10 Big Reasons to Get Legal Advice about Bankruptcy Before Selling Your Home

The SINGLE overarching reason to get advice from a bankruptcy attorney before selling your home is to save money, possibly a great deal of money.  I’ll tell you ten ways to do so—three today and then the rest in my next couple blogs.

1.  Avoiding judgment liens:  If some creditor has sued you in the past, that creditor likely has a judgment against you. You might not even realize or remember if this has happened to you. Or, a creditor may sue you in the near future, and get a judgment against you before the sale of your home closes. If a judgment has been entered against you, this usually means the creditor has a lien against your home. That lien amount is almost always substantially larger than the amount you owed the creditor. Most of the time, that judgment lien has to be paid in full before the house can sell. If the judgment is paid out of the proceeds of the house sale, this reduces the amount you receive. Or the lien could reduce the money you thought would go to more important debts, such as taxes, child support, or an ex-spouse. If there aren’t enough sale proceeds to cover the judgment, you will either have to pay the full judgment amount out of your pocket, or at least some discounted amount to get the creditor to release the lien. If you don’t pay it in full, you would likely continue owing the balance. And if the creditor won’t settle, you may not be able to go through with the sale. In contrast, either a Chapter 7 or 13 case often can get rid of that judgment lien and write off the underlying debt, allowing you to sell the home without paying anything on that debt.

2.  Stripping second and other junior mortgages:  Chapter 13 often allows you to “strip” your second (or third) mortgage from the title of your home. The law changes that debt from a secured debt to an unsecured one. It can do this when your home is worth no more than the first mortgage (plus any property taxes or other “senior” liens) by acknowledging that all of the home’s value is exhausted by liens that legally come ahead of that junior mortgage. As a result, these junior mortgage balances are thrown into the same pot as the rest of your other regular unsecured debts—all your other debts that have no collateral attached to them. When this happens, depending on your situation, you often don’t pay anything more into your Chapter 13 Plan. And even if you do have to pay something more because of that stripped “junior” mortgage, almost always you only have to pay pennies on the dollar. And you end up with your home completely free and clear of that mortgage.

3.  Buying time for a better offer:  A home sold in a hurry is seldom going to get you the best price. A basic rule of home sales is that the maximum price is gotten through maximum exposure. If you feel under serious time pressure to sell because of creditor problems, the extra time provided by filing either a Chapter 7 or 13 case could get you just the additional market exposure you need. No question–filing a bankruptcy can in some respects complicate the sale of your house, and there many situations when a bankruptcy filing will not likely help you reach your goals. But in the right situations the advantage of getting more time on the market far outweighs any potential disadvantage.

In my next blog I’ll give you more ways that bankruptcy can give you huge advantages involving your home. If some of these apply to your situation, they can totally change whether or not you should sell your home, and if so, when you should do so.

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Get a “Fresh Start” in Bankruptcy for Your Assets, Not Just Your Debts

Bankruptcy helps both sides of your balance sheet. Getting a financial fresh start means not just getting relieved of your debts, but also protecting your essential assets. You can preserve this crucial benefit of bankruptcy by not selling, using up, or borrowing against your protected assets BEFORE the filing of your bankruptcy case.

It is much more difficult to get your financial footing if you have nothing to stand on—if you don’t have at least basic housing, household goods, clothing, transportation, and, where appropriate, tools of trade, unemployment or disability benefits, and retirement savings.  

Bankruptcy usually protects most or all of your assets. On the one hand, Chapter 7 protects all “exempt” assets, so that a very high percentage of people who file under Chapter 7 lose nothing. And if you have assets which are worth more than the applicable exemptions, Chapter 13 usually protects those additional or higher-value assets as well.

But bankruptcy cannot protect what you’ve already squandered. It saddens me when just about every day new clients tell me how in the months or year or two before coming in to file bankruptcy they depleted their assets in a desperate attempt at avoiding bankruptcy. Most of the time, the assets they sold, spent, or borrowed against would have been completely protected had they filed bankruptcy while they still had them.

I recognize that it’s easy being a Monday morning quarterback—to say, after a client comes in needing to file bankruptcy, that they should not have used up assets in an effort to avoid filing. After all there undoubtedly are some people who were able avoid bankruptcy by selling their assets, and I don’t see them because they don’t need my services.

But I challenge you—if you are considering spending, selling, or borrowing against any of your assets, do you know whether that asset is one which would be protected in bankruptcy?

What concerns me are decisions with serious long-term consequences made without any legal advice about the alternatives. If a person in her 50s cashes in a substantial amount of a 401(k) retirement plan to pay creditors who would be written off, that can significantly harm the quality of her retirement lifetime.  Or if a husband and wife sell a free-and-clear vehicle that’s in good condition on the assumption that they’ll lose it once they file bankruptcy, only to be left with a single older vehicle that cannot reliably get them to work, that decision would lead to anything but a fresh start.

For a bunch of reasons, people tend to get legal advice when at the absolute end of their rope, well after these kinds of dangerous decisions have been made.  Let me help you avoid that. You have the capacity to get a better fresh start by getting the necessary advice on time in order to to preserve your assets.

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Don’t Give Up Your Vehicle Before Knowing Your Options

Why? Because you may be able to keep a vehicle you thought you couldn’t afford to pay for. Chapter 13 allows you to pay smaller monthly vehicle loan payments, under certain conditions. You may be able to pay off the debt and own the vehicle free and clear for a lot less than the loan balance.

This blog is one of a series on the mistakes people make before seeing an attorney about filing bankruptcy. These decisions often seem sensible from a certain angle. But almost always they are made without knowing all the options.

If you need a vehicle but just can’t afford the monthly payments, you probably figure that you are going to lose the vehicle and don’t have any choice about it. You know the contract requires you to make the payments or you lose the vehicle. You may have been trying hard for months to keep or get the payments current, putting up with late fees and constant notices or phone calls from the creditor threatening repossession. You would have already let the vehicle go except you’ve got to have a vehicle for work and/or other family obligations, and have no way to replace it. You feel stuck, with no good options.

On top of everything else, you might have heard that a bankruptcy can’t help much, at least for hanging onto the vehicle—that you still have to either make the payments, and catch up if you’re behind, or else lose the vehicle.

That’s true, in a “straight bankruptcy,” a Chapter 7.

But it’s not necessarily true in a Chapter 13 case. If you meet two conditions, you can likely do a “cramdown” on the vehicle loan: lower your payments and likely pay less overall for the vehicle. You may well also be able to lower your interest rate.

The two conditions to be able to do a “cramdown”:

1) Your vehicle loan was entered into more than 910 days before your Chapter 13 case is filed (that’s just about two and a half years before); and

2) At the time your case is filed, the value of your vehicle is less than the balance on your loan.

If your vehicle loan meets these two conditions, we can essentially re-write your loan.  We can reduce the total amount you must pay down to the value of the vehicle, “cramming it down” to that lower amount. That’s called the “secured portion” of the debt. We then calculate a new monthly payment—the amount needed to pay off that smaller balance, often at a lower interest rate, and often on a longer remaining term, resulting often in a radically reduced monthly payment.

What happens to the “unsecured portion”—the part of the debt beyond the value of the vehicle? It gets lumped in with the rest of your unsecured debts, usually not requiring you to pay anything more to all your unsecured creditors regardless of your vehicle loan.

And what if you’re behind on your vehicle loan at the time you file your Chapter 13 case—when do you have to pay that arrearage? You don’t. It’s just part of the re-written, new “crammed down” obligation.

So you can see that you might NOT want to surrender a vehicle or allow it to be repossessed if instead you could keep that vehicle while immediately having it cost you much less to do so. Often, having a reliable vehicle is essential to achieving a successful re-start of your financial life.  Before you lose that essential part of your financial plan, come see me to find out your options.

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