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Priority Debts

November 18th, 2019 at 8:00 am

One of the most important aspects of bankruptcy is that all debts are not equal.  “Priority” debts are treated special in a number of ways.

Debts Are Different So the Law Recognizes Some Differences

The law does not treat all debts the same. That’s because you have different kinds of creditors that you owe for very different reasons. The law tries to be practical and so to some extent it respects these differences.

Your debts all fall into three categories:

  • Secured
  • General unsecured
  • Priority

Today we start a series of blog posts covering priority debts.

Priority Debts

Priority debts are specific categories of debts that the law has decided should be treated as more important. Bankruptcy gives them higher priority, especially over “general unsecured” debts. Priority debts have power over you and over other debts in various ways.

Secured debts that are debts with liens on something you own.  Secured debts are special in that the creditor usually has a stronger position because of its lien. The lien gives the creditor power over you if you want to keep whatever secures the debt.  

Most priority debts are unsecured, but some may have a lien and so are secured. Secured priority debts have that much more power over you and over other creditors.  

Reasons for Priority

Each of the priority debt categories have their own different reason to be treated as special.

For example, the two most common categories of priority debts in consumer bankruptcy cases are:

  • Child and spousal support—the support you would owe when filing your bankruptcy case. See Section 507(a)(1) of the U.S. Bankruptcy Code.
  • Income taxes—certain income taxes that meet certain conditions. See Section 507(a)(8).

Support payments are special essentially because society very strongly believes that children and ex-spouses should receive the financial support ordered by divorce courts. Federal bankruptcy law incorporates this social attitude. So support debt has the highest priority in the list of priority debts.

Income tax debts are special because taxes are a debt to the public at large. It’s not a debt to a private person or business. In effect it’s a debt to us all. So it deserves a higher priority than regular private debt. However, unlike support debt which is always a priority debt, an income tax is a priority debt only if it meets certain conditions. Those conditions mostly relate to how old the taxes are. The newer the tax is the more likely it is to be priority. Income taxes that do not meet the required legal conditions are mere general unsecured debts.

Priority Debts in Bankruptcy

In most bankruptcy cases there isn’t enough money to pay all debts. So the laws that determine the order that creditors get paid often determine which debts receive full or partial payment and which receive nothing. Priority debts often receive full payment while general unsecured debts receive less or, often, nothing.

This works very differently under Chapter 7 “straight bankruptcy” vs. Chapter 13 “adjustment of debts.” Our next blog posts will show how.

 

Will Filing Chapter 7 Bankruptcy Stop a Foreclosure?

November 13th, 2019 at 11:17 pm

TX foreclosure attorney, Texas chapter 7 lawyerIf you are behind on your monthly mortgage payments and you have reached the point that your loan is in default, you could be facing a possible foreclosure on your home. You probably realize that if the bank forecloses on your loan, your home will be seized and sold, with the proceeds of the sale will go toward satisfying what you owe the bank. In the meantime, you might not have a place to live, and the foreclosure will leave a lasting mark on your credit.

Most people who are facing possible foreclosure often have a substantial amount of other debt in addition to their home loan. These obligations may include medical bills, credit card debt, and outstanding loans, such as personal loans and educational loans. As a result, it is not unusual for an individual in such a situation to consider filing for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. In certain cases, Chapter 7 bankruptcy might allow you to stop foreclosure proceedings, and a qualified bankruptcy attorney can help you understand your available options.

Bankruptcy Puts a Stay on Collection Activities

Under federal law, filing for bankruptcy of any type will result in an automatic stay being issued on all collections activities related to any debt that you have. The automatic stay applies to foreclosure, even if the lender has already initiated formal foreclosure proceedings. If the lender continues to push the proceedings after the stay has been ordered, your lender is violating federal law, and sanctions against the lender are possible.

The stay, however, will not last forever. In fact, the lender can petition the bankruptcy court to lift the stay so that foreclosure proceedings can continue. If the court has good reasons to believe that you will not ultimately be able to keep your home, the court may grant the lender’s petition to lift the stay.

Chapter 7 and Foreclosure

The goal of a Chapter 7 bankruptcy is to have as many of your obligations as possible discharged. During the proceedings, you may be required to sell any property of value. Texas law provides exemptions for the equity value in your home, presuming that your property does not exceed the established acreage limits of 10 acres in a city, town, or village, or 100 acres anywhere else.

Medical debts, credit card balances, and unsecured loans are typically eligible to be discharged in a Chapter bankruptcy, as is the amount you owe on your mortgage. Discharging your mortgage obligations, however, does not mean you simply get to keep the home; it means that you are no longer personally responsible for paying the debt. The lender still has the right to take the home to try to recoup its losses. In practice, this means that when the automatic stay expires, your lender is likely to restart the foreclosure process. The proceedings must start again from the very beginning, giving you an additional few months to decide what you will do next.

From a practical standpoint, if you have already paid a substantial amount of equity into your home, a Chapter 7 bankruptcy might not be the best option for stopping a foreclosure. If you do not have any other choices, however, a skilled attorney will help you pursue a favorable outcome in your unique situation.

Call a New Braunfels Bankruptcy Attorney

If you have fallen behind on your mortgage and you are looking at the possibility of bankruptcy to stop foreclosure proceedings, contact an experienced San Antonio Chapter 7 bankruptcy lawyer at the Law Offices of Chance M. McGhee. Call 210-342-3400 for a free consultation and case review today.

 

Sources:

https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics

https://statutes.capitol.texas.gov/Docs/PR/htm/PR.41.htm#41.001

Nondischargeable Co-Signed Debts

November 11th, 2019 at 8:00 am

Co-signed debts get tougher if your co-signer challenges the discharge of your obligation to him or her, or if the debt isn’t dischargeable. 

 

Last week we discussed obligations on co-signed debts, both to the joint creditor and to your co-signer. In that discussion we assumed that both those obligations could be discharged (written off) in bankruptcy. But what if the co-signer challenges your ability to discharge the debt? And what if the underlying debt can’t be discharged, such as a recent income tax? We address these two situations today.

Co-Signer Challenging Discharge

If you file bankruptcy any creditor can challenge your ability to discharge a debt. But creditors’ grounds for successfully doing so are narrow, so such challenges are rather rare. The creditor essentially has to prove that you committed fraud in incurring the debt. You must have misrepresented your intentions at the time the obligation was created.

How would this happen with a co-signer? Assume that you needed a co-signer to incur a debt. As that time you intended to pay the debt so that the co-signer would not need to pay it. But because of unforeseen circumstances—for example, you lost a job or got sick—you couldn’t pay it. Your co-signer is upset that he or she has to pay it. He or she is unhappy that you are discharging your obligation to pay the debt through bankruptcy. He or she is even more unhappy that you are discharging your obligation to pay back him or her for paying off the debt. So he or she files an objection to this discharge of your obligation to him or her.

Would the Challenge Be Successful?

That objection by your co-signer to the discharge of your obligation to him or her would not likely get anywhere. In fact, your co-signer would likely by advised by a lawyer not to waste money on such a groundless objection. That’s because at the time you incurred the obligation you committed no fraud or misrepresentation. You intended to pay the underlying debt so that your co-signer would not need to.

Your co-signer would only have grounds for a successful objection to discharge if the facts were different. Assume that you lied to your co-signer at the time you persuaded him or her to co-sign the debt. You said you had no other debts when you had many debts. Or you said your income was very reliable when you knew that it was not. Under these circumstances your co-signer could allege that you misrepresented the facts to induce him or her to co-sign the debt. If the bankruptcy judge is persuaded that this is what happened, your obligation to your co-signer would not get discharged and you’d have to pay him or her whatever amount he or she paid on the underlying debt.

Nondischargeable Co-Signed Debts

Now on to the other scenario, in which the underlying debt itself can’t be discharged in bankruptcy. Recall the example of a recent income tax debt. Assume that you filed joint income tax returns with your spouse last year and you jointly owe the IRS $3,000. Now you’re getting divorced. This $3,000 joint debt is too recent to be able to discharge in bankruptcy. So you are both fully liable on that tax. In fact, even if the divorce court decrees that one spouse must pay that tax, the IRS still considers both fully liable.  

Assume the divorce decree obligates you to pay this tax but you can’t afford to do so. You can’t discharge the tax obligation in bankruptcy. If you file a Chapter 7 “straight bankruptcy” case you also can’t discharge your separate obligation to your spouse created by the divorce decree for you to pay that tax instead of your spouse. So you need to make arrangements with the IRS to pay the tax. This would likely be in monthly installments, after discharging your other debts in your Chapter 7 case. You’d pay off the tax, and any additional interest and penalties.

This would be slightly different in a Chapter 13 “adjustment of debts” case. Again you can’t discharge the tax debt because it is too recent. However, under Chapter 13 you would be able to discharge your separate obligation to your spouse created by the divorce decree to pay all of the tax yourself. The practical difference? Under Chapter 13 you generally don’t have to pay ongoing interest and penalties. However, those would continue to accrue for your spouse, and he or she would likely be required to pay them. This would happen in spite of the divorce decree because bankruptcy law is stronger.

Possibly Nondischargeable Co-Signed Debts

The last scenario is a co-signed debt that could possibly be challenged as nondischargeable.

Assume you owe a business loan to a bank that you and a business partner co-signed. The business failed and you’re filing bankruptcy. Your now-former business partner has much more assets than you and is hoping to avoid filing. The bank is challenging your bankruptcy discharge of the business loan on the basis of some alleged misrepresentation. Assume also that your former partner has no grounds to challenge your separate obligation to him.

If you succeed in persuading the bankruptcy court that you made no misrepresentation in incurring the business loan, your obligation to the bank will be discharged, as will your separate obligation to your former partner. You will owe nothing to either the bank or your ex-partner.

If you do not succeed, the loan debt will not be discharged. You will continue owing the bank. If your former partner does not file bankruptcy or otherwise discharge the debt, you will both owe it. But assume also that you succeed in discharging your obligation to your former partner, since there made no misrepresentations to him or her. So your former partner cannot pursue you to pay the underlying debt. So if the bank forces him or her to pay the debt first, you won’t have to pay anything to the bank.

Conclusion

As you can see from these examples, protecting yourself when you owe co-signed debts can get complicated. Be sure to tell your bankruptcy lawyer about any possible joint obligations at your first meeting. It’s crucial to know what legal obligations you owe or do not owe to your co-signer(s). Then your bankruptcy lawyer can advise you how to best deal with them, together with your whole financial situation.

 

Concerns about Co-Signed Debts

November 4th, 2019 at 8:00 am

If you have a co-signed debt, you have two separate sets of concerns. Those having to do with your common creditor, and those with co-debtor. 


If you have a co-signed debt you tend to be more concerned about one of two sets of problems. You’re either mostly worried about the other co-signer, or about the creditor you’re both owe on the debt. It’s likely smart to be aware of both. Let’s start with concerns about the creditor.

Concerns about Your Joint Creditor

There’s a good chance you’re worried about the creditor you both owe because you’re having trouble paying the debt. This assumes that you are the one who is supposed to be paying the debt. The point of having a co-signer was to give you more incentive to pay the debt. The creditor has the right to make your co-signer pay the debt if you don’t. We’ll get into your options shortly.

What if you are not the one supposed to pay the debt? What the other co-signer is supposed to but is not doing so? You are obligated to pay a debt that you didn’t expect to pay. Especially if you were already financially challenged, this could push you over the edge. What can you do?

Protecting Yourself from Your Joint Creditor

Assume that the debt you owe is not legally secured by anything. The creditor does not have a right to take any personal property or real estate if you don’t pay the debt.

Assume also that it is not a special debt like income taxes, a student loan, a criminal debt or anything else that bankruptcy does not write off (“discharge”).

The first step in dealing with a co-signed debt is to find out your actual legal obligations on the debt. You may think you are completely liable on the debt when you really aren’t. Bring your bankruptcy lawyer any documents you may have on the debt (if any).

Even if you signed something related to the debt, your obligations may be different than you thought. For example, you might have signed something between you and the co-signer that didn’t in fact make you liable directly to the creditor itself.  The two of you may have assumed that there was joint liability when there actually isn’t. Or your liability may kick in only under certain circumstances. You don’t want to act without knowing these crucial details.

If you find out that you definitely owe the debt one option is to discharge that debt in bankruptcy. In a Chapter 7 “straight bankruptcy” you would likely not have to pay the debt at all. In a Chapter 13 “adjustment of debts” you would pay only as much as you could afford over usually a 3-year period of time. Often that would be only after paying other more important debts first. Either way, in the end you would likely no longer owe anything on the co-signed debt.

Concerns about Your Co-Signer

Concerns about your co-signer can get complicated.

Assume you learn that you are both fully legally liable on the debt. Again, is this a debt that you are supposed to pay or is your co-signer supposed to?

If your co-signer was supposed to pay it, do you have any way of enforcing this? In other words is there any documentation to back this up? Will he or she at least admit that it is his or her obligation? Assume you do have written and/or oral evidence that the co-signer was supposed to pay the debt. It’s still very difficult to enforce this obligation.

You need to discuss these facts with your bankruptcy lawyer to find out your legal AND practical options.

If instead you understand you were the one supposed to pay the debt, again you need to find out whether that’s legally true. Assuming it’s true, then you have two separate legal liabilities on the debt. The first is to the joint creditor. It can sue you to make you pay. We discussed how to deal with that above.

But you have a second separate legal obligation to your co-signer. He or she can also sue you if you do not pay the co-signed debt. How do you deal with him or her?

Protecting Yourself from Your Co-Signer

Assume again that the debt is neither legally secured by anything nor is it one bankruptcy does not discharge.

If you’re both liable on the debt the creditor is likely going to pursue both of you.  Your co-signer will likely demand that you pay. Then especially if your co-signer pays anything on the debt—voluntarily or not—he or she could sue you to repay him or her. To protect yourself from this separate liability to your co-signer, it may be worthwhile to discharge this separate legal obligation in bankruptcy. Chapter 7 and 13 would resolve with the debt as discussed above (about the debt to the joint creditor itself).

There’s a very important practical point about discharging your obligation to your co-signer. List both the creditor and your co-signer on your schedule of creditors in your bankruptcy case. Otherwise you could remain liable to your co-signer once your bankruptcy case is completed. That could happen even if you discharge the underlying joint debt. That does not erase your co-signer’s separate obligation to pay the debt to the creditor. So if you don’t list the co-signer and discharge your obligation to him or her, you could discharge the debt to the creditor and still be forced to pay the debt in full to your co-signer.

 

When Should I Delay Filing for Bankruptcy?

October 31st, 2019 at 7:14 pm

bankruptcyDeclaring bankruptcy can get you out of a less-than-favorable financial situation when you are in need, but your circumstances will dictate which type of bankruptcy you are eligible for and how much the bankruptcy will help you. Once you have figured out that you want to file for bankruptcy, you must then determine when your most opportune time to file is. In certain situations, you may want to delay filing for bankruptcy. Delaying your bankruptcy can sometimes allow you to keep more of your money, protect a friend or family member’s money or even increase your chances of qualifying for a Chapter 7 bankruptcy. Here are a few situations in which you may want to consider delaying filing for bankruptcy.

You Paid Money Owed to a Family Member Too Close to Filing

If you pay certain creditors $600 or more prior to receiving a discharge, your bankruptcy trustee could demand the money back from the creditor. This is called a preference because you have put that creditor in a better position than your other creditors. The preference period for most creditors is 90 days prior to filing for bankruptcy. For “insiders,” such as friends or family members, the preference period is one year prior to filing for bankruptcy.

You Recently Transferred or Gifted Money or Property to Someone

If you give away or gift property or money and get nothing in return, you could also face allegations of fraudulent transfer. Even if the property or money was a gift given with good intentions, you can still face these allegations if you file for bankruptcy less than two years after you give or transfer the property or money.

Your Income Has Decreased or You Expect Your Income to Decrease

If you want to file for a Chapter 7 bankruptcy, you will have to pass what is called the means test. The means test compares your income to the median income in your state. If you fail the means test, it will be extremely difficult for you to qualify for a Chapter 7 bankruptcy, if you can even qualify at all. If you know that you currently make too much to qualify, but that you will not be making as much in the future, you should wait to file for bankruptcy.

Our New Braunfels, TX Bankruptcy Attorney Can Advise You When to File

Like many things in life, timing is everything when it comes to bankruptcy. Even just a few days’ time can mean the difference between discharging certain debts and being forced to repay them. If you are unsure of when the best time to file for bankruptcy is, you should contact our skilled San Antonio, TX bankruptcy lawyer today. At the Law Offices of Chance M. McGhee, we will examine your case and advise you as to when you should file for bankruptcy so you can benefit from it the most. Call our office today at 210-342-3400 to schedule a free consultation.

 

Sources:

https://www.thebalance.com/what-is-chapter-7-bankruptcy-316202

https://www.law.cornell.edu/uscode/text/11/547

https://www.law.cornell.edu/uscode/text/11/548

Additional Charges and Curing Your Mortgage Arrearage

October 28th, 2019 at 7:00 am

Resolve disputes with your lender in Chapter 13 about 1) additional fees and charges, and 2) whether you’ve cured the mortgage arrearage.  

Last week we described a Chapter 13 procedure to force mortgage lenders to resolve mortgage accounting disputes. This procedure focuses on changes to the monthly mortgage payment amount during the case. These are often just the normal contractually mandated changes arising from adjustments to the mortgage interest rate, and in property taxes and homeowners’ insurance. You and your lender need to be on the same page on the monthly amount so that you can stay current. Because of the importance of this, Rule 3002.1 of the Federal Rules of Bankruptcy Procedure provides an enforceable way within Chapter 13 for you to timely learn about mortgage payment changes and to efficiently resolve any related disputes.

This Rule also addresses two other practical problems about mortgage accounting:

  • Determining the appropriateness of fees or charges a mortgage lender wants to add to your mortgage debt
  • Determining at the end of a Chapter 13 whether you have in fact fully cured the mortgage arrearage

Determination of Fees and Charges

During the course of a Chapter 13 case, a mortgage lender may add what it considers to be a contractually appropriate fee or charge to the mortgage balance. Common examples include residence inspection fees, late charges, and the lender’s attorney fees. Rule 3002.1 (c) requires the lender to give an itemized notice of any such fee or charge. It must provide this notice within 180 days of incurring the fee or charge. It’s served on you, your bankruptcy lawyer, and your Chapter 13 trustee.

Then either the trustee or you have a year to dispute the fee or charge. The bankruptcy court then determines “whether the fees, expenses, or charges set forth in the notice are required by the underlying agreement or applicable nonbankruptcy law to cure a default or maintain payments.” Rule 3002.1 (e).

Determination of Final Cure of the Mortgage

Chapter 13 effectively gives you up to 5 years to pay, or “cure,” any amount of your mortgage that you’re behind on. But what if you don’t know how much you need to cure because of miscommunications or disputes with your lender? You get to the end of your case believing that you’ve cured the arrearage but your lender says you haven’t.

Rule 3002.1 (f) of the Federal Rules of Bankruptcy Procedure addresses this. After you complete your Chapter 13 plan payments the trustee gives notice that you’ve done so. This notice goes to you, your bankruptcy lawyer, and your lender within 30 days after you’ve completed payments. Then within another 21 days the lender responds, stating whether you’ve cured the arrearage and are current on monthly payments. “The statement shall itemize the required cure or postpetition amounts, if any, that the holder contends remain unpaid as of the date of the statement.” Rule 3002.1 (g). Then both you and the trustee have another 21 days to ask for a bankruptcy court determination about these issues.

If your lender fails to provide the required information it is subject to sanctions. The court can award you “appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.” Rule 3002.1 (i)(2).

Resolve Mortgage Accounting Disagreements

October 21st, 2019 at 7:00 am

Chapter 13 gives you valuable power to force your mortgage lender to be up front about how much you owe, and to efficiently dispute the amount. 

 

Catching Up on Your Mortgage over Time

A Chapter 13 case gives you the power to catch up on your home mortgage(s) over an extended period.  This “adjustment of debts” type of bankruptcy can give you up to 5 years to catch up.

This power is found in the U.S. Bankruptcy Code language allowing you to cure “any default within a reasonable time.” Section 1322(b)(5). That amount of time is interpreted to mean, in most circumstances, the length of your Chapter 13 payment plan. Most payment plans are between 3 and 5 years long. If you need more than 3 years, usually you can extend your plan longer, up to 5 years.

The Mortgage Accounting Challenge

If you fall behind on your mortgage it can be ridiculously difficult to get accurate information from your lender about the amount you owe. If you don’t have accurate information, you can’t fulfill your desire and responsibility to cure the arrearage.

This problem is aggravated over the course of the case when the mortgage payment amount changes over time. This could be from normal changes in the interest rate, property tax and insurance, or the addition of fees.

You can’t cure the arrearage or maintain monthly payments if you aren’t timely told the amounts you owe. You can’t efficiently dispute the stated amounts if the lender does not respond in good faith.

This accounting confusion had been a serious problem for millions of homeowners trying to save their homes. In 2011 a new procedure was created within Chapter 13 to efficiently resolve mortgage accounting disputes. It’s contained in Rule 3002.1 of the Federal Rules of Bankruptcy Procedure. It gives you the power to force your lender to work with you to determine how much you owe.

How the Procedure Works

The procedure focuses on changes to the ongoing mortgage payment amount.  You can’t catch up on the arrearage if that arrearage increases because you’re not paying the right monthly payment. 

Your lender “shall file and serve on” you, your bankruptcy lawyer, and your Chapter 13 trustee “any change in the payment amount.” This includes “any change that results from an interest rate or escrow account adjustment.” This notice must be given “no later than 21 days before a payment in the new amount is due.” Rule 3002.1(b) of the Federal Rules of Bankruptcy Procedure.

You or your lawyer can object to the change in the lender’s notice. You must do so before that new payment is due. If you don’t object on time, the lender’s payment change goes into effect.

If you do object, the bankruptcy judge determines whether the lender’s proposed new amount is appropriate or not.

This procedure forces the lender to be up front about changes in how much you owe. It allows you to dispute those changes, and to get a quick court determination about who is right.

 

What Are the Laws for Filing Multiple Bankruptcies?

October 17th, 2019 at 3:27 pm

TX bankrutpcy lawyer, TX chapter 7 attorney, Texas bankrutpcy lawyer, Most Americans have some sort of debt, with one of the most common forms of debt being credit card debt. Most of the time, debt is manageable if you are able to budget your money, but sometimes life happens and debt can become overwhelming. In cases such as those, bankruptcy is often your best option. Filing for bankruptcy can allow you to manage your debt in affordable payments or even discharge your debt, allowing you to wipe your slate clean.

Unfortunately, sometimes your first bankruptcy is not your last bankruptcy. If you find yourself drowning in unmanageable debt again, you may wonder if it is possible to file for bankruptcy again. Technically, the answer is yes, but there are a few stipulations you should know about.

Filing for Bankruptcy More Than Once

You can file for bankruptcy as many times as you want to file. There are no rules about how many times you can file for bankruptcy, but there are rules as to how often you can receive a discharge of your debs. The time between discharges is based on the type of bankruptcy you filed before, whether or not you received a discharge in that bankruptcy and the type of bankruptcy you are trying to file. The waiting periods between bankruptcy discharges are as follows:

  • Chapter 7 to Chapter 7: You can receive a discharge after eight years.
  • Chapter 7 to Chapter 13: You can receive a discharge after four years.
  • Chapter 13 to Chapter 13: You can receive a discharge after two years.
  • Chapter 13 to Chapter 7: You can receive a discharge after six years.

It is worth it to note that if you previously filed for a Chapter 13 bankruptcy and are currently trying to file for a Chapter 7 bankruptcy, you may be able to obtain a discharge sooner if you paid back your debtors in full or you paid at least 70 percent of your debt back and your new bankruptcy filing is in good faith.

Do You Have Questions About Bankruptcy? A San Antonio, TX Bankruptcy Attorney Can Help

Nobody files for bankruptcy with the intention of filing for bankruptcy more than once in their lifetime, but sometimes life happens and you have no other choice. If you have previously filed for bankruptcy and you think you might want to file again, you should talk with a knowledgeable New Braunfels, TX bankruptcy lawyer. At the Law Offices of Chance M. McGhee, we understand that sometimes the only option for debt relief is a bankruptcy, even if you have filed for bankruptcy before. Let us help you determine if filing for bankruptcy is your best option. Call our office today at 210-342-3400 to schedule a free consultation.

 

Sources:

https://upsolve.org/learn/how-often-can-you-file-bankruptcy/

https://www.thebalance.com/if-i-filed-bankruptcy-before-how-soon-can-i-file-again-316173

Chapter 13 Really Helps Delay Your Home Sale

October 14th, 2019 at 7:00 am

Chapter 13 gives you much more power over your mortgage and other home-related debts so that you can sell your home when it’s best for you. 

 

Our last blog post was about using Chapter 7 “straight bankruptcy” to buy time to sell your home.  The advantages of Chapter 7 are that it’s usually quite quick and costs less that Chapter 13. It also importantly focuses on your present income and on the present value of your home. If you expect either your income or your property’s value to increase substantially, Chapter 7 could be your better option.

Chapter 7 Disadvantages—Buys Limited Amount of Time

However, Chapter 7’s quickness can often turn into a disadvantage. If you’re behind on your mortgage, or another home-related debt, the protection Chapter 7 provides against them doesn’t last long. The “automatic stay” protection lasts—at most—only 3-4 months, because that’s how quickly most cases finish. If within that time you don’t work out payment arrangements with them, they can start or resume collections and/or foreclosure.  

So Chapter 7 often doesn’t give you much additional time to sell your home.

Chapter 7 Disadvantages—Buys Limited Leverage with Ongoing Creditors

Also, if your mortgage holder or other home-related creditor refuses to negotiate, you have almost no leverage under Chapter 7. Not only does automatic stay protection expire within just a few months, the creditor can often speed up that timetable. Chapter 7 doesn’t give you any other strong tools directly against your mortgage holder or home lienholder. Mostly what it does is discharge (write off) other debts so that you can focus on your home creditor(s). If that doesn’t buy enough time to sell your home, than Chapter 7 is probably not your best solution.

Chapter 13 Advantages—Buys Much More Time and Leverage

A Chapter 13 “adjustment of debts” case buys you time and flexibility if you want to keep your home and are behind on your mortgage and/or other home-related debts. Basically it does so by protecting you and your property while you catch up in 3 to 5 years.

These are all also true if you want to sell your home but need more time to do so. Chapter 13 can often prevent you from being rushed into selling when the market is not the best for selling. For example, instead of being forced to sell during the holiday season you could sell during the prime spring season. Or hold off on selling when doing so now would cause personal or family hardships. ln many situations you could delay selling your home for many months, or even years.

The Power of Chapter 13

The way this works is that you and your bankruptcy lawyer put together a monthly payment plan covering the next 3-to-5-years.  This plan goes through a 2-3-month bankruptcy court approval process. The plan would show how you’d make progress towards catching up on your mortgage and other especially important debts. Usually you’d pay general unsecured debts only as much as you can afford to pay them after paying other more important debts. Often these unsecured debts don’t receive much, sometimes nothing.

Your payment plan would likely refer to your intent to sell your home, if that was to happen during the 3-to-5-year period. You’d have to pay your monthly mortgage in the meantime. And usually you’d have that same length of time to catch up on a first or second mortgage. Same thing if you were behind on property taxes or anything else that was a lien on your home’s title. This can often enable you to delay selling your home for years.

What if you couldn’t afford to catch up within even the 3-to-5-year length of a Chapter 13 payment plan? Under some circumstances you wouldn’t have to pay that much. If there is enough equity in the home, you could pay less towards catching up on the mortgage (property taxes, etc.) and just pay the remaining amount out of the proceeds of the intended home sale.

Conclusion

Chapter 13 could enable you to delay selling your home until the time is right for you. If your home has a healthy equity cushion, you could catch up on some or all of the missed mortgage payments (or property tax arrearage or some other home-secured debt) until you sell the home. In the meantime as long as you fulfill the terms of the court-approved payment plan, you wouldn’t have to worry about a pending foreclosure or other collection pressures. Instead you could focus on making the regular monthly mortgage payments and Chapter 13 plan payments. And then sell your home at a time that serves you best. 

 

Bankruptcy Helps Delay Your Home Sale

October 7th, 2019 at 7:00 am

When you need a rather quick solution, Chapter 7 can deal with your creditors and buy you time to sell your home, in the right circumstances. 


Our last several blog posts have been about using bankruptcy to either prevent various kinds of liens hitting your home or deal with those liens if they happen. For example, in the last few weeks we’ve addressed, in reverse order:

  • Protecting your  home from homeowners’ association dues and assessment liens
  • Addressing child  and spousal support liens
  • Preventing income tax liens through Chapter 7 and Chapter 13
  • Dealing with already-recorded income tax liens
  • Preventing judgment liens, and removing them if they’ve already attached to your home

So clearly bankruptcy gives you a multitude of tools to help you preserve your home and its equity.

It can do even more. In the midst of dealing with all your debts, bankruptcy can buy you time to sell your home. Let’s show you how, starting with Chapter 7 today, and Chapter 13 next week.

Chapter 7 Advantage—It’s Quick

Chapter 7 “straight bankruptcy” is quick.

Its quickness helps a number of ways. Chapter 7s are less complicated to prepare and almost always cost you less. So, practically speaking, you can usually go from your initial meeting with your bankruptcy lawyer to filing bankruptcy, faster.

This can be crucial in at least two sets of circumstances.

First, you’re up against some kind of debt-collection or possession-losing event that bankruptcy needs to stop. This can be related to your home, such as the start or the beginning of a mortgage foreclosure. Or it can be unrelated, such as a collection lawsuit against you, a paycheck garnishment, or vehicle repossession. You need to quickly file bankruptcy to stop a creditor from hurting you.

Second, you need to prevent some kind of lien from hitting your home. Preventing an income tax lien or judgment lien, for example, can, under some circumstances, mean the difference between not paying the underlying debt at all and paying it in part or in full.

Chapter 7 Advantage—It Focuses on the Present

The other big Chapter 7 advantage is that it focuses on your situation at the moment of filing. This is important as it applies to your assets and income.

Regarding your assets, Chapter 7 fixates—for most purposes—on your assets and their value at the moment of filing. It generally does not care about future assets (again, with rare exceptions).

This can be crucial when dealing a home that’s increasing in value. You may be getting close to having the maximum allowed equity for your applicable homestead exemption. Assume, for example, that your home is worth $250,000, you owe $230,000, and your state has a $25,000 homestead exemption. So you’d currently have $20,000 in equity ($250,000 minus $230,000). That equity amount can go up quickly if your property’s value is increasing, plus you’re paying down your mortgage (and maybe other liens against the home). Next year you may have too much equity to file a Chapter 7 case. Filing now lets you protect your equity now, and then it can grow freely after you’ve gotten your fresh start.

Regarding your income, Chapter 7 fixates—again for most purposes—on your income at the time of your filing. Future income, including increases in income, is generally outside of the reach of your creditors and the Chapter 7 trustee.

Buying Time to Sell Your Home

With all this in mind, how does Chapter 7 buy you time in selling your home?

Consider two scenarios. One, you’re current on your mortgage, and second, you’re far behind.

Buying Time When Current on Your Mortgage

First, assume you are current or close to current on your home’s mortgage. The amount of your equity is less than your homestead exemption amount. You are being battered by creditors, and if you don’t act quickly bad stuff will happen. So you’re tempted to sell your home to reduce your cost of living or to get at its equity. But you either don’t want to sell, or for personal or family reasons you’d rather wait to do so.

A Chapter 7 filing would prevent or stop virtually all lawsuits and garnishments. It could prevent judgment liens and income tax liens and support liens against your home. Judgment liens that are already on your home likely could be removed. Previously recorded income and support liens could be better resolved with your greater cash flow. You’d likely be better able to afford your mortgage and other home-related costs. All that would happen either immediately or within about 4 months after your bankruptcy lawyer filed your Chapter 7 case.

Buying Time When Behind on Your Mortgage

Second, assume instead that you are not current on your mortgage but rather you’re far behind and facing foreclosure. You definitely want to sell your home but you’ve run out of time. You’re about to lose your home to foreclosure.

Chapter 7 buys you some time. Instead of losing your home—and any equity you may have in it—to foreclosure, you stop the foreclosure. You gain a few precious months to either close a pending sale or to make a sale.

Or if you are not that close to foreclosure, filing bankruptcy may improve your monthly cash flow enough so that you and your lawyer can negotiate a “forbearance agreement” with your mortgage lender. This is a payment plan for catching up on the mortgage arrearage (and maybe any late property taxes). Then, anytime either during that payment plan or afterwards, you could sell your home.

You may even be able to work that into the forbearance agreement. You could agree to relatively smaller monthly catch-up payments, and then pay off of the remaining arrearage and the entire mortgage balance from proceeds of the house sale.

 

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