Expert: Norma Duenas - California Bankruptcy Attorney - 2/24/2010

Question
Dear Ms. Duenas:
RE: Credit Card Debt, Equity Loan and Chapter 7

Q1. I am receiving letters from credit card banks that they may start a lawsuit if I do not pay the debt. I cannot pay. If I am to file Chapter 7, do I have to do it before they start a lawsuit, or can I wait? What kind of time frame do I have consider about bankruptcy filing and bank's lawsuit?

Q2. I hear that home equity loan cannot be discharged in chapter 7. Is there any other avenue by which it can be discharged? I got the equity loan to purchase the house-it was a part of the package in order to buy the house in 2005. The bank is sending me a letter that they can foreclose the property. But the first mortgage is held by a different institution, so I though they cannot foreclose. The property is underwater: the market value is less that the outstanding first mortgage.

Answer
Q1. You can file for Chapter 7 bankruptcy after they file the lawsuit. You do not need to file prior to them filing a lawsuit. The reason you may want to file prior to them filing a lawsuit is the risk of getting a wage garnishment, levy on bank account or a lien on your property from a judgment they obtained from the lawsuit. The time frame for a company filing a lawsuit to collect varies from company to company. It generally is from a few months in default to numerous months before they proceed to a lawsuit. Generally, in order to file your bankruptcy case you will need to pay the attorney in full before the case is filed. Keep this time frame in mind if you are considering filing for bankruptcy.

Q2. In a Chapter 7 bankruptcy you can remove your personal liability with regard to a home equity loan. What this means is that they cannot come after you personally for the debt but they are still entitled to go after their security interest (the home)if you do not pay the loan. If you are planning to keep the home then you should try to get current on your second mortgage and continue to make the payments or work out an arrangement with the company. The second mortgage has a right to foreclose on your  home if you are in default. In this situation, the second mortgage may decide not to move forward with foreclosure, since there is no value they would likely receive from foreclosure (if the value of the home is below the first mortgage).

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