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Sometimes the timing of your bankruptcy filing hardly matters, but other times it’s huge. The three examples in this blog should convince you that you want to avoid being rushed to file your case because a creditor sued you earlier and is now garnishing your wages. Instead you want to preserve the ability to file bankruptcy at a time that is tactically the best for you.
1. Choosing between Chapter 7 and 13: Being able to file a Chapter 7 generally requires you to pass the “means test.” This test largely turns on a very special definition of “income.” For many people, their “income” under that definition can change every month, sometime by quite a lot. This means that you may not qualify to file a Chapter 7 case one month but then do so the next month. Being able to delay filing your case means being able to file when you will pass the “means test,” or at least more likely would do so, and therefore not be forced to file a Chapter 13 case. This means usually finishing your case in three or four months instead of three to five years, and almost always saving many thousands of dollars.
2. Discharging—writing off—debts: Getting certain debts discharged is harder if those debts were incurred within a certain amount of time before the filing of your bankruptcy case. So being able to delay the filing of your bankruptcy case makes it less likely the creditor on one of these debts would challenge your ability to discharge that debt. Or if such a creditor would still raise such a challenge, defeating it would be easier. The amount at stake is the amount of that debt, plus often the creditor’s costs and attorney fees, and your own attorney’s fees. Avoid or reduce the risk of continuing to owe that after your bankruptcy is over by avoiding getting creditor judgments against you.
3. Choosing property exemptions: The possessions you are allowed to keep in a bankruptcy depend on which state’s exemption laws apply to your case. If you moved to your present state of residence within two years before your bankruptcy is filed, you will not be able to use that state’s exemptions but rather your former state’s. Especially if you are getting close to the two-year mark, having flexibility about when to file would allow you to pick whichever state’s exemptions were better for you. Otherwise, you may either lose an asset in a Chapter 7 case, have to pay the trustee to be able to keep it, or else even be compelled to file a Chapter 13 case to keep it.
You may sensibly ask: if you do get sued, what are you supposed to do to avoid getting a judgment against you, so that you’re not later rushed into filling bankruptcy at an unfavorable time? The answer: see a bankruptcy attorney as soon as you get sued to figure out how to deal with that law suit and with your entire financial circumstances. The earlier you get advice, the more options you will have.
What you don’t know CAN hurt you, if it’s a judgment against you by a creditor. Judgments can hurt in three big ways. 1) They enable the creditor to use powerful collection mechanisms against you to collect the debt. 2) A judgment can rush you into filing bankruptcy at a legally disadvantageous time. 3) And under some circumstances a judgment can make it harder to write off the debt in your bankruptcy.
I’ll tell you about the first one of these in this blog, and the other two in my next ones.
The vast majority of lawsuits by creditors and collection agencies that are filed to collect their debts end with judgments against the people owing the debts. That’s because the main point of these lawsuits is to establish that the debt is legally owed, which is usually not disputed. Also, much of the time the debtors are at the end of their financial rope and can’t afford to hire an attorney to find out what their options are, much less to defend the lawsuit. So judgments are entered “by default”—meaning the deadline for the debtors to respond passed without any action by them, allowing the creditor to get a judgment. Often debtors are not given any notice that a judgment has been entered against them, so many do not realize that it has, especially when nothing seems to happen for months or even years afterwards. And very few people are fully aware of the possible consequences.
Most people know that a judgment gives a creditor the power to garnish your wages and bank accounts. But preventing garnishments by just keeping your money out of bank accounts and not being paid a regular wage or salary are often not enough to make you “judgment-proof.” For example, a judgment usually becomes a lien against any real estate you own, or will own in the future. That includes not just property under your own name but also your rights to property held jointly with a spouse, parent, or through a trust or estate. An aggressive creditor has a variety of other tools available to it, including getting a judge to order you to go to court to answer questions under oath about what you own. The creditor can get an order to send out a sheriff’s deputy to your home or business to take your possessions to pay the debt. If you are owed money by anyone, that person can be ordered to pay the creditor instead of you. If you own a business, the creditor can force your customers to pay it instead of you, and sometimes can even come to your place of business and take money directly out of the cash register to pay the judgment debt.
I don’t want to give the impression that these kinds of strong-arm collection procedures are used in most cases. But I talk regularly with distressed new clients who have been surprised, and financially hurt, by what a creditor has done to them and their assets.
Beyond the direct damage a creditor with a judgment can do to you before you file your case, such a creditor can cause you very real problems in your subsequent bankruptcy case. I’ll introduce this here and then discuss it more in my next blog.
If you are induced to file bankruptcy quickly to stop an ongoing garnishment or other financially devastating collection activity, you lose one of your most important advantages: the timing of the filing of your bankruptcy case. A lot of what happens in your bankruptcy case turns on precisely when it was filed. Not having the flexibility to pick the best timing can, among other things, turn a hoped-for Chapter 7 case into a Chapter 13 one, can mean a difference of many thousands of dollars, and can generally turn a straightforward case which meets your goals into much more complicated matter.
My entire job can be summarized as helping my clients meet their goals as smoothly and calmly as possible. The lesson here is that, whenever possible, the time to see an attorney—and if you have overall financial problems, specifically a bankruptcy attorney—is right when you get sued. Not after a judgment has been entered and you’ve lost some of your precious power over your own destiny.
Bankruptcy gives you a wide range of tools that can help you keep your home or sell it on your own schedule. Many of these tools provide surprising advantages for you. Especially when it comes to your home, know your options before you make decisions.
This is the last of a series of three blogs covering ten reasons why you should get advice from a bankruptcy attorney before selling your home. Here are the final four of those reasons.
1. Want to Pay off Ex-Spouse: After going through a divorce, you are often required to sell the marital home to pay off your ex-spouse. In most circumstances, debts that you owe from a divorce are not written off by a bankruptcy. But sometimes they are. And even with debts that are not written off, bankruptcy can affect the timing of payment or favor you in other ways. Divorce is often such a traumatic process. Even if during the divorce you received advice about how a possible future bankruptcy filing would affect the terms of your divorce, understandably you may not remember that advice. And frankly, many divorce attorneys do not understand bankruptcy enough to give thorough advice about it. You do not want to base decisions about your home without advice about your options, or, often worse, with incomplete advice. So now, before you sell your home to pay off your ex-spouse, get that advice, from a competent bankruptcy attorney.
2. Need to Pay off Property Taxes, Homeowners’ Association Dues: Creditors with the strongest rights against you and your home include your county or similar governmental entity which collects your property taxes, and your homeowners’ association. So you may feel powerless in dealing with them if you fall behind on paying them, especially if they are threatening to foreclose on your home. Bankruptcy can give you a leg up on fighting them, and so find out about this before you are pushed into selling your home to pay them off.
3. Selling to Avoid a Foreclosure: You’ve likely heard that the filing of a bankruptcy stops a foreclosure. And you probably know that Chapter 7 and Chapter 13 each deal with foreclosures differently. The truth is that every homeowner who is facing a foreclosure has a unique set of circumstances, and requires and deserves an individual analysis. Bankruptcy gives you many different combinations for addressing the issues you’re facing. Only by being informed about and thoroughly understanding those options can you make the right choices about whether and when to sell your home, and how all these fit into your whole financial picture.
4. Can’t Afford an Attorney: If you’re selling your home because you believe it’s the best way to deal with your debts, and you can’t afford to pay an attorney to get legal advice about that decision, consider the following. A decision about your home is likely about your biggest asset and your biggest debts. I assume you agree that if you could get solid, practical advice about that, you would do so. Since I do not charge for my initial consultation, I can give you that advice. Let me help you create the best possible game plan for dealing with your home.
If you’re a homeowner who is selling his or her home for any of the following three reasons, think again: 1) you can’t afford the house payments, 2) you owe income taxes with a tax lien on your house, and/or 3) your mortgage modification application was rejected.
In my last blog I told you the first three of ten reasons why you should get advice from a bankruptcy attorney before selling your home. Here are the next three. All of these are about saving you money, and helping you make much better decisions about your home.
1. Can’t Afford the House Payments: It’s sensible to sell your home if it’s more house than you need, or you’re not able to make the payments. But you may really need to hang onto the house, and are selling it because you think you have no choice. If so, you may instead be able to keep your home either by reducing the debt attached to the house or by reducing the rest of your debt so that you can afford the house debt. I gave you some ways to reduce the debts on the house in my last blog, and will give some more in the next one. As for reducing or getting rid of the rest of your debt, even if you are resisting the idea of filing bankruptcy “just so I can afford my house,” you still owe it to yourself to know your options. We live in truly extraordinary times in terms of home values and economic uncertainty. So especially now, it’s wise to be open to creative ways of meeting your financial needs.
2. Have Income Tax Debt: If you owe back income taxes, these taxes may have already attached to your home’s title with the recording of a tax lien. Or that may happen in the near future. You may feel extra pressure to sell your home to pay those taxes. But Chapter 7 and 13 bankruptcy options can often help you deal with your tax debts, sometimes in ways better than you expect. Some income taxes can be legally written off altogether. Others would likely be able to be paid much less than outside bankruptcy, through huge savings in interest and penalties, and other possible advantages. The details are beyond what I can cover in this blog. But if income tax debts or tax liens are part of why you are selling your home, first find out how bankruptcy would deal with them.
3. Your Mortgage Modification Application Was Rejected: Mortgage modification programs—both governmental ones like HAMP as well as private ones—have been tremendously controversial and of questionable benefit to homeowners. They are almost always terribly frustrating to go through. Without getting into all that here, there are definitely times when mortgage modification requests are rejected because the homeowner did not fully complete the application or the mortgage lender did not process it accurately. Often it is not really clear why the modification was not approved. After going through this challenging process without a reduction in your mortgage payments, understandably you may well feel like you have no choice but to sell your home. But sometimes a bankruptcy filing—either Chapter 7 or 13, depending on the circumstances—can help get a mortgage modification approved, either the first time or in a renewed application. Reducing your debts through bankruptcy provides you more resources to put into your house, generally making you a better candidate for mortgage modification.
Deciding whether to sell your home involves a whole lot of factors–personal, financial, and legal. Virtually every time I meet with new clients who are thinking about selling their home, they learn a bunch of things which puts that decision in a whole different light. Often, my clients are pleasantly surprised by options and advantages they did not know were available. Let me help you, too, make an informed and wise choice about most important asset.
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.
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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