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Bankruptcy Can Remove a Judgment Lien

August 19th, 2019 at 7:00 am

Bankruptcy can, in the right circumstances, remove a judgment lien from the title to your home. Here are the conditions for pulling this off. 


 

The Problem, and the Bankruptcy Solution

Do you have a judgment lien on your home? If so, the debt on that judgment is secured by whatever equity you have in your home. The debt is encumbering the title to your home, eating up your equity.

A judgment lien on your home gives the creditor holding the judgment lien legal rights against your home.

Those lien rights, those property rights, are similar to the lien rights of a vehicle loan lender. The lender is a lienholder on the car’s title. If the vehicle owner doesn’t pay the vehicle loan, the lender can repossess the vehicle. Similarly, a judgment lien holder on your home can, under many circumstances, foreclose on your home. At the least it can force you to pay the debt when you sell or refinance your home.

Bankruptcy can help. Filing bankruptcy usually results in the legal write-off (the “discharge”) of the debt. See, generally, Sections 727 and 1328 of the U.S. Bankruptcy Code. The problem is that in many situations bankruptcy does not curtail creditors’ lien rights. In the example of a vehicle loan with the lender on the vehicle’s title, if you discharge that debt the lien still survives. You generally have to either surrender the vehicle or, if you want keep the vehicle, pay the debt.

However, with a judgment lien on your home, bankruptcy often CAN get rid of the judgment lien. This would take away the creditor’s dangerous rights against your home. This is a potentially huge benefit of filing bankruptcy. The process of getting rid of a judgment lien within bankruptcy is called “judgment lien avoidance.” 

The Conditions for Judgment Lien Avoidance

Here’s how the process works.

When you file bankruptcy, to “avoid” a judgment lien you must meet certain conditions:

  • The lien you’re getting rid of must be a “judicial lien.” That’s legally defined as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” Bankruptcy Code Section 101(36). Mostly, this refers to judgment liens.
  • The judgment lien at issue must attach to your “homestead.” That is, it attaches to “real property or personal property that the debtor or a dependent of the debtor uses as a residence.” Bankruptcy Code Section 522(d)(1).
  • The judgment lien can’t be for child or spousal support or for a mortgage. Subsections 522(f)(1)(A) and (2)(C).
  • The judgment lien “impairs” the homestead exemption. That is, “you may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs a [homestead] exemption.” Section 522(f)(1)

Essentially, you’re entitled to protect the equity in your home provided by the homestead exemption. To the extent a judgment lien eats into that homestead exemption-protected equity, that portion of the lien is avoided, or negated.

For Example

Assume you had $20,000 of equity in your home beyond your first mortgage. Assume also that your designated homestead exemption amount is $25,000. (This varies by state.) This would mean that all of that $20,000 in equity would be protected by the homestead exemption. Then add that a hospital got a judgment against you of $15,000 which became a judgment lien recorded against your home. If you filed a bankruptcy case and moved to avoid that judgment lien, it would be completely avoided because:

  • It’s a judicial lien—one “obtained by judgment.”
  • The lien attaches to your homestead—the place you “use as a residence.”
  • The lien was not for child or spousal support or related to a mortgage.
  • All of this $15,000 judgment lien impairs your homestead exemption—eats into the home equity, all of which is protected by the exemption.

In this example, bankruptcy would very likely discharge the $15,000 hospital debt itself. And the motion to avoid the judgment lien would very likely be successful. You would no longer owe the debt. And your home would no longer be encumbered by the judgment lien.

 

Bankruptcy Stops a Property Tax Foreclosure

August 5th, 2019 at 7:00 am

Bankruptcy can help if you’re behind on real estate taxes. Chapter 7 by getting rid of other debts, Chapter 13 by buying you lots more time.  


Bankruptcy Stops a Property Tax Foreclosure

Filing either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts” stops a foreclosure by your property tax authority.

Filing bankruptcy stops most forms of debt collection through the “automatic stay.” In particular the automatic stay stops “any act to… enforce any lien against property of the [bankruptcy] estate” Section 362(a)(4) of the U.S. Bankruptcy Code. The bankruptcy “estate” includes all assets that you own when you file your bankruptcy case. It includes your home.

A tax authority’s foreclosure for property taxes is the enforcement of the property tax lien. That foreclosure becomes illegal as soon as your bankruptcy filing imposes the automatic stay.

So filing bankruptcy stops a tax foreclosure. What happens next?

Chapter 7: Discharge Your Other Debts to Afford Your Property Taxes 

If you’ve fallen behind on your property taxes, it’s likely because you’ve had other debts that you had to pay. You didn’t have enough cash flow to pay both, and likely haven’t for quite a while.

Maybe if you wrote off (“discharged”) your debts through bankruptcy you’d have enough to start paying the property taxes. Chapter 7 is usually the quickest and cheapest way to discharge your other debts. (This assumes that you qualify, and that you don’t have other reasons to file a Chapter 13 case instead.)

Most local tax authorities don’t have the legal right to foreclose on your property until you are several years behind. Talk with your bankruptcy lawyer about this. You may have some time to catch up. On the other hand, tax foreclosure rules vary greatly, and they tend to be very strict. Once it’s too late it’s simply too late.  Find out for sure where you stand on any deadlines.

Your bankruptcy lawyer should also be able to tell you whether your tax authority would likely set up a monthly payment plan for you to catch up. If so, determine whether you could afford the catch-up payments after you discharge your other debts.  

In these situations filing a Chapter 7 would give you the help you need.

Chapter 7: Often Not Enough Help

But there are many situations when Chapter 7 does not solve the problem.

First, if a tax foreclosure is happening soon, you probably don’t have enough time to catch up.

Second, even if there’s no pending tax foreclosure you may need more help for the following reasons:

  • Even after discharging your other debts you wouldn’t have enough money left over to satisfy your tax authority.
  • The tax authority doesn’t provide a way to catch up, maybe because you’ve let the collection process go too far.
  • You had a deal to catch up earlier but just didn’t have the cash flow to stick with it. Now they won’t give you another chance.
  • Your mortgage lender requires you to bring the taxes current more quickly, on threat of its own foreclosure.

Chapter 13: Buy More Time and Flexibility

Under Chapter 13 you can bring your property taxes current over a period as long as 5 years. This extended period results in lower monthly catch-up payments, making more likely that you’d succeed with it. During this time you wouldn’t be at the mercy of the tax authority. While you’d be in the Chapter 13 case you’re protected against foreclosure or any other collection activity. You do need to fulfill the terms of your Chapter 13 payment plan, as you proposed and the bankruptcy court approved. But as long as you do, Chapter 13 saves you a long of anxiety. It gives you a measure of financial consistency and stability.

Chapter 13 can also save you money in very practical way. It is a very good legal mechanism for dealing with many other special debts, such as income taxes, child and spousal support, and vehicle loans. Your payment plan may allow you to catch up on the property taxes ahead of these other special debts. So you get current on your back property taxes more quickly than with a Chapter 7 case. That saves you interest on the unpaid property taxes, which are usually assessed at a relatively high rate. Drawing down the property tax debt faster also builds equity in your home faster.

Chapter 13: When Behind on Your Mortgage, Too

Unless you own your home without a mortgage, if you’re behind on your property taxes you’re likely also behind on the mortgage. Even if you are current on the mortgage, your mortgage lender is likely threatening its own foreclosure because you’re not current on the taxes. In both of these situations Chapter 13 is usually the best option. That’s because it is especially adept at handling both of these debts simultaneously.

Chapter 13 allows you to stretch out your mortgage catch-up payments up to 5 years (just like with the taxes). Most importantly, throughout this time you are protected from foreclosure by either the tax authority or your lender.

You do have to keep current on your Chapter 13 payment plan. But those payments are based on a realistic budget. They can be adjusted for both anticipated and unanticipated changes in your income and expenses.

You do also have to keep current on ongoing property taxes, so that you don’t fall further behind. Because that’s incorporated into your budget, this should not be a problem.  You want to be completely current when you finish your payment plan, and you’re required to be. Chapter 13 gives you the means to do so.

 

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.

 

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