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.
Discussing Bankruptcy With An Older Relative
Just because a relative is older and living on a fixed income does not mean that he or she is also debt-free. Many older Americans struggle each month to pay unsecured debts from very modest incomes. The most common forms of unsecured debts are credit cards and medical expenses, and for many of our elderly even a small unsecure debt can be a big financial complication. Some face the difficult decision to cut back on food, prescription medicine, or home utilities in order to make minimum payments on these debts.
Many of our elderly try to avoid bankruptcy because they believe that they can pay their obligations with minimum monthly payments. The unfortunate truth is that it takes many years to pay off even a small high interest debt with minimum monthly payments. In the meantime a changed interest rate and annual fees can cause that minimum payment to increase. Additionally, forgotten payments can lead to creditor harassment or lawsuits which can result in a real estate judgment lien and/or an asset seizure.
Discussing personal bankruptcy with an older loved one can be difficult. In many cases there is great concern over losing property or income. The federal bankruptcy laws have changed significantly over the past fifty years and offer great protections for the elderly. For instance, retirement income and social security are protected from creditor garnishment during bankruptcy. In most cases all of the bankruptcy debtor’s property is exempt from turnover; however your bankruptcy attorney can discuss any property that may be at risk. The bankruptcy laws offer many options for retaining property and discharging debts. After the typical case the unsecured debts are discharged and there is more money available to pay necessary living expenses.
Another common concern is the embarrassment of bankruptcy. A personal bankruptcy is usually a very private legal process. Friends and family are not contacted and bankruptcy cases are not published in the newspaper. Only creditors and co-debtors receive notice of a personal bankruptcy.
If an older relative is struggling with debt, discuss the situation with an experienced bankruptcy attorney. The federal bankruptcy laws contain many protections that shield the assets and incomes of the elderly while discharging burdensome creditors. Don’t let the stress of credit cards and medical bills tarnish your loved one’s golden years.
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.
Law of Unintended Consequences Hurts Big Banks
In 2004 and 2005, the banking industry spent millions lobbying for tougher bankruptcy laws. Washington Mutual, Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. collectively spent $25 million during that period. The big banks’ efforts paid off in a major overhaul of the Bankruptcy Code in 2005 making it more difficult for struggling families to discharge credit card debt. However, the banks did not foresee the current housing crisis, and new research suggests that the 2005 changes to the Bankruptcy Code may have caused mortgage default rates to rise.
A paper published by the National Bureau of Economic Research states that the 2005 changes “raised the cost of filing and reduced the amount of debt that is discharged” thereby making it more difficult for debtors “to shift funds from paying other debts to paying their mortgages[.]“ In other words, before the 2005 changes, many debtors struggling with a mortgage arrears and credit card debt could file bankruptcy, discharge the credit card debt, and free-up money to pay the mortgage. The new bankruptcy provisions make this process more difficult. As a result, fewer debtors are able to afford to save their homes through the bankruptcy process.
Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank said, “Be careful what you wish for. [The banks] wanted to make sure that people kept paying their credit cards, and what they’re getting is more foreclosures.”
If you are facing overwhelming debt and want to keep your home, there are many alternatives available to you. An experienced bankruptcy attorney can review your finances and explain your legal options for discharging or repaying your debts. Bankruptcy is not the only option for saving a home from foreclosure, and many cases are successfully resolved using a combination of bankruptcy and non-bankruptcy methods. Get the facts today and solve your debt dilemma!
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.
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.
Who Will Know About My Bankruptcy?
One of the most common questions asked about the bankruptcy process is, “Who will know about my bankruptcy case?” Filing bankruptcy is usually very confidential, but the Bankruptcy Code and Federal Rules of Bankruptcy Procedure dictate that notice of your bankruptcy case must be sent to certain individuals and businesses.
Bankruptcy is a legal process and is a matter of public record. Few newspapers will publish bankruptcy filings in the “public notices” section. While this was a common practice for newspapers in the past, the sheer number of bankruptcy filings makes reporting personal bankruptcies impractical. This year more than a million and a half people will file bankruptcy, and more than 5.7 million people have filed since September 30, 2005. Unless you are a public figure or your bankruptcy case is somehow newsworthy, it likely will not appear in any section of a newspaper.
You are required to submit a list of the names and addresses of every individual or business you owe when your case is filed. Everyone on that list is sent a notice of your bankruptcy case. The notice also prohibits the creditor from taking any further collection activity. The bankruptcy court will send notices only to the names on your list of creditors, to your attorney, and a notice to your address. Friends and family members are not sent notices unless you identify them on your list.
Your employer may receive notice regarding your bankruptcy in a few limited circumstances. Obviously, if you owe your employer money, your employer will be notified. A second circumstance is when you file a Chapter 13 repayment bankruptcy and wish for your employer to withhold the plan payment from your wages. Finally, there may be a reason to notify your employer, like if your employer is under a court order to garnish your wages.
Since your bankruptcy case is a matter of public record, an individual may contact the bankruptcy court to obtain information about your case. Most bankruptcy courts have an automated telephone system that will provide basic case information to the public. Some individuals are able to access the Public Access to Court Electronic Records (PACER), an electronic public access service that allows users to obtain bankruptcy case information via the Internet. PACER registration is free, but the system charges an access fee per page.
The typical bankruptcy case is quick and confidential. However, every case is different. If you have specific questions about the effects of filing bankruptcy, consult with an experienced bankruptcy attorney. Your attorney can explain the benefits of the federal bankruptcy laws and the process for discharging your debts.
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.
Can An Illegal Immigrant File Bankruptcy?
There is no requirement of citizenship in the Bankruptcy Code. Section 109(a) of the Bankruptcy Code states that “…only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor” in bankruptcy. Your legal status does not determine eligibility to file bankruptcy; however there may be complications if you are not a U.S. citizen.
First, you must be able to prove a physical residence or ownership of property within the bankruptcy court’s jurisdiction. A permanent physical address is required for the bankruptcy forms. Residency is also important to qualify for state exemptions used to protect your property. Generally, a debtor must show residency within a state for at least 90 days preceding the bankruptcy filing in order to qualify for that state’s exemption laws.
Second, you must prove your identity. Most bankruptcy debtors use a social security number (SSN), but an individual tax identification number (ITIN) may also be used. An ITIN is issued by the IRS to foreign nationals and others who have federal tax reporting or filing requirements and do not qualify for SSNs. Whether a SSN or ITIN is used, physical verification of the number must be shown to the bankruptcy trustee.
While there is no requirement in the Bankruptcy Code that you must have either a social security number or ITIN, the bankruptcy petition requires you to sign a Statement of Social Security Number. The options on this Statement are (1) you have a social security number; (2) you have an ITIN; or (3) you don’t have either. If you select option three, you may be able to use a valid passport or some other official government issued identification as proof of identity. There are bound to be consequences for the debtor that does not have a SSN or ITIN including the red flags it sends to the Department of Justice, the IRS, and INS.
Crimes of “moral turpitude” that are be disclosed within a bankruptcy filing may affect your immigration status or application for citizenship. These acts include the fraudulent use of credit cards, bad check offenses, tax evasion, fraudulent transfer of an asset, or falsifying government documents (including your bankruptcy petition.)
If you have immigration issues and need to file bankruptcy, discuss your situation with an experienced attorney. The United States bankruptcy laws are very liberal and can help you get out of debt. Your attorney can work with you to resolve your debts while avoiding deportation.
Will I Lose My Tax Refund by Filing Chapter 7 Bankruptcy?
April 15 is quickly approaching and many Americans are filing their income tax returns. A common question at this time of year is, “Will I lose my income tax refund if I file Chapter 7 bankruptcy?” The short answer is no, at least if you consult with an experienced bankruptcy attorney.
The safest situation is to file your tax return and receive your refund prior to filing bankruptcy. The bankruptcy estate is calculated as of the date that you file your case. If the tax refund money is gone on the date you file your bankruptcy, there is generally no way for the bankruptcy trustee to make a claim against the tax money.
However (it’s funny how bankruptcy law, like life, has many “howevers”), there are exceptions to the general rule. For instance, if you pay an insider creditor on an antecedent debt, the trustee can avoid the transfer. An “insider” is a basically person close to you like a friend, family member, or business associate. If you owe an insider money, and you repay the debt from your tax refund, then the trustee could ask the insider to repay the money to the bankruptcy estate. Paying an insider within a year of filing bankruptcy usually leads to problems.
You may run into a similar problem if you pay down a loan, or pay any creditor a large lump sum within 90 days of filing bankruptcy. You could also run into an equity issue by paying off a vehicle with a large tax refund. These may seem like responsible actions, but the bankruptcy laws are full of landmines. Before spending your tax money it is wise to consult with your bankruptcy attorney to avoid these sticky situations.
Another issue that occasionally happens is when a bankruptcy debtor files a Chapter 7 case after filing a tax return, but before receiving an expected small refund. “No problem,” says the bankruptcy attorney, until the IRS adjusts the small refund into a large refund. There is “no problem” if the debtor has available exemptions to protect the refund, the debtor simply amends his schedules. But sometimes there is no way to protect all of the refund and the trustee is able to collect. That is an unfortunate situation for someone that really could use the extra money, and a case that can be avoided by waiting until the refund is received and spent.
If you are concerned about keeping your income tax refund, consult with an experienced bankruptcy attorney. Your attorney can advise you on property that is exempt (protected) and non-exempt (not protected) before you file your case and risk losing any property.