How to Walk Away From a Mortgage

Realizing that you can no longer pay for your home means that you have difficult decisions to make.  While modification and even lien stripping in bankruptcy may be options for some, if you truly cannot afford to keep your home, you must decide on the best way to walk away. 

Do Nothing

If you do not pay your mortgage payment, the lien holder will foreclose on your property.  Although not paying your mortgage payment and the resulting foreclosure will significantly harm your credit rating, the home finance industry is presently in such turmoil that it may be months to more than a year before the lien holder forecloses on your property.  During this time you live rent free and can save for the future.  Note that if you do not maintain insurance and do not pay real estate taxes, the foreclosure timeline will likely accelerate.  Also note that under the Mortgage Forgiveness Debt Relief Act, which extends through 2012, income normally attributable by the IRS in connection with a foreclosure is not taxable, although you may be liable for a deficiency balance when the home is sold for less than you owe.  A foreclosure is listed as a public record on your credit report and the late payments are also reported. 

Deed in Lieu of Foreclosure

Some financial “experts” have advised distressed homeowners to “just walk away.”  Walking away from a home is easier said than done, since you still own the home and are legally responsible for the property in a variety of ways.  One way to legally “walk away” is to transfer title of the property via a Deed in Lieu of Foreclosure.  Now the lien holder owns the property, which may sound pretty good until the property is sold for less than you owe, triggering a deficiency balance.  You may also end up owing taxes on the difference.  

Short Sale

A Short Sale is a sale for less than what is owed by the seller.  A lender will sometimes agree to allow the property to be sold for less than you owe if it is clear that you are unable to continue paying for the property and the home is upside-down.  In many cases the Short Sale deficiency is forgiven by the lien holder, but that will depend on the lender and on state law.  A Short Sale is identified as a settlement on your credit report and will hurt your score, although not as much as foreclosure or bankruptcy. 

Bankruptcy

A bankruptcy is a legal discharge of your debt.  It is the cleanest and most powerful option to “walk away” from the home with no contract or tax obligation.  A bankruptcy uses the power of federal law to stop further negative credit reporting and collection attempts.  In the end your credit report identifies the loan as “Discharged in Bankruptcy” with a “Zero Balance.”  The bankruptcy record will stay on your credit report for up to ten years, but by surrendering the property you will avoid a foreclosure on your record. 

If you need to walk away from your home and are weighing your options, consult with an experienced bankruptcy attorney and learn how the federal bankruptcy laws can help.  Bankruptcy can provide you time to move without foreclosure and without owing money in connection with the home.

How to Protect Your Credit When You Are Broke

Every so often a client will say, “I am hopelessly in debt, but I don’t want to ruin my credit score with bankruptcy.  It is still very good.”  This statement is just like the old joke, “I can’t be broke, I still have checks!”  A credit score is supposed to be an indicator of your financial health.  Unfortunately, many people assume that their financial health is indicated by the credit score.  Consequently, they continue to misuse credit, in many cases borrowing from credit sources to pay monthly credit obligations.  It is a vicious cycle of debt. 

In today’s economy your credit score is not the only factor a lender considers when issuing credit.  Financial institutions are using new sources to profile their customers.  A recent article by Wall Street Journal writer Karen Blumenthal entitled New Ways Bankers Are Spying on You reports that banks are now examining rent and utility payments, bank deposits, as well as estimating your home’s value in order to gauge your financial health.  Blumenthal writes that in one case a bank customer was denied a credit after the lender reviewed his home loan records, determined that the value of his California home had declined, and noticed that his mortgage principal wasn’t declining—giving away that he has an interest-only mortgage. 

Financial good health is living within a budget, using credit responsibly, controlling debt and excess spending, working towards short and long-term financial goals, and contributing to savings and investments.  It is difficult to manage just one of these aspects when a person is overwhelmed by debt. 

Fortunately, the federal bankruptcy laws provide an answer for individuals living beyond their means and buried in debt.  Bankruptcy offers a legal means to restructure or eliminate your debts while protecting your family’s assets including real estate, vehicles, or retirement accounts.  During bankruptcy creditors cannot contact you directly and the vast majority of debtors do not lose any property. 

If you are drowning in debt, don’t be fooled by a high credit score.  Your financial house is built on sand and it is time to rebuild on solid ground.  Consult with an experienced bankruptcy attorney and discover how the federal law can get you back on the path to financial health.

Bankruptcy Means Test

The bankruptcy means test is a calculation designed to identify debtors who can afford to pay some of their unsecured debts (for instance, credit card debt) and encourage repayment of these debts through a Chapter 13 repayment plan.  The first part of the means test determines whether your current monthly income is less than your state’s median income for a household of your size.  

If your family’s income is less than your state’s median income for a family of your size, you PASS the means test.  There is no other testing and you can proceed with a Chapter 7 bankruptcy.  The current state median income figures can be found at the U.S. Trustee’s website: http://www.usdoj.gov/ust/eo/bapcpa/meanstesting.htm. 

If your family’s income is more than your state’s median income, you must complete the means test worksheet to calculate if you have (or should have) money to repay unsecured creditors.  In the end if you are able to pay a significant portion of your unsecured debt, you will FAIL the means test and cannot file a Chapter 7 bankruptcy. 

The truth is that most debtors pass the means test without any difficulty based upon their income.  Others pass the means test after a skilled bankruptcy attorney has examined your income sources and made certain elections in completing the calculation.  That is not to say that the test can be manipulated!  On the contrary, the skilled bankruptcy attorney will work within the bankruptcy statutes, rules, case law, and local interpretations (which can vary a great deal among jurisdictions!) to obtain the best result from the means test.  

If you would like to “test-drive” the means test, Nolo Publishing has a free on-line calculator.  The Nolo calculator uses the language and formatting of Official Form B 22A, the means test form required in Chapter 7 bankruptcy cases.  Be warned: passing the means test can be complex and is more than simply crunching numbers! 

If you have questions or concerns about passing the means test, seek out competent legal advice.  An experienced bankruptcy attorney can guide you through the means test to reach the best possible result for your circumstances.

Transferring Property Before Bankruptcy Can Be A Bad Idea

Modern bankruptcy laws permit the debtor to keep certain property necessary to maintain a modest standard of living. These laws, called exemptions, protect property from collectors so that the debtor has a reasonable chance at a fresh financial start after bankruptcy. However, while these protections afford the honest debtor a fresh start, some individuals try to get a head start by transferring property in an attempt to hide it from the bankruptcy process. As you can guess, concealing assets from the federal bankruptcy court is a bad idea. 

Section 548 of the Bankruptcy Code endows the bankruptcy court trustee with the power to undo a fraudulent transfer made within two years of the bankruptcy filing. Fraudulent transfers include any transfer made with the intent to hinder, delay, or defraud creditors; or transfers made while the debtor is insolvent which do not involve a fair value exchange. While the lookback period is set at two years by section 548, another section of the Bankruptcy Code (section 544) permits the trustee to apply state law to undo a fraudulent transfer. In many cases the state law lookback period is longer than two years. 

There is generally no issue if you have sold property and received a fair price. However, if you have transferred property in a less than honest fashion, the transfer may be undone. For instance, if you sell your car worth $5,000 to your brother for $500, and then file bankruptcy two months later, the trustee may seize the car from your brother and sell it to pay your creditors. Likewise, deeding jointly owned real estate to a non-filing spouse prior to filing bankruptcy can create a thorny legal dilemma.

 Every individual bankruptcy case must include a Statement of Financial Affairs which asks the debtor to list all property transferred within two years before the bankruptcy filing. It is important to answer this question honestly, and to discuss any recent property transfer with your bankruptcy attorney. 

If you are considering bankruptcy, consult with an experienced bankruptcy attorney and discuss your legal exemptions. In many cases your attorney can legally protect your property without the need to sell or transfer. Your attorney can advise you on the best course of action to protect your property and restructure your financial obligations.

When Paying Your Debts Can Cause Trouble

Many tough decisions are made when a family is struggling with debt.  Often debts are paid according to priority.  Those bills at the lowest priority may not get paid at all.  While this may be a good strategy under ordinary circumstances, it may back-fire when a bankruptcy is imminent. 

The act of paying one creditor while ignoring another is called a preference payment by the bankruptcy laws.  The debtor preferred to pay one creditor and not others.  A preference payment is defined as a transfer of money made before a bankruptcy filing, to pay on a pre-existing debt, made while the debtor is insolvent, and gives the creditor more than it would receive from the liquidation of the debtor’s assets during a Chapter 7 bankruptcy. 

In deciding who should get paid first, the Bankruptcy Code divides creditors into classes and creates a hierarchy of preferences.  For instance, the Bankruptcy Code prefers that child support is paid before credit cards, and that a secured car payment is paid before a medical bill.  In many cases a pre-bankruptcy preference payment is perfectly fine; in other cases it can create trouble for the debtor and the creditor.  This is especially true when one creditor in a class receives more than other creditors in the same class, or a creditor in a lower class receives money before creditors in higher classes. 

When a preference payment occurs within 90 days of the bankruptcy filing, the bankruptcy trustee can ask the court to order the preferred creditor to turn over the payment(s) for distribution according to the hierarchy of preferences.  This period is increased to one year if the creditor is an “insider” creditor.  An “insider creditor” is generally a relative, business partner, etc. who has a special relationship with the debtor. 

Common preference payment scenarios include:

1. Repaying a personal loan from a family member just before filing bankruptcy;
2. Paying one business vender, while ignoring others.
3. Transferring a credit card balance from one card to another.
4. Paying off a credit card, medical bill, or personal loan just before bankruptcy. 

When the trustee requests turnover of a preference payment, the creditor is faced with either complying with the request or litigating the matter in bankruptcy court.  There are legitimate preference payment defenses which largely depend on the circumstances of the payment.  However, the general practice of bankruptcy trustee is to sue first and ask questions later. 

If you are struggling financially, seek out legal advice early and avoid making mistakes with preference payments.  An experienced bankruptcy attorney can help you make wise financial decisions and avoid preference payment situations.

Debt Collection and Your Rights

Debt collectors can be ruthless. Persistent telephone calls at home and work, embarrassing letters in red envelopes, calls to friends and family, and even public posts to your Facebook account are all dirty tactics that debt collectors employ to harass you into paying. Fortunately, there are laws that protect you from unlawful creditor harassment. 

The Fair Debt Collection Practices Act, or FDCPA, is a federal law that protects against abusive collection practices by third party collectors. Third party collectors include collection agencies and collection attorneys. The FDCPA does not apply to business debts or to original creditors. The FDCPA prohibits certain abusive practices including: 

*  Telephone calls before 8 a.m. or after 9 p.m. (your time);

*  Requesting payment beyond what is actually owed;

*  Using abusive, profane or obscene language;

*  Threatening legal action which is not permitted by law (e.g. criminal action);

*  Telephone calls at work after being instructed that your employer prohibits phone calls from debt collectors;

*  Contacting you directly after being instructed that you are represented by an attorney 

Another federal protection is the Fair Credit Reporting Act (FCRA). The FCRA is designed to promote accuracy and ensure the privacy of the information used in consumer credit reports. The FCRA contains a dispute process for correcting inaccurate information placed on your credit report.  More information about the Fair Debt Collection Practices Act and the Fair Credit Reporting Act can be found on the Federal Trade Commission’s Bureau of Consumer Protection website.  The FTC is charged with enforcement of both acts. 

Hiring a bankruptcy attorney provides immediate relief from creditor harassment under the FDCPA, and all collection action must cease the instant you file a bankruptcy case. This protection lasts the duration of your bankruptcy and is replaced with the bankruptcy discharge at the end of your case. A creditor who violates these bankruptcy prohibitions can face a contempt of court charge in the federal bankruptcy court. 

Don’t let creditor harassment overwhelm your life. Take charge by consulting an experienced bankruptcy attorney about your debt and learn how the federal and state laws can protect your property, your income, and your peace of mind.

Do I Have To List It In My Bankruptcy?

A common question from clients preparing to file bankruptcy is, “Do I have to list it?” “It” can be an item of property, a financial obligation, a source of income, or even a reoccurring bill. The simple answer is, “Yes!” You must list all of your assets, debts, income and expenses. The bankruptcy process expects and relies on honest disclosures from the debtor. These financial disclosures are made under oath and threat of perjury. You must disclose everything. 

Disclosing ownership of an asset doesn’t mean you will lose that property. Statistically, only four percent of all Chapter 7 bankruptcy cases have an asset that is turned over to the trustee. Federal and/or state exemption laws protect most property during bankruptcy, however property exemptions are only recognized when the asset is listed and the legal exemption is properly claimed. An asset that is concealed during your bankruptcy case will not receive the full protection of the exemption laws. 

Likewise, disclosing income does not mean that you will be forced into a Chapter 13 repayment case. Most debtors pass the means test without much effort. In the remaining cases, most only require small adjustments. Disclose all of your income early during the bankruptcy process, and your attorney can discuss your legal options for discharging unsecured obligations without filing a Chapter 13 repayment case. 

Intentionally failing to disclose a debt means that the debt is not discharged. Unfortunately, it also means that you have committed perjury since you attested to having listed all of your debts. Perjury is a federal crime, and you may be denied a discharge. Occasionally a debtor wants to omit a creditor from the bankruptcy case. Your attorney can help you with this decision. For instance, a credit card with a zero balance is not a debt and there is no disclosure requirement. In theory, since the credit card company is not listed as a creditor, it does not receive notice of the bankruptcy, and the credit relationship is not disturbed. Realistically, the credit card company will discover the bankruptcy independently and may restrict the account. 

When it comes to bankruptcy it is important to be completely honest with your attorney. Your attorney can advise you on making the best disclosure decisions while staying within the legal requirements of the bankruptcy laws. Don’t hide a financial fact! Discuss it with your attorney and protect your legal rights.

Is Debtors’ Prison Making a Comeback?

In the early days of this country it was common for debtors to be imprisoned until their debt was paid. Popular history records that the last debtors’ prison was closed in the 19^th century and the practice of incarcerating a person on account of a debt was abolished. However, the prohibition against debtors’ prison has always had its loopholes; the most well-known examples are tax evasion and child support delinquency. In one case a former corporate lawyer, H. Beatty Chadwick, was imprisoned for more than 14 years for failing to turn over money related to a divorce case. The judge who released him decided that after 14 years Mr. Chadwick either could not or would not pay. 

Since the start of the recession more debtors are being arrested for not paying debts. The Washington Post reports that “more than a third of all U.S. states allow borrowers who can’t or won’t pay to be jailed.” This process generally occurs after an individual fails to show up to court, but sometimes results from failing to make court-ordered payments to a creditor.  In one case the Post reports that a 26 year old woman was arrested for failing to show up to a court hearing over a $1,159.87 credit card debt. When she posted a $500 bond, that money was turned over to the creditor. 

While many state judges appear to be using the power of their office to influence debtors to pay their creditors, these judges cannot circumvent the power of the federal bankruptcy laws. When a debtor files bankruptcy, all debts owed prior to the date of the bankruptcy fall under the jurisdiction of the federal bankruptcy judge. All state court proceedings must automatically stop, including the execution of a state court contempt of court warrant to coerce payment. This automatic stay is a very powerful protection and gives the debtor a chance to propose a plan to either discharge the debt or repay it over time. 

If you are threatened with a lawsuit, don’t ignore it. Speak with an experienced bankruptcy attorney and learn how the federal bankruptcy laws can protect your income, your property, and even your freedom.

How Often Can I File Bankruptcy?

The federal bankruptcy laws do not limit the number of times an individual can file for bankruptcy protection. When an individual is facing overwhelming debt and needs relief from creditors, the bankruptcy laws provide powerful protection. In some cases that protection can be a discharge of debt. In other cases, it means an opportunity to repay what is owed. 

An individual may file multiple bankruptcies for many reasons. When a discharge of debt is needed, the federal law limits time between discharges. After you receive a discharge in a previous Chapter 7 bankruptcy case, you must wait 8 years before you can receive another Chapter 7 discharge; and 6 years to receive a Chapter 13 discharge.  If you received a discharge in a previous Chapter 13 bankruptcy case, you must wait 4 years before you can receive a Chapter 7 discharge; and 2 years to receive another Chapter 13 discharge. 

The above time periods are measured from the date the previous case was filed.  For instance, if you filed a Chapter 7 bankruptcy on June 1, 2005, then on June 1, 2013 you will be eligible to file a Chapter 7 bankruptcy case and receive a discharge. However, on June 1, 2011 you are eligible to file a Chapter 13 bankruptcy and receive a discharge. 

In some cases a discharge is not needed. A debtor can file a Chapter 13 bankruptcy and repay debts without receiving a discharge. In this situation there is no legal limitation between bankruptcy cases. This strategy is especially useful when faced with non-dischargeable debts that must be fully paid. The obligation is paid over time under the supervision and protection of the bankruptcy court.  In some rare cases of abuse a bankruptcy court will deny the debtor relief. This may occur when a debtor has shown a history of repeated bankruptcy filings that have been dismissed. 

If you have received a discharge and need the protection of the bankruptcy laws for a second time, discuss your situation with an experienced bankruptcy attorney. The bankruptcy laws are meant to help the honest, but unfortunate debtor and can help you straighten out a difficult financial dilemma.

How Long Will Bankruptcy Stay On My Credit Report?

When a bankruptcy case is filed, information about the case is reported on the individual’s credit file. The report lists the date filed, the type of bankruptcy case (i.e. chapter 7, 11, 12 or 13), the case number, the case status, and closing date. The federal Fair Credit Reporting Act (FCRA) permits credit reporting agencies to keep this information on an individual’s credit report for up to ten years. Note that the FCRA does not mandate that reporting agencies list the bankruptcy for ten years; only that bankruptcy information must be removed from the individual’s credit report at that time. 

Each credit reporting agency has its own policy regarding the length it reports a bankruptcy case as a public record. In general, Chapter 7 cases are reported for ten years and Chapter 13 cases are reported for 7 years. However, the FCRA does not distinguish between Chapter 7 and Chapter 13 cases and a bankruptcy case under either chapter may be reported for up to ten years. 

The FCRA is very clear regarding when the ten year period commences. Credit reporting agencies are directed to exclude bankruptcy case information from an individual’s consumer report ten years after “the date of entry of the order for relief.” The “order of relief” is a bankruptcy term defined in Section 301 of the Bankruptcy Code as the date the bankruptcy case is filed. The day the bankruptcy case is filed is the day the ten year clock begins to run.  For instance, if a case is filed on January 1, 2012, then the bankruptcy record must be removed from a credit report before January 1, 2022. 

Knowing the time limitation for reporting your bankruptcy information is an important part of the “fresh start” promised by the bankruptcy laws. Filing bankruptcy does not brand an individual for life; bankruptcy relieves the individual of overwhelming debts and provides the opportunity for a second chance at a better future. If you need a financial fresh start, discuss your options with an experienced bankruptcy attorney.

Next Page »