Question: I own a small home health care business for senior citizens. While the real estate market was booming, I was able to buy two houses, both with first and second loans. For five years I was able to pay the mortgages and take in sufficient clients to pay the mortgages and still earn sizable profit. However, clients start to dwindle. Meantime, my mortgage stays the same and one mortgage with start to have an adjustable rate of mortgage (ARM). I am afraid I won’t be able to pay the new monthly mortgage payments. So far, I have been dipping into my savings to pay off the mortgages for my first property. Incidentally, I also live in this property.
I have been behind about 4 months in mortgage payments for the second property. Yesterday, I received a Notice of Default for this property. I am afraid I will lose this property. The current market value for this property is about $300,000. I have a first mortgage for $350,000 and as second mortgage for $100,000. I used the second loan to make repairs on the house to put in additional bathrooms to be able to have more clients.
Meantime, my business is barely earning enough to survive. Should I file for bankruptcy? Can I still save my property if I file under Chapter 7? Will I still be able to run my business? This is my only means of income. I am a 50 year old widow and all my children have their own problems.
Answer: You can file for personal bankruptcy under Chapter 7 because we can show that you are making less than the state family median income for California. You need to go to your accountant to prepare your profit and loss statement, which we will submit to bankruptcy court along with your petition. Upon filing your bankruptcy petition, there will be an automatic stay for all your property. Under bankruptcy laws, all property of the debtor (person who filed for bankruptcy) becomes technically property of the Bankruptcy court. The creditor, in your case the bank holding the first mortgage must file a Motion for Relief from Automatic Stay in order to foreclose your property. This motion will be heard and an order granting the motion must be issued by the bankruptcy court.
In our experience, we need to coordinate with the attorney of the mortgagee bank to stipulate to continue negotiation for loan modification and that the bank will not foreclose on the property. This stipulation or agreement will be submitted for the bankruptcy court’s approval.
You must bear in mind that bankruptcy will not hold off foreclose indefinitely. Eventually, the creditor will want to get its collateral. Hence, if you really want to retain the second property, you need to be able to pay the mortgage or have a successful loan modification to lower your mortgage payments. You can show financial hardship and ability to pay off your loan application. We can submit bank statements and tax returns as proof of income. You must find a good attorney who can handle your bankruptcy and loan modification at the same time.
Debtors, under chapter 7 can still retain their houses, provided they are able to pay the mortgage payments. You may need to claim your property as exempt and reaffirm your debts. However, most houses have zero equity due to the slump in the market. Therefore, the Trustee is not interested in the property because there is nothing for him to take.
Yes, you will be able to run your business because you are filing under personal bankruptcy. The trustee will not run after all income accruing after filing for bankruptcy.
This article does not constitute any legal guarantee or advice for any individual matter and does not create attorney client relationship with the readership.