“N” Is For Notice To Creditors

N (Washington, DC)Creditors are entitled to notice when a debtor files for bankruptcy. Typically, by using a credit report, collection letters, and the debtor’s memory, all creditors are listed. The bankruptcy court then sends notice of the bankruptcy filing and the automatic stay to the creditors.

What happens if you forget to list a creditor?

If you have filed a Chapter 7 and there are no assets available for distribution to the creditors, then it doesn’t matter if they got knew about it or not, the debt is discharged. Letting them know after the case is over is sufficient. Our courts in Michigan (a 6th circuit state)  won’t reopen a case just to add a creditor. It’s a waste of time. There is a mistaken belief that the failure to list the creditor keeps the debt alive. Not true. It’s gone. This happened recently for an Allen Park client of mine. No worries though, I just sent notice of the bankruptcy even though the case was closed and that resolved it.

But you better make sure you list all your creditors.

While most Chapter 7 cases don’t have assets available for distribution, a small number do. In these cases, creditors are given notice to file a claim in order to receive a share of the proceeds. If the creditor isn’t listed, the trustee can’t give them notice to file a claim. If they don’t file, they don’t get paid anything. If the creditor is prejudiced by the debtor’s failure to list them, then that debt may not be discharged. Chapter 13s are very similar. All Chapter 13s are asset cases because a payment of some amount is made to creditors. Again, that debt may not be discharged by the debtor’s failure to list the creditor and the debt.

And there is no violation of the Automatic Stay if they don’t know.

If a creditor violates the automatic stay by continuing to collect on a debt after the case is filed, you can bring an action against the creditor which may entitle you to money damages. But if you didn’t list the creditor, how are they to know that you filed for bankruptcy? The automatic stay only prohibits collections by creditors that have actual notice. No soup for you.

“N” also stands for:

Chris 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.

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“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.

 

“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.

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“C” Is For Chapter Of Relief

"C" is for chaptersOnce you determine that bankruptcy is a smart, financial tool to eliminate your debt and and reorganize your finances, you need to determine what Chapter to file.  There are six Chapters of relief to chose from. These Chapters are found in Title 11 of the United States Code. By the way, the reason why they are called Chapters is because they are literally the chapters in the bankruptcy code.

Chapter 1: It was the best of times, it was the worst of times…

The typical consumer debtor will files a Chapter 7. A Chapter 7 is also known as a straight bankruptcy. It takes about four months from beginning to end. While most may want to file a 7, you have to be eligible. The debtor must be under the median household income level for their family size. If the income is over the median, a means test must be “passed” in order to rebut the presumption of abuse. However, you will need sufficient exemptions to protect all your property. If not, the property will be turned over to the bankruptcy trustee for sale with the proceeds going to the creditors. Since the Federal exemptions are fairly generous, most filers keep all their stuff but it’s still a consideration to keep in mind.

But I want to file a Chapter 7, not a Chapter 13.

Chapter 13 is for wage earners with a regular source of income that are able to pay something back to their creditors. The person that files Chapter 13 either makes too much money a Chapter 7 or has to file a Chapter 13 to force a creditor to take payments over an extended period, e.g., to save a house from foreclosure. The payment plan is typically three to five years.

So tell me again why I should file a 13.

While debtors usually want to file a Chapter 7 there are some benefits to filing a Chapter 13 that are not available in a Chapter 7. In a 13, you can strip your second mortgage or home equity line. You could tax care of back taxes or catch up on support arrears. Chapter 13s can discharge divorce property settlements and judgments. Also, since you are paying back something to your creditors, non-exempt property that would otherwise be lost in a 7 can be kept. That’s not too shabby.

Chapter 7s and 13s account for a great majority of all filings but, just if you really want to know the other four, read on. Chapter 9 is for municipalities or cities. Chapter 11 is for businesses or individuals with high assets or income. Chapter 12 is for family farmers and fisherman. Chapter 15 is for international bankruptcies or foreign debtors.  These are very specialized areas and your typical bankruptcy attorney doesn’t handle these.

“B” 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, read The Bankruptcy Book.

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Can Chapter 13 Bankruptcy Eliminate Second Mortgages?

Legal stamps – Mortgage deed

Pretty much any house purchased in the last 5 years in the Downriver area of Michigan where our office is located (Taylor, Southgate, Allen Park, etc.) is now worth less than the purchase price. During the real estate purchase boom, a lot of the homes were financed using an 80/20 loan. Basically, the primary mortgage paid for 80% of the purchase price and 20% came in the form of a home equity line of credit (HELOC) or a second mortgage. This is how many purchasers were able to buy their new home with little to no money down.

Well, those days have come to an end and many homeowners after this great recession are now making payments on a house that is worth less than what is owed. Some of these second mortgages had a flexible interest rate which has gone up and the payments made on it are mostly, if not entirely, interest. This is discouraging to say the least if not outright depressing. Many clients who fell into this finance trap with increasing home ownership costs and decreasing income find themselves considering bankruptcy as a smart option to restructure their finances and eliminate their debt.

Chapter 13 provides an option to modify your second mortgage that is not available in a Chapter 7. The general rule in bankruptcy is that secured liens will survive a discharge even if the obligation on the note is discharged. However, if you can show that the second mortgage is wholly unsecured you can strip the lien from the house once you complete your Chapter 13 plan payment.

Here is an example. Your house is appraised and has a fair market value of $125,000. The first mortgage has a principal balance of $140,000. The second mortgage is $25,000. Since the house is worth less than the first mortgage, the second mortgage is unsecured by any equity. When the bankruptcy is filed, a lawsuit is filed against the mortgage company to remove the secured lien and make it an unsecured debt like a credit card. This type of lien strip is only available in a Chapter 13.

Unfortunately, many of our clients think that because we can modify the second mortgage, the bankruptcy code allows them modify the terms of the first mortgage. Despite some efforts in Congress to allow this, as of right now, the Bankruptcy Code does not allow any mortgage modifications to the primary mortgage of your principal residence. Some proposed legislation has been discussed which would give bankruptcy judges the power to do this but it hasn’t gone anywhere. Until that does happen, there is still a lot of benefit to keeping your house and stripping any unsecured lien as part of the plan.

Christopher McAvoy is a Michigan attorney and consumer bankruptcy lawyer who helps people file Chapter 7 and Chapter 13 bankruptcy. To find out more about bankruptcy, read The Bankruptcy Book.

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Bankruptcy Filing Fees And Median Incomes In Michigan.

 

 

Here is some bad news for some future Chapter 7 filers in Michigan. The Census Bureau’s Median Family Income Data accessible through the “Means Testing Information” page has been updated. The U.S. Trustee Program will apply the updated data to all cases filed on or after November 1, 2011. Overall, it makes it a little easier for the single wage earner to file a Chapter 7 but a little bit harder for a household size of two or more.

Updated Median Income Numbers

The new numbers in Michigan:

  • 1 Earner: $43,677
  • 2 People: $50,079
  • 3 People: $58,467
  • 4 People: $70,237
  • Add $7,500 for each person in the household over four.

IRS Housing and Utility Standards

If you are over the median household income, you have to “pass” the means test to show that you are not abusing the system. Basically, if you make enough money, you are expected to pay something back to the creditors, even if it is less than the full amount. The means test has standard numbers developed by the IRS that determine the food, clothing, housing, transportation, and utilities. A quick review will show no relationship to reality but what can you do? Rules are rules. The IRS’s Local Standards for Housing and Utilities accessible through this page have been updated. The revised standards will apply to cases filed on or after November 1, 2011. I haven’t reviewed the impact overall as these are adjusted county by county and I am in Wayne County and service the Downriver and Taylor, Michigan areas.

Increased Filing Fees

To top it off, the filing fees in bankruptcy also went up nationally. Effective November 1, 2011, the filing fee for a Chapter 7 will increase from $299 to $306. A Chapter 13 will increase from $274 to $281. While this is only a $7.00 increase, it adds up with all the other costs and expenses which makes it more difficult for the people that need the most help to afford it.

The bottom line is if you want to file a Chapter 7 and your family size is two or more, better hurry up and file.

To find out more about bankruptcy and whether it is a smart, financial tool for you to reorganize your finances, please read my free ebook, The Bankruptcy Book: The Truth About Ending Your Bill Problems And Getting Back The Good Credit You Deserve.