Bankruptcy Code in 2005, says the American Bankruptcy Institute (ABI). Chapter 13 filings (where consumers pay back some or all of their debts) made up a quarter of all consumer cases in March. The rest were largely Chapter 7 cases where most of the consumer's debts were discharged.

Some of these consumers are filing because they have lost their jobs, but others are worried about holding on to their jobs. That's probably why I've recently been asked the question, Can I be fired from my job if I file for bankruptcy?

The straight answer is "probably not." The federal Bankruptcy Act explicitly prohibits most employers from firing someone simply because they file for bankruptcy. 

On a practical level, it may not be so clear cut. Many smaller employers probably are unaware of this law. Employers in most states, are allowed to review employees' credit reports for specific purposes described under the Fair Credit Reporting Act, as long as they get the written permission of the employee first. Even if your employer didn't see your bankruptcy in your credit file (and they can), they would see any late payments leading up to your bankruptcy, and that could be a reason for dismissal. 

However, while bankruptcies are matter of public record, it's probably unlikely that your employer would know you filed unless you live in a really small town where everybody knows everybody else's business, or your employer regularly reviews credit reports.

Gerri Detweiler – Personal Finance Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis.

Digging Out of Debt

Gerri Detweiler, our very own Debt Expert and Credit Advisor for Credit.com, appeared on FOX 35 Good Day recently. Gerri shared her insight on all of the different options for getting out of debt, including DIY debt reduction, credit counseling, debt settlement and bankruptcy.

To find out more, watch the clip:

Lower Incomes Make It Harder For Some to Wipe Out Debts Starting Nov. 1

If you’ve been considering bankruptcy, you may need to talk with a bankruptcy attorney now. In an ironic twist, the nation’s economic woes will make it harder for debtors in some (not all) states to wipe out debts in bankruptcy come November 1, 2009. Here’s why:

Bankruptcy law was reformed in 2005, largely as the result of an industry-led effort to make it harder for people to eliminate unsecured debt by filing what’s sometimes referred to as a “straight” Chapter 7 bankruptcy case. The purported goal was to make it harder for people to “abuse” the bankruptcy system and force them into a Chapter 13 repayment plan where they would have to pay back at least some of their debts. 

The “means test” was the method devised to achieve this goal. It is a complicated formula that starts with the state median income for families of a similar size. Unfortunately, because so many people are out of work or earning less, state median incomes have dropped in many places. That means more people may be subjected to the means test. And depending on the results of that calculation, they may find themselves forced into Chapter 13, or just out of luck.

The new income figures go into effect November 1, 2009. If you are curious what’s happened in your state, you can look at the before and after figures.

Warning! Do NOT look at these charts and try to determine for yourself whether you can or cannot file Chapter 7. You need a bankruptcy attorney for that. Some consumers have successfully filed Chapter 7 with incomes that are double the state median figure.

What I DO want you to do is get the help you need. If you’ve been hanging on and avoiding this difficult discussion, talk with an attorney before your problems get worse. The consultation is free and confidential, and the attorney can help you figure out what your options are – whether you decide to file or not. 

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis.