However, we understand why people get caught procrastinating. We think that there is a great deal of misinformation out there and that the costs of this misinformation are huge, so we want to try to set the record straight on some common misconceptions.
Here's one: "I'll just pay the interest for now. Bankruptcy seems major and not something I ever thought might happen...." - A lot of people delay filing bankruptcy, thinking "I'll just show the creditor I am trying my best a bit longer, and talk to some of my family and friends about what they think I should do."
This interest paid in the meantime is wasted money you probably need to live on or pay for your children's education. But what these people fail to consider is that very often during these months, the value of their assets and sometimes their income has gone up, making this delay far more expensive than the interest paid on their debts in the meantime. This has been particularly true for homeowners in the Bay Area recently. Over the November to April period last year, some neighborhoods saw price increases of 20% or more. This created a situation where a homeowner who could have filed a Chapter 7 case or Chapter 13 plan with a very low plan payment a few months back, but instead ends up having to file a Chapter 13 case that pays back a large percentage of debt - or sometimes, cannot file at all.
Example 1: It is November 2015. John and Mary, parents of two young children, own a home in San Mateo county and have about 100k of equity they could realize if they were to elect to sell their home. John and Mary started a business and lived off credit cards during that time, but most debt is related to business. Suppose the amount of their debt is 65,000. Houses in the neighborhood have been selling for approximately 700,000 the last time one sold. No houses nearby have sold for the last 2 1/2 months though. Assuming they have no other major assets, John and Mary could probably file bankruptcy Chapter 7, or bankruptcy Chapter 13. They would like pay back less than 10% of their debts in Chapter 13, or none in Chapter 7, if they take action. Chapter 7 would be the cheapest option, and Chapter 13 the safest option. Two affordable options are on the table for John and Mary. Things look great, as long as they take action they can move on with their lives and put their debt behind them.
Example 2: Same as above mostly, but it is now March 2016 - only four months later. John and Mary procrastinated on seeing a bankruptcy attorney and getting some advice. Suppose that the economy is good (as it has been since 2012) and two houses of similar size and condition in the neighborhood sell well over the asking price a block away in February and March. Due to the home values and seasonal selling patterns in the Bay Area, most of a "yearly" price increase in home values may actually occur over the "spring buying season." John and Mary get a modest raise at work. Due to this small percentage increase in home values and income, John and Mary may now have to pay back as much as 100% of their debts. Chapter 7 is not an option, and Chapter 13 is an expensive proposition. The problem? Their income has changed only very slightly. So not only is the remedy less affordable, it may not be available at all unless they want to sell their house.
Summary? By procrastinating talking to a bankruptcy attorney, depsite overwhelming debts, John and Mary have let a condition which was easily manageable and which would have allowed them to keep their home to escalate into a situation that bankruptcy can only mitigate, but not entirely resolve.
You will not read much about this problem I have described on national bankruptcy websites or publications. Why? The combination of high real estate prices and high volatility in those prices is relatively unique to the Bay Area and a few other parts of the country. Our prices, and the amounts those prices change, are both extremely high, and this can have a huge impact on homeowners with debt problems. Relative to home prices, California home exemptions are not particularly generous. In addition, incomes here can be very volatile here too, particularly for people in "boom and bust" industries like technology, real estate, construction, some sales and finance jobs, and jobs that may allow for more generous overtime when the economy is good.
How many times have we seen this in the last few years - with real people sitting in the office talking to us who have costs themselves tens of thousands or even hundreds of thousands by putting off debt resolution? Too many to count.... We have seen people who could have discharged all debt, including their second mortgage in 2012 who are not not eligible to completely discharge any debt now. (Sometimes it can be paid back with no or low interest, still saving enormous amounts of money). Still, this represents a "swing" of 100,000 of more. Procrastination has literally cost them hundreds of thousands of dollars. Sadly, many times "trying to do the right thing - paying back debt longer" also led to these unfortunate results. We have seen others who do not own a home who have had increases in stock holdings and salaries that have made any debt resolution considerably more expensive than it would have been when it was first clear there was a major problem. When it comes to bankruptcy, timing can be everything.
The good news? If you are reading this, you are probably considering bankruptcy and it is probably not too late. Home prices in the Bay Area are volatile over time - and so are incomes. You should plan in advance so you are ready to take action: now or whenever the market allows you to use the legal options that are on the table to help you manage your debt. We can tell you what your options are - without charge - at a free consultation. Give us a call. Don't procrastinate.