Bankruptcy Questions Answered

Bankruptcy Contempt Case Highlights Important Rules

A recent news article from LoanSafe.org tells the story of a woman who broke some important bankruptcy laws and ended up with almost $48,000 in fines to pay, on top of a five-year probation period. If that doesn’t sound like a good deal to you, read on to find out what she did wrong.

According to sources, the woman’s case worked like this:

• In 2005, the woman in question filed for Chapter 7 bankruptcy. Chapter 7 is designed to help filers eliminate certain unsecured debts without making creditor payments through a repayment plan (that only comes into play in Chapter 13 bankruptcy).
• As bankruptcy law requires, the woman testified to the completeness and accuracy of the information in her bankruptcy petitions as part of the Chapter 7 process.
• Before filing her bankruptcy petition, the woman apparently transferred a piece of property (worth more than $47,000) to her son. She did not mention this transfer in her bankruptcy documents.
• After the Chapter 7 case ended, the woman reportedly sold the “transferred” property and used the money to buy a home in a different state without reporting the proceeds of the sale.

Avoiding Bankruptcy Fraud

The woman’s crime was that she improperly transferred property with the intention of shielding it from the bankruptcy court. Had she proceeded lawfully without transferring the property, it would have been considered part of the bankruptcy estate.

Depending on the specifics of the woman’s case, the property might have been sold to raise money to repay her creditors in part; however, lying about the property ended up costing her in the long run.

One reason most insiders recommend that potential bankruptcy filers work with a bankruptcy lawyer is to help them avoid bankruptcy fraud, which includes all of the following.

• Reporting incorrect or incomplete information: While the bankruptcy court may excuse honest mistakes on paperwork, more serious “mistakes” will likely lead to some legal action.
• Attempting to repay a favored creditor before filing: Singling out one creditor (say, a family member or friend who lent you money) to repay before discharging other debts in bankruptcy is not allowed. Those who attempt to do so could face charges of bankruptcy fraud.
• Improperly concealing or transferring property: This could be considered a branch of the “complete and accurate” rule, but it deserves its own section. Attempting to hide or pretending to give away assets to shield them from bankruptcy is not permitted.
• Omitting known future income: Whether you’re expecting a tax refund or a hefty inheritance, it’s important to include it in bankruptcy petitions. Otherwise, you risk being charged with bankruptcy fraud.

As the story above illustrates, bankruptcy fraud is serious business: fines can get as high as $500,000 and those convicted may face jail time. Neither of those options sounds like a good way to get back on your feet financially.

Posted in Chapter 13 Bankruptcy, Chapter 7 Bankruptcy, Legal Info, bankruptcy fraud, homes in bankruptcy | Comments Off

Bankruptcy Lawyers Help Homeowners Erase Second Mortgages

Many Americans currently considering bankruptcy are in financial trouble partly because of the struggling housing market. Underwater mortgages (those in which the homeowner owes more than the home’s current value) are a reality for as many as 28 percent of American homeowners.

Even though bankruptcy law prohibits the court from modifying the terms of a primary mortgage, some bankruptcy lawyers have found a legal way to help their clients stay in their home and avoid foreclosure.

Unsecured Second Mortgages

Here’s the process some bankruptcy petitioners are following to help ease their mortgage debt:

• File for Chapter 13 bankruptcy: Entering a Chapter 13 case means that the filer agrees to a three- to five-year repayment plan in which she will catch up on past-due debts.
• Petition the court to declare a second mortgage unsecured debt: Filers who have second mortgages that, combined with their primary mortgages, exceed the value of their home’s current value, may be able to make this move. A bankruptcy lawyer can explain in more detail how the move works and whether it might be possible in any individual’s case.
• Make payments according to the repayment plan: If the court accepts the petition, the filer must continue making payments according to her repayment plan for the duration of the bankruptcy case. At the end of the case, the remaining unsecured debt (including that from the second mortgage) may be excused by the court.
• Avoid foreclosure: In many cases, reclassifying a second mortgage as unsecured debt allows filers to make mortgage payments and remain in their homes.

The Winners and the Losers

Naturally, this legal maneuver is good news for struggling homeowners and potential bankruptcy filers. But banks and other lenders are apparently less than thrilled about the development – after all, they’re the ones who lose out on mortgage payments when debts are excused in court.

But, as one news outlet reminds us, the only way to change the law is an act of Congress. Given the current state of the American housing market and level of financial difficulty many Americans are facing, a move of that sort seems unlikely: what politician would want to be responsible for taking away a tool for avoiding foreclosure?

Can You Save Your Home from Foreclosure?

In order to take advantage of this legal protection, your financial situation must meet a number of criteria:

• Sufficient income to make payments: In order to benefit from Chapter 13, you have to be able to make monthly payments according to a repayment plan, which means you have to have a steady source of income.
• Two (or more) mortgages: Again, primary mortgages cannot be modified in bankruptcy court.
• An underwater home: Finally, you can only have debt declared unsecured if there is no property to secure it (that is, if your loan is worth more than your home). If your home value exceeds the amount of your primary mortgage, then at least a portion of the second mortgage is secured by the home, and cannot be excused by the court.

If you’re ready to find out whether this might work for you, connect with a bankruptcy lawyer today.

Posted in Bankruptcy and the Economy, Chapter 13 Bankruptcy, Foreclosure, Mortgage Foreclosure, stop foreclosure, underwater home | Comments Off

Study: Minorities File for Chapter 13 More than Whites

A recent study released by the Woodstock Institute of Chicago shows some strange numbers about bankruptcy filings and race. Specifically, the study shows that African American bankruptcy filers choose Chapter 13 bankruptcy more frequently than their white peers.

The implications of this finding are interesting and instructive to anyone considering bankruptcy as a way of easing debt.

Chapter 13 vs. Chapter 7: What’s the Difference?

In order to understand why this study’s findings matter, it’s essential to understand the key differences between Chapter 7 and Chapter 13 bankruptcy.

• Chapter 7 bankruptcy is designed to offer filers a full discharge of eligible unsecured debt. In order to qualify, filers must pass a means test showing that they do not have sufficient income to make regular payments according to a Chapter 13 repayment plan. Chapter 7 often works well for low-income filers who don’t have very much non-exempt property.
• Chapter 13 bankruptcy is designed to help those with a regular income repay a portion of their debts. Chapter 13 filers follow a three- to five-year repayment plan in order to catch up on money they owe. At the end of this period, remaining unsecured debts may be discharged by the court.

Choosing the Right Chapter Matters

The study apparently found that blacks and whites of equal income levels were choosing bankruptcy chapters in different proportions. Specifically, sources indicate that in predominately black areas, about 47.9 percent of filers choose Chapter 13 bankruptcy and in predominately white areas, only 22.5 percent of filers do. Nationwide, the rate is 32.8 percent.

Some sources suggest the difference may have been caused in part by overly aggressive advertising by certain bankruptcy firms who were targeting filers in specific areas. These firms, it seems, may have earned more money by leading filers toward Chapter 13 even when they could have filed for Chapter 7.

And the consequences for filing for Chapter 13 when you qualify for Chapter 7 could be serious:

• Strained finances: Those who qualify for Chapter 7 protection may just barely make enough money to make payments in the Chapter 13 repayment plan, which could harm their ability to save money for emergencies.
• Prolonged debt: Rather than moving through a quick, four- to six-month Chapter 7 case and ending with a debt discharge, Chapter 13 filers must wait for several years before their debts are cleared. In that time, missing a payment could cause the court to remove its protection.
• Few benefits: Those who do not have significant non-exempt property may have little or nothing to gain from filing for Chapter 13 when they qualify for Chapter 7.

Deciding which type of bankruptcy makes the most sense for your situation can make a huge difference to your financial future. If you’re considering a bankruptcy filing, be sure to consult with a bankruptcy lawyer about your options.

Posted in Bankruptcy News and Events, Chapter 13 Bankruptcy, bankruptcy study, chapter 7 vs. chapter 13 | Comments Off

Strategic Default and Foreclosure: What’s the Difference?

With the housing market headed for what some analysts are calling a double-dip downturn, there’s been a lot in the news lately about homeowners who strategically default on their mortgages. Here’s a look at what that means, how strategic default relates to foreclosure and what you need to know if you’ve got a mortgage you can’t afford.

What Is a Strategic Default?

The mortgage manipulation known as the strategic default works like this:

• A homeowner reassesses her debt situation: This can be spurred by a number of things, and in the current economic climate common triggers include having difficulty paying bills (though not necessarily making mortgage payments) and realizing that a home is now worth less than the amount of the mortgage loan.
• A homeowner decides not to make mortgage payments: After a month or two of missed mortgage payments, the mortgage loan will be in default (or, said another way, the borrower will have defaulted on the loan). The decision is usually considered “strategic” because those who choose this path opt to meet other financial obligations in lieu of paying their mortgages.
• The home goes into foreclosure: Because the homeowner stops making mortgage payments, the mortgage lender begins the foreclosure process and takes back the home.
• The homeowner deals with the credit consequences: In addition to finding new housing, strategic defaulters must also face serious financial consequences. Strategically defaulting on a mortgage can seriously damage a credit score, and many lenders (of all kinds) may refuse to issue loans to those with strategic defaults on their record. Fannie Mae, for instance, has announced that strategic defaulters are banned from Fannie Mae mortgage loans for seven years after defaulting.

How Is Strategic Default Different from “Regular” Foreclosure?

A strategic default is a conscious choice on the part of a homeowner to stop making mortgage payments, even if those payments are still affordable. Those who choose to strategically default often indicate that they are no longer willing to pay for a loan worth more than their house.

“Regular” foreclosure happens when a homeowner can no longer afford a mortgage loan and so has no choice but to stop making payments. In both cases, the homeowner loses the house to the lender; in strategic defaults, doing so is a conscious decision on the part of the homeowner.

What Are Other Options for Struggling Homeowners?

Because of the serious credit consequences and questionable ethical nature of strategically defaulting, many homeowners are not willing to do it, even if their loan is bigger than they’d like. Alternatives include:

• Applying for a mortgage modification: Some banks (assisted by federal programs) offer mortgage modification programs. To find out whether you might qualify, contact your bank as soon as possible.
• Filing for Chapter 13 bankruptcy: Some homeowners are able to at least delay (and possibly prevent) mortgage foreclosure by filing for Chapter 13. If you’re interested in learning whether you qualify, contact a bankruptcy lawyer in your state.

Posted in Bankruptcy and the Economy, Chapter 13 Bankruptcy, Foreclosure, Mortgage Foreclosure, strategic default | Comments Off

The Latest on Student Debt and Underwater Homes

New reports highlight some interesting information about two topics near and dear to those who have filed or are considering filing for bankruptcy: underwater mortgages and student loan debt. Here’s a look at what kind of picture the latest numbers paint.

Students Don’t Need to Default to Be Behind on Loans

The Institute for Higher Education Policy released a report last week showing that two-fifths of those who borrowed money for educational purposes fell behind on their payments at some point in their first five years of repayment. So what does this mean?

• Widespread repayment difficulties: These numbers may not even reflect the current rates of repayment difficulty, given that graduates in the last few years have faced a much tougher job market than those who graduated five years ago.
• Old measures may be inadequate: Traditionally, studies on student debt have focused on the rate of default rather than delinquency. Looking at delinquent loans offers a clearer picture of how many people are struggling to repay their loans, even if they manage to get back on track at some point.
• Bankruptcy not an option: Student loans are typically not dischargeable in bankruptcy court, which means that those with unmanageable student debt have few options for easing their debt burden. This is scary, considering that some estimates put the country’s total student debt at $896 billion, which is greater than our national credit card debt total.

Reports note that these numbers may affect the current debate in Congress over whether for-profit colleges and universities should be eligible for federally backed financial aid.

More Underwater Homes

Recent numbers released by a company called CoreLogic show that the number of underwater homes in the U.S. (that is, homes with a current value less than the amount of the mortgage on the house) has climbed since last quarter. Here’s a look at the numbers.

• A reported 11.1 million U.S. homes were underwater in 2011’s first quarter, a jump from 10.8 million in the last quarter of 2010.
• Nevada has a 65 percent rate of underwater mortgages, and is apparently the only state in which the average homeowner is underwater.
• Besides the more than 11 million underwater homeowners in the U.S., 2.4 million Americans have less than five percent equity in their houses, according to sources.
• Collectively, we reportedly owe about $751 billion more on mortgages than our homes are worth.
• Analysts predict that home prices could fall by another five to 10 percent in 2011, meaning that those with little equity could soon find themselves underwater.

Unfortunately, mortgage loans for primary residences cannot be modified in bankruptcy court, but in some cases homeowners may find a Chapter 13 or Chapter 7 filing useful for eliminating other debts to help improve their odds of staying on track with their mortgages.

Posted in Bankruptcy and the Economy, Chapter 13 Bankruptcy, Chapter 7 Bankruptcy, Foreclosure, Mortgage Foreclosure, Student Loans | Comments Off

The Changing Face of Mortgage Loans

Since the start of the mortgage foreclosure crisis in 2007, the mortgage industry in the U.S. has changed significantly. And, according to a recent piece in the Wall Street Journal, one of the latest changes being noted is a push by banks for larger down payments on mortgage loans.

Here’s a look at what that might mean for potential homeowners, the housing market and the recovery of the U.S. economy.

More Money Down = Fewer People Buying Homes?

The WSJ reports on how the home-buying landscape has changed in recent years:

• Down payments at all-time high: One online real estate information base, Zillow.com, has apparently been keeping track of median down payments required by lenders since 1997, and this year’s median (22 percent of the home’s value) is the highest that number has been since the tracking began.
• Steep rise in required down payments: What’s more, sources report, that 22 percent figure marks a doubling of the median down payment required just three years ago! In other words, banks have reacted swiftly and decisively to the turmoil in the housing market.
• Higher stakes for homeowners: It seems that the push for higher down payments has been largely driven by lenders, as a reaction to findings that homeowners with more of their money on the line (i.e. those who make larger down payments up front) are less likely to default on payments or go into foreclosure than those with less money at stake.
• Alternative lending assistance sought: The Journal notes that, because many potential homebuyers cannot afford a 22 percent down payment, there’s been an uptick in applications for mortgage assistance programs designed to help select groups of people (including veterans).

A More Realistic Picture of Homeownership?

While owning a home has long been considered part of the “American Dream,” the real estate bubble’s devastating effects on the housing market has left some people questioning whether homeownership is in fact for everyone.

Considered from a broad perspective, tightened mortgage regulations could well be a good thing for the U.S. economy as a whole: with lending practices that require more fiscally conservative borrowing and spending, the housing market will have less of a chance to spiral out of control and create another boom-and-bust cycle like the one we’re currently digging out of.

Worried about Your Mortgage?

If you’re currently saddled with an unaffordable mortgage (or one that’s gotten out of your reach because of job loss or reduction), you may be able to benefit from the foreclosure-prevention power of Chapter 13 bankruptcy, which may allow you to catch up on your mortgage payments or sort out your living arrangements without the pressure of creditors breathing down your neck.

Posted in Bankruptcy and the Economy, Chapter 13 Bankruptcy, Mortgage Foreclosure, Mortgage Foreclosures, Personal Finance | Comments Off

2011 may Be a Record Year for Foreclosures

Much has been written in the last few years about the foreclosure crisis that took hold once the housing bubble burst. And, according to the Associated Press, this year will not offer any relief – in fact, sources suggest, 2011 looks like it could see even more foreclosures than 2010 did.

1.2 Million Foreclosures Predicted for 2011

So why are news outlets and industry insiders predicting that 2011 will have more mortgage foreclosures than any year we’ve seen? A number of factors are apparently contributing:

• High unemployment: While the national unemployment rate has declined slightly since its peak of just above 10 percent, it’s still much higher than normal and millions of Americans without work are or will soon be unable to keep up with their mortgage payments.
• Plunging home values: Further, the crash of the housing market means that millions of homeowners are currently “under water” on their mortgages – in other words, they owe more than the home’s value and so have little incentive to pay their loans back.
• Delayed foreclosures last year: Another spur for 2011’s foreclosure season is the delays in foreclosure processing that happened at the end of last year: in addition to ordinary holiday moratoria on foreclosure proceedings, the robo-signing scandal halted foreclosures on many properties around the country. Those foreclosures that were delayed may now proceed normally.

A Look at the Numbers

So just how bad is the foreclosure crisis expected to get this year? The numbers provided by news outlets paint a pretty bleak picture:

• A reported five million borrowers are currently behind on payments by at least two months; without serious change in the employment scene, that number is likely to increase.
• It seems that as many as 2.9 million (that’s one in every 45) U.S. houses were in some stage of the foreclosure process last year. This could mean that the homeowners simply received notice of default or that the foreclosure actually took place.
• Apparently, five states are responsible for the bulk of foreclosures around the country, and insiders expect the pain to worsen in these areas: California, Arizona, Florida, Michigan and Illinois have reportedly accounted for about 1.5 million of the foreclosure notices received last year.

An End in Sight?

One source quoted in the Associated Press article seems to think that 2011 will show the “peak” of foreclosure filings in the U.S., which could be taken for either a good sign or a bad sign – 2009 and 2010 both set records for foreclosure volume.

And is there any hope if your home is nearing foreclosure? You may still be able to benefit from the protection of Chapter 13 bankruptcy (ask a lawyer for details), or perhaps from lowered mortgage rates. But many banks, it seems, are still less than eager to offer refinancing deals.

Posted in Bankruptcy and the Economy, Chapter 13 Bankruptcy, Economy, Foreclosure, Mortgage Foreclosure | Comments Off

Foreclosures Expected to Balloon this Month

Recent news reports have forecasted a significant increase in the rate of mortgage foreclosures across the country in the first month of 2011. According to National Public Radio, the forces that held foreclosures in check for the final months of 2010 are no longer at play and this year should see foreclosures picking up with a vengeance.

Here’s a look at what’s happened so far in the foreclosure world and what you can expect in coming months.

The Sad Saga of U.S. Home Foreclosures

While many economic indicators suggest that we’re finally tugging ourselves out of the recession that’s gripped us for years now, the state of the housing market suggests otherwise. Here’s a look at why.

• Robo-signing foreclosure scandal: In the last few months of 2010, a foreclosure scandal hit: it seems that, at many banks, the practice of “robo-signing” had become common for foreclosure paperwork. Lawyers questioned the legality of the practice and, in the meantime, hundreds of thousands of foreclosures were put on hold while the courts decided what to do.
• End-of-year foreclosure stays: Following that scandal came the holidays, a time during which many banks and lenders traditionally put a hold on foreclosure processing.
• Backlog of foreclosures in 2011: Now, of course, the holidays are over and the robo-signing cases have been more or less settled. And, according to NPR, as many as 100,000 homes could go into foreclosure by the end of January.
• Even more homes on the market: Naturally, increased foreclosures are bad news for the families directly affected by them, but they’re also likely to be problematic for the already glutted housing market. And, with mortgage lending standards tightened and unemployment still above nine percent, the chances of other families buying those homes any time soon are slim.

Is there Any Hope for Foreclosure Relief?

If you’re worried about losing your home to foreclosure, now is the time to take action. Consider the following.

• Visit a housing counselor: She can help you figure out what your options are and whether you can realistically catch up on your mortgage and stay in your home.
• Speak with a lawyer: An attorney can help you figure out whether or not Chapter 13 bankruptcy could provide you with sufficient means to halt foreclosure and work towards saving your home.
• Consider rescission: Ask your lawyer about the right of rescission, which could help you keep your home if your lender originated the initial loan fraudulently.
• Contact your lender: Whatever you decide to do, be sure to keep lines of communication between you and your lender open. While mortgage modifications may not always be an option, they can provide a realistic alternative when they’re practical.

Posted in Bankruptcy and the Economy, Chapter 13 Bankruptcy, Foreclosure, Mortgage Foreclosure | Comments Off

Rescission: A Foreclosure-Fighting Tool in Peril

The Federal Reserve has proposed a troubling change that could all but eliminate one tool homeowners have to fight mortgage foreclosure, a recent post from Credit.com blog highlights. The tool is called rescission. Here’s what it is and what might happen to it.

What Is Rescission?

Rescission is a process that more or less offers homeowners a chance to get out of a mortgage if they can prove it was fraudulently or deceptively originated. Specifically:

• Deceptive & fraudulent mortgage lending: One phenomenon reported frequently during the subprime housing boom of a few years ago was lenders who allegedly lied about specific terms of mortgage loans (whether that meant concealing balloon payments, misrepresenting the nature of adjustable rate mortgages or something else), or encouraged borrowers to do so (usually by inflating their income level). Unsurprisingly, many borrowers who signed such mortgages ended up unable to make payments at some point.
• Beginning of the foreclosure process: After a few months of failing to make mortgage payments, most homeowners will receive notice from their lenders of foreclosure proceedings. Naturally, this is not pleasant for anyone and can lead to serious stress and financial trouble for affected families.
• Limited protections in Chapter 13 bankruptcy: While some homeowners are able to find relief from foreclosure proceedings in bankruptcy court, many others find that bankruptcy only addresses some of their problems – after all, the bankruptcy court cannot modify the terms of a mortgage loan.
• Rescission’s foreclosure prevention: One of the few options available to many homeowners facing foreclosure, then, has been the process of rescission, which works like this: if a homeowner provides a written statement to his lender that his loan was originated fraudulently and can prove as much in court, the court may rule to cancel the terms of the current mortgage. The borrower can then take on a different loan from a different lender to repay the balance to the original creditor.

Essentially, the process of rescission allows homeowners to trade out fraudulent mortgage loans for more affordable, honestly originated ones.

The Fed’s Proposal to Change Rescission

But, as CreditBloggers reports, the Federal Reserve has proposed a change to the rescission laws that would require mortgage borrowers to repay the entirety of their fraudulent mortgage loans and only then challenge the loan’s legality.

As many consumer advocates have pointed out, this would remove much of the foreclosure-prevention potential the current rescission process offers and would prevent most ordinary homeowners from hanging on to their houses.

To learn more about the proposed rule change and the consumer advocates fighting against it, please visit the article linked to above. To learn more about your potential for relieving your mortgage debt with rescission, contact a lawyer in your area.

Posted in Bankruptcy Law, Chapter 13 Bankruptcy, Foreclosure, Mortgage Foreclosure | Comments Off

May Bankruptcy Filings Down from April, Up from 2009

Personal bankruptcy filings for the month of May have increased compared with a year ago, but dropped slightly compared with a month earlier, the American Bankruptcy Institute reported last week.

Here’s a breakdown of the data.

• Total filings: In May 2010, 136,142 personal bankruptcy cases were filed, a nine percent increase from May 2009, when 124,838 cases were filed.
• Month-to-month change: May’s total marked a six percent drop from April of this year, when 144,490 cases were filed.
• Distribution: Of the cases filed, 26 percent were under Chapter 13 of the U.S. Bankruptcy Code, and most of the remaining 74 percent were under Chapter 7.
• Projected total: Based on figures collected so far this year, most sources estimate that personal bankruptcy filings this year will total about 1.6 million, a 10 percent increase over the 1.44 million filed in 2009.

So what can these numbers tell us about the economic situation in the U.S.? Let’s take a look.

The Effect of Unemployment

While the decrease in filings from last month can be seen as good news, the increase from this time last year could be read in just the opposite way, meaning that these bankruptcy figures provide no clearer picture of the economic situation than any other economic indicator.

• Long-term unemployment: The year-to-year increase we see in bankruptcy filings could be one of the effects that the nearly consistent unemployment rate has had—people who have been out of work for several months may have depleted their cash reserves and be turning to bankruptcy for financial relief.
• Chapter 7 vs. Chapter 13: Another indicator that unemployment is hurting the country is that Chapter 7 cases outnumber Chapter 13 cases nearly two to one, indicating that most people in financial distress cannot afford repayment plans to resolve their outstanding debts and have relatively little income.
• The role of mortgages: In addition to the problem of unemployment, mortgage costs may be pushing more filers toward Chapter 7. Despite the Obama Administration’s Home Affordable Modification Program (HAMP), millions of Americans with unaffordable mortgage loans have not been able to have their loans modified, meaning that they’re stuck with expensive (and, in many cases, too expensive) mortgage payments.

If you’re struggling with unwieldy debt, an unmanageable mortgage or other financial burdens, you may want to consider consulting with a bankruptcy attorney from your area to see whether personal bankruptcy protection is right for you.

Posted in Bankruptcy Statistics, Bankruptcy and the Economy, Chapter 13 Bankruptcy, Chapter 7 Bankruptcy | Comments Off