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Reversing Real Estate Judgment Liens with Bankruptcy

April 26th, 2018 at 11:40 pm

Texas bankruptcy attorneyCreditors know how to work the system to get the money owed to them. In some cases, creditors have the courts put a lien on debtor’s possessions without the owner’s consent or knowledge, granting the creditor a legal claim over the property. By placing a lien on real estate, a vehicle, or personal property, a creditor secures payment of the money owed, sooner or later.

Buyers will not purchase items without a clear title, and a lien makes any title unclear. Although a creditor has the option to sell the property, such as in foreclosure, most wait until the debtor chooses to sell the property. At that point, seller pays the debt out-of-pocket or uses part of the purchase price to repay the debt. Fortunately, in Chapter 7 bankruptcy, you may be able to avoid the whole ordeal by getting rid of the judgment lien altogether.

Consensual Versus Non-Consensual Liens

Liens are placed on property both with and without consent. If consent is given, it happens at the origination of the creditor-debtor relationship. For example, either the debtor is asking for money to purchase property, such as a home or a vehicle, where the bank would then own the property, and the purchaser makes payments to the financial institution; or the debtor is asking for a financial loan and offers property they already own as collateral.

Alternatively, if someone wins a judgment against another party in court and money is owed, a judge may grant a judgment lien, which frequently happens with unpaid debt. This is an example of a non-consensual lien.

Lien Avoidance

Through judgment lien avoidance, you can permanently remove a judgment lien. If this occurs during bankruptcy, you will own the property, free-and-clear with no other payments. Lien avoidance is recommended, if possible, even if you do not intend to keep the property long-term, as you can then sell the property to pay for other things. To qualify, the following must be true:

  • The lien is a court-issued money judgment;
  • There is exempt equity in part of the property; and
  • Property loss impairs the exemption.

Reduce Courtroom Surprises

Many filers do not realize they have any liens on their property. Others discover partial claims. Sometimes, debtors do not have equity during the bankruptcy filing, but that changes down the road. In all of these circumstances, a New Braunfels, TX bankruptcy attorney can help. If there is a lien on your property and you have little, no, or even negative equity, the Law Offices of Chance M. McGhee will explore all of your options. Call us today for your free, no-obligation consultation at 210-342-3400.

 

Sources:

https://study.com/academy/lesson/types-of-liens-equitable-possessable-statutory.html

http://www.landlordstation.com/blog/what-is-a-judgment-lien/

Leaving My Rental after Filing a Chapter 13 Case

February 15th, 2017 at 8:00 am

Chapter 13 has advantages and potential disadvantages compared to Chapter 7—it’s more flexible but there’s a chance you’ll pay more. 


The last blog post was about the advantages of leaving behind your residential lease after filing a Chapter 7 case. Most of those advantages apply to a Chapter 13, too. And then some.

Reminder about Chapter 7 vs. Chapter 13

The rest of this post will make much more sense after understanding the basic differences between Chapters 7 and 13.

Chapter 7 “straight bankruptcy” is usually a 3-4-month procedure that quickly discharges (legally writes off) most debts. It doesn’t help much or at all with debts that are not discharged. Its protection against creditors lasts only a short time.

Chapter 13 “adjustment of debts” is usually a 3-5-year procedure that deals with your debts more flexibly. It can be especially helpful with debts that Chapter 7 does not discharge or does not handle well otherwise.  

The Chapter 7 Advantages that Also Apply to Chapter 13

  • Buys You Immediate Time

Filing a Chapter 13 immediately stops a filed eviction proceeding, just like a Chapter 7 would. (This assumes that the landlord has not yet received a judgment giving it legal possession of your residence.) The “automatic stay” protecting you from your landlord’s actions against you applies to both types of cases. See Section 362(a) of the U.S. Bankruptcy Code.

  • Buys You More Time to Move

By preventing, stopping, or slowing down an eviction proceeding, filing a Chapter 13 case usually gives you more time to find a new place to live.

It prevents an eviction proceeding because the landlord can’t file one without getting bankruptcy court permission. Because you formally state your intention to “reject” the lease and leave, the landlord usually focuses its attention on making arrangements with your bankruptcy lawyer for your orderly move. That may include permission to stay for a designated number of months while you pay ongoing rent. It might even include reduced rent in return for your commitment to move on a specified date.

If an eviction proceeding has already been filed (but no judgment entered for the landlord), the same principles still apply. Your landlord may at this point be more anxious to have you move, so you may have less flexibility. But you now have a lawyer in your corner and the protection of the “automatic stay.” Plus you have less time pressure because the “automatic stay” lasts for years instead of expiring in 3-4 months. Even after an eviction is filed and “stayed” by your Chapter 13 case, your lawyer may be able to arrange for you to stay on for quite a few months.

  • A Calmer Way to Leave

With the immediate prevention or stopping of an eviction, that buys you some valuable peace of mind. Having a lawyer in your corner and the ongoing “automatic stay” protection give you more of the same. Finally, you get the certainty of an agreed move-out plan, while knowing you can’t be sued for any remaining debt.

  • Gets You Out of an Expensive Lease

Just like Chapter 7, going through Chapter 13 case enables you to leave an unfavorable lease. And once you complete the case, you don’t owe anything to your former landlord.

But Chapter 13 is somewhat more risky here. With both Chapter 7 and 13 you need to successfully complete the case to discharge any residual lease debt. But while a very high portion of Chapter 7s are completed, Chapter 13s have a lower success rate. That’s because they last so much longer and require you to complete a payment plan.

  • Avoid Eviction Proceeding

Just like with Chapter 7, Chapter 13 usually prevents an about-to-be-filed eviction proceeding from happening. That’s good for your renter’s credit record.

The Extra Advantage of Flexibility

Filing under Chapter 13 gives you greater flexibility in a number of distinct ways.

  • Budget Flexibility

Your Chapter 13 plan payment is based on what your budget says you can afford. That budget can usually provide money for after-filing monthly rent for your lender. The rent comes ahead of paying otherwise urgent debts like back child support, income taxes, and/or vehicle loan arrearage. This can be a major advantage over Chapter 7 which doesn’t empower you to prioritize like this.  

  • Moving-Away Flexibility

See above about the likelihood that you can stay longer because of the much longer “automatic stay” protection.

  • Staying-on-the-Lease Flexibility

Under certain circumstances you’d want to “assume” your lease, knowing you can “reject” it later. If you expect to stay at your rental for now, but would benefit from knowing that you can change your mind later, under Chapter 13 you could likely do this through a couple of procedures. If your situation changes so that you need to leave your lease, your lawyer prepares a “modified” or “amended” plan. In that new plan you “reject” your lease and make arrangements for your move. This could potentially be even a couple years after initially filing your Chapter 13 case.

  • Future-Chapter-7 Flexibility

The above scenario assumes that you’d benefit (presumably because of other debts) from staying in the Chapter 13 case. The other procedure for changing your mind and “rejecting” the lease is to “convert” to a Chapter 7 case. At the point in time that your circumstances change, you turn your Chapter 13 case into a Chapter 7 one. This option is better if you no longer need the benefits of Chapter 13 for other ongoing debts. It’s also helpful if you have new debts since filing the Chapter 13 case—including new obligations on the lease.

The Potential Financial Disadvantage

In a Chapter 7 case any financial obligations from the residential lease are almost always discharged in full. But in a Chapter 13 case those obligations are lumped in with other “general unsecured” debts. Most, but not all, Chapter 13 plans earmark some money towards that pool of “general unsecured” debts. However, even those plans that do pay some percentage of the “general unsecured” debts often do NOT result in you paying any more during the case overall.

Please see our blog post of February 3, 2017 regarding “rejected” vehicle leases for our discussion how this works. A hint: it’s because in most Chapter 13 cases there’s only so much money for ALL “general unsecured” debts. So, any of your money paid to your landlord on the lease debt just reduces how much other creditors receive. And you don’t end up paying any larger amount.

 

What If I’m Too Far Behind on My Rent?

February 10th, 2017 at 8:00 am

In a Chapter 13 “adjustment of debts” you have much more time to get current on your residential lease agreement than under Chapter 7. 


The Challenge under Chapter 7

Our last blog post showed how Chapter 7 “straight bankruptcy” can help you keep your home or apartment lease. Mostly it clears away other debts so that you can better afford your rent payments. Hopefully, if you’re already behind on those payments, it’s easier to catch up when you no longer have other debts.

But the disadvantage with Chapter 7 is that, if you are behind, you have very little time to catch up. Most of the time you need to get current within a month or two after filing the case. That’s because Chapter 7 cases are completed very quickly, giving you only brief protection against your landlord.

This short timetable presents a major challenge because usually you’re cash poor when you file bankruptcy. Often you’re pushed into bankruptcy because of a cash-depleting event like is a paycheck or bank account garnishment. You may be behind not only on rent but also on other obligations like utilities or rental insurance. That could additionally put you in breach of your lease agreement. Plus you may also be behind on other very important obligations like your vehicle loan or child support.

The short break you get from collections under Chapter 7 is often just not long enough to catch up on rent. That’s particularly true if some of your debts are of the type that Chapter 7 doesn’t discharge (legally write off).

The Chapter 13 Solution

The broad overall advantage of Chapter 13 is that it buys time. And that’s true with a residential lease agreement on which you owe late rent payments. Instead of having only a couple months to catch up, under Chapter 13 you have many months, or even possibly a couple years, to do so.

That’s potentially reason enough to file a Chapter 13 case, even though it takes several years instead of several months. The longer length gives you the advantage of more time to catch up on the rent.

An Example

The difference between Chapter 7 and 13 here is best shown by an example.

Imagine that you are two months behind on a home rental of $1,500 per month, or $3,000 behind. You also owe the IRS income taxes for 2014 in the amount of $10,000. Your paycheck was just garnished by the IRS, leaving you worse than broke. You’re also 5 months behind on your $500 monthly child support. Your ex-spouse just turned you over to the support enforcement agency to force you to pay up. And your landlord just informed you it’s about to file an eviction proceeding.

In spite of all this you desperately want to stay in your rental. It’s in a great location for your work and your kids’ schools. Besides, you’d have no way to come up with the first and last month’s rent for a new place. Your bad overall credit record and now your bad rental record would make qualifying for a new place very doubtful. So you understandably want to keep yourself and your family where you are now if at all possible.

If You Didn’t File Bankruptcy

Without filing bankruptcy, assuming you have no way of coming up with the $3,000 back rent, you would likely be evicted within a few weeks. In the meantime, the support enforcement agency can take very aggressive collection actions against you. That could include the suspension of your driver’s license, as well as any occupational or professional license. You could maybe work out a monthly payment plan with the IRS. But given the other extreme financial pressures on you it’s highly doubtful that you could reliably stick to any commitment.

You’d be evicted and continue to overwhelmed by debt. This is not a pretty picture.

Under Chapter 7…  

A “straight bankruptcy” would not likely help enough to save your home.

You’d get a 3-4 month break from the IRS’s collections. But you would not discharge (legally write off) that $10,000 tax debt because it’s not old enough to qualify. So very quickly you’d be back in their crosshairs.

The Chapter 7 filing wouldn’t give you ANY break from the support enforcement agency’s garnishments and potential license suspensions.

Somehow in the midst of all that you’d need to have quick access to the $3,000 in back rent. Maybe you have so much in other debts that not paying them would free up tons of money every month. But most people filing bankruptcy have already stopped paying a lot of their debts, so that likely wouldn’t help enough.

Chapter 7 simply doesn’t help most people in these kinds of situations enough.

Under Chapter 13…

Filing instead an “adjustment of debts” case would much more likely let you to stay in the home.

Your Chapter 13 filing would immediately stop all collections by the IRS, the support enforcement agency, and the landlord. And that stopping would likely last for the full 3-to-5-year length of the case. Your budget would determine how much you would realistically pay to ALL of your creditors each month. That monthly “Chapter 13 plan payment” would be divided among your creditors. It would pay the IRS, support enforcement, and the back rent before and instead of paying any other debts.

As a result, you would eventually completely catch up on the rent, likely within a year or two. (And you’d pay each new month’s rent on time as well, as provided in your budget). In the same way you’d also eventually bring your child support current, and pay off the income tax debt. To the extent that you’d have any “disposable income” beyond that, it would go to your remaining debts.

So, at the end of your Chapter 13 case you’d be current on your rental and child support, and you’d have paid off the income taxes. To whatever extent you didn’t have enough “disposable income” for the other debts, they would be discharged.

You would have succeeded in staying in your home, and be debt-free.

 

“Avoiding” a Judgment Lien on Your Home in Chapter 13

July 27th, 2016 at 7:00 am

Both Chapter 7 and Chapter 13 can wipe away judgment liens. But doing so under Chapter 13 can be better when used with its other benefits.  

 

In our July 1 blog post we gave a list of 10 ways that a Chapter 13 case can help you keep your home. Today we cover the 9th of those 10 ways. Here’s how we introduced this earlier.

9. Judgment Lien “Avoidance”

A judgment lien is put on your home by a creditor who sues and gets a judgment against you. It then records that judgment in the county where your home is located. (Or the creditor uses whatever procedure creates a judgment lien in your state).

In bankruptcy, a judgment lien can be removed from your home under certain circumstances. Essentially, the equity in your home that’s encumbered by the judgment lien must be covered by the applicable homestead exemption. In other words, the judgment lien must “impair” the homestead exemption. If it does, the judgment lien can be removed, or “avoided,” from the title of your home.

Judgment lien “avoidance” is available under Chapter 7 as well as Chapter 13. But Chapter 13 can be better when lien “avoidance” is used in combination with other tools only Chapter 13 provides.

Here’s how this works in practice.

The Example

Assume that you own a home that is worth $200,000. You lost your job 18 months ago and were unemployed for 12 months. As a result you fell 9 payments behind on the $1,200 monthly mortgage payments, a total of $10,800 behind. The full amount owed on the mortgage is $180,000. Your mortgage lender is threatening to foreclose on the home if you don’t quickly catch up on the missed payments.

During your unemployment you also couldn’t make the payments on a credit card with a balance of $7,500. It was sent to collection and the collection company sued you. You didn’t respond to the lawsuit because you knew you owed the money and saw no benefit to objecting. So the collection company got a default judgment against you. The amount of the judgment is $8,750, since the collector could add its costs of the lawsuit to the judgment. The collector then recorded a judgment lien against your home in that amount.

So your $200,000 home in encumbered by the $180,000 mortgage plus the $8,750 judgment. Assume also that you are entitled to a $25,000 homestead exemption.

The Judgment Lien “Avoidance” Here

Under either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts,” this $8,750 judgment lien can be removed from your home’s title.

That’s because the equity in your home that the judgment lien is encumbering is protected by the homestead exemption.

Here’s how the math works. Without the judgment lien, there’s $20,000 in equity in the home—its $200,000 value minus the $180,000 mortgage. The $25,000 homestead exemption would protect up to $25,000 of equity. So, all of the $20,000 in equity is protected. The entire $8,750 judgment lien eats into, or “impairs,” this protected equity. And so the entire judgment lien can be “avoided,” or released from your home’s title through bankruptcy.

The Chapter 7 Possibility

If you filed a Chapter 7 case and “avoided” the judgment lien you would likely also be able to “discharge”—legally write off—that $8,750 credit card debt. The debt would be gone, and the judgment lien would be gone off your home, and the debt itself would be gone forever. Mission accomplished there.

But that still leaves you $10,800 behind on your mortgage. Discharging your other debts may leave you with some available money each month to pay towards this mortgage arrearage. If so, you might be able to make a deal with your home mortgage lender for catching up on the mortgage. If so, go for it.

However, often the amount that you could pay towards the mortgage arrearage would not be enough to satisfy your mortgage lender. Mortgage lenders in this situation often insist on homeowners catching up within 10-12 months. That’s amounts to about $1,080 to $1,200 per month under our facts. And you’d have to pay that on top of the regular ongoing monthly payments of $1,200.

You may simply not have much extra money in your budget even after a Chapter 7 case.  You may not be able to catch up on your mortgage fast enough to satisfy your mortgage lender. If so it wouldn’t do much good to “avoid” the judgment lien on your home only to lose it to a mortgage foreclosure.

The Chapter 13 Advantage

If you and your bankruptcy lawyer instead filed a Chapter 13 case, it could solve this dilemma. Your mortgage lender would be forced to give you MUCH more time to catch up on the mortgage arrearage.

A Chapter 13 payment plan usually lasts from 3 to 5 years. You are generally allowed to push it out the full 5 years in order to reduce how much you would need to pay your mortgage lender monthly.

The payment plan can often be creative by adjusting for anticipated changes in your income or expenses. You may be able to pay less on the mortgage arrearage early in the plan to deal with even more urgent debts. Sometimes you can even pay all or part of the arrearage through a later refinancing or sale of the home.

The bottom line: when you need to “avoid” a judgment lien but also need other benefits that Chapter 13 provides, look closely at that option. Chapter 13 takes much longer but those benefits may make it well worthwhile.

 

Chapter 13 Benefits for Real Estate that Is Income-Producing and Equity-Creating

June 20th, 2016 at 7:00 am

Chapter 13 can be an effective way to temporarily or permanently hold on to business and investment real estate equity and income.

If you own real estate that is not your home, filing a Chapter 7 “straight bankruptcy” would likely result in you losing control of what happens to that real estate. In our last blog post we showed how filing a Chapter 13 “adjustment of debts” case could give you more control over that. Often you have more control over whether the property is sold or retained, whether undesirable real estate can be surrendered to its mortgage holder, and the timing of such events.

Chapter 13 also can also much better protect equity in your real estate from your creditors. If that real estate is producing income for you, Chapter 13 can often protect that income and put it to much better use. Furthermore, because Chapter 13 is much more flexible than Chapter 7, and its protection against your creditors lasts for years instead of just a few months, it can give you the opportunity to build equity in your real estate.

More Benefits to the Real Estate within Chapter 13
—Protecting the Equity

If your real estate clearly does have equity, in a Chapter 7 case you would definitely lose the real estate to the bankruptcy trustee and its sale proceeds to your creditors. After all, Chapter 7 is a liquidation form of bankruptcy, and anything that is not protected through property “exemptions” is usually taken by the trustee and sold to pay your creditors.

Usually real estate that is not your home is not protected by an exemption (although there are possible exceptions in certain states under certain circumstances). So again you’d likely lose such property in a Chapter 7 case.

But what if you needed the real estate for your business? Or what if you had some deep personal or family connection to the real estate?

Chapter 13 allows you to keep non-exempt property under many circumstances. You may well have to pay more or longer into your payment plan to pull this off. But in some situations that may not even be necessary.

Determining whether you can keep real estate that is not exempt, and what you would have to do in a Chapter 13 case to pull that off, requires a rather complicated case by case analysis. So you need to talk about this with an experienced bankruptcy lawyer. The point here is that being able to keep otherwise unprotected real estate is much more likely under Chapter 13 than Chapter 7.

—Protecting Real Estate Income

The minute you file a Chapter 7 case the bankruptcy trustee has a right to all rents and other income from your real estate. This is true even if the trustee later decides to abandon that real estate.

In contrast, under Chapter 13 income from real estate is treated much more like your income from employment. Your income from all sources is used to determine your monthly “disposable income”—your income after expenses—and the amount you can afford to pay into your monthly Chapter 13 payment plan.

There are other considerations—such as whether you can financially justify keeping that real estate going forward. But again it’s much more likely that you would be able to keep, or put to good use, income from such real estate under Chapter 13 than under Chapter 7.

—Creating Real Estate Equity under Chapter 13

One of the ways you can justify keeping real estate in a Chapter 13 case—either permanently or to sell later in the case—is to show that you are building equity in the real estate during the course of the case. You can create equity three ways:

1. The real estate may have liens on it—for property taxes, income taxes, or child support, for example—on debts that you would be paying off during the course of the case. Paying off those debts would result in the release of the liens, building equity in the real estate relatively quickly.

2. Some liens—such as for older income taxes—many not have to paid in full or sometimes even in part. The underlying debt may be discharged—legally written off—resulting in the release of such liens, and resulting in the building of equity in the real estate.

3. If the real estate’s value is rising year over year, over the span of a 3 to 5 year Chapter 13 case equity will be created through that appreciation, along with the reduction in the mortgage’s principal balance during that time.

In a Chapter 7 case, as a liquidation form of bankruptcy that fixates on you and your real estate’s status as of the moment your case is filed, future equity is essentially irrelevant. Chapter 13 can open up opportunities to build such future equity to your benefit. 

 

Chapter 13 Benefits Directly Related to Real Estate Other than Your Home

June 17th, 2016 at 7:00 am

Chapter 13 can be an effective way to keep or unload business and investment real estate.

 

Our last blog was about selling real estate that is not your home within a Chapter 13 “adjustment of debts” case. We showed how this would give you more control over the timing and other important circumstances of the sale than if you just surrendered the real estate through a Chapter 7 “straight bankruptcy.”

But Chapter 13 may provide other benefits to consider.

Some of those benefits are related to the real estate itself. We’ll cover those today and in our next blog post.

Benefits under Chapter 13 Related to the Real Estate
—Control over Keeping or Selling

When you file a Chapter 7 case you hand over total discretion about that decision to the bankruptcy trustee. He or she chooses whether to take possession and control over the property, whether to sell it, and all the circumstances of that sale. The guiding principle for the trustee’s decision is whether your creditors will benefit, with essentially no consideration for your interests.  

Under Chapter 13 you have at least some say about what to do with the real estate. For example, if you believe that with some “sweat equity”—repairs done through your efforts plus a modest amount of money—you could increase the equity in the property and thereby pay more than you would otherwise to your most important creditors, you’d have to opportunity to make your case about this.

You do have to justify what you propose to do with the real estate, and so your discretion is definitely limited. For example, if want to keep your real estate but it has no equity, requires monthly payments on a mortgage, and produces no financial benefit, you’re going to have a tough time justifying keeping that real estate. Keeping the real estate has to be part of a sensible financial plan.

—Surrendering Undesirable Property

This loss of decision-making includes your likely inability to get rid of real estate that you want to be rid of. It’s not unusual to have real estate that is a significant burden to you. For example, you may very much want to get out from under a rental home where the last tenants manufactured “meth,” with the result that the clean-up costs are prohibitively expensive. Your mortgage holder is not foreclosing, so you file a Chapter 7 case thinking that the bankruptcy trustee gets the property out of your hands. Not necessarily.

The Chapter 7 case may well discharge (legally write off) your mortgage debt, along with all or most of your other debts. But the Chapter 7 trustee would very likely choose to “abandon” the real estate back to you on the grounds that it is “burdensome” or “of inconsequential value and benefit” to your creditors. See Section 554(a) of the Bankruptcy Code.

So you’d still be saddled with the real estate after your Chapter 7 would be over, probably continuing to incur new debts for property taxes, potentially for homeowner association dues and assessments, city fines, and such.

Under Chapter 13 you may be able to be more proactive with such property. You may be in a stronger negotiating posture with the mortgage lender to induce it to accept its losses and foreclose on the property. The bankruptcy court may help with this since that one creditor is potentially harming your ability to pay the other creditors. At the very least you would have the power to convert the Chapter 13 case into a Chapter 7 one once the foreclosure occurred, allowing you to discharge the debts on the property that accrued in the meantime.

 

(Our next blog post in a couple days will have more about how Chapter 13 can help you temporarily or permanently retain and build your equity in business and investment real estate, and your income from it.)

 

Selling Real Estate Other than Your Home under Chapter 13

June 15th, 2016 at 7:00 am

Chapter 13 is often a better way to sell real estate, especially if you have other financial complications.

 

Our last blog was about letting go of real estate that is not your home through a Chapter 7 “straight bankruptcy.” We showed how you can escape debts related to the property. We also showed how you could possibly even have your “priority” debts paid by the Chapter 7 trustee out of any proceeds of the sale of that property.

But Chapter 7 provides limited help. It’s appropriate for certain scenarios, generally more straightforward ones. If you own real estate other than your home, there is a good chance that you have complications that would be better handled through a Chapter 13 “adjustment of debts.”

Chapter 13 Better If…

What kinds of complications would make Chapter 13 the better option?

  • if the real estate has equity and you want some control over the its sale and its timing
  • if the real estate has equity and you want some control over who gets paid out of the proceeds of sale
  • regardless whether the real estate has any equity, Chapter 13 gives you important benefits, some related to the real estate and some unrelated

Control Over Real Estate Sale and Its Timing

In a Chapter 7 case if you have any asset that is not “exempt”—protected from creditors—the bankruptcy trustee takes control over the asset. In the case of real estate with equity, the trustee would decide whether your creditors would benefit from its sale. If the trustee decides to sell it, he or she hires a realtor (usually) and goes through the sale process. You would not have any say in that process, other than to respond to the trustee’s requests for information and cooperate with the trustee’s sale. You would generally have little or no say in when the property is sold, how much it is sold for—beyond very broad standards of reasonableness—or to whom it is sold.

A Chapter 13 case gives you much more control over the sale.

Through a formal Chapter 13 plan put together with the help of your attorney, you propose what you want to do with the real estate, when you want to sell it, for how much, and who will be paid from the proceeds.

There ARE a bunch of rules the plan has to follow. Creditors and the Chapter 13 trustee get a say in the process. The bankruptcy judge has to approve the plan, and resolves any disputes about it. But you have much more say about what happens under Chapter 13 than under Chapter 7.

For example, you would likely be able to hire a realtor of your choosing, and decide whether to put some energy and maybe some money into getting the property ready for sale. Depending on the circumstances you may be able to delay marketing the real estate if the property is increasing in value. You may even be able to sell the property to someone you prefer as long as the transaction is otherwise fair. Overall, you are in control of the sale—albeit under the oversight of the Chapter 13 trustee and the bankruptcy court.

Control Over Who Gets Paid from Real Estate Sale Proceeds

In a sale of your real estate within a Chapter 13 case, valid liens against that real estate would of course have to be paid through escrow as usual. Then if you are entitled to any exemption on the real estate (an amount shielded from your creditors) you would be paid that amount out of the remaining sale proceeds.

But because Chapter 13 is an ongoing process involving your income and expenses, you may not be able to keep that exempt amount. You are generally required to pay “into the plan” all your “disposable income” (generally all income beyond your necessary business and personal expenses). But that may be negotiable. For example, if you need to replace your vehicle, or if it or your home urgently needs some maintenance or repair, some or all of the real estate sale proceeds could go towards such necessary expense(s).

If there are any remaining proceeds after that, there are rules in Chapter 13 about which debts are paid ahead of others out of those proceeds. But within those rules there is some flexibility. For example, certain secured and “priority” debts must be paid in full by the end of the 3-to-5-year payment plan, but you may have some flexibility about which ones are paid faster.

An example can show how this could be of significant practical benefit. 

Early in your Chapter 13 plan you may want to earmark money towards a debt that is particularly important to you, say a child support arrearage in order to bring some peace between you and your ex-spouse. Or you may want to start by catching up on property taxes on your home to avoid the high interest rate and to calm down your anxious mortgage lender. Then you could earmark other important but less urgent debts to be paid somewhat later from the subsequent sale proceeds of the (non-home) real estate. For example, you could hold off paying “priority” income taxes until the sale of the real estate. That because those taxes have to be paid by the end of the Chapter 13 case but incur no interest and penalties in the meantime. And the IRS and state tax agency can’t pressure you during the case. 

Chapter 13 Benefits Related and Benefits Unrelated to the Real Estate

Beyond the question of maintaining greater control over the real estate sale process, timing, and payout, Chapter 13 may provide you many other benefits over Chapter 7. Depending on your circumstances, those benefits may tie in with the real estate itself or may be unrelated to it. We’ll tell you about both sets of benefits in our next blog post.

 

Surrendering Real Estate Other than Your Home in Bankruptcy

June 13th, 2016 at 7:00 am

Chapter 7 writes off your mortgage debt, many other debts against the property, and potentially pays your “priority” debts as well.

 

If you own real estate that is NOT your home, and you’re considering bankruptcy, there’s a good chance that real estate is part of what’s dragging you down financially.

Maybe you made an investment that turned sour. Or the property is tied in somehow with a business that did not succeed. Or you may even have gotten the real estate by inheritance or divorce but it’s more of a burden than a benefit because of the debts against it.

How can filing Chapter 7 “straight bankruptcy” help with this?

Chapter 7 to Write Off Real Estate Mortgage Debt

In many states if you surrender your home to your mortgage lender, that lender can no longer pursue you for any liabilities related to that mortgage. That’s usually not the case with mortgages on business or investment property. You can often end up owing much of the mortgage debt after surrendering such property.

Chapter 7 to Write Off Other Real Estate-Related Debt

The debts can include not just the mortgage loan itself but various other potential obligations with liens against the property, for

  • real property taxes
  • commercial association dues and assessments
  • your business’ income and sales taxes
  • unpaid utility bills
  • city and other local assessments and fines
  • building contractor’s repairs
  • your personal unpaid federal and state personal income taxes
  • child and spousal support obligations
  • divorce property division

Some of these obligations tend to stay with the property and would be paid by your mortgage lender after taking possession of and selling the property. Real estate taxes are an example.

Some of these obligations do not get written off in a Chapter 7 bankruptcy. Child and spousal support and recent income taxes are examples.

Most of the rest of the obligations are ones that you would be personally liable for, would not be paid by your mortgage lender, and could be “discharged”—legally written off in bankruptcy. Examples are unpaid utility charges, contractor repairs, and older personal income taxes. A Chapter 7 bankruptcy case gets rid of these obligations—along with all or most of your other personal and business debts—and usually does so within a matter of just 3 or 4 months after the case is filed.

So, regardless whether you have equity in the real estate or not, consider a Chapter 7 bankruptcy to surrender that property to your primary mortgage holder, discharge  your debt to that mortgage holder, as well as most or all of your other debts against the property.

Chapter 7 to Pay Special Debts

In addition, if you DO have equity in your real estate and owe certain special kinds of debts, you can file a Chapter 7 case and have those special debts be paid in full or in part out of that real estate equity.

This can happen because under bankruptcy law certain kinds of debts are paid in full by the bankruptcy trustee before other debts receive anything.  These “priority” debts often also happen to be debts that are not discharged in bankruptcy, so you would have to pay them yourself after your Chapter 7 case was finished. Examples include more recent personal income taxes, and child and spousal support arrearage.  So you of course prefer that these “priority” debts be paid first out of the proceeds of your real estate, instead of other debts that would be discharged and you wouldn’t have to pay them after your bankruptcy case was done.

As a result, instead of surrendering your real estate with equity to your mortgage lender, you surrender it to the bankruptcy trustee. The trustee then sells it, the creditors with liens on the property are paid through escrow at the closing of the sale, and the trustee pays the remaining sale proceeds first to your “priority” debts. You end up either owing nothing on those “priority” debts after your bankruptcy is done, or at least less than you would have otherwise.

 

Keeping Non-Home Real Estate through Bankruptcy

June 10th, 2016 at 7:00 am

Whether you can keep other real estate depends first on whether it’s “exempt.”

                                       

Most people thinking about filing bankruptcy either don’t have any real estate or if they do it’s their home. But if you own real estate other than your home you’re really not that unusual. You may have property you bought as an investment or as part of operating a business. Or you may have received it in an inheritance or through divorce. You’re in financial trouble and need help, but if you go through bankruptcy you’d like to keep this property. Can you?

Real Estate with or without Equity

The first issue is whether the real estate is protected from being liquidated for the benefit of your creditors.

Outside of bankruptcy if you fall behind with any one of your general creditors it can sue you, likely get a judgment against you, put a judgment lien on all your real estate, and force its sale to pay the debt. Filing bankruptcy would stop that process at any point. But what happens next depends on 1) whether the real estate has any equity (any value beyond the amount of debt(s) secured by this real estate); 2) if it does have any equity whether that equity is “exempt” or protected; and 3) whether you file a Chapter 7 or Chapter 13 case.

1) No Equity or Very Low Equity: If the real estate has no equity, a Chapter 7 or 13 trustee will understandably not be interested in liquidating it to pay the proceeds to the creditors. Same thing if there is so little equity that the costs of sale would eat up that equity without a meaningful amount left over for creditor distribution to make the effort worthwhile.

2) Exempt Equity: Even if there is some equity, it may be “exempt”—covered by any property exemption that applies. Exemptions are categories of assets, usually up to a certain dollar limit, that are protected from creditors and from the bankruptcy trustees. Exemption amounts can vary widely from state to state. So you need to discuss this with your local experienced bankruptcy lawyer.

In addition, often there are “wild card” exemptions that can be applied to anything you own, such as to your real estate equity even if that real estate isn’t your home and you don’t need that “wild card” exemption for other assets. Also, if you don’t use your homestead exemption on your home—either because you don’t own a home or it has no equity needing protection—you may be able to apply all or part of that homestead exemption to your real estate.

3) Protecting Non-Exempt Equity through Chapter 13:  Even if there is equity in your non-home real estate that is NOT “exempt,” you can often protect that equity through Chapter 13. You do this by paying enough into through your Chapter 13 payment plan over its 3-to-5-year lifespan so that your creditors get paid enough. That often requires paying more over time than if you were not keeping and protecting the real estate. But sometimes this does NOT require you to pay any more than otherwise. Again, talk to an experienced bankruptcy lawyer to learn how this would work in your situation.

Surrendering Your Real Estate

If after all this you’re instead inclined to surrender your non-home real estate, there is more to this decision than you might think. We’ll cover this in our next blog post in a couple days.  

 

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