“M” Is For Mortgages In Bankruptcy

UoMGCHow bankruptcy affects the mortgage on my clients’ houses is a major concern. Clients either very much want to keep their house or they want to get dump it. Not a lot of middle ground. Because of the recession and real estate crash, most houses are underwater and this is particularly true where I practice. The equity in the houses in Downriver Michigan in cities like Taylor, Southgate, Allen Park, etc. has been wiped out by the drop in home prices. I bet anyone who bought a house or refinanced within the last decade likely has a house worth less than what is owed.

What is a mortgage?

This may seem basic but bear with me. A mortgage is nothing more than a lien on a house. The lien secures the loan. If you don’t pay the loan, the lender is allowed to foreclose on the house. Here is the one thing most people don’t understand. The lender gives the borrower a loan. The borrower gives the lender a mortgage. The bank does not give you a mortgage. Most people use the words interchangeably and say things like “I have to pay the mortgage.” I do it, too. But it’s wrong. You pay the loan. The loan is the written agreement evidencing the debt and contains your obligation to repay the lender. The mortgage is a lien which allows the bank to recover the house to satisfy an unpaid loan.

Bankruptcy and mortgage treatment in a Chapter 7.

Chapter 7 bankruptcy discharges your debts. This includes the loan the bank gave you to buy the house. So unless you reaffirm your mortgage, the debt is discharged. You don’t have to pay the loan back. This doesn’t mean you get to keep your house free and clear. Remember that mortgage/lien you gave the bank, well if you don’t pay the loan, the bank will foreclose and recover the house. So the bottom line is you don’t need to reaffirm the loan to keep the house. You can decide to pay your monthly payment and stay in the house. You can decide to walk away from the house and let the bank recover it. You can stop making payments right away or you can wait months, even years, after your bankruptcy is closed. There is nothing the lender can do to you unless you reaffirm the loan and, trust me, there is no good reason to ever reaffirm a home loan. A Chapter 7 bankruptcy filer really holds all the cards when it comes to what happens to the house.

Bankruptcy and mortgage treatment in Chapter 13.

A Chapter 13 requires the debtor to file a reorganization plan which states their intention regarding their repayment of debts. This includes the treatment of home loans. Either the debtor must keep the loan and keep making payments or surrender the house. This is a bit different than in Chapter 7 where you can retain the collateral and continue making payments without reaffirming personal liability on the loan. But there is one thing you can do in a Chapter 13 than you cannot do in a Chapter 7. You can strip off any unsecured lien. If you can show your house is worth less than the principal balance of the primary mortgage, any junior mortgage or home equity line can be stripped. Remember the lien you gave the bank? Well, in a Chapter 7 you can’t take it back but you can in a Chapter 13. For example, your house has three mortgages on it. The primary mortgage is $120,000. The home equity line is $40,000 and the home improvement loan for some windows is $8,000. If the house is worth less than $120,000, the Chapter 13 can strip off the other loans. After completion of the repayment plan, you will only owe the balance of the first mortgage. The other liens are gone. Most people don’t want to file 13s but this is a huge benefit that you can only get in a Chapter 13.

“M” also stands for:

 

Christopher McAvoy is a Taylor,  Michigan attorney and consumer bankruptcy lawyer who helps people file Chapter 7 and Chapter 13 Bankruptcy. To find out more about bankruptcy, click here for contact info. We help people in Taylor, Allen Park, Southgate, Lincoln Park, Riverview, Trenton, Flat Rock, Wyandotte, Brownstown, Belleville, Dearborn, Dearborn Heights, and the Downriver, Michigan area.

 

“L” Stands For List It Or Lose It

Letter L The primary duty of a debtor in bankruptcy is to disclose everything. This includes all present or future interest in assets and property. The basic rule of thumb is “list it or lose it.” Failure to list and exempt an asset in bankruptcy can, and usually does, result in losing that asset at a minimum and loss of your discharge and prosecution at a maximum. Clients typically forget to list everything that they own that has value. If the case is still open, you can amend your petition and include the asset and exempt it if you have available exemptions.

Debtors must disclose all assets.

The big problem comes when you forget to list an asset and never amend. A typical example I see here in Michigan: Inexperienced bankruptcy attorneys failing to list the debtor’s potential Federal and State tax refunds and credits. The result? The Trustee will keep the case open and wait for the refunds to come, intercept them from the IRS and distribute them to the creditors pro rata. Happens all the time.

If you intentionally fail to disclose an item, like a Rolex watch or classic car, and it is discovered, your case can be reopened and your discharge revoked. This means that your will lose the benefit of the discharge for your creditors forever and cannot file a new bankruptcy to get rid of those debts. Want more bad news? You will still lose the undisclosed assets and may even be prosecuted for bankruptcy fraud. I hope you look good in orange.

Even potential assets must be disclosed in bankruptcy.

Did you know that a potential lawsuit is an asset? It could be a personal injury lawsuit or a small claims case against your landlord for the return of a security deposit. These are assets even though they aren’t money in hand. The mere fact that a possible recovery exists triggers a duty to disclose. Again, the penalty to fail to disclose can result in a denial of discharge and the loss of the asset. You are swearing in your bankruptcy petition you have fully disclosed everything. If you don’t list the potential lawsuit as an asset, you will be bound by this. If you don’t list it, it must not exist and you will be barred, or estopped, from bringing the claim.

Sometimes assets acquired after filing bankruptcy must be disclosed.

Even after your case is closed, you may have a duty to go back and inform the court and Trustee of a new asset that didn’t even exist when you filed your case. Inheritances, life insurance benefits, even lottery winnings, are considered property of the bankruptcy estate if the debtor becomes entitled within 6 months of the date of filing. The debtor has to tell the court and Trustee of these new assets. Clearly the debtor wouldn’t know about these before the case was filed but once they do arise, if it is within those 180 days, the debtor must list them or lose them.

“L” also stands for:

Christopher McAvoy is a Taylor,  Michigan attorney and consumer bankruptcy lawyer who helps people file Chapter 7 and Chapter 13 Bankruptcy. To find out more about bankruptcy, click here for contact info. We help people in Taylor, Allen Park, Southgate, Lincoln Park, Riverview, Trenton, Flat Rock, Wyandotte, Brownstown, Belleville, Dearborn, Dearborn Heights, and the Downriver, Michigan area.

Creative Commons License photo credit: cdsessums

“J” Is For Joint Bankruptcy Filing

Green JayMost married couples do most everything together but that doesn’t mean they want to file a joint bankruptcy together. Well, they don’t have to. Just because one files, it doesn’t mean that the other has to. A married couple will have to decide before the case is filed whether or not they will file a joint case. While most of my married clients file jointly, not all do. There are pros and cons to each to consider.

Benefits of a Joint Bankruptcy Filing.

The cost is the same whether you file joint or single. If your spouse wants to file later, I will happily charge you and your spouse twice. Remember, once the case is filed, you can’t jump back in. A joint case is cheaper than separate cases.

It eliminates all individual and joint debt. If your spouse doesn’t file, they will be remain responsible for their individual and any joint debt. Since married couples are economic units, eliminating half the debt in the house probably isn’t the best fresh start it could be.

You only need to do the credit counseling courses once. A debtor must do a pre-petition credit counseling course before they file and a post-petition debtor education course to get their discharge. A married couple does the courses together which saves time and money.

It’s less paperwork. Whether you file jointly or singly, I will pretty much need the exact same things: Tax returns, bank accounts, deeds, etc. Even if your spouse doesn’t file, I will need their pay stubs and budget the household income and expenses.

If you are eligible for a Chapter 7, so is your spouse. The bankruptcy court reviews household income and expenses to determine whether you can file a Chapter 7 or a Chapter 13. If one spouse is eligible for a Chapter 7 based on household income, so is the other.

Disadvantages of a Joint Bankruptcy Filing.

One spouse owns too much non-exempt property. I recently had a case where both spouses wanted to file but the wife owned some land in northern Michigan. It had been in the family for a long time and was owned free and clear. If she filed, she would not have had enough exemptions to protect the real estate. The trustee would have administered the property for the benefit of the creditors. He filed. She didn’t.

Credit is damaged for both filers. Sometimes one spouse has little or no debt. Sure it would be nice to have bankruptcy wipe out the debt but if one spouses debts are manageable and not overwhelming, perhaps having one spouse with good credit is worth the trade off.

Divorce is on the horizon. Sometimes financial problems and divorce go hand in hand. If you are a married couple considering divorce, consider filing bankruptcy after the divorce if you are not a joint Chapter 7. You may both be a Chapter 7 after a divorce but a Chapter 13 while married. Even if both of you would be a Chapter 13 after a divorce, would you really want to be in a repayment plan with your ex-spouse? Probably not.

“J” also stands for:

Christopher McAvoy is a Taylor,  Michigan attorney and consumer bankruptcy lawyer who helps people in the  Downriver area  file Chapter 7 and Chapter 13 Bankruptcy. To find out more about bankruptcy, click here for contact info.

 

“I” Is For Income Tax Refunds

ITI Blue Black White Pink Blue Green
Federal and State income tax refunds and credits are treated like a savings account for most people. Income tax refunds are used to catch up on bills, make repairs, or buy some necessary household items. Clients want to keep their income tax refunds, creditors want to garnish them, and Trustees like to seize them. Read on for the essential guide on how you can file for bankruptcy and keep your income tax refunds in Michigan.

Chapter 7 and income tax refunds.

Income tax refunds and credits are considered an asset in a Chapter 7 bankruptcy and must be listed on Schedule B as property even if you aren’t sure what they will be. If you forget to list and exempt them, you may very well lose them to the Trustee. It doesn’t matter what month you file, you need to schedule them pro rata. For example, it is June of 2012 and you file bankruptcy.  You have to list your anticipated refunds for 2012. In 2011 you received $3,000 in Federal and State tax refunds and credits. Using that as a your guide, list half of the prior year’s refunds. Remember, this is June in our example and half the year is up. After the anticipated refund is scheduled, exempt them using your Federal d5 wildcard exemption and you are all set. Most pro se clients and a lot of rookie lawyers make this mistake to their detriment.

Chapter 13 and income tax refunds.

Here in the Eastern District of Michigan tax refunds are not handled the same in Chapter 13s are they are in 7s. If you don’t live here, your local custom may treat them differently. Anticipated Federal tax refunds are considered disposable income and are turned over to the Trustee for distribution to your creditors for as long as you are in bankruptcy. State of Michigan refunds and credits are yours to keep. If you are in your Chapter 13 you may be able to keep your refund if you can show a need, for example, you need the money to make a necessary car repair, buy a new stove, or make a home repair. You will need court permission to do this. Do not spend the money without court permission. Here is a quick tip: If you are expecting a tax refund, try to hold off on filing your Chapter 13 until after you have filed your returns and received your refunds. You will have to turn them over in the future, but you can get them one last time. After your Chapter 13 is completed, you can stop turning them over to the Trustee.

Garnishment of income tax refunds.

Filing for bankruptcy protects you from creditor garnishments. But what if you haven’t filed yet and you are worried judgment creditors will try to garnish your refunds. Federal refunds cannot be garnished from the IRS. They can only be garnished from your bank account after you have received them. State of Michigan refunds and credits can be garnished by a judgment creditors. Usually in the Fall of each year, creditors file garnishments. If you would like to keep you state tax refunds and are going to file for bankruptcy here is a really simple solution to keep them from being garnished: File your State tax returns after you file for bankruptcy. It’s just that simple. You don’t have to file your tax returns by April 15th of each year if you are owed money. You have up to three years to file and get your past refunds without penalty. The filing deadline is for people that owe taxes.

“I” also stands for:

Christopher McAvoy is a Taylor,  Michigan attorney and consumer bankruptcy lawyer who helps people in the  Downriver area  file Chapter 7 and Chapter 13 Bankruptcy. To find out more about bankruptcy, click here for contact info.

Creative Commons License photo credit: bixentro

“H” Is For Harassment By Creditors

HCreditor harassment, obnoxious phone calls to your house and job, lawsuits and garnishments overwhelm and stress people out. Ripping open your paycheck to see if there is a garnishment is not a good feeling.  Creditor harassment and debt collectors make ridiculous threats to get you to pay. Creditors say harassing things like they will have you arrested or they will take money from your bank account if you don’t start making payments.

Lies, goddamn lies, and creditors.

Here are some of my favorites:

The threat:

  1. You will be arrested if you don’t start making payments.
  2. They will take the money from your bank account immediately.
  3. Your check will be garnished this week.

The truth:

  1. Debtor’s prisons no longer exist. I assure you a cop is not going to arrest you because Visa said so.
  2. Your bank will only allow a creditor access if you give them permission.
  3. Garnishment will only happen after you have been sued and there is a judgment. Even then it will be a lawyer, and not a debt collector, doing the garnishing.

Having said all of that, threatening calls and letters is a symptom of a much bigger problem: You can’t afford to pay your debt. That’s the real problem. Whether it is because of job loss, wage reduction, overwhelming medical debt, the result is the same. There are only two ways I know of that are guaranteed to work to stop the collections. Either pay off the debt or file for bankruptcy protection.

Bankruptcy and the automatic stay.

Once you file for bankruptcy, the “automatic stay” kicks in. Your creditors are no longer allowed to contact you, write you, call you, sue you, garnish you, seize your property, etc. When you file your bankruptcy petition, all of your creditors are listed. The bankruptcy court mails notices to the creditors to inform them of the bankruptcy. If the contact continues, the creditor is in contempt of court and can be sanctioned for violating the automatic stay. In some cases, a debtor will be awarded damages and attorney fees for having to enforce the stay against the willful violator.

“H” also stands for:

Christopher McAvoy is a Taylor,  Michigan attorney and consumer bankruptcy lawyer who helps people in the  Downriver area  file Chapter 7 and Chapter 13 Bankruptcy. To find out more about bankruptcy, click here for contact info.