It's been an especially busy week in foreclosure news in Santa Clara County, California. I came across a very interesting article the other day in the San Jose Mercury News. The gist of the article was that many area homeowners are in default on their mortgages, but the lenders aren't foreclosing. Apparently they're concerned that real estate prices will decline precipitously if they foreclose on all these homes because a glut of supply will come onto the market. Moreover, these houses likely would remain vacant for an extended period of time and deteriorate from lack of maintenance.
So how does this affect people considering bankruptcy? Especially in light of California's two different systems of bankruptcy exemptions, it can be tricky, even for a bankruptcy attorney. That's why I'm going to break down this blog topic into parts. Each part will examine how this phenomenon affects a different kind of bankruptcy filer.
For the sake of simplicity, I'm going to call the system that closely resembles the federal one the "federal exemptions" and the other one the "California exemptions." Let's look at the first of several differently situated people to examine the possible effects.
Person 1 - Owns a house and has a substantial amount of equity in it.
This person will usually elect to use the California exemptions because they have a higher homestead exemption. Unfortunately, if this person simply saves the money that would have been spent on the mortgage and then files bankruptcy, the bankruptcy trustee will probably want to use all or nearly all the funds to pay off creditors. It's possible the cash could be used to purchase other assets that would be exempt or to pay off debts that would not be dischargeable through bankruptcy, such as student loans, child support, etc. Obviously, good planning and the involvement of a bankruptcy attorney is the key to maximizing the possible benefit.
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