Should I File For Bankruptcy?

February 26th, 2011 No comments

What Is bankruptcy? What does it mean to declare bankruptcy?

Bankruptcy is a legal process available to consumers or businesses seeking federal protection from creditors when the borrower is unable to repay their debts.  Declaring  bankruptcy is the legal filing with a court of a person’s or company’s inability to repay debts. It is intended to afford the debtor with a legal fresh start by “wiping the slate clean” of debts.

The ability to file for bankruptcy and obtain a fresh start is an important and long-standing part of American law. The right to file for bankruptcy protection is guaranteed under federal law and the U.S. Constitution  (Article I, Section 8, of the United States Constitution).  Prior to 2005 it was a relatively simple process which enabled many people to easily walk away from their debts.

Why were changes made to the bankruptcy law?

In 2005, mostly at the prodding of the credit card industry, Congress made some significant changes to bankruptcy laws . The main purpose of these changes was to make it harder to file for bankruptcy. Nonetheless, the ability to file for bankruptcy and obtain a fresh start is an important and long-standing part of American law and people who need bankruptcy relief can still get it.

The bankruptcy laws have made it more difficult to file Chapter 7 as the government would prefer that everyone meet their financial obligations. The eligibility requirements for Chapter 7 or Chapter 13 are based on your income, living expenses, and debts. A bankruptcy lawyer will help you determine which option is best for you.

What are some of the more important changes to bankruptcy laws?

* Higher income filers must file for Chapter 13
* Filings are more closely investigated and more documentation is required
* Credit counseling and  financial budget counseling is required
* Property must be valued at replacement cost, instead of a “fire sale” cost
* State exemptions are not available to new state residents in order to prevent debtors from moving to a state with more liberal exemptions.
* Residency requirements have been tightened to prevent people from moving to states that allow a person to protect more equity in their personal residences.

What are the types of bankruptcy available to individuals?

There are two basic types of bankruptcies for individuals: Chapter 7 Bankruptcy and Chapter 13  Bankruptcy.

Chapter 7, also known as a liquidation bankruptcy or no asset bankruptcy, is a bankruptcy procedure designed to eliminate your debt. One of the advantages of Chapter 7 is that it immediately stops creditors from collecting or attempting to collect any of your debts the moment you file the bankruptcy petition with the court. This is done by filing a Suggestion of Bankruptcy document with creditors. The other advantage is that at the conclusion of the process you are immediately provided with a discharge of debt without having to pay any of your debt and you have no monthly payment plans. Both individuals and businesses can file for Chapter 7 bankruptcy.

Most individual bankruptcies are Chapter 7. It is relatively fast and simple. Typically, a case is opened and closed within three to six months. Local bankruptcy lawyers in your area are available for Chapter 7 bankruptcies filings and consultations.

There are numerous reasons why people elect a Chapter 7 bankruptcy over a Chapter 13 bankruptcy. Most people who chose Chapter 7 do so because they have large debts that they cannot manage to pay down, such as credit card bills, hospital bills or legal judgments.

A Chapter 13 bankruptcy, also known as a wage earners bankruptcy, is different from Chapter 7 in that it does not completely eliminate your debt. Instead, it gives you the opportunity to pay off some your debts over an extended period of time through a court-approved, court-supervised, and court-enforced payment plan.  Chapter 13 bankruptcy filers are given from three to five years to pay off their debts. You make one monthly payment based on how much you can afford for 3 to five years. Most creditors will not be paid in full, however, and unpaid balances are discharged, subject to some exceptions, at the end of the three to five year period.

Who can file for bankruptcy?

Generally, almost anyone can file for bankruptcy. If you are a person who simply cannot afford to pay your bills, regardless of the reason, you probably can qualify for bankruptcy, either Chapter 7 or Chapter 13. If you have filed a previous bankruptcy, it could limit the options that may be available to you. For instance, if you have previously filed for a Chapter 7 bankruptcy, you cannot file another Chapter 7 for eight years.

You will not, however, be permitted to file for bankruptcy to in order to beat your creditors. If you know you are having financial difficulties, you cannot deliberately max out your credit cards just to beat the system by filing bankruptcy. At the very least you could find your bankruptcy filing dismissed and wind up being stuck with all that debt. You could also find yourself filing your next bankruptcy petition from a prison cell.

There are numerous documentation requirements. You will need to provide an inventory of everything you own. You will need to provide your personal tax returns, proof of income for six months prior to filing along with a list of your spending, and a certificate showing that you took a mandatory credit counseling class.

What is the actual bankruptcy process?

There are eight basic steps in obtaining your bankruptcy. Your bankruptcy attorney will guide you through the entire process which takes about 3 to 6 months on average.

* Attending a credit counseling course at an approved credit counseling agency.
* Meetings with your bankruptcy attorney to draft copies of your paperwork.
* Providing proof of income for the previous six months in order to determine eligibility.
* Determining with your attorney which assets are safe in a bankruptcy.
* Filing the paperwork with the bankruptcy court.
* Attending a short meeting with the bankruptcy trustee.
* Attending an additional personal financial management class.
* Obtaining the final discharge of debts from the bankruptcy court.

Credit counseling

Before you can file for bankruptcy, you must first have a consultation with a nonprofit credit counseling agency that has been approved by the United States Trustee. The purpose of this consultation is to see whether there are any alternatives available to you other than filing for bankruptcy protection.

You must meet with the counseling agency within the 180 day period prior to filing your bankruptcy petition. The agency will probably try to work out a repayment plan with you and your creditors. You do not, however, have to agree to any repayment plan. You will still receive a certificate from the agency stating you have received the counseling. And you need to submit their proposed repayment plan to the court along with the rest of your filing.

After your bankruptcy has been completed, but before your debts are discharged, you will also be required to attend a personal financial management class. A certificate will be given to you after completing your course.  This certificate must be submitted to the court. This is the last step of your bankruptcy.

Can I keep my house and my car?

Bankruptcy courts are aware of the importance of keeping your home and car. There are certain rules that may allow a person to keep their home or car under what is called a “Homestead Exemption” or “Automobile Exemption.”

Homestead exemptions vary by state and marital status. The concept is very simple: if your home has more equity in it than the amount of your state’s homestead exemption you will be forced to sell your home to pay off your other debts. If your homestead exemption is higher than the amount of equity in your home, you may be able to keep your home even after you file for bankruptcy.

For example, if you have $25,000 in equity in your home, and your state’s homestead exemption is $50,000, you may be able to keep your home. If your equity is $150,000, the court will force the sale of your home in a chapter 7 bankruptcy proceeding. However, you could file Chapter 13 bankruptcy and still keep your home.

Automobile exemptions work very similar to homestead exemptions. However, if you are behind on car payments in a Chapter 7, your car may still be repossessed by the creditor in the bankruptcy proceeding if you do not pay your back payments. However, Chapter 13 could provide you an opportunity to prevent the repossession of your car even if you are behind on the payments.

Personal property exemptions and other assets

When you file for bankruptcy, the court will allow you to keep certain personal items of low value. Every state has different laws regarding what you can keep. But in general, you can keep a small amount of jewelry (ranging from $2000 to $7000), health aids, animals, crops, appliances, furnishings, books, musical instruments, and various other inexpensive items of property.

Personal luxury items such as expensive watches, furs, paintings and jewelry must be disclosed and will probably be sold by the trustee.

Pensions are generally exempt from bankruptcy and so are ROTH IRAs and Keoghs. Insurance benefits are also usually exempt, as are tools of your trade.

Do I have to pay my credit card bills if I’m bankrupt?

Credit card debts can be completely forgiven in bankruptcy as long as you did not run up your credit cards just prior to filing for bankruptcy protection.

After you file for bankruptcy, it is against the law for credit card companies to contact you. They must stop calling you, cannot file a lawsuit against you or proceed with a lawsuit they previously filed; they cannot record liens against your property; they cannot report your payments to the credit reporting agencies; and they cannot seize your income, bank accounts, or property.

When you file for bankruptcy, something called an “automatic stay” goes into effect. The automatic stay usually prevents most actions from moving forward against you. No more harassing phone calls or letters, and no more threats from lawyers.  The “automatic stay” will also temporarily stop a foreclosure, but only for the very short term until the bank goes into court and gets the stay lifted.

Will my other debts be eliminated in bankruptcy?

You may have all types of debts that are weighing heavily on you. Most of these debts are dischargeable in bankruptcy, but there are a few exceptions.

The most common dischargeable debts are credit cards, medical bills, obligations under leases and contracts, personal loans and promissory notes.

The most common debts that are not dischargeable are student loans, alimony and child support payments, certain tax debts, and criminal fines and penalties (like parking tickets or moving violations) imposed on you by the courts.

The most common debts that are sometimes dischargeable are student loans, some IRS income taxes, and debts from prior lawsuits. The term “sometimes” is used because it depends on the circumstances of the debt. For instance, while generally non-dischargeable, if your student loans are causing a tremendous burden and you have made a good faith effort to pay them back, they may be discharged. In regards to regular income taxes, if the taxes have been owed for more than three years, and the IRS has not reassessed the amount in the last 240 days, they may be discharged.

Since each individual’s situation is unique, you should discuss with your bankruptcy attorney all of your debts to determine whether or not they can be discharged in bankruptcy.

I am married. Do married couples have to file bankruptcy together?

Many married couples often feel they are legally responsible for each other’s debts. This is simply not so.

While you are responsible for your own debts, these debts may or may not include your spouse’s debts. It depends on whether you have co-signed any debts together. For instance, if you bought a car together, you may both have signed for the loan. Also, if you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), you and your spouse are jointly responsible for each others’ debts incurred during marriage, even if you did not “co-sign” for the loan.

In order to file a joint bankruptcy petition, you must be legally married. Living as co-habitants does not allow you to file joint bankruptcy. Most states do not recognize common law marriages or same-sex committed relationships as valid marriages.

It costs about the same to file a joint bankruptcy as is does to file individually

What are the alternatives to bankruptcy?

Bankruptcy may not always be the best solution for many reasons. You might still have to give up your non-exempt assets. Your debts may be non-exempt and non-dischargeable, or you may not be eligible to file.

You might want to take other steps first. You could try to sell whatever assets you have to pay off your debts. If you own anything valuable, such as jewelry, cars, or watches, you may want to consider selling them first to try to pay off your debts. Another option may be to approach family and see if they are willing to help you. Of course, many people prefer not to involve family, especially if they can qualify for bankruptcy.

Transferring credit card debt to a lower interest credit card will only solve your problems temporarily. Oftentimes, the new credit card companies will fight to collect their money if you file for bankruptcy after transferring large debts to a new card.

Refinancing your home if you have equity is an unattractive alternative, as is a home-equity line of credit. You want to make absolutely certain you can afford the payments because if you can’t, you risk losing your house because you have turned your unsecured and dischargeable credit card debt into a lien on your property. You must be very cautious about trying to pull equity out of a house to pay creditors, especially if bankruptcy could provide a way to preserve your equity and still eliminate your debt.

Do debt consolidation services work?

If you can find a debt consolidation service that isn’t an outright scam you will find a plan that is similar to a Chapter 13 payoff plan. They get the credit card companies to  lower their interest rates and your payments. You make one payment a month to them for years and after they’ve taken their cut they give the rest to your creditors. After you have completed the plan the credit card companies wipe out your remaining balance and consider you paid up. They report it to the credit reporting agencies as a “negotiated settlement” which puts another dent in your credit score and then promptly send a 1099 to the IRS reporting the “forgiven amount”.  The IRS comes looking to you for taxes on the “forgiven amount”.  With few exceptions, whenever you settle a debt with a creditor for less than you owe, you are liable for taxes on the balance you didn’t pay. Simply stated, if you owe the bank $10, 000 and they agree to take $6,000 as a settlement, you now owe taxes on the $4,000 you didn’t have to pay. Depending on your tax rate, you could owe Uncle Sam $1,000 in taxes. And he will want it all right now. If you think the credit card companies were annoying when they didn’t get paid, just wait until the IRS comes after you!

What are the long term consequences of filing for bankruptcy?

Without a doubt bankruptcy will have the worst possible effect on your credit score.  Credit reporting agencies will report information about your bankruptcy for as long as 10 years. If you’re thinking about filing bankruptcy this may be of little consequence since your credit score may already be so low that it would take that long to rebuild your credit anyway. Having a bad credit score doesn’t necessarily mean you can’t get any credit, it just means that you will have to pay a lot for it for years to come.

The credit cards and other accounts that you listed as part of your bankruptcy will definitely be canceled by the issuers if they have not already suffered that fate.  Oddly enough, you might be surprised to find that you can still get new credit cards and other loans, and you will probably start receiving offers in the mail for them soon after you file for bankruptcy.  The offers you will get will be for accounts where the credit line will be small and the interest rates will be much higher than on regular credit accounts. Since after bankruptcy you have no debt and can’t file again for 7 years you’re a actually a better credit risk to the card issuers than before your bankruptcy.

If you had any loans before bankruptcy that had co-signers, your obligation to repay will be wiped out. Instead, your co-signer will get stuck with them.  So if your parents co-signed a car loan for you they will continue to be fully responsible for the loan.

Tapping into your retirement plan is oftentimes ill-advised. The reason is because pension plans are generally safe from bankruptcy. You will be able to keep your pension or retirement money, unless you borrow against it. If you borrow against it, your creditors can attack your pension or retirement money during bankruptcy and you will have to pay income tax penalties on an early distribution.

Conclusion

Deciding to file for bankruptcy is not an easy decision. While you can file bankruptcy without a lawyer, doing so should not be undertaken lightly. There are simply to many pitfalls that need to be avoided. Even if you don’t want to hire a bankruptcy lawyer, at least talk to one before you file. Most will give you a free consultation and many will keep the cost down by letting you do some of the grunt work yourself if you decide to file for bankruptcy.

Homeowners Associations, Condo Associations and Deficiency Judgments

June 20th, 2011 No comments

Homeowners associations and condo associations wage war with deficiency judgments

 

As a result of the foreclosure crisis, cash starved homeowner and condo associations are resorting to using aggressive collection agencies and lawyers to try to recover delinquent fees.

The collectors employed by the associations have turned to the courts in an attempt to force current and former property owners to pay up. Judges have written orders giving the collectors the right to seize the bank accounts and posessions of delinquent owners.

Taking their cue from the banks, more and more HOA’s are seeking deficiency judgments for unpaid association fees. Many homeowners thought their nightmare had ended when they turned over the deed to their lender, not realizing that their unpaid mortgages and association fees could come back to haunt them years later.

Either as the result of a short sale or an outright foreclosure, when a lender sells a home for less than the mortgage amount owed the difference between the amount owed and the amount the bank sold the property for, including legal fees, is usually recorded with the court as a deficiency. In Florida, the lender then has five years to seek a deficiency judgment in order to collect the amount owed. Once the deficiency judgment is granted by the court, the lender has up to twenty years to collect their money. The end result is that twenty years later when you’re back on your feet again and doing well and have forgotten all about it, the lender seizes your assets.

The time allowed for a lender to file for a deficiency judgment varies from state to state.  Some states, known as non-recourse states do not allow deficiency judgments at all, and some require the lender to apply for it at the time of foreclosure, while others require an additional lawsuit. One would be well advised to consult a local attorney to find out how the law applies in their state of residence.

The same is true with unpaid homeowner’s or condo association assessments. The association can ask the court for a deficiency judgment, and more and more of them are exercising their right to do so.

A whole new cadre of lawyers specializing in defending distressed homeowners from judgments has evolved, along with another group who work for the homeowner’s association or lender and specialize in chasing down these former property owners.

Once a deficiency judgment has been obtained it is a relatively simple matter for the association or lender’s attorney to have a judge issue a Writ of Garnishment. With only a few exceptions the judge’s order can be used to seize almost anything of value, including wages or the cash in a checking or savings account. In most states you will be given no notice that a writ has been issued, and the only way you will find out about it is after your money or property has been taken. You will then have a short period which varies from state to state, in which to file your objections with the court.

Most creditors will go after the cash in your accounts because it is easier to get at. They tend to stay away from seizing your possessions simply because it is too expensive to levy on them. However, your lender can show up at your door step unannounced accompanied by the sheriff and a moving van and clean out your home. Each state defines what can, and can’t be seized, so it would be wise to research the laws in your state.

Since Florida law sets limits of 12 months of association payments or 1 percent of the amount of the original mortgage, whichever is less, it’s not likely that the association would resort to something as drastic as a moving van unless you have really managed to annoy them. Banks, however, are generally owed a substantial sum and could resort to such draconian measures.

It’s also worth pointing out that your bank may have sold the deficiency judgment for pennies on the dollar to a scavenger firm that specializes in collecting these debts. Eventually, more and more banks will be selling these judgments to collection firms, and obviously those firms are going to be a lot more aggressive in collecting the money judgments. These firms will go to great lengths to extract payments from debtors, sometimes forcing them into bankruptcy.

The myth that you can simply walk away from your house and mortgage and be done with it is just not true. Years down the line when you least expect it you could find your money and your property taken from you.

If you find yourself facing a deficiency, most attorneys will advise you to try to settle for a lesser amount or work out payment arrangements. Condo associations and homeowner’s associations will probably be amenable to settlement.

If you are contemplating a short sale get an agreement in writing with your lender that they won’t seek a deficiency judgment. Generally speaking, there are tax liabilities involved with a short sale, but the IRS has some new rules under the Obama Mortgage Plan. Talk to your lawyer or accountant before you agree to anything.

Most importantly, talk to a local attorney who specializes in bankruptcy and mortgages before you get in any deeper. There are ways to avoid having a deficiency judgment ruin your future.