BE WARY – FILING BANKRUPTCY WITHOUT AN ATTORNEY: Trouble with the Automatic Stay

          Whether you are filing bankruptcy on your own behalf, or if you have chosen to hire a paralegal you should be wary.  There are many intricate nuances to the bankruptcy code that an individual debtor or a paralegal will not be able to navigate.  One wrong misguided step could cost you dearly.

          Case in point – the weekend before Christmas our office was receiving frantic calls on our emergency line from a debtor whose lender had foreclosed on his home a couple of days after his Chapter 13 case had been filed.  He said that he was representing himself (although I believe that he was getting help from a paralegal).  The man was desperate to save his home that had already been foreclosed on, and when he spoke to the lender they said that they had a right to foreclose.  After looking into this problem for him it came to light that he had two prior cases that were dismissed in the same year as the most recently filed Chapter 13 case.  This meant that the bank was correct and that the foreclosure was valid. 

          When a bankruptcy case is filed the debtor is protected by a federal shield called the automatic stay.  The automatic stay was created to protect debtors from any and all collection attempts including (but not limited to) pursuing a lawsuit, foreclosing on a home, garnishing wages, and even calling or writing letters to collect on a debt.  This protection comes into existence automatically when a bankruptcy case is filed and is taken very seriously by judges, but it is not without limitations.  The code contains provisions which in some cases weaken the protections for the debtor. 

One such limitation is when a debtor files multiple cases within one year.  If the debtor had one case that was previously dismissed then their second case within the same year will only have an automatic stay for 30 days unless certain steps are taken.  If the debtor had two or more cases that were dismissed then the next case filed in the same year will have no automatic stay at all unless proactive steps are taken and the Judge orders a stay into effect. 

Therefore, when attempting to use the bankruptcy code to save a piece of real property make sure that you consult with an experienced bankruptcy attorney who can properly advise you.  If you have proper help you can ensure an outcome that does not result in the loss of assets.  The attorneys' fees are usually more affordable than people think, especially before any problems arise in a case filed without an attorney. 

SETTLEMENT OF MEDICAL DEBT

          Some people who are knocking on the bankruptcy door, just have one or may have a handful of debts that are primarily medical debts.  Before jumping into the bankruptcy arena, settlement may be pursued.  Evans Law Offices has had great success settling medical debt.  The key to working out an arrangement that benefits everyone is to know how to tactically position the settlement, and to assist in any state court defense.  Medical debt does have some peculiarities in the settlement process, especially if the debt is a large bill from a hospital.  The key is tenacity and reasonableness.  If this is your problem, maybe settlement is the answer.  Plan ahead, in advance of any lawsuit.  This kind of strategy can ensure success, if at all possible.

CHAPTER 7 BANKRUPTCY FAILURE -- Rapper DMX's Bankruptcy Dismissed

            Recently, a judge in New York, threw out the bankruptcy filing of rapper and hip hop star, DMX.   DMX had filed for Chapter 7 relief due to crushing debt, including over $110,000 owed in child support obligations (which is non-dischargeable).  The case failed, and the Federal Bankruptcy Court dismissed the case with an 18 month bar to refiling.  The dismissal was due to failure to satisfy trustee demands for information, and to properly document income of DMX.  This set back does not mean that he cannot seek bankruptcy relief in the future (once the time period of the filing bar has elapsed).  He could re-file once he is able to properly document his earnings, and possibly his assets.  DMX is not unlike any of us, who got into debt, slowly, over time, and now, it is out of control.  We hope that his financial affairs can be straightened out, so the can get control of his financial life.  Read more here. 

Can Debtors in California Discharge Traffic Tickets in Bankruptcy?

Whether or not a debtor in bankruptcy can discharge a traffic ticket is dependent on federal and state law, and the answer may be different depending on the Chapter the individual files.

The answer is clear for Chapter 7 cases and for a hardship discharge in a Chapter 13 case, NO.  Traffic tickets may not be discharged in a Chapter 7 case or in the case of a hardship discharge in a Chapter 13 case because Bankruptcy Code Section 523(a)(7) provides that those cases do not discharge debts to the extent the debt is a fine or penalty payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss.

Whether or not a debtor can discharge a traffic ticket in a Chapter 13 case depends on how the particular state classifies the traffic violation.  If the state considers the offense a crime then the debt will not be discharged pursuant to Bankruptcy Code Section 1328(a)(3) which makes criminal fines non-dischargeable.  In California traffic violations are classified as either infractions, misdemeanors, or felonies.  In California all three of these classifications are included in the definition of a crime.  See California Penal Code Section 16.
In California debtors will not be able to discharge traffic tickets, but in a Chapter 13 case the debtor can provide for payment over time for the priority traffic fines.

Popstar Files Chapter 7 & Bankruptcy Misinformation Reported

Stars file for bankruptcy protection too!  Aaron Carter, pop star and brother to Backstreet Boy singer, filed for Chapter 7 bankruptcy protection.  Yahoo OMG! is spreading news of Aaron's Chapter 7 bankruptcy filing in an article written by Lauren Shutte.  The article gives some history as to how Aaron Carter got into the financial upheaval.  According to Lauren Shutte, the debt was accruing over years, and much of it can be blamed on forces beyond Aaron Carter's control.  This article is spreading misinformation about Chapter 7 by intimating that Aaron Carter will be turning over all of his assets to the Chapter 7 Trustee (including his dog).  The article also misstates the dischargeability of tax debt in a Chapter 7 case.

This is simply not true.  A Chapter 7 is a liquidation proceeding, and the Chapter 7 Trustee does have the power to sell a debtor's assets.  However, Chapter 7 debtors are entitled to certain protections for their personal and real property.  These protections vary from state to state and are provided in the form of exemptions.  Aaron Carter is able to exempt the majority of assets listed in his bankruptcy schedules.  There are some assets which are not exempted or protected.  The unprotected assets include publishing rights to certain songs, a portion of a Brietling watch, and a judgment that was assigned to him.

For assets that are not protected by an exemption the Chapter 7 Trustee will assess whether or not there will be a potential value to creditors if that asset is pursued.  If the Trustee believes that there are assets of value unprotected the Trustee will pursue the assets and administer any funds for the benefit of creditors.  However, in order for the Trustee to pursue an asset it must not be protected by an exemption, and it must have value.  Therefore, Aaron's dog listed with a value of zero will never be picked by the Trustee for sale.

Also, most people who owe more than $20,000 in tax debt will have a lien recorded in the county that they live in.  The result, is that when the bankruptcy case is filed, the taxing authority will have a security interest for plus dollar sum of the value of the assets.  For those in the know, Aaron Carter had to file either a Chapter 7 or Chapter 11 because he exceeded the debt limits for the Chapter 13.  The result of this, for poor Aaron Carter, is that he will not exit with a fresh start, because some of that debt will follow him later, and not dischargeable in the Chapter 7.  Still, we are glad that Bankruptcy can help.  Good luck Aaron Carter!

Garnishment Basics in California

One collection method that creditors can use is the garnishment of wages.  This is when money is withheld by an individual’s employer to pay back the individual’s debt.  The wages subject to garnishment will be turned over to the levying officer (usually the sheriff) who turns the funds over to the creditor. 

Usually, a creditor must first sue the individual in state court and obtain a judgment.  Once the creditor has a judgment the creditor can apply to the court for permission to garnish the individual’s wages.  This is not true for all creditors.  Some creditors such as the IRS can garnish an individual’s wages without first initiating a lawsuit and obtaining a judgment.

Once the creditor gets permission from the court to garnish the individual’s wages an earnings withholding order is served upon the employer.  The employer is instructed to give the employee 10 days notice of the garnishment.  The employee’s wages can be withheld 10 calendar days after service is effected on the employer.

The maximum withholding is 25% of the individual’s disposable earnings (in some instances the maximum withholding will be lower than 25% -- see our article Blueprint of a Garnishment in California for more detail).  This is true even if more than one creditor is attempting to garnish the individual. 

If the garnishment is for spousal or child support the amount garnished can range from 50% to 65% of the individuals earnings.

Some earnings are exempt from garnishment through action of the individual (application for exemption through the court) or through the nature of the funds (such as social security or veterans benefits).

Bankruptcy can help stop a garnishment (for most types of debts).  Once the case is filed the automatic stay comes into play and acts as a shield to protect the individual from collection attempts by creditors (including garnishments).  Any funds garnished after a bankruptcy case is filed must be returned to the debtor, as the garnishment violated the federal bankruptcy law.

Bankruptcy & Your Credit Report

People considering filing bankruptcy and individuals who have filed bankruptcy have many questions about the effect of bankruptcy on their credit report.  The overall effect of the bankruptcy on an individual's credit depends on a number of factors, such as the other items that are reported on the credit report, and the individual or agency who is reviewing the report.

After a bankruptcy case is filed it is reported on an individual's credit report (just as other public records are reported such as lawsuits and tax liens).  The Federal Fair Credit Reporting Act Section 605(a)(1) provides that the bankruptcy must be removed from the credit report ten years after the date the case was filed.  This remains true for Chapter 7 cases; however, the credit reporting companies have made a practice of removing Chapter 13 cases from individual's credit reports after 7 years.  The credit bureaus have said that this differing treatment is due to the fact that a Chapter 13 is a reorganization plan, and the debtors may be paying back some of their debt.  (In reality in the majority of Chapter 13 cases individuals are not paying back unsecured debts).  

After a bankruptcy discharge is received the balances on the debts that have been discharged should be changed to zero (showing that nothing is owing on these debts).  While any negative entries, such as late payments, will remain on the credit report until the time has passed for negative entries to fall off the credit report (that is typically 7 years from the date of the entry).

It is possible with diligent effort to rebuild one's credit score after a bankruptcy is filed.  Even within the 7 year period where the bankruptcy remains on the credit report.  

Keeping Your Home California and Bankruptcy

         During these tough economic times we meet many people and families who are struggling to keep their homes.  The most common thread to their struggles is that either property taxes or their mortgage payments are defaulted.  Usually there is a reduction in income, or possibly increased mortgage payments under an adjustable rate mortgage that has caused the financial imbalance. While there are state programs that can help such as Keep Your Home California, or internal programs that your lender may have to help with short term defaulted solutions, bankruptcy should also be considered as a tool, and option to help save a home in jeopardy of loss.

         With the acquisition of real estate, comes for most people, an investment in the single largest asset of their financial life.  When a property is lost in foreclosure, this event will be reported on a person's credit report, with obvious derogatory consequences.  Before this happens, bankruptcy should be considered.  For many who have been turned down for mortgage modifications, bankruptcy is the solution, to allow for reinstatement of the mortgage, or to allow for a new mortgage modification application through the bank's loss mitigation bankruptcy department.  Amazingly, this has been the avenue that many people have found success in their struggles to save their home.

      A Chapter 13 case can stop a pending foreclosure sale, and give individuals breathing room, a sense of security, and extra time to sort out the problems associated with the mortgage.  (The bankruptcy will prevent the foreclosure until the case is closed or until the lender files a motion for relief from stay with the court).

The bankruptcy code allows people to reinstate their mortgage over the term of their Chapter 13 plan (3 to 5 years).  Upon the completion of their case their mortgage will be current and they will no longer be facing foreclosure (that is assuming that all payments were made after their case was filed).

Here in California's bay area, there are two divisions which give debtors a second path for dealing with their mortgage arrears during the Chapter 13 case.  This is to let the people try to modify their mortgage to deal with the arrears.  This type of plan can be useful to people who have large arrears that are not easily cured through a plan.  This is available in the San Jose division (which includes Santa Clara, Campbell, Gilroy, Salinas, Monterey, and other outlying cities), and in the San Francisco division.

Another aspect of Chapter 13 that helps people and families keep their homes is the ability to remove a second mortgage.  This is available when the property value is lower than the debt owing on the first mortgage.  This can reduce the monthly obligations associated with the home, and make the retention of the property more feasible.  

Bankruptcy is a financial tool that should be considered when the finances are too tight, or when a person's home becomes unaffordable.  Many attorneys offer a free consultation that can be used to learn how bankruptcy can help you.  Both the bankruptcy system and the people within the system are here to help.

California Foreclosure Timelines

          In California the vast majority of foreclosures are done outside of the court system.  This is called a non-judicial foreclosure.  In other states, such as Hawaii, it is more common for the foreclosure to be done through the court system (where an actual lawsuit is filed in court).  This is called a judicial foreclosure. 

          The law surrounding foreclosures here in California is currently evolving, and there are new requirements about notices that a homeowner is supposed to receive prior to the first step in the foreclosure process (these are a topic for a post on a different day.  This post will just outline the basic timelines for a foreclosure starting with the Notice of Default).

          First, a lender must issue a Notice of Default (also referred to as an NOD).  This document is required to tell the homeowner what the default is (ie what the total amount the homeowner is behind in payments).  The NOD must be filed in the county in which the property is located, and it must be mailed to the homeowner.  Usually, about 90 days after the notice of default (give or take a few days) the Notice of Trustee Sale is issued, recorded at the county recorder’s office and mailed to the homeowner.  This document sets forth the actual date that the foreclosure will take place.  The actual sale must be scheduled at least 110 days from the NOD (or about 20 days from the Notice of Trustee Sale).  (See California Association of Realtors Summary for a more in depth look at the timelines).

How Does Bankruptcy Stop a Foreclosure?

          If a bankruptcy case is filed before a foreclosure sale is completed the bankruptcy will irrefutably stop the foreclosure from going through.  What is it about the filing of a bankruptcy case that stops the foreclosure?  It is the automatic stay that stops the foreclosure.  This automatic stay is akin to a shield that once enacted by the filing of the bankruptcy case protects debtors from collection actions of creditors, and this includes foreclosure.

          This shield is, as the title would have you believe, automatic.  Courts take violations of this stay very seriously, and when creditors violate the automatic stay the creditor can be in jeopardy of financial sanctions, including paying for the debtor’s attorneys fees to enforce the stay and in egregious cases punitive damages.

          While all bankruptcy chapters provide an automatic stay (with exceptions for repeat filings) the different chapters are not created equally when it comes to retaining your home.  A Chapter 7 filing would stop the foreclosure but would only act as a band aid.  The Chapter 7 case typically lasts only 3 months, and creditors routinely seek the court’s approval to lift the stay and proceed with the foreclosure.  A debtor does not have tools at their disposal to readily combat the creditor’s request.  A Chapter 13, on the other hand, is designed to allow a homeowner to cure any defaults on their mortgage over a 5 year term.  Also, some courts (including San Jose, Salinas, and Monterey) have local guidelines that allow individuals to have additional time while in a Chapter 13 case to pursue a mortgage modification (and be protected from foreclosure by the automatic stay).  (See our article on bankruptcy and foreclosure posted on evanslawonline.com)

High Interest Rate Credit Cards Cause Vicious Cycle

Credit cards may be a lifesaver when you run out of funds to purchase groceries and you have hungry children.  Or your dishwasher breaks and you can only afford to make payments over time.  There is a point when the credit card turns from a useful tool into a budget wrecking and money sucking thing.  This is when the credit card balance reaches a level beyond which the individual cannot easily pay down, and the interest on the account is basically equal to the minimum monthly payments.  This cycle of making the minimum monthly payment but never seeing the principal balance decrease can go on for years.

In today’s economy with layoffs and other financial problems it can be easy to get sucked into the vicious credit card cycle.  It is especially easy with the high interest rate cards that are offered (a large majority of our clients cards are over 20% and I have even seen cards with rates as high as 36%). 

Something needs to give to break that cycle.  Some individuals can do it by devoting more money each month to the payments.  Other individuals simply cannot devote more than the minimums.  Bankruptcy protection, Chapter 7, Chapter 13, and Chapter 11, can provide a way to break the cycle.  In Chapter 7, Chapter 13, and Chapter 11 individuals may be able to discharge (get rid of) their credit card balances (subject to qualification standards set forth in the bankruptcy code). 

Mi Pueblo Pushed Into Bankruptcy by a Cause Common to Individuals

On July 22, 2013, Mi Pueblo filed for bankruptcy protection under Chapter 11 of the United States Code in the Northern District of California, San Jose Division (case no. 13-53893).  The Honorable Arthur Weissbrodt is the presiding judge.

The story of Mi Pueblo is similar to many individuals that we meet in our law firm.  In the case of Mi Pueblo, Wells Fargo was a catalyst to the grocery chains need to file bankruptcy.  Mi Pueblo had most of its cash in Wells Fargo accounts, and used loans from Wells Fargo to keep the day to day operations of the grocery store going.  Wells Fargo attempted to change the terms of the loans with Mi Pueblo after becoming concerned about Mi Pueblo's debt to income ratio.  (San Jose Mercury News).

Lenders do the same thing to individuals.  Lenders will increase interest rates, reduce the available balances and hit consumers with penalties and other fees.  This can cause a snowball effect that eventually leads an individual to feel the need to turn to bankruptcy protection for the fresh start that it can provide.

Detroit Troubled Bankruptcy Filing

On July 18, 2013, Detroit filed for Chapter 9 bankruptcy protection in the Eastern District of Michigan, Southern Division (case number 13-53846).  This is the largest municipal bankruptcy filing in American history!   Detroit has a reported 18 billion dollars in debt, and included in that 18 billion is billions of dollars owed to approximately 23,000 retirees.  The city was reportedly running a deficit of $1 million dollars a day at one point.  (New York Times).

At this time it is unclear whether or not Detroit will be allowed to remain in bankruptcy and reorganize their obligations.  Individual debtors can reorganize their obligations in a Chapter 13 bankruptcy, and in an individual bankruptcy filing the viability of the case is easier to predict.  In individual cases it is a rare occurrence when other parties try to block the debtor's access to bankruptcy protection.

New York City Opera Files for Bankruptcy Protection

On October 3, 2013, New York City Opera filed for bankruptcy (case number 13-13240) in the Southern District of New York.  The opera filed a Chapter 11 case which will allow them to restructure the organization, or will allow them to sell off assets and liquidate. (Business Bankruptcy).

Individuals have speculated that the opera will be reorganized under different management.  The operas problems are the same type of problems that individuals face when they turn to bankruptcy for help.  The opera's revenues were not great enough to support its expenses.  The opera's largest creditor (approximately $1.6 million) is the New York City Ballet.  Other creditors include landlord, employees (severance pay), pensions, and health fund.

Time will tell what will happen to the opera which is such an iconic part of New York's history.

MY DRIVER’S LICENSE IS SUSPENDED, WHAT CAN I DO?

         Driver’s license suspension is an enforcement mechanism for various types of unpaid debts or fines.  In California, debt owing to an individual may be the basis for a license suspension.  This can occur if you have been sued, and a judgment has issued for damages (property or personal injury) caused by a car accident.  The good news is that many of these types of judgments can be discharged in a bankruptcy case.  Depending on the injury and the type of damages, a Chapter 7 case may be the solution.  Otherwise, a Chapter 13 case can be filed.  Chapter 13 allows for a greater scope of dischargeability of various types of difficult debts, and can often be the necessary step toward obtaining a release. 

        There are various legal grounds for suspension in the State of California.  California’s vehicle code section 16370 provides that an individual’s driver’s license can be suspended if the individual fails to pay a judgment within 30 days of the judgment being issued.  The judgment must be for property damage exceeding $750 or for damage in any amount on account of bodily injury to or death of any person resulting from operation of a motor vehicle on a highway in California.  Cal. Vehicle Code § 16251.

        The driver’s license will remain suspended until the judgment is satisfied (or one of the other enumerated steps have been taken).  Cal. Vehicle Code § 16371.

        Bankruptcy can, for some, be a safe harbor that will allow an individual to have a fresh start on life.  It is possible to get a driver’s license reinstated that has been suspended due to an unsatisfied judgment related to a vehicle accident in California.  To get the driver’s license released an individual must receive a bankruptcy discharge and then provide a certified copy of the discharge to the Department of Motor Vehicles. 

       However, not all individuals will be able receive a discharge of the underlying debt.  Bankruptcy Code Section 523(a)(9) provides that a debt for death or personal injury caused by the debtor’s unlawful operation of a motor vehicle while the debtor was intoxicated from using alcohol, a drug or another substance is not discharged.  Thus, a driver’s license cannot be reinstated through the bankruptcy process if it was suspended due to a judgment related to a motor vehicle accident that involved drugs or alcohol, and the driver was cited for a DUI. The specific facts of the case need to be reviewed by an experienced attorney who will research the current state of the case and statutory law, and review the judgment for the legal basis for the debt.  Often there is a loophole that can be utilized to gain a favorable outcome for the client.

       Another common basis for license suspension is non-paid child support.  The best avenue for a driver’s license release is to go to family court, with a properly noticed motion, requesting the affirmative relief, with a plausible argument regarding the current state of non-payment.  Most judges are somewhat sympathetic, and will issue a release if the proper documents are filed and noticed with the Court.

DEFENSE OF MARRIAGE ACT, PROPOSITION 8 AND THE COURT RULING OF JUNE 26, 2013

            June 26, 2013 marked a fateful day in our country's history as the U.S. Supreme Court's long awaited decisions came down on the Defense of Marriage Act ("DOMA"), and California's Proposition 8.  The effect of the Court's ruling was to strike down central portions of the DOMA act as violating the equal protection and liberty clauses of our U.S. Constitution.  The Court found that certain provisions of DOMA were enacted to harm a discrete segment of our society and were therefore unlawfully discriminatory.

            As the ripple effect of the Court's ruling on DOMA is felt, those most affected by lack of access to federal benefits, our friends in the gay and lesbian community, can now enjoy equal access to privileges previously only conferred upon a marriage between a man and a woman.

            A second opinion handed down by the U.S. Supreme Court on the landmark day of June 26, 2013, is their decision finding that the appellant proponents of California's Proposition 8, which prevented gays and lesbian's from marrying in the State of California, lacked standing to bring the action before the Court.  And, for this reason, Gov. Jerry Brown has ordered the State of California officials to immediately allow the issuing of marriage licenses to same sex couples.

            The Court's holding with respect to DOMA changes the landscape to clearly give rights where a complete lack of rights previously existed, such as areas of filing joint tax returns, probate laws with respect to the tax allocated upon death of a spouse, verses a non-spouse, social security benefits, ERISA Qualified Retirement Benefits, and other federal retirement benefits, military benefits conferred upon spouses including housing, living and death benefits.  In other areas the boundary of clarity, which may have been hazy, is now brighter.  Gays and Lesbians have been denied the equal rights in the federal bankruptcy arena.  Needlessly, thousands of dollars are spent by same sex couples, as duplicative cases are filed due to the lack of clarity the previous status of the law brought to all of us.

            Fortunately, it may be possible to recoup losses, as there may be some retroactive application of the law.  Couples should go to their tax professionals to see if amending the last 3 years of tax returns, including 2010, 2011 and 2012, can either lower any current tax obligation, or allow for a tax refund.

            For many, the outcome of the Court's decisions will be most felt in the area of healthcare, health insurance, and retirement planning.  Now, gays and lesbians can enjoy the lower cost of adding a "spouse" to their health insurance plans, and can elect to add their spouses as "surviving spouses" for the benefits conferred under any ERISA Qualified Retirement Plans.

CAN BANKRUPTCY HELP SOMEONE WITH MEDICAL BILLS?

Unfortunately, in our present economic times, many people with medical insurance still incur large medical debt when an illness requires hospital care, or protracted medical treatment.  Depending upon the medical diagnosis, certain strategic planning may be necessary in order to protect a person's or families' personal budget, and in order to qualify for important medical financial assistance programs. 

Unfortunately, a recent article in Forbes told a story that is all too common for people who have gotten sick. 

The choice of which bankruptcy chapter to file, and when is the correct time to file the bankruptcy case varies from case to case.  Medical debt is dischargeable in bankruptcy in both Chapter 7 and Chapter 13 cases.  The timing of when the medical debt was incurred, and what procedures were obtained should be considered.  If you are thinking about filing bankruptcy for medical debt reasons, then the possibility of not filing bankruptcy, and seeing if other alternatives are available should usually be explored before a bankruptcy case is filed.  Many hospitals have internal programs that will reduce the debt, and allow for a portion of the debt to be paid by the uninsured.  Many health care providers will accept a stepped down, or compromised payment from the sum owed.  Before filing for bankruptcy, these programs should be explored. 

When no payments are made on medical debt, like other unpaid debt, the debt will be assigned to collection agencies or attorneys.  Again, this debt can be settled or compromised without filing for bankruptcy.  Usually, collection agencies will be reasonable with settlement offers if the person does indeed qualify for a bankruptcy filing.  If a person finds themselves in this situation, then it is wise to consult with a bankruptcy professional, and perhaps have this person work on settling the debt.  The debt can often be settled for 25 percent, based upon the face amount of the debt.

Bankruptcy should be considered if there is no way to make some sort of compromised payment to the creditors.  However, it is wise to time the bankruptcy filing so that no new significant medical debt will be incurred after the bankruptcy case is filed.

See this article for more information on bankruptcy and medical debt.  

Can I get rid of my second mortgage through a bankruptcy case?

In today’s economic climate many individuals are able to “get rid” of a second mortgage through their bankruptcy case.  The legal jargon for getting rid of a junior lien in a bankruptcy case is “strip off,” or “lien avoidance.”  In a Chapter 13 bankruptcy case an individual debtor can strip off or remove a junior lien from their home and treat it as an unsecured debt if certain conditions are met.  That means the second mortgage will be treated as an unsecured creditor (the same as credit cards and medical bills).  In a typical case the second mortgage will not receive any money, but this is not true in all cases.  Depending on different factors such as income and assets owned some individuals are required to pay a percentage of their unsecured debts.

A junior mortgage can be stripped off in a Chapter 13 bankruptcy case if the value of the home is less than the amount owed to the senior liens.  An example is shown in the chart below:

	Value of Home	Principal owed to 1st Mortgage Holder	Principal owed to 2nd Mortgage Holder	Is a lien strip possible?
Scenario 1	$500,000	$600,000	$75,000	Yes, the 2nd mortgage of $75k can be treated the same as other unsecured debts
Scenario 2	$500,000	$490,000	$75,000	No, the 2nd mortgage remains in place and must be treated as other secured debts

            To be able to get rid of your second mortgage in your bankruptcy case certain procedures must be followed: (1) a Chapter 13 plan that states that the lien will be stripped or removed; (2) a motion and accompanying documents must be filed with the court, and (3) a court order must be obtained.  The creditor has a chance to object to the motion if the creditor believes that the home is worth more money (that the value exceeds the amount of debt owed to senior liens as in scenario number 2).  A creditor's objection can in a small number of cases turn into a mini trial on the value of your home (this is called an evidentiary hearing).

            The typical lien strip order issued by the court requires the individual to complete their bankruptcy case and receive a discharge before the lien is actually removed.  So if for some reason your case is closed before you actually complete it you will still owe the second mortgage creditor and they still have the ability to foreclose on your home (once you are no longer protected by your bankruptcy case).  

            At the end of the case, a judgment can be applied for from the court which says that all conditions have been met and the lien is officially stripped.  This judgment should then be recorded at the county recorder’s office to put the world on notice that the second mortgage is no longer valid.

            As the economy stands today there are many individuals who are able to take advantage of the bankruptcy code provisions allowing the removal of a second mortgage.  However, this may not be true for long as housing prices are increasing.

DEBT, CREDIT REPAIR AND BANKRUPTCY

            As a bankruptcy lawyer with 19 years of experience representing debtors through the bankruptcy process, I am all too familiar with the common misgiving that everyone that goes through bankruptcy has, that is, how will their credit be affected? And, how can they get their credit back?

            Common threads that many people have who are struggling with the concept of filing bankruptcy are that their credit may already be damaged.  For these people a bankruptcy filing will likely not decrease their credit score.  The question thereafter becomes, "how will I get good credit back?" or "will the bankruptcy ruin my credit for 10 years?"

            The concept of good credit is something that we all need to be aware of, because when we have good credit, we have greater opportunities in our life to have and acquire "things" that we may want, like cars and homes on credit, or just credit cards to help us ease some of the stresses of our daily lives.  Some of us feel that good credit is beyond our reach.  But really, each one of us can have good credit.  It is not beyond the reach of any one of us if we care to work on the process.  So, if there is old debt on the credit report, the solution to the problem can be solved in one of three ways. 

 

            The first would be to conduct credit repair in an aggressive manner.  This can be done by writing demand letters to remove debt on the basis that it is disputed.  When pursuing this, the consumer must write letters to each of the credit bureaus (Experian, Transunion, and Equifax).  You may be able to electronically submit your credit dispute as well.  The purpose of the letter is to use the law under the FairDebt Collections Practices Act to your benefit.  I have personally seen the effectiveness of this path through friends and family.  This process can be time consuming, but is worth pursuing to raise the credit score, and remove old debt that serves to pull the credit score down.  If you don't have time to work on this yourself, firms like the Lexington Law Firm have a proven reputation for success, and for a reasonable fee, can complete all the steps in this process for you.

            The second way a person can effectively deal with debt to increase their credit score is to negotiate debt settlements with their creditors.  This process entails usually the offer of a lump sum settlement that approximates a percentage of the debt, usually 25% of the face amount owing when the offer is made.  The problem with this course is that their may be one or two creditors who will not negotiate, and who refuse to make any settlement at all.  When this occurs, this forces people to file bankruptcy, as they may not have the liquid funds to settle all the debt in lump sum payments.

            When the debt is too high to settle, or too new to be effective with credit repair, people often turn to the bankruptcy system for assistance.  The bankruptcy, when used as a financial tool, can be filed for the purpose of receiving a "clean slate" or "fresh start."  This avenue should be seriously considered when looking at the following aspects of a person's life:  age, total savings, including retirement and other savings and the present state of your credit score.  Age is considered in the context of savings and investments., because as we age we have less time to save.  The immediate future needs for the credit should also be considered.  Many people don't have significant savings and investments, and unless you are planning on buying a new home in the next two years, a bankruptcy filing will weigh positively in the balance of pros and cons.

            Once the bankruptcy is concluded, the process of credit repair should begin.  This process is different from the credit repair conducted without a bankruptcy filing.  What becomes necessary after the case is concluded is that new solicitations for credit are accepted by the consumer and properly managed.  For the major credit bureaus, it is a numbers game.  Once the bankruptcy is completed, you will not have personal liability on debt.  In order to have a good credit score, their must be a history of paying on debt.  The greater the number of accounts, and credit extended, the higher a person's credit score will be or become.   This means that once a bankruptcy case is finished, the person must apply for new credit cards to improve their credit score.  In the beginning, it may be that all the person might obtain would be "secured" credit cards.  There are companies that cater to assisting a person increase their credit score by offering these sorts of cards (see Bankrate.com for more information about secured cards).  Although it may not seem like a good deal, these sorts of cards go on a person's credit report and assist greatly in increasing their overall scores. 

           If new credit cards are obtained, then the next step is to manage the cards well.  No late payments should be made.  Ideally, the credit cards would be paid in full at the end of each cycle.  After 24 months of charging and timely payments, a person's credit score will dramatically improve.  I know of one individual who with successful management of his credit was able to bring his credit score to the mid 700's in two short years after his bankruptcy filing. 

            Over the years of my practice, I have personally witnessed the successes of many clients who have filed bankruptcy and rebuilt their credit in a short time, and go on to becoming real estate investors or the owners of new and successful businesses.

Bankruptcy Chapters for Individuals in a Nutshell

Bankruptcy is a financial tool that you are guaranteed by the United States Constitution.  There are different bankruptcy structures for different situations.  The different structures are defined in bankruptcy law as “Chapters.”  Individuals have three bankruptcy chapters available to them:

(1)   Chapter 7

(2)   Chapter 13

(3)   Chapter 11

Chapter 7 – Liquidation

Chapter 7 bankruptcy cases are the most common chapter for individuals.  Chapter 7 is sometimes referred to as a liquidation proceeding.  The Chapter 7 Trustee (an individual appointed to oversee the Chapter 7 case) has the power to sell property if it is not protected by an exemption.  California provides two sets of exemptions that individuals can use to protect their personal and real property. 

A Chapter 7 bankruptcy case with no unexempt assets typically lasts for three months.  Some cases are open for more than three months depending on different variables, such as the Trustee may research specific asset values, among other reasons.  Once the case has run its course the Court will issue a discharge of debt, which means that the individual no longer owes money on their debts.  Some debts are not discharged, such as student loans, most taxes, and spousal support or child support arrears. 

If Trustee is selling assets then the case will stay open longer before the Court issues a discharge.  Cases can be held open for a year or longer depending on the specific facts of the case.

Chapter 13 – Reorganization

Individuals who file Chapter 13 cases receive a similar discharge as those in Chapter 7 (additional debts not discharged in a Chapter 7 case may be discharged in the Chapter 13’s superdischarge).  A common misperception about Chapter 13 cases is that individuals are required to pay their debts back.  This stems from the fact that Chapter 13 debtors are making monthly payments to the Chapter 13 Trustee.  These payments usually go to secured creditors (car lenders, mortgage arrears), or to taxes that will not be discharged and/or to pay attorneys fees.

This Chapter can help individuals who have fallen behind on their mortgage payments, who are having difficulties with their car loans, have problem tax debt, and many other situations.  The case typically lasts from three to five years.  Many will close much earlier depending on how the case was set up and the claims filed. 

Chapter 11 – Reorganization

Individuals only file Chapter 11 when they do not qualify for Chapter 7 or Chapter 13.  Chapter 11 is more burdensome in terms of the tasks required by law.  Chapter 11 cases are for secured debts exceeding $1.1 million and unsecured debts exceeding $380,000 for individuals (approximate numbers as of May 2013), or for corporations or other shell entities that need to reorganize their debt obligations.

Common Elements:

In each Chapter an individual acts as a Trustee for the bankruptcy estate (in Chapter 11 proceedings the debtor normally acts as their own trustee).  One thing the Trustee does is to ensure that the bankruptcy case is in line with the bankruptcy law.

Also, in each Chapter the individual is required to attend a hearing called Meeting of Creditors.  The Meeting of Creditors is where the Trustee asks the individual questions under oath related to their bankruptcy schedules.