Posted by Kevin on October 3, 2019 under Bankruptcy Blog | 
Powerful Chapter 13 gives you tools to solve your mortgage and other home lien problems from a number of different angles.
The Limits of Chapter 7 “Straight Bankruptcy”
In my last blog I described how a Chapter 7 case can under certain circumstances help you enough to save your home., or, at least, delay a foreclosure for a limited time.
The Extraordinary Tools of Chapter 13
Chapter 13, on the other hand, provides you a range of much more powerful and flexible tools for solving many, many debt issues so that you can keep your home.
Here are the first five of ten significant ways that Chapter 13 can save your home (with the other five to come in my next blog).
Under Chapter 13 case you can:
1. stretch out the amount of time for catching up on back mortgage payments for as long as 5 years. This is in contrast to the one year or so that most mortgage lenders will give you to catch up if you do a Chapter 7 case instead. This longer period can greatly lower your monthly catch-up payments, making more likely that you would succeed in actually catching up and keeping your home.
2. slash your other debt obligations so that you can afford your mortgage payments. The mortgage debt—especially your first mortgage—can’t be significantly changed under Chapter 13. So you are usually required to pay your full monthly mortgage payment, and to catch up any arrearage, but to accomplish this you are allowed to pay to most of your other debts.
3. permanently prevent income tax liens, and child and spousal support liens, and such from attaching to your home. The “automatic stay” preventing such liens under Chapter 7 last usually only about 3 months, and there’s no mechanism for dealing with these kinds of debts. Instead under Chapter 13, these liens are prevented throughout the three-to-five-year length of the case.
4. have the time to pay debts that can’t be discharged (legally written off) in bankruptcy, all the while being protected from those creditors attacking your home. So even if a tax or support lien is already in place before you file, you are given the opportunity to pay the debt while under the protection of the bankruptcy laws. That undercuts the leverage of those liens against your home. Then by the end of your case, the debts are paid and those liens are released.
5. discharge (write off) debts owed to creditors which could otherwise attack your home. For example, certain (generally older) income taxes can be discharged, leaving you owing nothing. But had you not filed the Chapter 13 case, or delayed doing so, a tax lien could have been recorded, which would have required you to pay some or all of the balance to free your home from that lien. Even most standard debts can turn into judgment liens against your house once you are sued and a judgment is entered. Depending on the facts, a judgment liens may or may not be able to be gotten rid of in bankruptcy. If instead you file a Chapter 13 case to prevent these liens from happening, at the end of your case the debt is gone, and no such liens attach to your home.
See my next blog post for the other five house-saving tools of Chapter 13.
Posted by Kevin on February 11, 2019 under Bankruptcy Blog |
Chapter 13 Is a Powerful Package
If you want to keep your home but are behind on your mortgage payments, a Chapter 13 “adjustment of debts” is often what you need. It comes with an impressive set of tools to address many home debt problems. It gives you more time to catch up on the mortgage, may enable you to “strip” a second or third mortgage off your title, and gives you very helpful ways for dealing with property taxes, income tax liens, judgment liens, and such.
When Chapter 7 is Enough
But what if you have managed to fall only a few months behind on your mortgage, and could afford the payments if you just got relief from your other debts?
Or what if you aren’t even keeping the house, but do need a little more time to find another place to live?
Then you may not need a Chapter 13 case, and could save the extra time and cost that it would take compared to Chapter 7.
Buying Just Enough Time for What You Need
The “automatic stay”—the bankruptcy provision that stops virtually all actions by creditors against you or your property—applies to Chapter 7 just as it does to Chapter 13. So the filing of a Chapter 7 case stops a foreclosure just as quickly as a Chapter 13 filing.
But Chapter 7 usually buys you much less time than a Chapter 13 could.
If you are not very far behind on your mortgage payment(s) and want to keep your home, when you file a Chapter 7 case your mortgage lenders will usually give you several months to catch up on your back payments. You must immediately start making your regular monthly payments, if you had not been making them, and must enter a strict schedule for catching up on the arrearage. In return the lender agrees to hold off foreclosing, as long as you make the payments as agreed.
Where do you get the money to make these extra payments? By discharging your pre-petition debt in the Chapter 7, it could free up hundreds of dollars per month. The key, then, is to make sure that you use that money to pay the mortgage arrearage and not spend it on other items.
If instead, you are not keeping the house but just need to have more time to save money for moving into a rental home, a well-timed Chapter 7 case will buy you more time in your house. During that time you don’t pay mortgage payments, enabling you to get together first and last month’s rent payment, any necessary security deposit and other moving costs.
The tough-to-answer question is how much extra time would a Chapter 7 filing give you. It mostly depends on how aggressive your mortgage company is about trying to start or restart the foreclosure efforts. A pushy lender could, soon after you file your case, ask the bankruptcy court for “relief from the stay”—permission to start or restart the foreclosure process. If so, then your bankruptcy filing would buy you only an extra month or so.
Or on the other extreme, a mortgage lender could potentially take no action during the 3-4 months or so until your Chapter 7 case is finished. At that point the “automatic stay” protection expires, and the lender can start or restart the foreclosure. Or it may sit on its hands even longer. Your bankruptcy attorney will likely have some experience in how aggressive your particular mortgage lender is under facts similar to yours.
Posted by Kevin on June 9, 2017 under Bankruptcy Blog |
How does bankruptcy stop garnishments, foreclosures, and repossessions?
Filing a bankruptcy case gets immediate protection for you, for your paycheck, for your home, and for all your possessions. This “automatic stay” provides this kind of protection for you and your property the moment either a Chapter 7 “straight bankruptcy” case or a Chapter 13 “adjustment of debts” case is filed. Virtually all efforts by all your creditors against you or anything you own comes to an immediate stop.
“Automatic Stay” = Immediate Stop
“Stay” is simply a legal word meaning “stop” or “freeze.”
“Automatic” means that this “stay” goes into effect immediately upon the filing of your bankruptcy petition. That filing itself, according to the federal Bankruptcy Code, “operates as a stay” of virtually all creditors’ actions to pursue a debt or take possession of collateral. Since the filing of your case itself imposes the stay, there is no delay or doubt about whether a judge will sign an order to impose the “stay” against your creditors.
Creditors Need to Be Informed, Sometimes Directly
Although the protection of the “automatic stay” is imposed instantaneous, practically speaking your creditors need to be informed about the filing of your case so that they are made aware that they must comply with it. If your creditors are all listed in your bankruptcy case documents, they should all get informed by the bankruptcy court within about a week or so after your case is filed. This doesn’t take any additional action by either you or your attorney (beyond making sure all of your creditors are listed in the schedule of creditors filed at the bankruptcy court). If you have no reason to expect any action against you by any of your creditors before that, just letting them all be informed by the court is usually all that’s needed.
However, if you are expecting some action by any of your creditors quicker than a week or so after filing the case, be sure to talk with your attorney about it. That way any such creditor can be directly informed by about your bankruptcy filing to stop whatever collection action it was contemplating. Make sure you and your attorney are clear which of you is informing that creditor and in what way.
Creditor Action Taken Unexpectedly
But what if a creditor has not yet been informed of your bankruptcy filing when it takes some action against you or your property in the days after your bankruptcy filing but before it finds out about it?
If this happens, the “automatic stay” is so powerful that in most circumstances such a creditor must undo whatever action it took against you after your bankruptcy was filed, even if this creditor honestly did not yet know about your filing. For example, if after your bankruptcy is filed a creditor files a lawsuit against you or gets a judgment on a lawsuit that it had filed earlier, the creditor must dismiss (throw out) its lawsuit or vacate (erase) the judgment.
Posted by Kevin on March 27, 2016 under Bankruptcy Blog |
The policy behind bankruptcy is to give an honest debtor a fresh start. The fresh start begins with the filing of the bankruptcy petition. By just filing, almost all attempts at collection of a debt are stopped by the automatic stay. The fresh start is completed when the debtor receives a discharge. A discharge means that the debt is cancelled, wiped out.
Not all debts are discharged, however. And a discharge does not mean, in certain circumstances, that a creditor cannot make some recovery. For example, in the case of a mortgage on your house, the bankruptcy discharge only applies to the debt. Say, you borrower $500,000 from the bank. You sign a note which is a promise to pay back the $500,000 with interest. That is the debt. And you sign a mortgage which is the collateral for the debt. The mortgage says that if you do not pay back the $500,000, the bank can take your house. The bankruptcy discharge knocks out the note, the debt, but not the mortgage. So, the lender can foreclose on the house and get what it is owed from the house. What if the house is only worth $300,000? Then, that is what the bank gets. The bank cannot come after you for the deficiency because the debt is discharged.
What debts are discharged in bankruptcy? Credit card debt, medical bills, personal loans without collateral, as stated above deficiencies on home mortgages but also deficiencies on car loans, most claims for injury based on negligence (car accidents, slip and fall, etc.), most judgments, business debts, guarantees, leases and older taxes for which you have filed a return which is not fraudulent, and the taxing authority has not filed a tax lien.
The Bankruptcy Code, however, does not discharge all debts. Some are dischargeable sometimes. Some are not dischargeable. For example, students loans are not usually dischargeable absent a showing of undue hardship. The burden is on the debtor to prove undue hardship which is not easy in New Jersey. Willful and malicious injury by the debtor to another, some debts incurred by fraud and/or dishonesty, and embezzlement may not be dischargeable, but the creditor must go to court to challenge the discharge. The bankruptcy judge makes the decision whether the debt is dischargeable in these cases.
Payroll and sales taxes are not dischargeable (called trust fund taxes). Other debts not dischargeable include income taxes recently incurred, domestic support obligations, criminal fines or restitution, injuries suffered when the debtor is intoxicated because of alcohol or drugs, post filing condo fees, and debts not put down in your schedules except in a no asset case.
So, if you are thinking about filing bankruptcy, you should speak first with an experienced lawyer so you can determine which of your debts may or may not be dischargeable.
Posted by Kevin on September 22, 2014 under Bankruptcy Blog |
Filing Chapter 7 bankruptcy while letting go of your home can be a smart combination.
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Chapter 13—the three to five year partial payment plan—consists of an entire toolbox full of different tools to help people hang onto their homes. But that may not be what you need. After getting informed about how those tools would work (or not work) in your situation, you may decide that it’s best for you to walk away from your home. If so, here are some advantages of doing that in conjunction with filing a Chapter 7 bankruptcy:
- Have more control over when you leave:
If you have a foreclosure sale date scheduled, or a foreclosure lawsuit pending, usually you would have no say about when you have to leave. You could even be forcibly evicted by county sheriff deputies. However, if you file a Chapter 7 bankruptcy case, that will delay the foreclosure sale or lawsuit, at least for a few weeks, and possibly for a matter of months. That alone could save you a couple thousand dollars in rent. Also, after a bankruptcy filing, your mortgage lender may well be willing to negotiate a departure date convenient to you, in return for avoiding their need to rack up a lot of attorney fees. As part of the deal you may be willing to sign over your title through a “deed in lieu of foreclosure,” with no risk of further liability since your bankruptcy case is discharging any remaining debt.
- Avoid house-related debt following you:
Depending on your situation, and on your local state laws, after surrendering a house without bankruptcy you risk being saddled with debts coming at you from various directions. Sometimes you could be liable for any deficiency on the first mortgage. Surrendering your house to a first mortgagee does not take you off the hook on a second mortgage. You could also be liable on other debts related to the home—such as unpaid utilities, contractor liens, property tax liens, or homeowner association dues. Many of these debts would be discharged if you filed a bankruptcy.
- Have an attorney in your corner:
Fair or unfair, your mortgage lender will likely treat you better when it knows you are being advised and represented by an attorney (assuming that you would be filing your Chapter 7 case through an attorney). You will have the peace of mind that comes from knowing your rights, understanding what will happen when, and having an advocate available to get directly involved as needed.
- Get a fresh financial start instead of a continuation of a vicious cycle:
If you are surrendering your house and reducing your monthly cost of keeping a roof over your head, you may be tempted to think you don’t need a bankruptcy. Perhaps you don’t. But if you have fallen so far behind on you mortgage that it’s gotten to the point of foreclosure, the odds are that you need more help than giving up your house alone will achieve. You at least owe it to yourself to get legal advice about your financial situation and your realistic options. You can then be pro-active to turn your situation around rather than waiting for the other shoe to drop.
Think about it
Posted by on October 13, 2013 under Bankruptcy Blog |
Don’t get rushed into filing bankruptcy when the timing’s not right. Filing at the right time could save you thousands of dollars.
Timing Does Not Always Matter Much, But It CAN Be Huge
Many laws about bankruptcy are time-sensitive. And those time-sensitive laws involve the most important issues—what debts can be discharged (written off), what assets you can keep, how much you pay to certain creditors, and even whether you file a Chapter 7 case or a Chapter 13 one.
It is possible that the timing of your bankruptcy filing does not matter in your particular circumstances. But given how many of the laws are affected by timing, that’s not very likely. It’s wiser to give yourself some flexibility about when your case will be filed. If you wait until you’ve lost that flexibility—because you have to stop a creditor’s garnishment or foreclosure—you could lose out on some significant advantages.
Today’s blog post covers the first one of those potential timing advantages.
Being Able to Choose between Chapter 7 and Chapter 13
Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” are two very different methods of solving your debt problems. There are dozens and dozens of differences. You want to be able to choose between them based on what’s best for you, not because of some chance timing event.
To be able to file a Chapter 7 requires you to pass the “means test.” This test largely turns on your income. If you have too much income—more than the published median income for your family size and state—you can be disqualified from doing the get-a-fresh-start-in-four-months Chapter 7 option and be forced instead into the pay-all-you-can-afford-for-three-to-five-years Chapter 13 one.
The “Means Test” Income Calculation
What’s critical here is that income for purposes of the means test has a very special, timing-based definition. It is money that you received from virtually all sources—not just from employment or operating a business—during the six full calendar months before your case is filed, and then doubling it to come up with an annual income amount. For example, if your bankruptcy case is filed on September 30 of this year, what is considered income for this purpose is money from all sources you received precisely from March 1 through August 31 of this year. Note that if you waited to file just one day later, on October 1, then the period of pertinent income shifts a month later to April 1 through September 30.
So if you received an unusual chunk of money on March 15, that would be counted in the means test calculations if you filed anytime in September, but not if you filed anytime in October. If that chunk of money pushed you over your applicable median income amount, you may be forced to file a Chapter 13 case if your bankruptcy case is filed in September. But not if you filed in October because that particular chunk of money arrived in the month before the 6-month income period applicable if you waited to file until October.
Conclusion
Being able to delay filing your bankruptcy in this situation—here literally by one day from September 30 to October 1—allows you to pass the means test and therefore very likely not be forced to file a Chapter 13 case. Being in a Chapter 13 case when it doesn’t benefit you otherwise would cost you many thousands of dollars in “plan” payments made over the course of the required three to five years. Clearly, filing your case at the tactically most opportune time can be critical.
The sooner you meet with a competent attorney who can figure out these and similar kinds of considerations, the sooner you will become aware of them and the more likely problems like the one outlined here can be avoided.
Posted by Kevin on August 7, 2013 under Bankruptcy Blog |
More answers about how Chapter 13 gives you up to 5 years to catch up on your past-due mortgage.
The last blog, and this one, answer questions about how Chapter 13 gives you time to “cure the arrearage.” Check out the last blog for answers to these questions:
- Can you give a simple example how this “curing the arrearage” works?
- If my Chapter 13 plan proposes to catch up my mortgage in 5 years, does my mortgage lender have to go along with this?
- What if, based on my income, I’m allowed to finish my plan in 3 years instead of 5?
Now on to today’s questions:
How are back property taxes handled?
If you are paying your home’s property taxes as part of your mortgage payment, and you’ve fallen significantly behind on those mortgage payments, the lender may well have paid the current year’s property taxes with its own money. If so, the lender will add the amount it advanced for your taxes into the total amount that you are behind. So through your Chapter 13 plan payments you will simply pay to your lender the amount that it paid for your taxes, as you pay the rest of your back mortgage payments.
If you are paying the property taxes directly (not as part of your regular mortgage payments) and have fallen behind on those taxes, your Chapter 13 plan will include payments to the county or other appropriate taxing authority.
What if the mortgage lender and I don’t agree on the amount of arrearage that’s owed?
Chapter 13 has a relatively efficient mechanism for determining the accurate amount of arrearage. Your creditors, including your mortgage lender, are required to file a document in bankruptcy court—a “proof of claim”—stating the total amount owned, the amount of arrearage and how it is calculated, as well as the amount of any additional fees. You as the debtor then have the opportunity to object to that proof of claim. The bankruptcy judge is a convenient and experienced decision-maker in these kinds of disputes.
This area has been a controversial one in the past 5-10 years, mostly because lenders have often been inaccurate and unclear in their accounting, and been simply unable to justify the amounts on their proofs of claim. This particularly became a problem when lenders added fees to the balance without telling the homeowners, so that the homeowners would think that they were current only to learn, often after the completion of their Chapter 13 case, that supposedly they were still behind. Bankruptcy Rule 3002.1 was put into place to solve this problem. This rule requires lenders to give timely notice of the amount owed and any changes to the amount, and provides for serious consequences if they fail to follow these rules.
What happens if my circumstances change and I decide not to keep the house after all during my Chapter 13 case?
One of the great features of Chapter 13 is its flexibility. So you CAN change your mind and surrender your house part-way through your case. Or you can sell it. And at that point you can either stay in the Chapter 13 case or get out of it.
You could stay in it if there were still worthwhile reasons to do so, reasons not related to your house. For example, you could continue the case if you had debts that were best handled in a Chapter 13 case—such as taxes, support obligations, or possibly student loans. Your attorney would work with you to amend your plan to stop payments going to the house and redirect them elsewhere.
But if you filed a Chapter 13 case solely because of your house and now no longer needed or wanted to catch up on the arrearage, your attorney could either “convert” your case into a Chapter 7 one or simply end the Chapter 13 case by “dismissing” it. More likely your case would be converted into a Chapter 7 one to finish taking care of your debts, including possibly debts related to your house.
A big caution comes with all this flexibility. Although it’s good to know when you start your Chapter 13 case that it does not HAVE to be completed as it was originally put together, it seldom makes practical sense to start a case that you don’t intend to finish. You need to have a reasonable chance to complete it. Consider very carefully whether you will be able to make the necessary payments over the whole 3-to-5-year length of your case. If you had trouble making your regular mortgage payment before filing bankruptcy, look at whether Chapter 13, with all of its benefits, will help your cash flow enough so that you will be able to do what the plan requires of you.
Posted by Kevin on June 25, 2013 under Bankruptcy Blog |
The Simple Surrender
If you’ve decided to surrender your home, vehicle, or any other collateral that you no longer need or want to pay for, filing a Chapter 7 “straight bankruptcy” is usually the cleanest way to go. The remaining debt on the home is mostly either discharged (legally written off)—including 2nd mortgages, judgments, utilities—or is paid off by the mortgage holder after taking back the real estate—such as property taxes and homeowner association dues. On your vehicle loan, the often large “deficiency balance”—the amount you would owe after the creditor sells the vehicle and applies the sale proceeds to the loan balance—is discharged. You give up the collateral but you are quickly free of the debt.
The Possible Delayed Surrender
If you wanted to keep the property, Chapter 13 allows for that. But what if you know that your job may not last for more than another year, so you’re sensibly facing the reality that at that point you would likely not be able to continue making payments on the home or vehicle? Once again, Chapter 13 is the way to go. It allows you to make usually reduced payments while you have your job so you can keep the home or vehicle. Then, if you lose your job, you can convert to Chapter 7, surrender the property and have the debt discharged. Clearly, Chapter 13 gives you a lot a flexibility under these scenarios.
Flexibility at a Price
But, as with most things in life, there is a cost factor for this flexibility. Chapter 13 costs more in fees than Chapter 7, easily twice the cost, or more. The attorney fees are much higher because it is more work over a longer period of time. Plus the Chapter 13 trustee receives a percentage of what you pay to the creditors. Yes, you may save some money to retain the property in Chapter 13 as opposed to what the regular payment would be; however, those savings you may be partially or even fully offset by these higher fees.
Posted by Kevin on May 16, 2013 under Bankruptcy Blog |
Secured Debts
A secured debt is usually one in which your agreement to pay a debt is backed up with some collateral. If you don’t pay, the creditor can take possession and ownership of that collateral. So, a mortgage holder can foreclose on your home, a vehicle lender can repossess your vehicle, and the appliance store can haul away your washer and dryer.
But for the creditor to have rights to your collateral—for the debt to be truly “secured”—the creditor needs first to have gone through the appropriate legal steps to tie the collateral to the debt.
Besides secured debts in which you voluntarily gave the creditor rights to the collateral, there are many kinds of secured debts in which the creditor got those rights by operation of law. This happens without your consent, sometimes even without your knowledge, often as part of the debt collection process. An example is an IRS tax lien recorded against your real estate and/or personal property for non-payment of income taxes.
Power Provided by Chapter 7
A Chapter 7 case can help with both voluntary and involuntary secured debts. It will 1) temporarily or permanently prevent your creditor from taking your collateral; 2) help you keep the collateral; and 3) if you want, enable you to surrender the collateral to the creditor without economically hurting yourself.
Power # 1: Stop the Creditor from Taking the Collateral
The moment your Chapter 7 case is filed, all your secured creditors are immediately stopped from taking possession of your collateral. This is the same power that stops all collection activity by all your creditors again you and your property. You may hear this referred to as the “automatic stay.”
Very importantly, not only does the “automatic stay” stop secured creditors from chasing previously agreed to collateral, also stops unsecured creditors from becoming secured ones, such as by stopping the IRS from getting a tax lien. Since secured creditors have tremendously more leverage, inside and outside of bankruptcy, this is a very helpful power that bankruptcy gains for you.
Power # 2: Keep the Collateral
Whether the collateral on a secured debt is your home, vehicle, appliances, or everything you own (as with an IRS tax lien), if you want to keep the collateral or whatever is included in a lien, bankruptcy can help in a variety of ways, including:
- If you are current on a secured debt and want to keep the collateral—such as with a vehicle loan—you can virtually always do so. . This is also a good way for you to get a head start on rebuilding your credit.
- If you are not current on your payments, you will generally be given a limited amount of time to bring the account current.
- In some situations, the loan terms can be changed to waive payment of any missed payments, to lower the interest rate, and perhaps even lower the balance.
- Select kinds of secured debts—for example, judgment liens on your home—can be “avoided”—stripped off your home title.
Power # 3: Dump the Collateral
Outside of bankruptcy, simply surrendering collateral to the creditor because you do not need or want it any longer, or just can’t afford to pay for it, is often not an economically sensible option. That is because you can end up still owing much of the debt after the creditor sells the collateral for substantially less than the amount of the debt, adds all of its sale costs to the debt, and then sues you for the remaining “deficiency balance.”
And if instead the creditor just forgives that balance, in some situations you can be hit with a serious income tax obligation. The amount forgiven may be considered “cancelation of debt income” upon which you may be required to pay income taxes.
Chapter 7 solves both of these problems. Except in very unusual situations, it would discharge (permanently write off) any “deficiency balance” after the surrender of any collateral. And the discharge of debts in bankruptcy is not considered “cancellation of debt income,” so you don’t have the risk of it is being taxed. As a result, you can freely surrender collateral in a Chapter 7 case if you want to, without worrying about owing the creditor or owing taxes for doing so.
Posted by Kevin on February 22, 2011 under Bankruptcy Blog |
Of course, they are related. People who cannot pay their mortgages are likely to be people who are having trouble paying other debt, like credit cards.
But, I am talking about strategy. Some of the same arguments that are being used by the cutting edge foreclosure defense attorneys were actually used first by bankruptcy attorneys.
Read more of this article »
