Impact of New Bankruptcy Laws on California Real Estate Unclear
When homebuyers first sign on the dotted line at closing, the last thing on their minds is the possibility that they are in over their heads.
But with the real estate market softening and values possibly holding steady or declining, some buyers may have bought more home than they can financially manage.
Such buyers may find life more difficult, now that the new bankruptcy law is in effect.
“We don’t quite know what the impact is going to be. The general consensus is that this is going to make it more difficult for people on the edge,” says Mariam Marshall, partner in Marshall & Ramos, an Oakland law firm that advises bankruptcy trustees. Marshall is also Vice Chair of the Alameda County Bar Association’s Bankruptcy section.
Marshall says that perhaps one of the most devastating impacts of the new bankruptcy law on homeowners is the elimination of the automatic stay period. Under the old bankruptcy law, the stay period stopped many debt collection procedures, such as foreclosure.
“Under the old law, if the foreclosure sale was going to happen tomorrow, attorneys would file a ‘skeletal’ bankruptcy petition and get the automatic stay,” she explains. They would then go back, later, and amend the paperwork for the full bankruptcy filing.
But now, the automatic stay is severely limited. Marshall says this is particularly devastating because many homeowners wait until the very last minute to file bankruptcy. “I know of cases where debtors filed bankruptcy the morning of the foreclosure sale,” she notes. Whether homeowners are reluctant to face up to their dire financial situation or were working on other possibilities until the very last minute, that opportunity is now gone. “Under the new law, you get a very small stay, but not the same as you had before.” That means homeowners may be able to pursue options of keeping their home, but they will have to act earlier and move faster than before.
In addition, Marshall says that attorneys are held to a much higher standard of liability, and may be more reluctant to file ‘skeletal’ bankruptcies because of it.
In fact, attorneys are looking at the law closely, as the new bankruptcy law does not allow them to advise clients on ways to preserve their assets. “Under the old law, attorneys may have advised their clients, in some circumstances, to take on more debt, such as a home equity loan or car loan, to protect their assets,” she notes, and now they cannot.
Making that kind of advice available to clients may be sanctionable conduct under the new law. “On the other hand, that same attorney could be sued by the client because they weren’t advised properly,” Marshall notes, adding, “There are lot of things about this law still being worked out.”
In fact, Marshall says that the new law may reduce the number of Chapter 7 bankruptcy filings in the short-term. Because each case must now go through means testing, debtors who have more assets are likely to be forced into Chapter 13, where at least part of the debt is paid over time.
“Debtors may not qualify to file Chapter 7 and yet not be able to fund a Chapter 13, so they’re stuck between a rock and a hard place,” Marshall notes, leaving many choosing not to file bankruptcy at all. Marshall says that, as a result, she personally believes foreclosures will increase.
Outside of bankruptcy, unsecured creditors, such as credit card companies and medical facilities, have the option of taking the debtor to court. “They can sue a person, get a judgment, and start garnishing wages,” Marshall explains. “Under California law, the creditor can pursue the debt for 10 years, and renew for another 10 years.”
“These judgment creditors can also record the judgment against the debtors’ real property.” And unlike Florida law, California law has a homestead exemption that is fairly limited. “The exemptions are $50,000 if you are single, $75,000 if you are married,” Marshall explains. “Consequently, the lienholder may be able to force the sale of the home to satisfy that judgment. With bankruptcy no longer readily available, these judgment debtors may stand to lose their homes.”
As the new law takes effect and challenges are raised, it might be best for homeowners to watch their finances carefully. “For most people filing bankruptcy, it’s not just the mortgage,” Marshall explains. “It’s credit card debt, or it’s medical debt, or it’s a car payment, and the mortgage.”
In addition, Marshall encourages people to be aware that the law may change, and to seek the advice of an attorney who is abreast of new developments in bankruptcy law. “There are a lot of unintended consequences, there’s a lot up in the air,” she says. Court challenges, and new interpretations of the law as real cases are tried, could change how the new bankruptcy laws affect some individuals.
But with the real estate market softening and values possibly holding steady or declining, some buyers may have bought more home than they can financially manage.
Such buyers may find life more difficult, now that the new bankruptcy law is in effect.
“We don’t quite know what the impact is going to be. The general consensus is that this is going to make it more difficult for people on the edge,” says Mariam Marshall, partner in Marshall & Ramos, an Oakland law firm that advises bankruptcy trustees. Marshall is also Vice Chair of the Alameda County Bar Association’s Bankruptcy section.
Marshall says that perhaps one of the most devastating impacts of the new bankruptcy law on homeowners is the elimination of the automatic stay period. Under the old bankruptcy law, the stay period stopped many debt collection procedures, such as foreclosure.
“Under the old law, if the foreclosure sale was going to happen tomorrow, attorneys would file a ‘skeletal’ bankruptcy petition and get the automatic stay,” she explains. They would then go back, later, and amend the paperwork for the full bankruptcy filing.
But now, the automatic stay is severely limited. Marshall says this is particularly devastating because many homeowners wait until the very last minute to file bankruptcy. “I know of cases where debtors filed bankruptcy the morning of the foreclosure sale,” she notes. Whether homeowners are reluctant to face up to their dire financial situation or were working on other possibilities until the very last minute, that opportunity is now gone. “Under the new law, you get a very small stay, but not the same as you had before.” That means homeowners may be able to pursue options of keeping their home, but they will have to act earlier and move faster than before.
In addition, Marshall says that attorneys are held to a much higher standard of liability, and may be more reluctant to file ‘skeletal’ bankruptcies because of it.
In fact, attorneys are looking at the law closely, as the new bankruptcy law does not allow them to advise clients on ways to preserve their assets. “Under the old law, attorneys may have advised their clients, in some circumstances, to take on more debt, such as a home equity loan or car loan, to protect their assets,” she notes, and now they cannot.
Making that kind of advice available to clients may be sanctionable conduct under the new law. “On the other hand, that same attorney could be sued by the client because they weren’t advised properly,” Marshall notes, adding, “There are lot of things about this law still being worked out.”
In fact, Marshall says that the new law may reduce the number of Chapter 7 bankruptcy filings in the short-term. Because each case must now go through means testing, debtors who have more assets are likely to be forced into Chapter 13, where at least part of the debt is paid over time.
“Debtors may not qualify to file Chapter 7 and yet not be able to fund a Chapter 13, so they’re stuck between a rock and a hard place,” Marshall notes, leaving many choosing not to file bankruptcy at all. Marshall says that, as a result, she personally believes foreclosures will increase.
Outside of bankruptcy, unsecured creditors, such as credit card companies and medical facilities, have the option of taking the debtor to court. “They can sue a person, get a judgment, and start garnishing wages,” Marshall explains. “Under California law, the creditor can pursue the debt for 10 years, and renew for another 10 years.”
“These judgment creditors can also record the judgment against the debtors’ real property.” And unlike Florida law, California law has a homestead exemption that is fairly limited. “The exemptions are $50,000 if you are single, $75,000 if you are married,” Marshall explains. “Consequently, the lienholder may be able to force the sale of the home to satisfy that judgment. With bankruptcy no longer readily available, these judgment debtors may stand to lose their homes.”
As the new law takes effect and challenges are raised, it might be best for homeowners to watch their finances carefully. “For most people filing bankruptcy, it’s not just the mortgage,” Marshall explains. “It’s credit card debt, or it’s medical debt, or it’s a car payment, and the mortgage.”
In addition, Marshall encourages people to be aware that the law may change, and to seek the advice of an attorney who is abreast of new developments in bankruptcy law. “There are a lot of unintended consequences, there’s a lot up in the air,” she says. Court challenges, and new interpretations of the law as real cases are tried, could change how the new bankruptcy laws affect some individuals.
