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Archive for the ‘homeowners’ tag

Chapter 13 with a Judgment Lien, HOA Lien, or Child/Spousal Support

December 6th, 2017 at 8:00 am

Chapter 13 can work much better than Chapter 7 if you have a judgment or HOA lien on your home, or get behind on child or spousal support.  


You may need the extra help of Chapter 13 if you have any of the following liens against your home:

  • Judgment lien
  • Homeowner association lien
  • Unpaid child or spousal support

Or you may not need that extra help. Two blog posts ago we showed scenarios where Chapter 7 “straight bankruptcy” could handle these situations well. If you’re current on your mortgage but have any of these three issues, check out that earlier blog post.

But even if you are current on your first mortgage, if you do have any of these 3 debts/liens in some circumstances Chapter 13 could definitely be better for you. Today we show you how.

Judgment Liens

When we got into judgment liens two blog posts ago, we ended by saying that having a judgment (or “judicial”) lien is not a deciding factor in choosing between Chapter 7 and 13. That’s because judgment lien “avoidance” is available under both, with the same rules for qualifying for it. (That’s in contrast to a number of legal benefits only available under Chapter 13.)

However, getting rid of (“avoiding”) a judgment lien may be procedurally easier under Chapter 13. And arguably the judgment creditor is less likely to respond and object.

To avoid a judgment lien in Chapter 7 your bankruptcy lawyer has to file a Motion for Avoidance of Lien. It’s filed at bankruptcy court along with a formal Notice of that Motion. For example, see these Local Bankruptcy Forms 717 and 717.05. Both have to be formally served on the judgment creditor. So the creditor receives these documents that no other creditor receives.

In contrast, under Chapter 13 the judgment lien avoidance language is buried within the multi-page proposed payment plan. See page 4 of the bankruptcy court’s 8-page Official Form 113 Chapter 13 Plan. All creditors receive a copy of this proposed plan. So, there’s more of a tendency for a judgment creditor to not notice the lien avoidance. And if it does notice, it’s more likely to just shrug it away if the resulting unsecured debt is being paid anything under the plan.

(Please see our earlier blog post for the rules about qualifying for judgment lien avoidance, applicable to both Chapters. Also see the applicable Section 522(f)(1)(A) of the U.S. Bankruptcy Code.)

Homeowner Association Lien

Homeowner association liens are special, and especially dangerous, for a number of reasons. In certain circumstances they can be superior to your mortgage lender’s lien. (That means it comes ahead of the mortgage itself on your home’s title.) State laws differ but generally HOAs have unusually aggressive collection powers. So you need be especially attentive if you fall behind on your HOA dues or assessments. Doing so can result in serious risks for your home, both from the HOA and your mortgage lender.                          

You can protect yourself from those risks much better in a Chapter 13 case. In a Chapter 7 case, if you’re behind on any HOA obligation you essentially have to work it out with your HOA. And you may well have to placate your mortgage lender at the same time. You don’t have much leverage with either.

In contrast, in a Chapter 13 case you and your home are protected while you catch up on your HOA arrearage. You do need to keep current on any ongoing dues and/or assessment payments. But as far as the past-due payments, you’d generally have up to 5 years to bring them current. As long as you stick to the court-approved payment plan you won’t have to worry about the HOA. Nor your lender.

Child/Spousal Support

In most circumstances, being behind on support creates a lien against your home. (This is usually the result of the legal judgment arising out of your divorce decree).

Filing a Chapter 7 case doesn’t freeze the collection actions of any support obligations. The “automatic stay” is the usual protection from creditor collections during bankruptcy. There is an exception in the “automatic stay” for the collection of support. See Section 362(b)(2) of the Bankruptcy Code.

However, filing a Chapter 13 case DOES freeze the collection of PAST-DUE support. (The collection of ongoing monthly support payments can continue, but you’d want to pay those anyway.) Because support collections can be extraordinarily aggressive, this can be a crucial benefit of Chapter 13. You DO need to fastidiously keep current on any ongoing support, and maintain your Chapter 13 commitments. But as long as you do so you’d have up to 5 years to get current on the past-due support.

 

Chapter 7 Prevents Judgment Liens on Your Home

November 13th, 2017 at 8:00 am

Filing a Chapter 7 case stops foreclosure of your home temporarily, helping you gather funds for your transition to your next housing. 


Recently we went through a list of ways Chapter 7 buys you time when dealing with debts affecting your home. Included was that filing a Chapter 7 case can “stop a lawsuit from turning into a judgment lien.” That judgment lien could turn a debt that you wouldn’t have to pay after bankruptcy into one you would. That’s certainly a result you want to avoid.

Some judgment liens against your home can be “avoided”—or undone– in bankruptcy. Then maybe you wouldn’t have to pay the underlying debt. But some judgment liens can’t be “avoided.” The debt behind such a lien would therefore have to be paid, even after filing bankruptcy. Again, that’s a result you really want to avoid.

In those situations filing a Chapter 7 case before there’s a judgment usually prevents that bad result. Let’s dig into this more to better understand it.

Lawsuits by Conventional Creditors

If you’re thinking about bankruptcy the judgments you mostly likely need to be worrying about are those by creditors. By “creditors” we mean conventional ones like those you might owe for credit cards, medical bills, a repossessed vehicle, personal loans, and such.

Lawsuits by such creditors often don’t leave you with much defense. You concede owing the money you’ve contracted to pay, haven’t paid, so usually (but not always) you have no defense. The creditor will get a judgment by default against you if you don’t respond to the lawsuit in time.

Less Conventional Creditors

But you might also be involved in other kinds of legal disputes potentially resulting in a judgment against you. That could arise from just about anything. A few examples would be:

  • a vehicle accident with a dispute about fault, damages, or insurance coverage
  • an injury to someone on your property that for some reason isn’t covered by your homeowner’s or renter’s insurance
  • a disagreement with a contractor or other service provider on repairs to your home
  • a dispute with family members about the proceeds of a deceased relative’s estate
  • a disagreement with your business’ investor, co-founder, employee, supplier, or its commercial landlord

It’s not unusual for people involved in such disputes to file bankruptcy if such litigation is not going well. They have much financially riding on wining the lawsuit. Then when it becomes clear that’s not happening they desparately need to cut their losses.

Filing Bankruptcy Prevents a Judgment against You

Whether with conventional creditor lawsuits or these other kinds of disputes, the timing of your bankruptcy filing is crucial. It has to be filed in time to prevent the lawsuit from turning into a judgment, and then into a judgment lien against your home.

So when dealing with a conventional creditor lawsuit, your bankruptcy lawyer generally needs to file your Chapter 7 case in bankruptcy court before your deadline to file the formal answer to the creditor’s complaint in the state court. (There are also likely other more expensive ways to prevent a default judgment from being entered against you.)

When dealing with ongoing litigation, talk with your lawyer about when you’d have to file bankruptcy to prevent entry of a judgment.

Judgments and Judgment Liens

State laws differ about what it takes for a creditor who gets a judgment against you to turn that into a judgment lien against your home. This may take an extra procedure. Or it may happen simultaneously with the court’s entry of the judgment. Again, talk with your lawyer. But in most situations, the judgment lien can happen very fast after the judgment, if not at the same time. So, for practical purposes, you’re going to want to file bankruptcy before the entry of the judgment.

Next: Avoidable vs. Unavoidable Judgment Liens

If you already have a judgment lien against your home, don’t despair. As we said in the first couple paragraphs, bankruptcy allows you to “avoid” some judgment liens against your home. In our next blog post we’ll distinguish between judgments that can and can’t be “avoided”—or undone—in bankruptcy.

 

Statutory Liens in Chapter 7

January 18th, 2017 at 8:00 am

Statutory liens survive bankruptcy. Chapter 7 may still be able to help in various ways and be your best solution.  

 

In our last blog post we introduced statutory liens as a less common but still potentially important kind of lien. A statutory lien on your home is one that is usually imposed on your home without court action. It’s imposed when you meet certain conditions specified in a written law—a statute. The most common examples are income tax liens, contractor and mechanic’s liens, and homeowners’ association liens.

The most important practical concern about statutory liens is that they cannot be removed from your home in bankruptcy like judgment liens often can. Nevertheless, bankruptcy can often help solve your financial problems if you have a statutory lien. Today we show how that can happen under Chapter 7 “straight bankruptcy,” tomorrow in a Chapter 13 “adjustment of debts.”

Chapter 7 Discharge of Personal Liability

Although Chapter 7 does not remove a statutory lien, it may take away your personal liability on the underlying debt. Bankruptcy may “discharge” the debt. This is an important and possibly confusing distinction.

There’s the debt—your personal liability to pay the money owed. And then there’s the lien on your home imposed because you didn’t pay the debt.

Some debts that result in statutory liens can be discharged and some cannot. It depends on the type of debt and often the circumstances of each case.

With income taxes, you can discharge the tax debt if it meets certain conditions, usually based on its age. But you can’t discharge more recent income taxes.

You can usually discharge debts underlying contractor/mechanic’s liens for work done on or materials supplied for your home. But sometimes the contractor or supplier might try to challenge the discharge based on allegation of fraud or misrepresentation.

Bankruptcy may discharge homeowners’ association fees and assessments, but they continue to be assessed as long as you own the property, even after you file your Chapter 7 case. They present special issue which we’ll address in a separate upcoming blog post.

The Benefit of Discharge

If you can discharge the debt underlying your statutory lien, that may give you major advantages.

First, if you are surrendering your home, the lien stays on the home but your debt goes away.

Let’s say you put a huge amount of money into trying to fix up a fixer-upper home. That resulted in major bills to a couple subcontractors and suppliers. The house has turned into a major liability and you’re throwing in the towel, surrendering it to your mortgage lender.  You would likely be able to discharge those debts to the subcontractors and suppliers. The contractor/mechanic’s liens would stay with the surrendered house, and be out of your life.

Second, sometimes you can keep the home and the lien goes away, eventually.

Let’s say you owe an income tax that is old enough that it qualifies for discharge. But the IRS or state has recorded a tax lien. Also assume that your home is seriously underwater—the first mortgage is lots more than the home is worth. There is effectively no equity for the tax lien to attach to. After your Chapter 7 case discharges the underlying tax debt the tax lien survives. But the IRS/state may recognize that its lien has no equity backing it up. It may do nothing until the lien expires. The home may increase in value sufficiently in the meantime to give them more leverage. They may even try to enforce their lien in spite of the tax debt being gone. So be sure to talk with your bankruptcy lawyer directly about this.  

The Big Indirect Benefit of Chapter 7

You may not be willing to give up your home to get away from the statutory lien. You may not be able to discharge the underlying debt. Or either way you may need to pay to get rid of the lien regardless. That’s where the indirect benefit of Chapter 7 comes in. Sometimes it’s worth filing a Chapter 7 case to get rid of all or most of your other debts so that afterwards you can concentrate all your financial energy on one debt. It may make sense to file bankruptcy on your other debts so that you can pay the one with the statutory lien on your home. That may be best solution for your overall situation.

 

The Option of Surrendering Your Home Later in a Chapter 13 Case

August 24th, 2016 at 7:00 am

As you decide whether to use the powerful tools of Chapter 13 to hold onto your home, it helps to know that you can later change your mind.  

 

Our last blog post was about surrendering your vehicle in a Chapter 13 “adjustment of debts” case.  One major advantage we discussed is being able to change your initial decision about keeping your vehicle if circumstances change.

This can be even more beneficial when dealing with a home because of the much greater amount of money involved. When you’re considering whether to use the tools of Chapter 13 to save your home, it is important to know what would happen if circumstances changed a couple years later and you decided to let go of the home.

Some of the Home-Saving Tools of Chapter 13

Here are just a few of the potential benefits of Chapter 13 “adjustment of debts” if your goal is to keep a home on which you’re behind:

·         You usually get the whole length of your 3-to-5-year Chapter 13 payment plan to catch up on late mortgage payments.
·         You are given the same length of time to catch up on any late property tax payments.
·         Judgment liens on the home can often be “avoided”—gotten rid of.
·         Second mortgages can sometimes be “stripped” off your home’s title.

An Example of These Tools at Work

Imagine that you and your spouse own a home currently worth $215,000. Its first mortgage balance is $225,000 and the second mortgage balance is $20,000. Their monthly payments are $1,000 and $300, respectively. Because of losing your job a year ago you’re 6 months late on both mortgages, $6,000 and $1,800 behind, respectively. Plus you haven’t paid last year’s property tax bill of $2,000.

Six months ago you and your spouse were sued by a collection company on n unpaid hospital bill. A year earlier your spouse had emergency appendix removal surgery, and there were complications, aggravating a prior condition.  The unpaid balance is for the portion not paid by insurance. You didn’t respond to the collection lawsuit, and judgment for $10,000 was entered against the two of you. You’ve heard that there is now a judgment lien in the amount of $10,000 against your home.

You also owe $50,000 in other medical bills plus credit cards, all past due. Some of these creditors have threatened to sue you.

You have two kids who attend and are very active at their local public high school. If you had to leave your home you would not be able to afford another home within the school district. Your kids would have to change schools, something you and your spouse absolutely want to prevent.

A couple months ago you finally got a new job at the local plant of a large nationwide corporation. The position looks to be reliable, although you’ve heard rumors that the plant may close in a year or two. Also, the medical insurance coverage provided is not great. Since your spouse’s health situation continues to be tenuous, the high deductibles and co-pays leave you feeling financially exposed.

Your Legal Options

You and your spouse meet with a bankruptcy lawyer to find out your legal options. The lawyer tells you that a Chapter 7 “straight bankruptcy” filing would:

·         very likely “discharge”—legally and permanently write off—the $10,000 lawsuit debt
·         remove the judgment lien from your home’s title
·         discharge the $50,000 in other medical debts and credit cards
·         not directly affect the two mortgages or the property taxes on your home

Your lawyer carefully reviews your after-Chapter 7 budget and advises you that, under present circumstances, the two of you do not have enough disposable income to catch up on your first and second mortgage and your property taxes. So if you filed a Chapter 7 case you would have to surrender your home to your mortgage lenders. You’d have to do so within a few months.

However, you would not have to pay the mortgage payments in the meantime. So you could save money for future rent after you leave. And you’d never have to catch up on either mortgages, or on the property taxes. That alone would save you $6,000, $1,800, and $2,000, respectively, a total of $9,800.

The Chapter 13 Option

Your lawyer also informs you that if instead you wanted to keep your home, you could do so through a 5-year Chapter 13 payment plan. But that assumes your present income and expenses would remain steady. But you have genuine concerns as to the reliability of your job and the ambiguities of your spouse’s health.

So your lawyer also explained that Chapter 13 gives you the additional benefit of being able to keep your home for a few years and then surrender it only if your circumstances changes—such as if your income went down or your expenses went up—or if keeping your home because less important—such as after your kids graduate from the local high school.

See our next blog post to learn how this delayed home surrender works.

 

Protect Equity in Your Home Better with Chapter 13

August 1st, 2016 at 7:00 am

If your home is exposed to your creditors and to the Chapter 7 trustee because it has too much equity, Chapter 13 can protect that equity.  

 

In our July 1 blog post we gave a list of 10 ways that a Chapter 13 “adjustment of debts” case can help you keep your home. Today we’re on the 10th one on that list. This one’s about saving your home and its equity when that equity is larger than the allowed homestead exemption.

We took a detour in our very last blog post by showing how sometimes filing the simpler Chapter 7 case can still let you keep your home in this situation. But the circumstances that will work are quite rare. So it important to understand how to protect otherwise unprotected equity through Chapter 13.

Here’s how we introduced this earlier as it pertains to Chapter 13.

10.  Protect Equity in Your Home NOT Covered by the Homestead Exemption

Having too much equity in your home is a problem if you owe a lot to creditors.  “Too much equity” means equity more than the amount the homestead exemption protects. Creditors can sue and get judgments against you, resulting in judgment liens attached to that home equity.

If you file a Chapter 7 “straight bankruptcy” case you run the risk of the bankruptcy trustee taking and selling your home to pay the unprotected portion of the proceeds to your creditors.

Under a Chapter 13 “adjustment of debts,” in contrast, you can keep and protect the home and its equity. You pay a certain amount of those debts gradually over the course of the up-to-five-year Chapter 13 case.

Here’s how this works in practice.

The Example

Assume the following facts:

  • You own a home that is worth $275,000.
  • Your mortgage loan on that home is $195,000, so you have equity of $80,000.
  • The homestead exemption available to you is $50,000. This means that you can protect that much of your home equity. (The homestead exemption amount varies greatly from state to state. But let’s assume it’s $50,000 in this example.)
  • You owe $15,000 in income taxes for last year and the year before.
  • You owe $75,000 in credit cards and personal loans, plus $25,000 in medical bills. So you have a total of $100,000 in debts other than the home mortgage.
  • During the last couple of years your income has decreased and your medical and other expenses have increased. So for the last year or so you haven’t been able to pay the minimum amounts on many of your debts as they came due. One collection company has just sued you for $10,000, and others are threatening to do so very soon.

Without Bankruptcy

Summarizing our last blog post, unless you act quickly the collection company would likely get a $10,000 judgment against you. That would likely quickly turn into a $10,000 judgment lien against your home. That creditor may be able to foreclose on that lien, forcing you to pay save your home. At best you’d have to pay off the $10,000 (plus interest) whenever you refinance or sell your home.

Some of your other creditors would very likely also sue and get their own judgment liens against your home.

Chapter 13

You and your bankruptcy lawyer would put together a Chapter 13 payment plan. That plan would be based on the principle that Chapter 13 allows you to keep your home even if its equity is not fully protected by the homestead exemption, as long as you follow certain rules. See Section 1325(a)(4) of the Bankruptcy Code.

Essentially, you must treat creditors in a Chapter 13 case at least as well as they would have been treated in a Chapter 7 case. This applies particularly to the $10,000 tax debt and to the $100,000 in other debts.

So here’s what you would provide for in your Chapter 13 payment plan:

  • Over the course of your plan you would pay off the $15,000 income tax debt. It’s not old enough to “discharge”—legally write off—under either Chapter 7 or 13. But you would not have to pay any ongoing interest or penalties under Chapter 13 (assuming you finished it successfully). And your payments would be flexible, based on what you could afford to pay.
  • You’d pay only as much of the remaining $100,000 as that would have been paid in a Chapter 7 case. Here how that’s calculated, roughly:
    • Determine, hypothetically, how much net sale proceeds would come from your home if a Chapter 7 trustee would sell it. The $275,000 sale price would be reduced by about 6%, or $16,500, for the realtor’s commission. Another $3,500 or so would be spent on title insurance, escrow fees, and any other closing costs. (This assumes no need for any repairs or other sale preparation costs.) The $275,000 sale price minus the $16,500 and $3,500 means a net sale price of $255,000.
    • Subtract the mortgage amount of $185,000 from this $255,000 net sale price results in sale proceeds of $70,000 in this hypothetical sale.
    • Subtracting the $50,000 homestead exemption from this $70,000 leaves $20,000 that you must pay to your unsecured creditors in your Chapter 13 plan.
    • $15,000 of that would go to the income taxes.
    • That leaves only $5,000 ($20,000 minus $15,000) that you need to pay to the remaining $100,000 of debt. In other words, you would have to pay 5% of those debts.
    • Your monthly plan payment would be around $400 per month, for about 60 months. Much of that would go to pay off the taxes, which you’d have to pay after a Chapter 7 case anyway.
    • At the end of your case you would have kept your home in spite of it having $30,000 in equity beyond the $50,000 homestead exemption. The unpaid $95,000 of debts would be discharged.

This is quite a good result. Throughout the Chapter 13 case you and your home would have been protected from the tax collector, the suing collection company, and all your other creditors. Then as of the end of the case you’d have paid off the income taxes, and would be (other than the mortgage) completely debt free.

 

Protect Equity in Your Home Not Covered by the Homestead Exemption

July 29th, 2016 at 7:00 am

If your home is at risk because you have more equity than the amount of the homestead exemption, Chapter 7 might still save your home.  

 

In our July 1 blog post we gave a list of 10 ways that a Chapter 13 “adjustment of debts” case can help you keep your home. Next time we’ll finish this off with the last of those 10 ways. But today we take a detour. We show how filing a Chapter 13 case, lasting 3 to 5 years, might not be necessary to save your home and its equity even if the amount of that equity is larger than what is protected by your homestead exemption. Chapter 7 may be enough.

Here’s how we introduced the Chapter 7 part of this earlier.

10.  Protect Equity in Your Home NOT Covered by the Homestead Exemption

Having too much equity in your home is a problem if you owe a lot to creditors.  “Too much equity” means equity more than the amount the homestead exemption protects. Creditors can sue and get judgments against you, resulting in judgment liens attached to that home equity.

If you file a Chapter 7 “straight bankruptcy” case you run the risk of the bankruptcy trustee taking and selling the home to pay the unprotected portion of the proceeds to your creditors. But you may still be able to keep your home.

First, you might be able to claim exemptions in addition to the homestead exemption. Second, you may be able to convince the trustee to accept a deal to let you keep the home.

Here’s how this works in practice.

The Example

Assume the following facts:

  • You own a home that is worth $250,000.
  • Your mortgage loan on that home is $180,000, so you have equity of $70,000.
  • The homestead exemption available to you is $50,000. This means that you can protect that much of your home equity. (The homestead exemption amount varies greatly from state to state. But assume it is this amount for this example.)
  • You owe $75,000 in credit cards and personal loans, plus $20,000 in medical bills, totaling $95,000.
  • During the last couple of years your income has decreased and your medical and other expenses have increased. So for the last year or so you haven’t been able to pay the minimum amounts on many of your debts as they came due. One collection company has just sued you for $7,500, and others are threatening to do so very soon.

Without Bankruptcy

Unless you have some defense to the $7,500 lawsuit, the collection company will likely get a judgment against you within a few weeks. In most states that would quickly turn into a judgment lien against your home.

That creditor may be able to foreclose on the judgment lien, forcing you to pay to not lose your home. The judgment lien encumbers your title, reducing the equity you have in the home. The underlying judgment debt continues earning interest. At best it would have to be paid off whenever you refinance or sell your home.

Your other creditors would also be motivated to sue you. That’s because even after the $7,500 judgment lien, you still have more home equity that could be attached. You and your home are sliding downhill fast.

Chapter 7

Assuming you want to keep you home and the equity you have in it, Chapter 7 provides some help. Under the right circumstances that help may be enough.

If you and your bankruptcy lawyer file it fast enough, the collection company would not get a judgment. So, no judgment lien on your home. These are good things.

And most likely that $7,500 debt would be legally written off, and usually only 3-4 months after the bankruptcy filing. Furthermore, most likely all of the $95,000 in credit card, medical, and other debts would be written off. Another good thing.

So what’s the problem? The problem is that Chapter 7 is a “liquidation.”

In most Chapter 7 cases nothing the debtor owns gets “liquidated”—taken, sold, and the proceeds paid to creditors. Nothing is taken because in most Chapter 7 cases everything that the debtor owns is “exempt.” That means it’s protected both from your creditors and from the bankruptcy trustee, who works on behalf of the creditors.

But under our facts your home is not fully exempt. The homestead exemption protects only $50,000 of the $70,000 of equity. The Chapter 7 trustee could take and sell the home, pay you your $50,000 homestead exemption, and divide the remaining proceeds of the sale among your creditors. How could you avoid this, keep your home, and write off all your debts? How could you do this without being in a Chapter 13 case for 3 to 5 years?

1) Possibly Apply Other Exemptions

In some states and under some circumstances, you may have other exemptions that you could apply to your home on top of the homestead exemption. Some states provide a relatively large floating exemption that you can add to the homestead exemptions. That may eat up enough of the remaining equity that the trustee is persuaded it’s not worth taking and selling the home.

2) Negotiate with the Chapter 7 Trustee

The trustee is not particularly interested in taking your house. He or she just wants to pay your creditors what the law provides. Under the right circumstances, deals can be struck with the trustee.

In our example, let’s assume that the trustee would agree that the home’s fair selling price would be $250,000. But after paying the mortgage lender $180,000 and $50,000 to you, the trustee wouldn’t actually have $20,000 to distribute to your creditors. There would be selling costs that would cut into that. The realtor’s commission at about 6% is $15,000. Other selling and closing costs would likely eat up all or most of the remaining $5,000.

At this point the trustee may simply agree that selling the home “would not result in a meaningful distribution to the creditors.” That is, there’s a good chance that after much effort there would be little or nothing for the creditors.

Or the trustee may push to get something out of you in return for not selling the home. The trustee may argue, and even get a realtor’s estimate, that the home could sell for $255,000 or $260,000. So the trustee may agree to let you keep the home if you agreed to pay $5,000 or $10,000. You would likely get a year or so to pay it. If you could afford the monthly payments, or had a source for that kind of money, that may be better than a much longer lasting Chapter 13 case.

 

For the sake of comparison, and in case the Chapter 7 option would simply not work, see our next blog post for how a Chapter 13 could solve this problem better.

 

Catching up on Your Home Mortgage through Chapter 13

July 6th, 2016 at 7:00 am

You have much, much more time to catch up on unpaid mortgage payments, as well as any unpaid property taxes.

 

 

Last week we wrote a blog post that listed 10 ways Chapter 13 helps you keep your home. Here’s the first of those ways it can help:

1. Gives You More Time to Catch up on Unpaid Mortgage Payments

Chapter 7 usually gives you a very limited amount of time, usually a year at the most, to catch up on your mortgage loan. In contrast Chapter 13 often gives you years to catch up. This can greatly reduce how much you have to pay each month to eventually get current. The much lower catch-up payments per month can be crucial. That’s especially true if you are many thousands of dollars behind on your mortgage(s). Having so much more time to cure the arrearage often makes the difference between losing your home and keeping it.

We recognize that this explanation might be a little dry. So today let’s see if we can bring it to life and have you can see how this Chapter 13 benefit could really help you.

An Example

Assume that your monthly mortgage payment, including the property tax “escrow” portion, is $1,200. Because of losing your job 2 years ago, you fell behind by 10 payments, or $12,000. You’ve gotten a new job but it does not pay as well as your earlier one. So cash flow is very tight.

You want to keep you home but the mortgage lender has threatened foreclosure for being so far behind. Your bankruptcy lawyer has advised you that if you filed a Chapter 7 “straight bankruptcy” case this lender would likely give you about 12 months to catch up on your missed payments. This means having to pay $1,000 per month on top of your regular $1,200 mortgage payment. Even after legally writing off your debts in a Chapter 7 bankruptcy, you could absolutely not come up with that extra $1,000. So you would not be able to satisfy your mortgage lender and would lose your home.

Chapter 13 Solution

A Chapter 13 “adjustment of debts” would likely solve this dilemma. You’d have as much as 5 years to catch up on the $12,000 back payments. This would bring that impossible extra $1,000 per month down to a much more manageable $200 or so per month.

Why is it that you have that much more time in a Chapter 13 case? It’s because your mortgage lender is stopped from starting or continuing a foreclosure throughout the case’s 3 to 5 year lifetime. A lender can ask the bankruptcy court for an exception to this protection. But if your payment plan is feasible based on the information you present through the help of your lawyer, and if you make the payments required by your plan to catch up on the mortgage, then the court will likely continue the protection of your home.

A Property Tax Twist

Let’s now also assume $200 of that monthly $1,200 payment was for property taxes. So your 10 unpaid payments result in you being $2,000 behind on property taxes.

With most mortgage contracts falling behind on property taxes is a separate breach of the contract. It gives your mortgage lender an independent reason to foreclose (beyond being behind on your mortgage payments).

There’s a sensible reason for that. Eventually the county or other property tax creditor could itself foreclose on your home. The county or property tax creditor is usually legally ahead of your mortgage holder on the home’s title. So at least in theory your mortgage lender could be foreclosed off the property as well. This could leave the lender with absolutely nothing, something it absolutely won’t let happen.

That’s one of the reasons mortgage lenders are so aggressive in insisting that you catch up on the missed mortgage payments—including the property tax portion—so quickly.

Chapter 13 to the Rescue Again

This dilemma is solved by Chapter 13 neatly as well.

When you’re behind on property taxes, the county/property tax creditor is also stopped from foreclosing the home. Your home is protected from that creditor the same as from the mortgage lender. The county/property tax creditor inability to take action against the home protects the mortgage lender as well. Now the mortgage lender no longer needs to be afraid of a foreclosure by the county/property tax creditor. So the lender no longer has this separate justification for its own foreclosure.

Your Chapter 13 payment plan just needs to detail how you are feasibly going to catch up on the property taxes. Of course the plan needs to show that along with how you’re catching up on the mortgage arrearage itself.  And then you need to actually make the payments into that plan to demonstrate that you are actually going to catch up on both sets of arrearages as laid out in your plan.

Back to the Example

So let’s go back to our hypothetical example. You’re behind 10 payments of $200 in property taxes, or $2,000.  You are behind 10 payments of $1,000 in mortgage payments, or $10,000.

Your Chapter 13 plan could state that you would be paying $50 per month towards the $2,000 property tax arrearage. And you would be paying $170 per month towards the $10,000 mortgage arrearage. Let’s assume that you and your lawyer could demonstrate that you can afford to make these payments. If everything else was in order the bankruptcy court would then presumably approve the payment plan.

You’d be well on your way to getting current on your home and saving it permanently from foreclosure.

 

Dealing with Statutory Liens on Your Home in Bankruptcy

June 6th, 2016 at 7:00 am

Bankruptcy cannot remove contractor’s liens or other statutory liens from your home, but both Chapter 7 and 13 can help you deal with them.

 

A bankruptcy “discharge” legally and permanently wipes out your personal liability for most debts.

But it doesn’t automatically remove liens from your home. Each different type of lien is dealt with differently in bankruptcy, so it can certainly be confusing. The blog posts of the past three weeks have been about these difference, regarding liens securing first and second mortgages, property taxes, income taxes and judgments.

Today we’re talking about a category that does not get much attention on bankruptcy lawyer’s websites, “statutory liens.”

What’s a “Statutory Lien”?

The Bankruptcy Code defines a statutory lien as a lien “arising solely by force of a statute.” See Section 101(53).

A “lien” is an interest in property—in our situation, an interest in your home—that secures payment of a debt. (Section 101(37).) It’s what turns a debt that is not secured by anything you own into a debt that is secured by your property—your home.

A statute is a written law based by a legislative body—mostly federal or state.

Statutory liens exclude “judicial liens,” which arise out of a lawsuit and its judgment, commonly called judgment liens. See our two last blog posts about them.

Statutory liens are not generally created voluntarily, by agreement, like a home mortgage or vehicle lien when you finance its purchase.

So, essentially statutory liens are created automatically by operation of a statute.

Some Common Statutory Liens

Most statutory liens are created by state law, so they vary from state to state. The main ones that apply to homes are:

  • Mechanic’s lien. This is a broad term for liens on your home for contractors, laborers, or suppliers if you don’t pay for the construction or materials used to improve the home.
  • Income Tax lien. These are liens imposed by the IRS under federal law and by state and local taxing authorities under state law for unpaid tax obligations. These come up so often and have so many special twists that we dedicated four recent blog posts to them (from May 23 through 30).
  • Homeowners’ Association lien. If you don’t pay the fees or any special assessments owed to your homeowners’ association in most cases a lien will usually automatically attach to your property. In certain states homeowners’ association liens are given “super lien” status, meaning that they get paid ahead of the mortgage and certain other liens. 

No “Avoiding” of Statutory Liens

Both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” allow you under certain circumstances to “avoid” judgment liens, to release them from your home’s title. See Section 522(f) of the Bankruptcy Code. As a result the judgment debt that was secured by your home through the judgment lien again becomes an unsecured debt. Then usually you can discharge the underlying debt, owe nothing, and have no lien on your home.

You can NOT do this with statutory liens. The lien survives your bankruptcy case, and remains on your home.

How Chapter 7 Can Help

“Straight bankruptcy” can help you deal with statutory liens in only limited ways. Mostly, it can discharge other debts so that you can start focusing your attention and as needed your financial resources on paying off the statutory lien.

So, for example, if you owe a home repair contractor on a roof job and you’re in a dispute with him or her about the quality of the job or other terms of the contract, getting rid of most of your other debts lets you concentrate your time and money on this. You’ll better be able to come to a fair settlement and then pay off any remaining obligation as quickly as possible.

How Chapter 13 Can Help

The Chapter 13 “adjustment of debts” version of bankruptcy gives you more leverage. You generally can put together a payment plan to address all of your debts, one which could highly prioritize the one secured by the statutory lien. But if you had other even more urgent obligations (such as back payments on a home mortgage, vehicle payments, or child support) you would usually have much more flexibility in dealing with the debt with the statutory lien than under Chapter 7.

In the example of the debt owed to the roof contractor, your court-approved Chapter 13 plan could likely front-end payments to the contractor to pay off that debt as quickly as possible. Or under certain circumstances—such as if there was plenty of equity in your home to cover the contractor’s lien—you could drag that perhaps as long as 5 years so that you could pay other urgent debts earlier.

In general determining how much you can manipulate payment of statutory liens in Chapter 13 bankruptcy gets quite complex and depends on many factors. Be sure to discuss your options fully with a knowledgeable bankruptcy attorney.

 

The Homestead Exemption Cap

March 4th, 2016 at 8:00 am

Bankruptcy law sets a maximum dollar amount of protection for your recently-bought home, but this really applies only to certain states.

 

Our last blog post a couple days ago was about protecting retirement funds in bankruptcy. Today’s is about protecting your home, specifically if you bought your home within the last few years.  

Property Exemption Laws

When you file a bankruptcy case, your assets are protected through a set of legal exemptions–a list of categories of assets usually with maximum dollar limits, which you can keep out of the reach of your creditors.

Each state has adopted a set of property exemptions. Federal bankruptcy law also contains its own set of exemptions. When filing bankruptcy in ANY state you may use the state exemptions, plus in some states you also have the option of using the federal set of exemptions instead. This blog post applies only if you are using your state’s exemptions, and in particular applies to your state’s homestead exemption.

The Homestead Exemption

Almost every state has a homestead exemption, protecting their residents’ homes and/or home equity. The homestead exemptions vary widely state to state in how much home value or equity they protect.

At the low end, the Kentucky and Tennessee homestead exemptions protect only $5,000 in value or equity for an individual homeowner.

At the opposite end, the Montana exemption is $250,000, Minnesota’s is $390,000, Rhode Island’s and Massachusetts’s are $500,000, and Nevada’s is $550,000.

Also, the following states have homestead exemptions with no dollar limit (although some have acreage or other limitations): Texas, Oklahoma, Arkansas (if married or head of household), Kansas, Iowa, South Dakota, and Florida.

The Federal Cap on the State Homestead Exemption

As we said at the beginning, under certain circumstances federal bankruptcy law caps the dollar amount of state homestead exemption if you bought the home recently.

The purpose of this cap is to prevent people from moving from a small homestead exemption state and buying a home in a state with a very large or unlimited state homestead exemption in order to shield their assets from their creditors. It also may prevent some long-time residents of these same large exemption states from converting other assets into expensive homes, again shielding those assets from their creditors leading up to filing bankruptcy.

This federal cap on homestead exemptions is $155,675 (increasing to $160,375 on April 1, 2016).

Applicable to High and Unlimited Homestead Exemption States

The relatively large dollar amount of this cap makes it irrelevant to the residents of many states.

This cap will only affect you if your state’s homestead exemption is larger than this cap. That’s true only for the 12 states mentioned above which have either large homestead exemptions (Montana, Minnesota, Rhode Island, Massachusetts and Nevada) or unlimited homestead exemptions (Texas, Oklahoma, Arkansas, Kansas, Iowa, South Dakota, and Florida).

Only Applicable to Relatively Recent Home Purchases

This homestead exemption cap doesn’t kick in unless you bought the home at issue within the 3-years-and-4-months period before filing bankruptcy (within 1,215 days before, to be precise).

And even if you did, the cap doesn’t apply if the equity in the home you bought came from the sale proceeds of another “principal residence” within the same state, which had been purchased before that 3-years-and-4-month period.

The point of these conditions is to cap the large homestead exemptions only for relatively short term residents, or those sinking other money into expensive homes. It’s not designed to prevent those who bought their home more than 1,215 days earlier from using the full state homestead exemption. And it’s not designed for those who bought within that time period but did so by using equity from a prior home bought in that same state before that time period.

 

Upcoming Increase in Federal Property Exemptions

February 26th, 2016 at 8:00 am

The federal exemptions are nudging up about 3%. But that only matters if you are allowed to use them, and are higher than your state ones.

 

States with Access to the Federal Exemptions

This blog post is not for everyone. It’s only for the residents of 19 states—Alaska, Arkansas, Connecticut, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin, and the District of Columbia. It’s also for anybody who’s moved within the last 2 years from any of these places.

What makes these residents special is that they have the option of using a set of federal property exemptions to protect their assets when filing bankruptcy (instead of their state exemptions). And those federal exemptions are nudging higher as of April 1, 2016.

What Makes These States So Special?

If bankruptcy is a matter of federal law under the U.S. Constitution, why can’t the residents of the rest of the states use the federal property exemptions? Why are they stuck with their state’s set of property exemptions, which in some cases are much lower than the federal exemptions?

The reason is that the residents of those other states are the victims of a compromise made in bankruptcy law between federal power and states’ rights. This compromise allows each state to dictate that their residents must use that state’s set of property exemptions when filing bankruptcy, and can’t use the federal ones. The 31 states not listed above have so dictated.

Does It Really Matter?

We said that state exemptions can be much lower than the federal ones. In situations where that’s true, it can hurt a lot not to be able to use the federal exemptions.

Take the homestead exemption (in Section 522(d)(1) of the Bankruptcy Code). The federal homestead exemption is $22,975 before April 1, 2016, and is $23,675 on and after that day. (It’s double those amount for a married couple jointly owning a home.)

If you individually owe a home worth $200,000 with a mortgage of $180,000, your equity of $20,000 would be fully protected by the federal homestead exemption. That’s because the $22,975/$23,675 exemption amount is larger than and covers the entire amount of the $20,000 equity. But that would only work this way if you live in one of the above 19 states in which debtors are able to use the federal exemptions.

Take the state of Kentucky. The state homestead exemption is much lower than the federal one. It’s only $5,000 for an individual (double that for a couple). That would be way too low to protect $20,000 in home equity.

But because Kentucky allows its residents to use EITHER the state OR federal sets of exemptions, you could choose the federal exemptions and fully protect the $20,000 in equity.

However, if you were instead a resident of the state next door to the east, Virginia, the situation would be completely different. Virginia also has a $5,000 homestead exemption (double that for a couple). But it has chosen NOT to allow its residents to use the federal set of exemptions. So the higher federal homestead exemption is not available.

When It Doesn’t Matter

There are quite a few states which, like Virginia, do not allow the use of the federal exemptions but have higher state exemption amounts, at least in the particular exemptions that count in a particular situation.

Utah, for example, requires its residents to use its state exemptions, and not the federal ones. But its homestead exemption is $30,000 (double that for a married couple). So $20,000 in home equity would be fully covered.

West Virginia, with $25,000 for an individual’s homestead exemption, and Colorado, with $60,000, also require use of its state exemptions. But their homestead exemptions are higher than the federal one so in that respect it doesn’t hurt.

Can’t Pick and Choose Among Different Federal and State Exemptions

We’ve just been focusing here on the homestead exemption, and comparing the federal and state amounts. But you may not even own a home and of course you own other things other than a home. So there are within the state and federal exemptions different exemptions to cover different types of assets. To illustrate, here’s a list of many of the federal exemptions (with their before-April 1, 2016 amounts and their starting-April 1 amounts):

  • homestead, increasing from $22,975 to $23,675
  • motor vehicle, from $3,675 to $3,775
  • household goods and clothing, from $575 to $600 “in  any particular item,” from $12,250 to $12,625 “in aggregate value”
  • jewelry, from $1,550 to $1,600
  • “any property,” from $1,225 to $1,250, plus from $11,500 to $11,850 to the extent of any unused homestead exemption
  • tools of trade, from $2,300 to $2,375
  • personal bodily injury claim, from $22,975 to $23,675

If you are filing bankruptcy in a state where you have a choice between that state’s exemptions and this federal set, you have to look at all your assets and see which set of exemptions covers all your assets better.

 

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