Archive for the ‘payment’ Category
Tuesday, September 14th, 2010
There are dozens of lawyers out there who offer to prepare and file bankruptcy cases. Some work in high volume "bankruptcy mill" firms that compete on price while others compete on experience, knowledge and service. Usually the cost differential is a few hundred dollars, but when you are considering bankruptcy, every dollar counts – so why would you want a lawyer like me as opposed to a firm that would offer to represent you for a lower price?
I could offer a glib answer like "if you needed brain surgery, would you look for the cheapest surgeon on the one with the most experience and industry recognition" but that does not really answer the question. Perhaps it would be helpful if you could look over my shoulder as I analyze a real life situation that came before me recently.
Earlier this month an email arrived from a couple who wanted information about bankruptcy. The wife wrote that she was a stay at home mom raising 2 children and that her husband lost his job about a year ago, and recently started back to work at a lower paying job. Their current household income is just under $50,000. They own a house that is now worth less than what they paid for it – the house is worth about $200,000 – the first mortgage is $210,000 and the second mortgage is $35,000. They own one older car outright and are financing a mini-van. They have also incurred around $25,000 of credit card debt – most of which was used trying to keep the mortgage current.
Earlier this year they fell behind on both the first and second mortgage. The first mortgage lender started foreclosure proceedings, but suspended foreclosure and offered to consider my potential clients for a mortgage modification. They have been making modified payments for several months but when they called the lender to ask if they had been approved for a permanent modification, the account rep told them that their modification paperwork had not been approved but that their application had been sent to another department for a reconsideration. News of this decision had not been provided to my prospective clients – the only reason they found out was from their call. No one from the mysterious reconsideration division was available and their multiple calls have not been returned for over 2 weeks.
They decided to contact me because they are getting the sense that the mortgage company is unlikely to approve their modification and they want to be prepared for a possible foreclosure. What are their options?
Here is what I advised them through my conversation with the wife:
First, I asked what was their desire regarding the house – was keeping the house a priority? The wife responded that they would like to keep their house but they were not sure they could afford it given the husband's reduced salary.
I explained that Chapter 13 is the type of bankruptcy that can stop a foreclosure but that Chapter 13 would not allow us to change the amount of the monthly payments, nor would it change the total balance due on the mortgage. Chapter 13 would allow them to "cure" their arrearage by paying that arrearage (the past due payments) over a five year period of time, along with other debts that would also be included in the Chapter 13 payment plan. However, if they were not able to afford the regular monthly payments Chapter 13 probably did not make much sense.
The only possible justification for a Chapter 13 would arise from the possibility that they could use Chapter 13 to "strip" the second mortgage and make that unsecured. Under Chapter 13 law, a second mortgage that is wholly unsecured, meaning that the balance due the first mortgage exceeds the fair market value of the home. If the second mortgage is wholly unsecured, we can file a motion to strip the lien, thereby making the second mortgage debt an unsecured claim in the Chapter 13. If our Chapter 13 plan called for paying unsecured debt at 5 cents on the dollar, then Chapter 13 might be something to consider.
In this case, the wife advised me that the monthly payment due the first lender was more than what they could afford, plus she did not seem enthusiastic about signing on for a five year payment plan, so we decided to remove Chapter 13 from consideration.
We then proceeded to discuss Chapter 7.
I pointed out that Chapter 7 would allow the couple to discharge their credit card debt as well as any potential liability arising from the surrender of their home. I felt that the real danger came from the second mortgage lender as it has been my experience that first lenders rarely pursue deficiency claims because of the Georgia law that requires them to go to court to certify the deficiency before a judge within 30 days of the foreclosure. Second mortgage holders, by contrast, need only file suit on the promissory note associated with their loans. I see far more deficiency balance claims from second mortgage lenders than from first mortgage lenders.
I also noted that since the foreclosure process could take several months, one strategy here would be to remain in the house and pay nothing – nothing to either mortgage lender and nothing to the credit card lenders. This strategy would allow my prospective clients to reduce their budget outflow dramatically for several months while they built up a small cash reserve, and then file bankruptcy in four to six months when creditors were starting to take action. I noted that this strategy was based on economics, and that they would have to be comfortable with the moral implications of this course of action. I also noted that this "wait until the last minute" strategy would cause significant damage to their credit in addition to the bankruptcy. By contrast, filing a Chapter 7 when there were few or no 120 day late references would make recovery from bankruptcy a little easier. Credit reports document payment histories and while a bankruptcy discharge will put the balances at zero, it does not delete the negative payment histories.
On the other hand, I advised the wife that if she and her husband waited to file and the husband secured a better, higher paying job, their household income might leave them with disposable income in their budget, or it might cause their household income to exceed the median income for a family of four, thereby making Chapter 7 much more difficult or impossible. It has been my experience that when household income exceeds the median (in Georgia the current median income for a family of 4 is $68,258) by $10,000 or more, it can be very difficult to qualify for Chapter 7 under the means test. Thus, if the husband was actively looking for employment and his target income was $80,000 or more, waiting to file Chapter 7 might not be the best idea.
The wife then asked me about the credit report issue – how long would it take for she and her husband to rebuild their credit. I responded by saying that it my experience, a Chapter 7 debtor can expect his credit score to remain depressed for eight months to a year following the Chapter 7 discharge. However, Chapter 7 has the positive effect of eliminating all debt and thereby causing an improvement to the debt to income ratio. Further, individuals can only file Chapter 7 once every eight years – so from a lender's perspective a recently discharged debtor has no debt and cannot file bankruptcy for at least 8 years.
I assured the wife that I made it my practice to follow up with my clients who had received a discharge to review their credit reports three to five months after discharge. I have found that at least half of the time, there are errors on the credit reports that artificially depress post bankruptcy credit scores and sometimes, the errors are actionable, meaning that we can collect damages from creditors for Fair Debt Collection Practices Act violations. In a few cases I have been able to collect enough in damages to cover the attorney's fees and filing fees associated with the original bankruptcy filing!
I ended by conversation with the wife by thanking her for contacting me. I then followed up our conversation with a brief email summarizing what we had spoken about and providing her with the "get started" link to one of my web sites.
I hope you can see that even a "simple" fact pattern can give rise to a variety of options and pratical considerations. Consumer bankruptcy is not a "one size fits all" practice and I am able to raise all of the points that I did because I have seen a lot of different issues over the past 23 years. If you have any questions about what have written here or if you want to discuss your personal situation, I encourage you to contact attorney Susan Blum or me by phone at 770-393-4985 or send us an email.
Posted in Chapter 13, Chapter 7, Credit, Current, Foreclosure, General consumer bankruptcy info, Georgia Bankruptcy, Lenders, Mortgage, a, and, because , choosing a bankruptcy lawyer, claims, deficiency, document, easier , exceeds, georgia, histories, house, household, in, income, keeping, lender, median, payment, priority , proceedings, pursue, rarely, reports, responded, started, the, wife | Comments Off
Tuesday, August 3rd, 2010
I recently received an email from a blog reader asking about his obligations to his mortgage company when he does not reaffirm:
I have read your blog and you are very through so I write you with hopes that you might answer this question for me. I file Chapter 7 in 08, and did not reaffirm my loan. I am still living in the house and did make some payments. However, i have not for the last 8 months. It is my understanding that I must sign a document to reaffirm and that continuing payment in itself is not a reaffirmation…or? Well it gets a little more complicated. My house is valued at $410,000 and the bank has offered me a deal that is going to be hard to refuse. They have agreed to let me do a short re-fi in the amount of 180k. If I agree to that is that in itself a reaffirmation?
Here is my response: in most cases, when you take out a mortgage loan, you are signing two different types of agreements. The first type is a promissory note whereby you personally agree to make the payments. The second type of obligation creates a property lien, meaning that you, as the owner of the property, pledges that property as collateral for the loan.
When you file a Chapter 7 and receive your discharge, your personal obligations are extinguished. However, a Chapter 7 discharge does not eliminate the mortgage company's lien against your property. If you "reaffirm" your mortgage, you are actually reaffirming the promissory note and your personal obligations to pay.
For years, many bankruptcy attorneys advised their clients to avoid signing reaffirmation agreements for mortgages, car loans or any other secured debt. The reasoning – even without a personal "guarantee" lenders are protected by the property lien. If the lender is willing to accept payments (the so-called "stay and pay" option), the now discharged debtor keeps his property, keeps making payment, but does not have personal liability on the note.
If the debtor misses payments, the lender would still have the right to foreclose or repossess based on the property lien. The debtor would not have personal liability for any foreclosure or repossession deficiency because his personal liability was extinguished in the bankruptcy.
There is a downside to this "stay and pay" strategy. First, the debtor does not get any credit report benefit for making payments. Because the debtor's personal obligations have been extinguished, the lender no longer reports either a positive or a negative payment history. A positive payment history from a mortgage company can be a good way to restore credit after bankruptcy, and if you do not reaffirm, you will not get this benefit.
Second, there is the "uncertainty factor" if you do not reaffirm. Most mortgage or vehicle finance installment notes contain a default provision that includes bankruptcy as a default trigger. In theory, at least, once your bankruptcy is closed (and the automatic stay of bankruptcy terminated), your lender could declare your loan in default and take action under State law to recover the collateral. In my experience, lenders would much rather have monthly payments than your collateral but this risk does exist.
Finally, many of my readers have asked me if there is such a thing as "constructive reaffirmation" meaning that by making payments, are you in effect re-obligating yourself? Are you creating a contractual obligation by your actions?
I think that the answer to this depends on State law but I would suspect that a mortgage or vehicle lender would have a hard time making this argument. In many States (such as in Georgia) a financial obligation related to real estate must be written and they must have specific terms. As a matter of general contract law, a contract usually will not be enforceable if its terms are not specified. I would argue therefore that a debtor's actions of simply making payments and the lenders actions of accepting such payments should not be enough to create personal liability on the part of the debtor. I would be interested to know if any of the attorneys who read this blog have a different opinion or if anyone is aware of any case law that says otherwise.
At a minimum, if a lender tries to make the argument that you have somehow re-obligated yourself personally by your act of making payments, I would insist that the lender provide you with case law or other support for its position, and you should consult with a lawyer before agreeing to any payment or taking any action (like signing a new, valid contract) that could create personal liability.
My reader states that his lender has proposed a refinance for $180,000. He did not say, but I presume that his prior (discharged) mortgage was much higher than this and that his current payments under the "stay and pay" are based on this higher balance. If he enters into a mortgage contract for $180,000, that contract will function like any other mortgage – and include both personal liability under a promissory note as well as a property lien. It is not a reaffirmation because the bankruptcy is over – instead, the proposed $180,000 loan deal is equivalent to a new mortgage. This proposed deal could result in lower payments plus positive credit history, but it will also create personal liability that currently does not exist. I would certainly advise my reader to discuss his options with an attorney so that he will fully understand the implications of his decision.
Posted in Chapter 7 issues, Lenders, Mortgage, Mortgage modifications, Obligation, Post bankruptcy credit rebuilding, Reaffirmation and negotiation, a, actions, agreements, and, avoid, clients, contract, create, creates, enters, history, history , liability, liability my, lien, making, mortgage loan reaffirmation, negative, note, payment, payments, personal, positive, promissory, property, reader, reaffirmation, reaffirmation after bankruptcy, reaffirming, refinance and bankruptcy, signing, simply, states, the, type | Comments Off
Friday, February 12th, 2010
As you probably know, there are two types of consumer bankruptcy cases available to you – a Chapter 7 which wipes out debt, and a Chapter 13 which creates a five year payment plan in which you pay back some or all of your debt with your "disposable income." When I prepare a Chapter 13 case, we work with you to create a liveable budget. The money "left over" after you pay for housing, food, transportation, insurance, utilities and other necessities must be sent to the Chapter 13 trustee, who then disburses these funds to your creditors based on a plan of reorganization that we submit to the court.
What happens if you need to file a Chapter 13, you have not yet filed your tax return for last year, but you know that a refund will be coming your way. The simple answer is that unless you are paying back your creditors at 100%, your Chapter 13 will demand that you turn over your tax refund check, and will use that money to pay your creditors. If you know that a refund is headed your way, make sure to tell your lawyer before you file – there are some steps you can take to preserve some or all of your tax refund money.
Your Chapter 13 trustee will also want future refunds paid to the trustee. This situation is easier to handle – you will want to adjust your payroll withholdings so that you do not have any refund coming. As far as the Chapter 13 trustee is concerned, your tax refund is kind of like a savings account that artificially reduces your net pay amount.
All of the Chapter 13 trustees in the Northern District of Georgia require debtors who are paying less than 100% to creditors to include in their Chapter 13 plans a provision that authorizes the IRS to intercept any refund payable during the years that your plan is in effect and send this money to the Chapter 13 trustee. And until now, the IRS has cooperated with the Chapter 13 trustees in redirecting refund money.
In January, 2010, however, a federal district court in Michigan has rules that the Chapter 13 trustee does not have the power to compel the IRS to serve as its collection agent. In the case of United States v. Carroll, a judge in the Eastern District of Michigan ruled that there is no legal basis for the IRS to withhold money and deliver it to the trustee because Congress has not waived the IRS' "sovereign immunity" that would otherwise leave the IRS vulnerable to contempt actions and other enforcement actions by the trustee (in other words, if the IRS failed to withhold a debtor's refund, the trustee would not have the right to sue the IRS for damages or for remedial action). The Michigan judge issued an order forbidding the bankruptcy courts there from confirming any Chapter 13 plan that has the income tax refund seizure language.
I would not be surprised if bankruptcy courts elsewhere in the nation begin to follow the path set by the Michigan judge. We'll know soon enough, but I suspect that the trustees in the Northern District may discontinue their demand for an income tax provision involving the IRS in Chapter 13 plans.
I do not expect, however that Chapter 13 trustees here or elsewhere in the country will permit Chapter 13 debtors from keeping large tax refunds. I suspect that trustees will still demand provisions that obligate debtors to tender their tax refunds but they will expect the debtors to send in the money, rather than having it withheld by the IRS. I will continue to advise my clients to minimize their refunds to avoid the problem entirely.
Needless to say, losing this automatic tax refund payment mechanism will make enforcement of tax refund plan provisions much more difficult. It will be interesting to what if anything Chapter 13 trustees do to address this potential administrative nightmare.
Posted in 2010, Bankruptcy, Chapter 13 issues, Chapter 13 plan calculations, Irs, Tax issues, a, an, automatic, chapter 13 plan, chapter 13 trustee, court, courts, district, enforcement, federal, forbidding, income, intercept, issued, january, judge, keeping, language i, large, losing, mechanism, michigan, money in, order, payable, payment, plan, provisions, redirecting, refund, refunds , seizure, tax, tax refunds in chapter 13, the, | Comments Off
