Is now a good time to file bankruptcy?

Debt Relief

IF you live in LA County — or in Southern California, which included Orange, Riverside and San Bernardino counties — and you own the house that you live in, now is a good, no, now is a very good time to file for Chapter 7 bankruptcy fresh start. Why? Because the homestead exemption under 704.730 of the California Code of Civil Procedure has been increased a lot, and when I say a lot, it’s a lot.

If you filed for Chapter 7 before the amendment and owned the house that you were living in Los Angeles County and needed to wipe out $100,000 of credit cards but had equity of $200,000 in your house, and you were younger than 65 years old, you would not haven been able to file for Chapter 7 total wipe out of the $100,000 credit cards without losing your house to the Chapter 7 trustee.

If it was before amendment, you would have had to file a Chapter 13 and pay the entire $100,000 over five years if you did not want to lose your house. Your plan payment would be about $1,600 a month. After paying $1,600 a month for 60 months, the court will give you an order discharging your debts.

In effect, you paid 100% of principal through the Chapter 13 plan, without paying any interest for 5 years. That would still have been better than paying $3,000 a month of minimum payments every month to keep the $100,000 current.

On the other hand, assuming your income under the “means test” makes you eligible for Chapter 7 relief this year, and you waited until now to file your bankruptcy, you would be eligible for a complete wipe out of the $100,000 without making a single payment and still be able to exempt your house (keep it despite the bankruptcy), even if the equity in your house had increased to $300,000 or even to $400,000, or even to $600,000!

This is really quite amazing the likes of which, we as bankruptcy lawyers have never seen before in our lifetime.

How is equity calculated?

Let’s say your house is now worth $1.0M using comparable sales of similar properties around your neighborhood. You owe a first trust deed balance of $400,000. This makes your equity (your own money) in your residence at $600,000. In other words, if you were to sell your house for $1.0M to Redfin for cash, you will net maybe $550,000 after deducting commission and closing costs, that entire amount of $550,000 is your equity in your house. That’s your money. The way house values are increasing in here in S. CA since mortgage rates are rock bottom low again never seen before low, about 2.5% fixed 30 years, anyone who owns a house here in LA is definitely sitting on a big pile of cash. It’s almost unbelievable that you can exempt your house under 704.730 even if your equity in the house is $600,00. But it’s true. I’m having clients with $400,000 of equity, or even $500,000 of equity qualify for Chapter 7 to wipe out credit card debt they have racked up during the pandemic to pay for basic necessities, food, shelter and transportation.

Many people lost their jobs during the pandemic and because of it. Surely, the pandemic unemployment benefits have helped tremendously but still not enough. So many households had to rely on credit cards to make up for the difference.

Many households have increased their credit card balances by $20,000 to $30,000 during the pandemic just to make ends meet, or even a lot more than that to hang on the