Foreclosure or Short Sale, Bankruptcy Means Test, and Chapter 7 or Chapter 13

Foreclosure or Short Sale, Bankruptcy Means Test, and Chapter 7 or Chapter 13

Overwhelmed homeowners seeking debt relief should be aware of certain legal remedies before allowing a foreclosure or short sale on their primary residence.

The 2005 Bankruptcy code changes brought about the Means test. The test determines whether a debtor qualifies for Chapter 7 and can discharge most debts without repayment. The thing about the Means test is that arguably it is neither fair nor intuitive, but it is what it is and we deal with it.

In seeking bankruptcy relief, a debtor who earns income above the median must go through the test to determine his/her eligibility under the chapters. For certain debtors filing for bankruptcy protection before or after a foreclosure can have profoundly different results.

Two Identical Homeowners: Pre-Foreclosure/Short Sale and Post

Consider two debtors with the same income, assets, and debts. The first one proactively and voluntarily files for bankruptcy protection before a foreclosure or a short sale. The second one reactively is forced to file for bankruptcy protection to protect future earnings and assets after being sued for post-foreclosure deficiencies.

Depending on the income and expenses for the household, the first one may get a discharge in 90 days and start fresh. The second one must pay for five years all “disposable” income toward repaying debt. That’s in quotes because the law provides the formula for calculating disposable income. This number may have very little resemblance to the debtor’s budget. Often, it is a challenge for the debtor to adjust expenses in order to propose a confirmable plan. The calculation formula can really be quite problematic for some, for instance it completely disregards student loan debt repayment, vehicle leases.

Why the Difference? One critical piece of the calculation is deducting from the income secured debt obligations. You guessed it… things like car payments and mortgages. It’s almost as if the Test rewards those with high secured debt. Before the foreclosure, a debtor can deduct from their income the mortgage payment (even if they have not been able to actually make that payment for a long time). This can be a significant deduction. After foreclosure or short sale, the debtor is only allowed to deduct a housing allowance, published by the IRS based on the household size and location.

California Differences

For California residents, the difference between the housing allowance and debtor’s mortgage obligations can indeed be profound. If after deducting the “allowable” expenses the debtor’s net exceeds the limits, such debtor will be forced into a Chapter 13 repayment plan. Considering the consequences, it is wise to know beforehand which side of the fence you are on.

Kathryn U. Tokarska, Esq. is admitted to practice in State of California. Graduate of California Western School of Law in San Diego, California, Ms. Tokarska concentrated her legal studies in area of Bankruptcy, Estate Planning, Taxation, Securities Regulations, and Real Estate Finance. She has over fourteen years of experience working for major financial investment institutions, offering financial planning services, investment products, wealth building and preservation strategies. Ms. Tokarska holds a Financial Paraplanner certificate, was a licensed stockbroker, and is currently enrolled in an LL.M. in Bankruptcy/Finance at Thomas Jefferson School of Law.

For assistance, contact Tokarska Law Center online, by Emailing Us, or by phone (619) 285-1992. We are a FEDERAL DEBT RELIEF AGENCY. We help people file for Bankruptcy Protection under the Federal and State Laws.

Similar Articles

Foreclosure or Short Sale... Foreclosure or Short Sale, Bankruptcy Means Test, and Chapter 7 or Chapter 13 Overwhelmed homeowners seeking debt relief should be aware of certain legal remedies before allowing
How to Choose Affordable ... How to Choose Affordable & Best Bankruptcy Attorney, Lawyer, Law Firm, Legal Counsel in San Diego CA Recent historically high bankruptcy filing rates have created more demand
Will Bankruptcy Really Ru... Will Bankruptcy Really Ruin Your Credit? Contrary to popular belief, bankruptcy does not ruin credit. Financial trouble ruins credit, regardless of the circumstances that surround it. Bankruptcy
Is Debt Settlement The Ri... Is Debt Settlement The Right Debt Relief Option For You? Keep in mind that settlement is a negotiation and voluntary on the part of the creditor. Before
Talk to Bankruptcy Attorn... Talk to Bankruptcy Attorney: How to Avoid Foreclosure and How to Stop Foreclosure by Filing Chapter 13 Bankruptcy When considering Chapter 13 Bankruptcy, the borrower needs to
Get Bankruptcy Informatio... Get Bankruptcy Information Documents Before You Find a Bankruptcy Attorney to File for Bankruptcy Great bankruptcy attorneys aren’t just up on the law, they are organized. Same
Choosing Debt Consolidati... Choosing Debt Consolidation over Debt Settlement or Bankruptcy to Deal with Credit Card Debt When it comes to debt relief there are basically three options: Debt Settlement,
IRS and Bankruptcy: Are I... IRS and Bankruptcy: Are Income Taxes Dischargeable in Chapter 7 or Chapter 13? Often people are misinformed about Taxes and Bankruptcy. Whether due to the recent wave
Filing Bankruptcy, Debt R... Filing Bankruptcy, Debt Relief Option if Credit Consolidation or Debt Settlement Don’t Work When it comes to debt relief there are basically three options: Credit Consolidation, Debt
Things to Know Before Fil... Things to Know Before Filing Chapter 7 or Chapter 13 in San Diego: Disclosure & Bankruptcy Fraud Among many considerations, the first thing to understand is that