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When a Chapter 7 “Straight Bankruptcy” Helps You Enough on Your Home

A 3-to-5-year Chapter 13 case is often the right tool if you are behind on mortgage payments. But sometimes the simpler Chapter 7 is enough.

 

Chapter 13 Is a Powerful Package

If you want to keep your home but are behind on your mortgage payments, a Chapter 13 “adjustment of debts” is often what you need. It comes with an impressive set of tools to address many home debt problems. It gives you more time to catch up on the mortgage, may enable you to “strip” a second or third mortgage off your title, and gives you very helpful ways for dealing with property taxes, income tax liens, judgment liens, and such.

When Chapter 7 is Enough  

But what if you have managed to fall only a few months behind on your mortgage, and could afford the payments if you just got relief from your other debts?

Or what if you aren’t even keeping the house, but do need a little more time to find another place to live?

Then you may not need a Chapter 13 case, and could save the extra time and cost that it would take compared to Chapter 7. In the right situations Chapter 13 is highly worthwhile because of what it can do. But if you don’t need those advantages, Chapter 7 may be adequate and appropriate.

Buying Just Enough Time for What You Need

The “automatic stay”—the bankruptcy provision that stops virtually all actions by creditors against you or your property—applies to Chapter 7 just as it does to Chapter 13.  So the filing of a Chapter 7 case stops a foreclosure just as quickly as a Chapter 13 filing.

But Chapter 7 usually buys you much less time than a Chapter 13 could.

If you are not very far behind on your mortgage payment(s) and want to keep your home, when you file a Chapter 7 case your mortgage lenders will usually give you several months to catch up on your back payments. You must immediately start making your regular monthly payments, if you had not been making them, and must enter a strict schedule for catching up on the arrearage. In return the lender agrees to hold off foreclosing, as long as you make the payments as agreed.

If instead you are not keeping the house but just need to have more time to save money for moving into a rental home, a well-timed Chapter 7 case will buy you more time in your house. During that time you don’t pay mortgage payments, enabling you to get together first and last month’s rent payment, any necessary security deposit and other moving costs.

The tough-to-answer question is how much extra time would a Chapter 7 filing give you. It mostly depends on how aggressive your mortgage company is about trying to start or restart the foreclosure efforts.  A pushy lender could, soon after you file your case, ask the bankruptcy court for “relief from the stay”—permission to start or restart the foreclosure process. If so, then your bankruptcy filing would buy you only an extra month or so.

Or on the other extreme, a mortgage lender could potentially take no action during the 3 months or so until your Chapter 7 case is finished. At that point the “automatic stay” protection expires, and the lender can start or restart the foreclosure. Or it may sit on its hands even longer. During the height of the mortgage crisis a few years ago, mortgage lenders were so backed up and so reluctant to foreclose, that many homeowners were living in their homes without making payments for a year or two! That is mostly a thing of the past but it goes to show how open-ended this situation can be at times.

Your bankruptcy attorney will likely have some experience in how aggressive your particular mortgage lender is under facts similar to yours.

Stopping Dangerous Liens Against Your Home

Chapter 7 prevents potential liens from being placed against your home, especially important when the lack of a lien makes all the difference. This can occur with IRS and state tax liens and judgment liens. A timely filing of a Chapter 7 case could result in paying nothing on a debt vs. paying it in part or in full.

Consider the example of an older IRS debt that meets the conditions for discharge (legal write-off in bankruptcy), in a situation in which you have equity in your home but no more than would be protected under the homestead exemption. If you did not file a bankruptcy until after the IRS recorded a tax lien for that debt against your house, that lien would continue being attached to your house in spite of your bankruptcy. You would have to pay the tax debt in order to get the lien released when you sold or refinanced the house.

However, if your Chapter 7 case was instead filed before the IRS recorded a tax lien, the “automatic stay” would prevent that tax lien from being recorded, the tax debt would be discharged and never have to be paid.

Discharge Other Debts So You Can Afford to Pay Your Mortgage Payments

Chapter 7 allows you to focus your financial resources on your house payments by getting rid of your other debts.

If you’ve managed to keep current on those mortgage payments, but fear you can’t continue to do so because of financial pressure from other debts, the relief you get from discharging those other debts can allow you to stay in your home long term.

Or you may have missed only a few mortgage payments, AND, after discharging your other debts, can reliably make future monthly payments plus enough extra to catch up on your arrearage within year or less. If so, then Chapter 7 would like likely do enough for you. Most mortgage creditors will make arrangements with you –called a “forbearance agreement”—to catch up the missed payments by paying a sufficient specific amount extra each month until you’re caught up, as long as that catch-up time is relatively short.

However, if after discharging your other debts you could not catch up on your arrearage within about a year, you may well need the extra firepower of Chapter 13 to buy you more time.

 

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Don’t Let a Creditor Get a Judgment Preventing its Debt from Being Written Off in Bankruptcy

Some creditor judgments are very dangerous since the prevent you from writing off the debt later in bankruptcy. Try to avoid judgments.

 

Consequences of Allowing a Judgment

In recent blog posts we’ve written about the most direct reason to avoid letting a creditor which has sued you get a judgment against you–it gives the creditor powerful ways to make you pay the debt, such as by garnishing your paychecks or bank accounts. Also, if you own any real estate, including your home, a judgment usually creates a lien on your real estate, another way to force you to pay the debt.

But there’s another reason we mentioned earlier–you should avoid a judgment whenever possible because it can result in that debt not being written off (“discharged”) when you file bankruptcy. Or even if that debt can be discharged, it may become much more difficult to do so. This blog post is about these kinds of judgments.

How a Judgment Can Affect Whether a Debt Can Later Be Discharged

So how can a judgment turn a debt that could have been discharged into one that can’t, or is much harder to discharge?

A very basic principle of law states that once one court has decided an issue, other courts must respect that decision. The idea is that litigants should be able to use court resources only once to resolve a specific dispute. Once a court decides an issue, the losing party shouldn’t be able to hunt around for another court to hear and decide the same dispute (except for appeals to a higher court).

The original court—usually a state court—could potentially resolve a lawsuit in a way that would later makes the debt not dischargeable under bankruptcy law. A creditor could allege that the person owing the debt incurred it in some fraudulent or inappropriate way. If the lawsuit is resolved with the judgment reflecting that that’s what happened, then later when the debtor files bankruptcy the bankruptcy court would likely be bound by that decision by the original court. The judgment having been previously entered by the original court, the debtor would not have an opportunity to challenge its conclusions after filing bankruptcy.

Many Judgments Do NOT Cause Discharge Problems

Most creditor lawsuits are about only one thing: whether the debt is legally owed. So the judgments arising from such lawsuits usually establish nothing more than that the debt is a valid debt, at a certain amount, plus certain fees and interest. Such judgments, which don’t make any determination about a debtor’s fraudulent or otherwise inappropriate behavior, do not impact the discharge of the underlying debt in a subsequent bankruptcy.

It’s Safer to File Bankruptcy Before a Judgment is Entered

The problem is that it’s not always clear what exactly the initial lawsuit decided in its judgment, and thus whether the judgment makes the debt not dischargeable or at least harder to discharge. Specifically, the language of the judgment may not mesh exactly with the bankruptcy laws about fraudulent debts, which makes difficult to determine whether that issue is still open for determination by the bankruptcy court.

A related question is whether the matter was “actually litigated” if the person against whom the judgment was entered did not appear to defend the lawsuit or did not have an attorney.  In other words you may or may not be able to get your day in bankruptcy court depending on whether in the eyes of the law you really already had your day in the prior court.  

To avoid these kinds of ambiguities, and to avoid the risk of losing your chance to defend your case in bankruptcy court, don’t wait until after a judgment has been entered against you to see a bankruptcy attorney. This is especially critical if a lawsuit’s allegations against you refer to any inappropriate behavior other than not repaying the debt.

The bottom line is that if you get sued by any creditor you should quickly see an attorney, even if you don’t plan on fighting the lawsuit. Getting to an attorney quickly enables you to learn if the lawsuit could lead to a judgment making the debt not dischargeable, or more difficult to discharge, in bankruptcy. If so, you would then have the option of filing the bankruptcy to prevent such a harmful judgment from being entered, instead of being stuck with it if you file a bankruptcy later.

 

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A Combination of Chapter 13 Tools for Saving Your Home, Illustrated

It’s often the combination of tools that come with Chapter 13 that allows you to keep your home. Because Chapter 7 has only some of these tools, sometimes it can’t do nearly as much for your home as Chapter 13 can.

 

Please read my last blog. There I laid out an example to illustrate how much a Chapter 13 case can do—on multiple fronts—to enable you to keep your home. That example also shows why sometimes Chapter 7 is not effective for that purpose. Today I explain how Chapter 13 can pull it off.

To summarize, here is a list of this hypothetical person’s debts:

  • first mortgage arrears: $5,000
  • first mortgage balance: $230,000
  • second mortgage arrears: $3,000
  • second mortgage balance: $50,000
  • past-due real estate taxes: $2,000
  • judgment lien from unpaid medical debt: $8,000
  • 2009 income tax with tax lien recorded against the home: $3,000
  • 2010 and 2011 income tax: $5,000 (no tax lien, yet)
  • credit cards: $18,000

A Chapter 7 “straight bankruptcy” would discharge (write-off) all or most of the credit card balances, as well as the medical bill that turned into the judgment, and likely even get rid of that judgment’s lien on your home title. That would save you about $26,000, and take away the threat to your home from the judgment lien.

But that still leaves both mortgage arrears, the past due real estate taxes, and many thousands of dollars of income tax debts, one holding a tax lien on the home. This debtor can afford to pay a total of $1,500 per month to all creditors, but with a $1,000 first mortgage and $300 second mortgage regular payment, that leaves only a measly $200 per month for the mortgage arrearages and all the taxes. Looks quite hopeless.

And yet, here is how Chapter 13 could be the solution:

1. Stripping second mortgage: In this example the home is now worth $225,000, less than the $230,000 balance on the first mortgage. So there is no equity in the home securing that second mortgage. Under these conditions, Chapter 13 can legally turn that second mortgage balance into an unsecured debt. (This cannot be done under Chapter 7). As a result, the debtor no longer pays the $300 monthly mortgage payment, freeing up that amount to pay other more important creditors. So instead of $200, there’s now $500 per month available to pay the remaining creditors.

2. Plan payment of $500 per month: Paying this $500 per month into a 36-month Chapter 13 payment plan results in a total of $18,000 paid ($500 X 36 = $18,000), or a total of $30,000 in a 60-month plan ($500 X 60 = $30,000). The length of a plan depends on a number of factors. But in this case let’s assume that the plan will run only as long as it takes to pay all secured and priority creditors—here, the first mortgage arrears and all the property and income taxes. That’s $5,000 of arrears, $2,000 of property tax, $8,000 for all the income taxes, or a total of $15,000. Interest needs to be paid on the property tax and on the portion of the income taxes with the tax lien, but Chapter 13 often allows those debts to be paid faster to lessen the amount of interest. The plan payments also need to pay the Chapter 13 trustee– usually a percentage of the amount flowing through the plan–plus whatever portion of the debtor’s own attorney’s fees not paid before the filing of the case. To simplify the calculations, let’s estimate that the total amount that the debtor would need to pay into the plan would be $20,000. At $500 per month, that would amount to 40 months of payments. (In some situations, the unsecured creditors would also need to be paid a certain amount of money or a certain percentage of their debt. In that situation, the $500 payments would need to be paid into the plan that much longer.)

3. Continuous protection from the creditors by the “automatic stay’: During the entire length of the Chapter 13 case—this estimated 40 months–the “automatic stay” would be in effect, preventing any of the creditors—the mortgage lenders, the property tax creditor, or the IRS—from taking any action against the debtor or the debtor’s home. So the first mortgage lender would not be able to start or continue a foreclosure because the monthly payments or the property taxes weren’t current. The property tax creditor itself could not conduct a tax foreclosure. And the IRS could not enforce its tax lien nor could it record a new one for the more recent tax debts.

4. Debt-free: At the end of the 40 months or so, the first mortgage and property taxes would be paid current, all of the income taxes would be paid in full, the tax lien would be released, and all the (remaining) unsecured debts would be discharged, leaving the debtor debt-free.  

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The Power of Chapter 13 to Save Your Home, Brought to Life

A mere list of the many ways that Chapter 13 can help save a home can start sounding dry. So here’s a powerful example that shows off some of its extraordinary advantages.

 

Let’s start by setting the scene. Say you lost your job in early 2010 and, except for temporary, part-time work, you did not find new full-time employment until 3 months ago. It pays less than your old job.

  • While you weren’t working full-time, you used up your savings and then borrowed on your credit cards to try to pay the house payments. That seemed to make sense at the time because you kept getting promising job leads, none of which panned out until you finally got hired for your present job. So you owe $18,000 on the credit cards, with minimum payments totaling $550 per month.
  • After your savings and available credit ran out, you still fell $5,000 behind on your first mortgage and $3,000 behind on your second. They are both starting to send papers sounding like they are going to start foreclosing.
  • Because there wasn’t enough money in your property tax escrow account with your first mortgage lender to pay the recently due annual $2,000 property tax bill, the lender is demanding that you pay that right away. It is threatening to foreclose for this separate reason if you don’t.
  • You had some medical problems soon after losing your earlier job, while you had no medical insurance, resulting in a $7,500 medical bill. That went to a collection agency, turned into a lawsuit, and then recently into an $8,000 judgment lien against your home.
  • Money had been tight even back before you’d lost your job because of cutbacks in hours, so you cut your tax withholding way back, so that you owed $2,000 to the IRS for 2009 income taxes. You couldn’t make the agreed monthly installment payments, and have just found out that that a tax lien has been recorded against your home in the amount of $3,000, after adding in all the accrued penalties and interest.
  • While you were working temporary jobs during 2010 and 2011, you were desperate for every dollar you could bring home, and so didn’t have any taxes withheld. As a result you owe the IRS another $2,500 for each year, or a total of another $5,000 that you have not even filed tax returns for yet.  You’re afraid to because you have no money to pay it and are afraid of more tax liens against your home.
  • Your home was worth $300,000 in 2008, but has lost about 25% of its value by now, so is worth $225,000. You owe $230,000 on the first mortgage, with monthly payments of $1,000, and owe $50,000 on the second mortgage, with monthly payments of $300.
  • With your current reliable income, after paying modest but reasonable living expenses, you have $1,500 available monthly for all creditors, including the two mortgages. That’s only $200 per month beyond the two mortgage payments, a drop in the bucket considering this mountain of debt:
    • credit cards: $18,000
    • first mortgage arrears: $5,000
    • second mortgage arrears: $3,000
    • property tax arrears: $2,000
    • judgment lien: $8,000
    • 2009 income tax with tax lien: $3,000
    • 2010 and 2011 income tax: $5,000

That’s a total debt of $44,000, besides the $230,000 first mortgage and $50,000 second mortgage.

  • Last fact: your two school-age kids live with you, they’ve lived in this home their whole lives, and have gone to the good local public schools for years, with their friends who live in the neighborhood. So more than anything you want to maintain this home and the stability it brings to their lives (and yours!). But it sure seems hopeless.

A Chapter 7 “straight bankruptcy” would help by discharging (writing off) tens of thousands of dollars, but NOT likely help nearly enough for you to be able to keep the home. A Chapter 7 case would likely discharge all or most of the credit card balances, as well as the medical bill that turned into the judgment, and likely even get rid of that judgment’s lien on your home title. That would save you about $26,000, and take away one threat to your home. But with only $200 to spare after paying the current first and second mortgage payments, that $200 is just way too small to even begin to satisfy the mortgage lenders or the IRS, much less both.

So after your Chapter 7 case would be completed, the IRS would attempt to collect the 2009 debt through garnishments of your bank account or wages, and sooner or later you’d have to deal with the 2010 and 2011 taxes, possibly resulting in them at some point turning into tax liens. And sooner or later your home would be foreclosed because you would have no way to catch up on the mortgage arrears.

However, if INSTEAD you filed a Chapter 13 case, under these circumstances you very likely you WOULD be able to keep your home, cure the mortgage arrears, and pay off all the taxes. And all this would happen while you and your home was protected from collection efforts by any of your creditors. How could that possibly be? I’ll show you in my very next blog. Sorry to keep you hanging, but today’s blog is way too long already.

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Debts with Collateral–THE Fixation of Many Bankruptcies

Your vehicle loan, home mortgage, account at the appliance or electronics store, and maybe a debt that’s resulted in a judgment lien—these debts with collateral are the ones that grab the most attention during a bankruptcy case. And that includes the attention of the creditors, very interested in “their” collateral.

 

General unsecured debts, which I talked about in the last two blogs, are pleasantly boring in most bankruptcy cases. In a Chapter 7 case, they are generally discharged (legally written off) without any opposition by the creditors, who usually get nothing. And in a Chapter 13 case, general unsecured debts are often just paid whatever money is left over after the secured and priority debts, and trustee and attorney fees, are paid. Nice and boring. That’s because the creditors don’t have much to fight about.

But with secured debts—debts with collateral—both sides have something to fight about—the collateral. The creditors know that the vehicle or house or other collateral is the only thing backing up the debt you owe to them, so they can get quite pushy about protecting that collateral.

The next few blogs will be about how you use either Chapter 7 or Chapter 13 to deal with the most important kinds of secured debts. Today we start with a few basic points that apply to just about all secured debts.

Two Deals in One

It helps to look at any secured debt as two interrelated agreements between you and the creditor. First, the creditor agreed to give you money or credit in return for your promise to repay it on certain terms. Second, you received rights to—and usually title in—the collateral, with you in return agreeing that the creditor can take that collateral if you don’t comply with your first agreement to repay the money.

Generally, bankruptcy will absolve you of that first agreement—your promise to pay—but the creditors’ rights to collateral survive bankruptcy (except in certain rare situations we will highlight later). Your ability to discharge the debt gives you some options, and can sometimes give you a certain amount of leverage. But the creditors’ rights about the collateral give them certain options and leverage, too. You’ll see how this tug-of-war plays out with vehicle and home loans, and few other important secured debts.

Value of Collateral

In that tug-of-war between your power to discharge the debt and a creditor’s rights to the collateral, how much the collateral is worth as compared to the amount of the debt becomes very important. If the collateral is worth a lot more than the amount of the debt, the creditor is said to be well-secured. It has a much better chance of having the debt be paid in full. You’ll really want to pay off the relatively small debt to get the relatively expensive collateral free and clear of that debt. Or if you didn’t make the payments the creditor will get the collateral and sell it for at least as much as the debt.

If the collateral is worth less than the amount of the debt, the creditor is said to be undersecured. It is much less likely to have this debt paid in full. You’ll be less likely to pay a debt only to get collateral worth less than what you’re paying. And if you surrender the collateral the creditor will sell it for less than the debt amount.

Depreciation of Collateral, and Interest

With the value of the collateral being such an important consideration, the loss of value through depreciation is something that creditors care about, a concern which the bankruptcy court respects. Also, in most situations secured creditors are entitled to interest. So, you’ll see that in fights with secured creditors, this issue about the combined amount of monthly depreciation and interest often comes into play.

Insurance

Virtually every agreement with a secured creditor—certainly those involving vehicles and homes—requires that you carry insurance on the collateral. If the collateral is damaged or destroyed, this insurance usually pays the debt on the collateral before it pays you anything. And, if you fail to get the required insurance—or sometimes even if you simply don’t inform the creditor about having the insurance—the creditor itself is entitled to buy “force-placed” insurance to protect only its interest in the collateral, AND charge you the often outrageously high premium.

 

With these points in mind, the next blog will tell you your options with your vehicle loan under Chapter 7.

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The Dangers of Allowing a Creditor to Get a Judgment Against You

 

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.

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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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“If Only I’d Gone to See My Bankruptcy Attorney Sooner . . . “

Those are the words I hate to hear from a new client.

Bankruptcy attorneys are in the business because we truly want to help people. It’s an emotionally tough area of law, dealing all the time with clients who are financially hurting. Usually my client are also hurting in other ways, related to what caused or contributed to their financial problems—an illness or injury, the end of a marriage or of a business, the loss of a job or, these days for many people, the loss of an entire career. What makes my day—which it does virtually every day—is to give great news to a client, that they will now get relief from their debts, or that there is a feasible plan to save their home, or to deal with their child support arrearage or their income tax debt. Every day we see people transformed in front of our eyes as impossible burdens are lifted from their fatigued shoulders.

But of course the information I share with clients is not always good news, and the advice I give is not always what my clients want to hear. Tough choices have to be made, and some goals turn out to be unrealistic. That’s all part of life.

But the most frustrating situations for both me and my clients are when we find out that they have self-inflicted some of their own wounds. The easily-preventable-but-now-it’s-too-late bad decisions they’ve made, often just a few months or weeks earlier, without getting legal advice beforehand. The goal of my next few blogs is to help you avoid those.

Here’s a taste of some of what we will be covering.

1) Preferences:  If you pay a creditor any significant amount before filing a bankrutpcy—especially a relative you hope not to involve in that bankruptcy—the bankruptcy trustee may well be able to force that relative—through a lawsuit if necessary—to  pay to the trustee whatever amount you paid to that relative.

2) Surrendering a “cramdownable” vehicle:  If you really needed a vehicle but you owed on it more than it was worth and figured you couldn’t afford the payments anyway, so you either voluntarily surrendered it, or did not file a bankruptcy until after it was repossessed, you may well have been able to keep that vehicle in a Chapter 13 case with much lower payments and total amount paid

3) Squandering exempt assets:  Just about every day it seems clients tell me how they’ve borrowed against or cashed in retirement funds in a desperate effort to pay their debts, using precious assets that would have been completely protected in the bankruptcy case they later file, used to pay debts that would have simply been “discharged” (legally written off) in that bankruptcy.

4) Rushing to sell a home:  Bankruptcy provides some extraordinary tools for dealing with debts that have attached as liens against your home, such as judgments and 2nd mortgages. If you hurriedly sell your home to avoid involving it in your bankruptcy case, or some other reason, you could lose out on opportunities to save tens of thousands of dollars.

5) Allowing a judgment against you: If you are sued by a creditor, you may assume that the debt or claim from that lawsuit would be discharged in your anticipated bankruptcy case.  But in some cases, the judgment from that lawsuit can effectively result in exactly the opposite, a determination which results in the debt NOT being able to be written off in your bankruptcy case.  

As you look at this list, notice that the legally and financially wrong choice is often what seems to be 1) the morally right one, and 2) common-sense one. Doing what seems right and sensible can really backfire. In the next few blogs I explain these so they make sense to you, along with other avoidable mistakes.  But by now it should be clear—nothing takes the place of actual legal advice about your own unique situation from an experienced attorney. So, make your day and mine by coming in to see me. Avoid ever having to say “if only I had gone in sooner.”

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Buying Just Enough Time for Your Home with a Chapter 7 Straight Bankruptcy

What if you are under threat of foreclosure, don’t want to keep your house, but just need a little more time to find another place to live? Or if you just need to finish a pending sale before the scheduled foreclosure happens?

Or maybe you don’t want or need the extra benefits of Chapter 13. Or you just want to put it all behind you in a few months instead of going through a 3-to-5 year Chapter 13 Plan. A Chapter 7 “straight” bankruptcy may give you just the right amount of help.

A Chapter 7 case:

1. Stops a pending foreclosure sale, at least temporarily. Depending on your situation, and the aggressiveness of the mortgage lender, it may buy you an extra few weeks or an extra few months. Chapter 7 does give you much less control over the situation than a Chapter 13, but the extra time it gives you may be enough in your particular situation.

2. It temporarily stops not just foreclosures by your mortgage company, but also by other creditors. This includes foreclosures for unpaid property taxes, homeowner assessments, or judgment lien creditors.

3. Prevents, at least briefly, most kinds of liens from attaching to your house, such as income tax liens, or judgment liens by creditors who have sued you and have not yet gotten a judgment.

So if you have a pending sale of a house which has less equity than your allowed homestead exemption, and need to buy enough time to close the sale before the foreclosure or before a new lien eats into your equity, and need to file some kind of bankruptcy to deal with your debts, filing Chapter 7 may be your best option. Or if you have resigned to losing your house but need to postpone the foreclosure to give you time to save money for rental and moving costs, again Chapter 7 could well be the best tool for you.

Because the amount of time a Chapter 7 will gain for you depends a great deal on the facts of your case, the anticipated actions of your creditors, and sometimes the behavior of your Chapter 7 trustee, be sure to discuss this thoroughly with your bankruptcy attorney. Find out if the comparatively modest help a straight bankruptcy provides is enough help for you.

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