Qualifying for a Chapter 7

Most of my clients want to file a Chapter 7 bankruptcy. After all, the complete debt relief that a Chapter 7 can provide seems more desirable than the payment plan that a Chapter 13 provides. However, the new bankruptcy law enacted in 2005 requires a means test which involves an analysis of a debtor’s income for 6 months. This income is compared to the median income for the state. A debtor’s income is analyzed based on the number of people in the household. If the income is lower than the median income, then it is presumed that the debtor qualifies for a Chapter 7 although the court will still look at whether it appears that there is extra income available to pay creditors.

Even with income higher than the median, debtors may still be able to file a Chapter 7 bankruptcy. If a debtor no longer earns the higher income due to a job loss or reduced income, then an affidavit can be filed with the court showing that the means test shouldn’t apply. Also, the means test provides additional calculations for higher income debtors to see if they can qualify for a Chapter 7. That’s why it’s important to see an attorney about qualifying for a Chapter 7. There may be ways for a debtor to qualify for a Chapter 7 bankruptcy now or in the future with accurate analysis and planning.

To Surrender or Not?

The decreased home values in the Detroit metropolitan area have prompted many people to seek a way to walk away from their homes and mortgages. However, the decreased home value shouldn’t be the only reason to surrender a home. I do believe that home values will eventually increase, so there should be other reasons for surrendering a home.

Can you afford your mortgage payments? If you are unable to afford your mortgage payments, there may still be some options available for keeping your home. If you can easily afford your first mortgage payments, but your second mortgage or equity loan are giving you problems, then you may be able to remove the second mortgage’s lien in a Chapter 13 bankruptcy. This option is available if your home is worth less than what you owe on the first mortgage.

Another option for reducing your mortgage payment is a loan modification. In order to obtain a loan modification, you must contact your mortgage company and submit an application. There are different types of loan modifications. Some will reduce your mortgage payment while others will simply put the past due amount at the end of the loan. A loan modification is never guaranteed and mortgage companies have different criteria for approving them. There are new government programs that encourage lenders to modify mortgages, but lenders are not absolutely required to do so.

Michigan has enacted a law designed to reduce foreclosures by encouraging mortgage lenders to modify loans. The law becomes effective on July 5, 2009. Most Michigan foreclosures occur by advertisement. Now, homeowners can request a meeting with a housing counselor to discuss mortgage modification. The request must be made within 14 days after the borrower receives written notice about the pending foreclosure and will delay the foreclosure for 90 days.

Do you really want to keep your home? If you are in a position to purchase a different home, it may be worth surrendering your current home. There’s a good chance that you can purchase a bigger and better home for less money resulting in a lower mortgage payment and the opportunity to benefit when home values increase in the future. It may also be worth surrendering your home if you need to move to be closer to a job or if the quality of your neighborhood has declined significantly.