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Protecting Excess Home Equity through Chapter 13

July 15th, 2019 at 7:00 am

Chapter 13 can be a highly advantageous way to protect your home equity if that equity is larger than your homestead exemption amount.  

 

The Problem of Too Much Home Equity

Our last two blog posts were about protecting the equity in your home through the homestead exemption. Two weeks ago was about protecting the current equity; last week about protecting future equity. The blog post about protecting current equity assumed that the amount of equity in your home is no more than the amount of your applicable homestead exemption. For example, if your home is worth $300,000, your mortgage is $270,000, that gives you $30,000 of equity. If your homestead exemption is $30,000 or more that equity would be protected in a Chapter 7 bankruptcy case.

But what if you have more equity in your home than the applicable homestead exemption amount? In the above example, what if you had $30,000 in equity but your homestead exemption was only $25,000? Your home could conceivably be sold by the bankruptcy trustee if you filed a Chapter 7 case. Your creditors would receive the proceeds of the sale beyond the homestead exemption amount. Presumably you need relief from your creditors. But clearly don’t want to give up your home and its equity in return for being free of your debts.

What about getting that equity out of the home through refinancing the mortgage? Well, what if you don’t qualify to refinance your home? You may not have enough of an equity cushion. Or your credit may be too damaged. Or maybe you’d qualify for a refinance but it still wouldn’t get you out of debt. That would not be a good option. So what do you do instead to protect your home and that equity?

The Chapter 13 Way to Protect Extra Equity

If your home equity is larger your applicable homestead exemption, then filing a Chapter 13 case can usually protect it.  Chapter 13 “adjustment of debts” protects excessive equity better than Chapter 7. Essentially Chapter 13 gives you time to comfortably pay your general creditors for being able to keep your home.

Why do you have to pay your creditors to be able to keep your home? Remember, if your home equity is larger than your homestead exemption, the alternative is having a Chapter 7 trustee sell the house to get the equity out of it to pay to your creditors. Chapter 13 is often a tremendously better alternative, as we’ll explain here. Also, see Section 1325(a)(4) of the Bankruptcy Code.

Gives You Time to Comfortably Pay

Consider the example above about having $5,000 of equity more that the amount protected by the homestead exemption. Chapter 13 essentially would give you 3 to 5 years to pay that $5,000. This would be done as part of a monthly payment in your Chapter 13 payment plan. $5,000 spread out over 3 years is about $139 per month. Spread out over 5 years is only about $83 per month. Assuming this was part of a monthly payment that reasonably fit into your budget, wouldn’t it be worth paying that to your general creditors if it meant keeping your home and all of its equity?

It’s likely more complicated than this in your personal situation. You may be behind on your mortgage payments or owe income taxes, or countless other normal complications. But at the heart of it Chapter 13 can protect your equity in a flexible way. It’s often the most practical, financially most feasible way.

Chapter 13 is Flexible

To demonstrate Chapter 13’s flexibility, let’s add one of the complications we just mentioned: being behind on your mortgage. Chapter 13 usually allows you to catch up on your mortgage first. So, for example, most of your monthly plan payment could go to there during the first part of your case. Then after that’s caught up, most of the payment could go to cover the excess home equity. The creditors would just have to wait.

Protecting Your Excess Equity “For Free”

Sometimes you don’t have to pay your general creditors anything at all to protect the equity beyond your homestead exemption.  Consider the example we’ve been using with $5,000 of excess equity. Now, using another complication mentioned above, assume you owe $5,000 in recent income taxes. That tax is a nondischargeable” debt, one that is not written off in any kind of bankruptcy case. It’s a “priority” debt, one that you’d have to pay in full during the course of a Chapter 13 case. If you pay all you can afford to pay into your Chapter 13 plan, and it’s just enough to pay your $5,000 priority tax debt, nothing gets paid to your general creditors. You pay the priority tax debt in full before you have to pay a dime to your general creditors. If there is nothing left for the general creditors after paying all that you can afford to pay during your required length of your payment plan, you likely won’t need to pay those debts at all. 

This means that you saved the equity in your home by paying the $5,000 into your plan to pay off the tax debt. That’s a debt you’d have to pay anyway. You’d have to pay it if you didn’t file any kind of bankruptcy case. You’d have to pay it after completing a Chapter 7 case because it does not get discharged. And it also has to be paid in a Chapter 13 case. But in a Chapter 13 case you fulfill your obligation to pay the $5,000 (in our example) to protect your home equity (the amount in excess of the homestead exemption), whether it goes to the pay the tax or goes to pay the general creditors. Under the right facts you save your home and pay nothing to your general creditors.

Conclusion

Chapter 13 can be an extremely favorable way to keep a home with more equity than the homestead exemption amount. At worst, you’d pay the amount of equity in excess of the exemption. But you would do so based on a reasonable budget, with significant flexibility about the timing of payment. At best, you wouldn’t pay anything to your general creditors, when the money instead goes to a debt you must pay anyway, like the recent income tax debt in the example.

These situations depend on the unique circumstances of your finances.  See a highly competent bankruptcy lawyer to get thorough advice about how your circumstances would apply under Chapter 13.

 

Protecting Future Home Equity through Chapter 7

July 8th, 2019 at 7:00 am

Protecting present home equity is a sensible focus when considering bankruptcy. Protecting future potential equity can be even more important. 

 

Our last blog posts discussed how to protect the equity currently in your home through the homestead exemption. We discussed property exemptions in bankruptcy in general, and federal and state homestead exemptions in particular. Overall we showed how your homestead exemption can preserve the equity you presently have through a Chapter 7 case.

We mentioned that you can also protect your future home equity through these same tools, but we didn’t describe how. This is worth more attention.

Future Home Equity

Chapter 7 bankruptcy fixates on the present. It deals with debts you have at the moment your lawyer files the Chapter 7 case at the bankruptcy court. In particular, Chapter 7 usually is not interested in new assets you acquire after the date of filing, For example, the money you earn when you go to work the day after filing is outside bankruptcy jurisdiction. Again, for most purposes bankruptcy looks only at what you own on the date of filing.

This is also true as far as your home is concerned. Chapter 7 fixates on how much equity you have in the home at the moment of filing. That is, we look at what the home is worth then, and how much debt there is against it. (The debt includes all valid security interests against the home: mortgages, property taxes, income tax liens, etc.)

But those factors that determine your home equity—the home’s value, and the amount(s) you owe against it—change. They change all the time. The home’s value goes up and down (but mostly up) with the market. The debt on the security interests change every day with interest and every time you make a payment. Generally after filing bankruptcy and getting your financial house in order, you’d make progress paying down home debts. With the home value usually going up and debt against it going down in the years after filing bankruptcy, most people build equity in their home.  

Future Home Equity Greater than Present Homestead Exemption Amount

There’s a good chance that at some point—if you keep your home long enough—the amount of your home’s equity will exceed the applicable homestead exemption.

Take this example. A home is worth $300,000, the mortgage is $260,000, with a remaining equity being the difference, $40,000. Assume the applicable homestead exemption is $50,000. That covers the $40,000 in equity.

Now let’s say that in 3 years the home value increases to $335,000, and the mortgage is paid down to $250,000. The amount of equity at that point is the difference: $85,000. That’s $35,000 more than the applicable $50,000 homestead exemption (assuming that hasn’t been increased in the meantime).

If this homeowner filed a Chapter 7 bankruptcy now, the $40,000 in present equity is protected by the homestead exemption. But what if the homeowner doesn’t file bankruptcy now but waits 3 years to do so? The home equity will at that point have increased well beyond the amount the homestead exemption would protect.

Future Equity is Even More Important than Protecting Your Home Now

Sure, when you’re considering bankruptcy, your focus is on the present. As far as protecting your home equity, mostly all you want to hear from your bankruptcy lawyer is that the equity is covered now. Is the home equity going to be protected?

But as you think about whether you should file bankruptcy, Chapter 7 or Chapter 13, and when to do so, potential future equity is arguably an even more important consideration.

Most directly, there are simply likely more dollars at stake in future equity vs. present equity. In the above example, the person was protecting $35,000 in home equity when filing bankruptcy now. But by the same bankruptcy filing he or she was protecting $85,000 in future equity. Isn’t protecting that future $85,000 at least as important in protecting the present $35,000 in value?  

Conclusion

When you consider whether to file bankruptcy, you’re thinking about both the present and the future. You want relief and a fresh start now so that you can have a more financially peaceful and prosperous future. When thinking about your home, Chapter 7 allows you to preserve your present modest equity now so that it’ll have the opportunity to build it into much larger future equity.

Exploring Federal and Texas Bankruptcy Exemptions

March 15th, 2019 at 4:27 pm

TX bankruptcy attorneyFor some people, filing for bankruptcy can be a scary thing. In the beginning, you may not know what the future has in store for you and you may wonder which of your possessions you are allowed to keep and which possessions you must give up. Exemptions are an important part of the bankruptcy process. In a bankruptcy case, exemptions are the possessions that you get to keep after you have liquidated your luxury assets to help pay back a portion of your debts. Each state has its own guidelines for what property is exempt during a bankruptcy. In 17 states, including the state of Texas, you are able to choose between state exemption guidelines or federal guidelines, but you must choose one or the other. It is important to understand bankruptcy exemptions because they do differ.

Federal Exemptions

The exemptions that are listed here are the exemption amounts for each individual bankruptcy filer. That means if both you and your spouse are filing for bankruptcy, you can double the amounts. Here is a list of the current federal exemption amounts for each individual filer:

  • Homestead Exemption: Up to $22,675 in equity for a primary residence;
  • Motor Vehicle: $3,775 for one vehicle per filer;
  • Jewelry: Up to $1,600 in jewelry, not including wedding rings;
  • Household Goods: A total of $12,625, but with no item valued more than $600 can be exempted. Household goods include clothing, furniture, appliances, linens, kitchenware, and personal effects;
  • Tools of the Trade: Up to $2,375 for items you use for work;
  • Domestic Maintenance: An amount reasonably necessary for support
  • Social Security, Unemployment, Veteran’s Benefits, Public Assistance, Disability: Exempt without regard to the value;
  • Personal Injury Awards: Up to $23,675, not including pain and suffering or actual pecuniary damages or loss of future earning capacity;
  • Retirement Accounts: Tax exempt retirement accounts are exempt, but IRAs and Roth IRAs are capped at $1,283,025; and
  • Wildcard Exemption: You may also exempt up to $1,250 of any property, plus $11,850 of any unused homestead exemption.

Texas Exemptions

The state exemptions in Texas are slightly different than the federal exemptions. Here is a list of exemptions you receive if you choose to follow state bankruptcy exemptions, rather than federal exemptions:

  • Homestead Exemption: You are permitted to exempt equity in your primary residence as long as that residence does not span more than 10 acres in a city, town or village, or 100 acres elsewhere;
  • Personal Property: If you are single, you can exempt personal property up to $50,000 in value. If you have a spouse, you are permitted to exempt up to $100,000 in personal property;
  • Motor Vehicle: You are allowed to exempt one motor vehicle per household member who has a driver’s license;
  • Pensions and Retirement Accounts: Most tax-exempt pensions and retirement accounts are exempt under Texas law. These can include government employee pensions and retirement accounts, IRAs and Roth IRAs, teacher’s retirement and pension benefits and law enforcement pension and retirement benefits.

Contact a New Braunfels, TX Bankruptcy Attorney Today

Many people who decide to file for bankruptcy do so because it is their last option for debt relief. While filing for bankruptcy can cause you to have to liquidate some of your non-necessary assets, you will not lose everything. At the Law Offices of Chance M. McGhee, we understand that filing for bankruptcy can be a hard decision, but we can help you throughout the entire process. Our skilled Boerne bankruptcy lawyers can help you understand the difference between federal and Texas state exemptions and choose the exemptions that would best benefit you. Call our office today at 210-342-3400 to schedule a free consultation.

 

Sources:

https://www.law.cornell.edu/uscode/text/11/522

https://statutes.capitol.texas.gov/Docs/PR/pdf/PR.41.pdf

https://statutes.capitol.texas.gov/Docs/PR/pdf/PR.42.pdf

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.

 

Chapter 7 Buys Time and Money to Move from a Foreclosing Home

November 10th, 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. 

 

Last week we went through a list of ways Chapter 7 buys you time when dealing with a home foreclosure. Included was that filing a Chapter 7 case “can give you time to surrender your home while saving up for moving expenses.”  This deserves a more thorough explanation.

 Stopping a Foreclosure

The filing of a bankruptcy case, including a Chapter 7 “straight bankruptcy” one, stops a pending home foreclosure sale. This happens through the “automatic stay,” the law which freezes most creditor collection actions the moment you file bankruptcy. In particular, the automatic stay statute says that a bankruptcy filing stops “any act to… enforce any lien” against your property. (See Section 523(a)(4) and (5) of the U.S. Bankruptcy Code.)  A mortgage lender’s foreclosure of your home is an act to enforce a lien. So your bankruptcy filing stops it from happening.

It’s crucial to time your bankruptcy filing strategically. Otherwise you will file it too soon or too late. You want to buy as much time as possible. And you don’t want to mess up and fail to stop the foreclosure. 

You absolutely need to talk with your local bankruptcy lawyer to determine the best timing. This decision requires a thorough understanding of BOTH federal bankruptcy law and state property and foreclosure law.  While bankruptcy law provides the ins and outs of the “automatic stay,” state law lays out crucial considerations like exactly when a foreclosure takes away your rights to your home. For example, filing too late would leave you with no rights to your home that your bankruptcy filing could protect.

After Your Bankruptcy Stops the Foreclosure Sale

What happens after you file the Chapter 7 case? In particular how much time will you have before you have to move away from your home?

A consumer Chapter 7 case usually takes about 3 or 4 months. The automatic stay is in effect that whole length of time, UNLESS the mortgage lender asks for “relief from stay.”

So if your lender does not file a motion asking for that “relief,” filing Chapter 7 can buy you 3 or 4 months. It could be even longer. That’s because there is usually some delay between when the foreclosure process is restarted and the new foreclosure takes place.

If your lender does file a motion for “relief from stay,” your Chapter 7 filing may only buy you an extra month or so. That’s because if you’re surrendering the home you’re presumably not making the mortgage payments. So you don’t have much defense against the lender’s motion, and it would almost certainly be granted.

However, if your mortgage lender does ask for “relief” to resume foreclosure, that often presents an opportunity for negotiation. You have something to offer in the way of surrendering the home peaceably at an appropriate time. The lender may well save attorney fees and foreclosure costs. Under some circumstances it may even pay you some money to move and sign the home to the lender.

Gathering Funds for Your Move

Usually the main benefit to delaying a foreclosure once you’ve decided to give up the home is for time to gather moving costs. By moving costs we mean everything needed for your transition, including rent, security deposit, moving truck rental—everything. Every month you are not paying your mortgage should give you the opportunity to save a chunk of money. In some states money you save for this purpose even before filing your Chapter 7 case can be protected under the homestead or some other exemption. Money saved after filing is virtually never a problem.

Conclusion

Filing Chapter 7 bankruptcy stops a foreclosure, although you have to time it right through the help of your lawyer. The point of buying time is to give you more time to cover your costs in transitioning to new housing. The amount of time you can buy depends in part on the aggressiveness of your mortgage lender. The extra time will usually be between one and four more months. You can often negotiate your leaving to make it less disruptive for you.

 

Buy Time for Your Home with Chapter 7

October 13th, 2017 at 7:00 am

Filing a Chapter 7 bankruptcy case stops a foreclosure and buys some time to either arrange to keep the home or move in a peaceful way.  

 

Chapter 7 “Straight Bankruptcy” vs. Chapter 13 “Adjustment of Debts”

Speaking very generally, Chapter 7 buys you some time with your home while Chapter 13 buys you much more time.

So the questions are: how much more time to do you need and will Chapter 7 buy you enough?

How Chapter 7 Helps

As to your home, your filing of a Chapter 7 case:

1. Stops a pending foreclosure sale of your home, at least temporarily, through the “automatic stay.” Your bankruptcy filing stops “any act to… enforce any lien against property of the estate.” “Property of the estate” includes essentially everything you own at the time of filing, including your home. See Section 362(a)(4) and (5) and of the U.S. Bankruptcy Code. How much time Chapter 7 buys depends on your situation, as we’ll get into a bit below.

2. It also at least temporarily stops not just foreclosures by your mortgage company, but also by other lienholders. This includes foreclosures for unpaid property taxes, homeowner assessments, or judgment lien creditors. In the case of judgment liens, Chapter 7 may also get rid of them, and the debt underlying it.

3. Prevents, at least for a few months, most kinds of new liens from attaching to your home. So an income tax debt does not turn into a tax lien. A pending lawsuit does not turn into a judgment lien against your home. This is particularly helpful if that tax is old enough to qualify for discharge (legal write-off). And most likely the debt underlying the lawsuit can be discharged. In these situations Chapter 7 protects your home from those debts and anticipated liens.  

Situations When Chapter 7 May Be Enough

Here are some of the main situations when it’s worth filing a Chapter 7 case for your home.

A Scheduled Mortgage Foreclosure

You already have a scheduled foreclosure date, and it’s coming very soon. Your Chapter 7 filing will very likely cancel it. The “automatic stay” protection lasts throughout the 3-4 months that your case is open. So your mortgage lender can restart the foreclosure after that. But the delay may be much shorter if your lender asks the bankruptcy court for permission to restart the foreclosure while your Chapter 7 case is still open. So it depends on the aggressiveness of your lender. Filing under Chapter 7 may buy you an extra few weeks or an extra few months.

  • If you are selling your home and are close to selling it, those extra weeks or months may be all you need to finish the sale and pay off the mortgage.  This only works if the net sale proceeds—your money from the sale—are fully covered by your homestead exemption. Then you keep those proceeds. Otherwise the Chapter 7 trustee would have a right to any proceeds in excess of the homestead exemption.
  • You’re surrendering your home but need to buy more time to gather funds for moving and rental expenses. Your lender might possibly even pay you to move faster (to save itself foreclosure expenses).

 An Anticipated Mortgage Foreclosure

A foreclosure sale date has not yet been scheduled but you think it’ll happen soon. Your Chapter 7 filing will postpone it. As stated above, your mortgage lender can ask the court for permission to proceed with the foreclosure. So how much time your bankruptcy filing buys depends on your lender.

A Debt Expected to Turn Into a Lien

You’re not concerned about a mortgage foreclosure, but rather about a debt turning into a lien on your home. As discussed above, if this is a debt that would be discharged in bankruptcy, Chapter 7 can be hugely helpful. Your Chapter 7 filing stops the placing of the lien, discharges the debt forever, and thus avoids the lien forever.

Even if the underlying debt cannot be discharged—such as a relatively recent income tax debt—your Chapter 7 filing stops the lien at least temporarily. Your bankruptcy case then discharges most or all of your other debts. At that point you can focus your financial efforts on paying the tax. Entering into a formal payment plan may prevent a tax lien from being recorded.

Summary

A Chapter 7 case filed through your bankruptcy lawyer may give you less power than a Chapter 13. It usually only buys you a relatively short amount of time. But the limited power and time it does give may be enough in your particular situation. And it may enable you to discharge a debt, preventing that debt from resulting in a lien on your home.

 

Debt Secured by Judgment Lien Can Often Be Turned into an Unsecured Debt

August 15th, 2016 at 7:00 am

A judgment lien turns an unsecured debt into one secured by a lien on your home. Bankruptcy can undo that, and write off the debt.

 

Very Different Treatment of Unsecured Debts and Secured Debts

A couple blog posts ago we discussed how differently unsecured and secured debts are treated in bankruptcy.

Most debts that do not have a “lien” on any of your property or possessions are legally, permanently written off in bankruptcy. However with secured debts the lien that the creditor has in your asset is NOT USUALLY written off or affected in any way in bankruptcy. That means the creditor can take collection action against your asset through that lien after the bankruptcy case is completed. As a result usually you have to pay the debt.

But in certain situations bankruptcy CAN turn a secured debt back into an unsecured debt. We focus on another one of those situations today.

Erase a Lien in Bankruptcy is Extraordinary

It’s important to realize how extraordinary it is to be able to turn a secured debt into an unsecured one. It’s unusual even in bankruptcy. Most liens cannot be erased. Instead, after bankruptcy they often have to be paid either in full or in part.

So it’s quite special to be able to erase a judgment lien, write off the debt, and not pay anything.

Erasing a Judgment Lien

But this can only be done under certain circumstances. The good news is that for practical reason these circumstances apply to a large percentage of people filing bankruptcy who have a judgment lien on their home.

In order to get rid of a judgment lien, the liens must “impair your homestead exemption.” (See Section 522(f) of the Bankruptcy Code).

An Example of “Impairing Your Homestead Exemption”  

Here are the conditions that have to be met, applied to a hypothetical example.

  1. The judgment lien that is being gotten rid of must be attached to your “homestead.” That is legally defined differently in different states but generally means the place where you live. So assume you live in a home titled in your name, with a mortgage—that’s your homestead. In our example it’s worth $200,000 with a $180,000 mortgage, and so has equity of $20,000.
  2. The equity in your homestead must be protected by a “homestead exemption.” State and federal laws provide different amounts of protection for your home. It’s usually described as a certain maximum dollar amount of equity. In our example assume a homestead exemption of $30,000. Since that’s more than your $20,000 in equity, all of your equity is protected by the homestead exemption.
  3. The lien being removed must be a “judicial lien.” That’s defined in the Bankruptcy Code as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” And that judgment lien can’t be based on child or spousal support, or a mortgage foreclosure. In our example you’ve been sued by a collection company for an unpaid $15,000 medical bill. You knew you owed the money so you didn’t respond to the lawsuit. So a judgment was entered against you, which turned into a judgment lien against your home. This is the kind of “judicial lien” that could potentially be removed in bankruptcy.
  4. That judgment lien must “impair the homestead exemption” to be able to get rid of it through bankruptcy. This generally means that the judgment lien attaches to equity that is protected by the applicable homestead exemption. In our example the $15,000 judgment lien attaches to the $20,000 in equity in the home.  ALL of that $15,000 of equity is included in the equity that is protected by the homestead exemption. So, the ENTIRE $15,000 judgment lien would be removed by filing bankruptcy. The underlying medical debt would be written off. You would owe nothing and the judgment lien would be gone.

 

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.

 

Ten Ways to Keep Your Home through Chapter 13

July 1st, 2016 at 7:00 am

These 10 tools, especially used in combination, can defeat your mortgage debt and other home-based challenges.

   

A few blog posts ago we said that while Chapter 7 “straight bankruptcy” strengthens your hand with your secured debts, Chapter 13 can be much stronger. One way that Chapter 13 is stronger is in enabling you to keep things you own which have a secured creditor’s lien on them. Indeed, that’s probably the most common reason for filing a Chapter 13 case—to keep your home, vehicle, and/or other possessions at risk of repossession.

Because Chapter 13 can help you in so many ways keep assets with liens on them, we’ll focus today on just one of those assets, your home. Here are 10 ways that this tool helps you stay in your home.

1. 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. Chapter 13 often gives you years, which greatly reduces how much you have to pay each month to eventually get current. 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.

2. Stripping Second or Third Mortgage

Under Chapter 7 you simply have to pay any second (and third) mortgages on your home or lose the home. Chapter 13 gives you the possibility of “stripping” a second or third mortgage lien off your home title, potentially saving you hundreds of dollars monthly, and thousands or even tens of thousands of dollars in the long run. To do so the home value must be no more than the total of the liens legally superior to, or ahead on the title to, the junior mortgage you want to “strip.” In other words, there can be no home equity being encumbered by the mortgage at issue because that equity is fully absorbed by the other earlier liens. “Stripping” a mortgage can save you many hundreds of dollars every month and many thousands of dollars during the life of your home ownership.

3. Much Greater Flexibility in Selling Home

Chapter 7 gives you at most only about three or four months while your mortgage holder can’t foreclose and your other creditors can’t take action against you or your home. In contrast, under Chapter 13 you could potentially be protected for years. You may need to move and sell your home, but not until you are ready to do so. You may need to wait until a kid finishes high school or you reach an anticipated retirement date. Chapter 13 may allow you to delay selling and curing part of your mortgage arrearage until then, so that you can live in your home in the meantime.

4. Get Current on Past Due Property Taxes

Filing a Chapter 7 case doesn’t protect you from property tax foreclosure—beyond the three, four months that the case lasts. Chapter 13 protects you and your home while you gradually catch up on those taxes, in a court-approved plan that also incorporates your mortgage(s) and all other debts.

5. Protection from Both Previously Recorded and Future Income Tax Liens

Chapter 7 usually does nothing to address tax liens that have already been recorded on the home, or to stop future tax liens on income taxes that you continue to owe after the bankruptcy case is completed. In contrast Chapter 13 provides an efficient and effective procedure for valuing, paying off, and getting the release of tax liens. And the IRS/state cannot record a tax lien on income taxes while the Chapter 13 case is active.

6. The Chapter 13 “Super-Discharge”

You can “discharge” (permanently write off) in a Chapter 13 case obligations arising out of a divorce decree dealing with the division of property and the division of debt (but NOT the provisions about child/spousal support). You cannot discharge these non-support divorce debts under Chapter 7.

So if you owe a significant amount of this kind of debt, and there isn’t already a lien on your home securing it, Chapter 13 could stop a lien from being imposed. The debt would be discharged at the end of your Chapter 13 case as a “general unsecured” debt.

7. Debts Which Cannot Be Discharged Such as Income Taxes & Back Child/Spousal Support

If you owe any of those special debts which cannot be discharged in bankruptcy, as soon as you finish a Chapter 7 case (usually only about three or four months after you start it) the creditors on those debts can start collecting on them from you. Those particular creditors—such as the IRS, the state taxing authority, the state or local support enforcement agencies, and your ex-spouse—often have extraordinary collection powers. They can put a tax lien or support lien on your home, and under some circumstances can even seize and sell your home to pay those liens.

In great contrast, a Chapter 13 case protects you while you pay off those special debts in a payment plan that you propose and is reviewed and approved by the bankruptcy judge assigned to your case. During the 3-to-5-year plan, all of your creditors—including the ones just mentioned above—are prevented from putting liens on your home. By the completion of your Chapter 13 case those special debts are paid in full or paid current, so that they can’t threaten you or your home any more.

8. “Statutory Liens”: Utility, Contractors, Municipal/Local and Other Involuntary Liens

If you had an involuntary liens imposed by law against your home before you file bankruptcy, those liens would very likely survive a Chapter 7 bankruptcy.

These are called “statutory liens” because they are set up through state statutes, or laws. Examples include a utility lien is for an unpaid utility bill, a contractor’s lien (sometimes called a “mechanic’s” or “materialman’s” lien) is for an unpaid, and usually disputed, home remodeling or repair debt, and local government liens for unpaid fees against your property.

These liens against your home generally survive a Chapter 7 case, and so these creditors would be able either to threaten foreclosure of your home to force payment, or at least would force payment whenever you’d sell or refinance your home. Under Chapter 13, in contrast, the protection for your home would generally continue throughout the three-to-five year case, keeping it safe while you satisfy the lien.

9. Judgment Lien “Avoidance”

A judgment lien is one that is placed on your home after someone (usually a creditor) sues you, gets a judgment against you, and records that judgment in the county where your home is located (or uses whatever the appropriate procedure is in your state).

In bankruptcy a judgment lien can be removed from your home under certain circumstances. Although judgment lien avoidances are available under Chapter 7 as well as Chapter 13, it can often be put to better use in Chapter 13 when used in combination with advantages available only under Chapter 13.

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

If you have too much equity in your home—value beyond the homestead exemption’s protection—in a Chapter 7 case you run the risk of a Chapter 7 trustee seizing it to sell and pay the unprotected portion of the proceeds to your creditors. Under Chapter 13, in contrast, you can keep and protect the home by paying those creditors gradually over the course of the up-to-five-year Chapter 13 case.

 

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