Bankruptcy & Your Credit Report

People considering filing bankruptcy and individuals who have filed bankruptcy have many questions about the effect of bankruptcy on their credit report.  The overall effect of the bankruptcy on an individual's credit depends on a number of factors, such as the other items that are reported on the credit report, and the individual or agency who is reviewing the report.

After a bankruptcy case is filed it is reported on an individual's credit report (just as other public records are reported such as lawsuits and tax liens).  The Federal Fair Credit Reporting Act Section 605(a)(1) provides that the bankruptcy must be removed from the credit report ten years after the date the case was filed.  This remains true for Chapter 7 cases; however, the credit reporting companies have made a practice of removing Chapter 13 cases from individual's credit reports after 7 years.  The credit bureaus have said that this differing treatment is due to the fact that a Chapter 13 is a reorganization plan, and the debtors may be paying back some of their debt.  (In reality in the majority of Chapter 13 cases individuals are not paying back unsecured debts).  

After a bankruptcy discharge is received the balances on the debts that have been discharged should be changed to zero (showing that nothing is owing on these debts).  While any negative entries, such as late payments, will remain on the credit report until the time has passed for negative entries to fall off the credit report (that is typically 7 years from the date of the entry).

It is possible with diligent effort to rebuild one's credit score after a bankruptcy is filed.  Even within the 7 year period where the bankruptcy remains on the credit report.  

Keeping Your Home California and Bankruptcy

         During these tough economic times we meet many people and families who are struggling to keep their homes.  The most common thread to their struggles is that either property taxes or their mortgage payments are defaulted.  Usually there is a reduction in income, or possibly increased mortgage payments under an adjustable rate mortgage that has caused the financial imbalance. While there are state programs that can help such as Keep Your Home California, or internal programs that your lender may have to help with short term defaulted solutions, bankruptcy should also be considered as a tool, and option to help save a home in jeopardy of loss.

         With the acquisition of real estate, comes for most people, an investment in the single largest asset of their financial life.  When a property is lost in foreclosure, this event will be reported on a person's credit report, with obvious derogatory consequences.  Before this happens, bankruptcy should be considered.  For many who have been turned down for mortgage modifications, bankruptcy is the solution, to allow for reinstatement of the mortgage, or to allow for a new mortgage modification application through the bank's loss mitigation bankruptcy department.  Amazingly, this has been the avenue that many people have found success in their struggles to save their home.

      A Chapter 13 case can stop a pending foreclosure sale, and give individuals breathing room, a sense of security, and extra time to sort out the problems associated with the mortgage.  (The bankruptcy will prevent the foreclosure until the case is closed or until the lender files a motion for relief from stay with the court).

The bankruptcy code allows people to reinstate their mortgage over the term of their Chapter 13 plan (3 to 5 years).  Upon the completion of their case their mortgage will be current and they will no longer be facing foreclosure (that is assuming that all payments were made after their case was filed).

Here in California's bay area, there are two divisions which give debtors a second path for dealing with their mortgage arrears during the Chapter 13 case.  This is to let the people try to modify their mortgage to deal with the arrears.  This type of plan can be useful to people who have large arrears that are not easily cured through a plan.  This is available in the San Jose division (which includes Santa Clara, Campbell, Gilroy, Salinas, Monterey, and other outlying cities), and in the San Francisco division.

Another aspect of Chapter 13 that helps people and families keep their homes is the ability to remove a second mortgage.  This is available when the property value is lower than the debt owing on the first mortgage.  This can reduce the monthly obligations associated with the home, and make the retention of the property more feasible.  

Bankruptcy is a financial tool that should be considered when the finances are too tight, or when a person's home becomes unaffordable.  Many attorneys offer a free consultation that can be used to learn how bankruptcy can help you.  Both the bankruptcy system and the people within the system are here to help.

California Foreclosure Timelines

          In California the vast majority of foreclosures are done outside of the court system.  This is called a non-judicial foreclosure.  In other states, such as Hawaii, it is more common for the foreclosure to be done through the court system (where an actual lawsuit is filed in court).  This is called a judicial foreclosure. 

          The law surrounding foreclosures here in California is currently evolving, and there are new requirements about notices that a homeowner is supposed to receive prior to the first step in the foreclosure process (these are a topic for a post on a different day.  This post will just outline the basic timelines for a foreclosure starting with the Notice of Default).

          First, a lender must issue a Notice of Default (also referred to as an NOD).  This document is required to tell the homeowner what the default is (ie what the total amount the homeowner is behind in payments).  The NOD must be filed in the county in which the property is located, and it must be mailed to the homeowner.  Usually, about 90 days after the notice of default (give or take a few days) the Notice of Trustee Sale is issued, recorded at the county recorder’s office and mailed to the homeowner.  This document sets forth the actual date that the foreclosure will take place.  The actual sale must be scheduled at least 110 days from the NOD (or about 20 days from the Notice of Trustee Sale).  (See California Association of Realtors Summary for a more in depth look at the timelines).

How Does Bankruptcy Stop a Foreclosure?

          If a bankruptcy case is filed before a foreclosure sale is completed the bankruptcy will irrefutably stop the foreclosure from going through.  What is it about the filing of a bankruptcy case that stops the foreclosure?  It is the automatic stay that stops the foreclosure.  This automatic stay is akin to a shield that once enacted by the filing of the bankruptcy case protects debtors from collection actions of creditors, and this includes foreclosure.

          This shield is, as the title would have you believe, automatic.  Courts take violations of this stay very seriously, and when creditors violate the automatic stay the creditor can be in jeopardy of financial sanctions, including paying for the debtor’s attorneys fees to enforce the stay and in egregious cases punitive damages.

          While all bankruptcy chapters provide an automatic stay (with exceptions for repeat filings) the different chapters are not created equally when it comes to retaining your home.  A Chapter 7 filing would stop the foreclosure but would only act as a band aid.  The Chapter 7 case typically lasts only 3 months, and creditors routinely seek the court’s approval to lift the stay and proceed with the foreclosure.  A debtor does not have tools at their disposal to readily combat the creditor’s request.  A Chapter 13, on the other hand, is designed to allow a homeowner to cure any defaults on their mortgage over a 5 year term.  Also, some courts (including San Jose, Salinas, and Monterey) have local guidelines that allow individuals to have additional time while in a Chapter 13 case to pursue a mortgage modification (and be protected from foreclosure by the automatic stay).  (See our article on bankruptcy and foreclosure posted on evanslawonline.com)

High Interest Rate Credit Cards Cause Vicious Cycle

Credit cards may be a lifesaver when you run out of funds to purchase groceries and you have hungry children.  Or your dishwasher breaks and you can only afford to make payments over time.  There is a point when the credit card turns from a useful tool into a budget wrecking and money sucking thing.  This is when the credit card balance reaches a level beyond which the individual cannot easily pay down, and the interest on the account is basically equal to the minimum monthly payments.  This cycle of making the minimum monthly payment but never seeing the principal balance decrease can go on for years.

In today’s economy with layoffs and other financial problems it can be easy to get sucked into the vicious credit card cycle.  It is especially easy with the high interest rate cards that are offered (a large majority of our clients cards are over 20% and I have even seen cards with rates as high as 36%). 

Something needs to give to break that cycle.  Some individuals can do it by devoting more money each month to the payments.  Other individuals simply cannot devote more than the minimums.  Bankruptcy protection, Chapter 7, Chapter 13, and Chapter 11, can provide a way to break the cycle.  In Chapter 7, Chapter 13, and Chapter 11 individuals may be able to discharge (get rid of) their credit card balances (subject to qualification standards set forth in the bankruptcy code). 

Mi Pueblo Pushed Into Bankruptcy by a Cause Common to Individuals

On July 22, 2013, Mi Pueblo filed for bankruptcy protection under Chapter 11 of the United States Code in the Northern District of California, San Jose Division (case no. 13-53893).  The Honorable Arthur Weissbrodt is the presiding judge.

The story of Mi Pueblo is similar to many individuals that we meet in our law firm.  In the case of Mi Pueblo, Wells Fargo was a catalyst to the grocery chains need to file bankruptcy.  Mi Pueblo had most of its cash in Wells Fargo accounts, and used loans from Wells Fargo to keep the day to day operations of the grocery store going.  Wells Fargo attempted to change the terms of the loans with Mi Pueblo after becoming concerned about Mi Pueblo's debt to income ratio.  (San Jose Mercury News).

Lenders do the same thing to individuals.  Lenders will increase interest rates, reduce the available balances and hit consumers with penalties and other fees.  This can cause a snowball effect that eventually leads an individual to feel the need to turn to bankruptcy protection for the fresh start that it can provide.

Detroit Troubled Bankruptcy Filing

On July 18, 2013, Detroit filed for Chapter 9 bankruptcy protection in the Eastern District of Michigan, Southern Division (case number 13-53846).  This is the largest municipal bankruptcy filing in American history!   Detroit has a reported 18 billion dollars in debt, and included in that 18 billion is billions of dollars owed to approximately 23,000 retirees.  The city was reportedly running a deficit of $1 million dollars a day at one point.  (New York Times).

At this time it is unclear whether or not Detroit will be allowed to remain in bankruptcy and reorganize their obligations.  Individual debtors can reorganize their obligations in a Chapter 13 bankruptcy, and in an individual bankruptcy filing the viability of the case is easier to predict.  In individual cases it is a rare occurrence when other parties try to block the debtor's access to bankruptcy protection.