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Many clients “surrender” their house as part of their Chapter 7 bankruptcy and assume that said act will allow them to put their homeowner’s “experience” totally in their rear view mirror. Unfortunately, in the context of dealing with secured debt (such as mortgages or car loans) in bankruptcy, the term “surrender”does not mean what many people think it does. The act of “surrendering” someone’s collateral in bankruptcy only means that you no longer intend to make the mortgage or car loan payments associated with the collateral. Although receiving your bankruptcy discharge does eliminate your personal obligation to repay the note and mortgage, you still own the collateral (the house or car) until something happens which divests you of such ownership interest, such as a foreclosure sale, short sale or deed in lieu of foreclosure.
The perception that a Chapter 7 Trustee will take control of all property surrendered by a debtor is simply not true in most instances. The Trustee’s goal is to liquidate assets (ie., sell property) in order to generate funds for a distribution to the creditors. However, if the property in question has no non-exempt equity, the Trustee will abandon the estate’s interest in the property and no liquidation will occur. Further, discharging your personal obligation to repay the mortgage does not somehow make the bank the new owner of the property. The bank will only become the owner of the property (1) if their foreclosure process is completed and the bank is the successful bidder at the auction sale, or (2) if they accept from you a deed in lieu of foreclosure.
There are “pros” and “cons” to remaining the owner of your “surrendered” house after bankruptcy. The “up side” is that, if you choose to do so, you should be able to live there for quite a while without making any mortgage or rent payments, which should help in your efforts to get back on your feet financially (although we do recommend that you continue to keep liability insurance on the property). The “down sides” are numerous, especially if you have vacated the property and moved on with your life:
- First, as the property owner you will remain liable for any injuries sustained on the property, such as if a neighborhood kid wanders on to the property and gets hurt. This is effectively dealt with by maintaining (and paying for) your own liability insurance policy on the property. The bank will maintain its own policy insuring the building’s structure against things such as fire, but said policy normally will not protect you from persons getting injured on the property.
- Second, you must still comply with all municipal ordinances regarding property ownership. If someone creates an eyesore on the property by storing old tires or junk cars on it, etc., it is the property owner who will (1) receive a citation from the municipality to remedy the problem and (2) be fined if such remediation does not occur in a timely fashion (as determined by the municipality). This can be difficult to deal with, especially if you have moved far away, hopefully to greener pastures. A caveat to this is that in certain circumstances where the mortgage holder has taken an egregiously long period of time between the entry of a Judgment of Foreclosure and Sale and the conducting of the auction sale (ie., 29 months in one reported case), the mortgage holder can be fined by the municipality if tenants in the property become endangered due to conditions on the premises that are allowed to develop and not remedied by anyone. There is a paucity of reported law on this issue, and we do not suggest that it provides a “safe harbor” for property owners whose abandoned property remains titled in their names.
- Third, if the property in question is a condo or townhouse or part of any community having a homeowner’s association, you will remain liable for all post-bankruptcy HOA dues and assessments. We recommend that you continue to pay the HOA fees after the bankruptcy filing, since homeowner’s associations tend to be very quick about suing those property owners who are in default.
- Fourth, unless you have a tax escrow with the bank, you will continue to receive your property and school tax bills from the taxing authorities. You should immediately forward all such bills to the bank holding the mortgage, as they should pay the taxes in order to protect their interest. You will stop receiving these tax bills once there is a new owner.
You cannot force a bank to accept from you a deed in lieu of foreclosure, and in many instances they will simply refuse to do so, especially if there is a second mortgage or other liens on the property. Further, a recent First Circuit Court of Appeals case made it clear that as long as the bank is not trying to squeeze payments out of you, a lender’s failure to commence and prosecute a foreclosure proceeding does not violate the Discharge Injunction. In short, you cannot force the lender to foreclose, so you might be “stuck” for a while with the burdens of property ownership. Bankruptcy can be a very effective tool for discharging debt, including mortgage obligations, but it is less effective when it comes to undoing all of the incidents of property ownership. Like most things, you take the good with the bad.
According to affidavits signed by former Bank of America employees in a class action lawsuit filed in a Boston federal court, the bank regularly lied to customers seeking home loan modifications to deny their application. The affidavits were filed last week in a multi-state class action lawsuit filed on behalf of homeowners who claim they were wrongfully denied a loan modification under the Home Affordable Modification Program (HAMP). www.MakingHomeAffordable.gov
We were told to lie to customers and claim that Bank of America had not received documents it had requested, and that it had not received trial payments (when in fact it had). We were told that admitting that the Bank received documents would ‘open a can of worms’ since the Bank was required to underwrite the loan modification within 30 days of receiving those documents, and it did not have sufficient underwriting staff to complete the underwriting in that time.” Affidavit of Simon Gordon, Senior Collector of Loss Mitigation for of Bank of America from 2007 to 2012.
According to William Wilson Jr., a former Case Management Team manager for Bank of America, twice a month the bank would deny 600 to 1,500 modification applications at time in a procedure called a “blitz.” Wilson states that Bank of America told its managers to “clean out” the backlog of HAMP applications even though all financial documents were received and Trial Payments had been made by the homeowners. In addition, Wilson claims that homeowners were coerced to accept “in-house” modifications with 5% interest rates instead of the 2% rate provided under HAMP.
I personally reviewed hundreds of files in which the computer system showed that the homeowner had fulfilled a Trial Period Plan and was entitled to a permanent loan modification, but was nevertheless declined for a permanent modification during a blitz. . . . Employees who challenged or questioned the ethics of Bank of America’s practice of declining modifications for false and fraudulent reasons were often fired.” Affidavit of William Wilson Jr.
Theresa Terrelonge, a “collector” for Bank of America, provides more details on how the bank denied applications.
One tactic Bank of America used to delay the modification process involved telling homeowners who applied for a HAMP modification or who were in a Trial Period Plan to resubmit financial information each time they called to inquire about a pending modification. Bank of America then treated any change in financial information as a justification for considering the home owner to have restarted the HAMP process. Even a small change to financial information or correcting an error that Bank of America made will cause Bank of America to restart the application process under the pretext of changed financial information." Affidavit of Theresa Terrelonge.
It gets worse. Terrelonge declares that managers received bonuses based on how many applications they denied.
The production goals of Bank of America placed on its managers were based on how many accounts they could ‘close’—meaning how many homeowners they could reject for the loan modifications rather than how many modifications they could successfully complete. Managers received bonuses if their teams met or exceeded production goals. . . . Employees were awarded incentives such as $25 in cash, or as a restaurant gift card based on the number of accounts they could close in a given day or week—meaning how many applications for modifications they could decline.
It gets even worse than that. Terrelonge states she witnessed employees and managers change, falsify and delete information from Bank of America’s computer system to make it appear that the homeowner was ineligible for a loan modification.
Steven Cupples was employed by Bank America as an underwriter and Team Leader in Bank of America’s HAMP department. He observed that due to poor training, Bank of America employees did not know how to find all the documents submitted to the bank.
Most underwriters did not know that they needed to look for documents in multiple systems and often assumed documents had not been sent. As a result, many borrowers were declined loan modifications that should have been received." Affidavit of Steven Cupples.
The statements made by these Bank of America employees match the complaints I have heard from my clients over the past four years. Banks losing documents. Banks requesting that documents be submitted over and over again. Banks denying the application for no apparent reason.
Studies have shown, however, that loan modifications filed while a bankruptcy case is ongoing have a significantly higher success rate. In states like Florida where the bankruptcy courts have established mediation programs to help homeowners in the modification process, the success rate is nearly 90%.
It is clear that the modification process requires a third party to watch over the banks to ensure that the applications are properly administered. We have helped many of our clients successfully apply for the HAMP program, and I believe bankruptcy court oversight is essential to making this program work.
Bringing you the most up-to-date news, tips and blogs throughout the web. Here’s your Bankruptcy Update for June 18, 2013 Orchard Files for Bankruptcy, but Lowe’s Buying Assets Mexico’s Maxcom negotiates prepackaged bankruptcy Texas Construction Firm Caught in Rare Spider’s Web
Here at Shenwick & Associates, many of our clients have complex bankruptcy cases involving factors that often lead to increased scrutiny by the Chapter 7 Bankruptcy Trustees assigned to the cases, as well as by the United States Trustee Program (USTP), a component of the U.S. Department of Justice that oversees the administration of bankruptcy cases and Bankruptcy Trustees. Some of these factors include:
• High levels of income, expenses and/or assets
• Tax debts
• Business debts
As part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the USTP established procedures for independent accounting firms to audit petitions, schedules, and other information in consumer bankruptcy cases.
However, due to the federal budget sequestration that began on March 1, 2013, the USTP has indefinitely suspended its designation of cases subject to audit and notified the independent accounting firms performing the audits. At the conclusion of fiscal year 2013 (Sept. 30th), the USTP will make public information concerning the aggregate results of the debtor audits performed during fiscal year 2013.
To find out how you can minimize the chances of an audit of your bankruptcy case through pre–bankruptcy planning, please contact Jim Shenwick.
Warning – this article is fairly technical. It’s an important issue if you’re thinking about filing for bankruptcy and have student loan debt, so skim it to get some ideas.
At least once a week, a client comes in to me with a lot of credit card debt and student loans they can’t pay.
We crunch the numbers and realize that they can pay down their student loans if only they could get rid of the credit card debts.
For those people who are over median income and fail the means test, this may mean they can’t file for Chapter 7 bankruptcy and get rid of the credit card debt.
In some situations, however, we may be able to look to the student loan debt as a way to qualify you for Chapter 7 bankruptcy.
Means Testing Applies Only To Primarily Consumer Debt
Under the U.S. Bankruptcy Code, you’re required to go through means testing only if your debts are primarily consumer in nature. That means we total all of your debt, then divide it into consumer and non-consumer debt.
If the non-consumer debt comes out to 50% + $1 of your total consumer debt, then you do not need to go through means testing.
What Is A Consumer Debt?
Under the U.S. Bankruptcy Code, a “consumer debt” is defined as “debt incurred by an individual primarily for a personal, family, or household purpose.”
So how do you know if a debt was incurred primarily for a personal, family, or household purpose?
In the 1998 case of In re Kelly, the court determined that if a debt isn’t incurred for business ventures or other profit-seeking activities then it is considered to be consumer debt. The bankruptcy court in Los Angeles went along with this reasoning in a related 1994 case, as have other courts covering California through the years.
In New York, too, the question of a consumer debt has come down to profit motives.
So long as the debt is considered to have been incurred with an eye towards profit, you can consider is as non-consumer in nature.
If you’ve got enough non-consumer debt to tip the scales, you’re in a far better position for Chapter 7 bankruptcy.
Is A Student Loan Considered Non-Consumer Debt?
If student loan debt can be considered non-consumer, then someone with a large amount of student loan debt may be able to file for Chapter 7 bankruptcy without worrying about the means test.
The question of whether student loan debt is consumer or non-consumer is an open question in many bankruptcy courts, with judges looking at a variety of factors to decide on a case-by-case basis.
After all, every student can claim that he or she decided to pursue an education because of a long-term profit motive. But the reality is that some people get an education for reasons other than capitalism.
Some folks go back to school to be smarter than they were before (I’m not saying it’s the end result, just that this is the intent). Others do so because they’re looking to avoid a tough job market.
Student Loan Payments As Means Test Deduction
In Los Angeles bankruptcy cases, we may be able to use student loan payments as a deduction on your means test for Chapter 7 bankruptcy purposes. This can help you qualify for Chapter 7 bankruptcy even if you’re above median income.
In New York bankruptcy cases, we cannot deduct those payments from the means test.
If you live in another place and are thinking about filing for bankruptcy, your lawyer can tell you about your local practice.
The Devil is In The Details
The upshot is that when you’ve got student loan debt, you really want to sit down with a lawyer who will take the time to work through every single angle.
For example, if you went back to school because your employer told you to do so in order to get a promotion then I’d look more closely into getting that student loan debt classified as being non-consumer debt.
If, on the other hand, you took a few classes for personal improvement and pleasure then I’d lean the other way.
There are lots of grey areas but, as you can see, for the right situation there may be a way to make a better outcome.
Image credit: Roberto Trm
Student Loans As Non-Consumer Debt In Chapter 7 Bankruptcy was originally published on Consumer Help Central. If you're seeing this message on another site, it has been stolen and is being used without permission. That's illegal, a violation of copyright, and just plain awful.
Many people may not realize that planning ahead for bankruptcy may help you save money, aside from protecting your assets. Planning ahead includes taking a number of important steps to ensure you complete the process faithfully to the best of your knowledge. Taking time to get advice from informed professionals can help you obtain a [...]
Never got one of these on a report card so I am extremely pleased to report that our law firm has obtained an ‘A+’ rating from the Better Business Bureau for our Bankruptcy and Fair Debt Collection Practices Act work.
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The original post is titled New Better Business Bureau A+ Rating for Our Bankruptcy and FDCPA Law Firm! , and it came from Oregon Bankruptcy Lawyer | Portland, Salem, and Vancouver, Wa .
Credit card debt settlement can leave you owing taxes on the forgiven balance.
If you’re in debt and have only one or two credit cards that you need to clear up, you may want to look into settling your debt.
It’s no secret that lots of debt buyers and collectors will negotiate to reduce the balance due and let you pay it off all at once.
After all, it makes sense for them to settle. Most companies buy past-due debt for a fraction of the face value, so when you settle they still make a profit.
You may think you’re getting away with paying less by engaging in credit card debt settlement. Sometimes you’re right.
But without proper planning and guidance, you may find yourself in a bad situation.
Credit Card Debt Settlement Makes For Taxable Income
When you settle a credit card debt, the lender or debt buyer may be required to file Form 1099-C, Cancellation of Debt. This form must be filed if the creditor has canceled $600 or more of a debt you owe.
Because you no longer have to pay the debt in full, the IRS treats the forgiven amount as income.
You may need to pay taxes on that forgiven amount.
Avoid Paying Taxes On The Forgiven Debt
There are two circumstances under which you may not need to pay taxes on the amount that’s wiped out in a credit card debt settlement.
Under Internal Revenue Code Section 108(a), you do not need to include the forgiven amount of the credit card debt in your gross income if the discharge occurs in a bankruptcy case or the discharge occurs when you are insolvent.
In order to waive the tax liability, you’ll need to file IRS Form 982.
The Insolvency Test
If the settlement occurred while you were insolvent, you won’t need to pay taxes on the amount forgiven.
You are considered insolvent if your liabilities exceeded the fair market value of your assets when the debt was settled.
According to the IRS, liabilities include the following:
- the entire amount of recourse debts;
- the amount of nonrecourse debt that is not in excess of the fair market value of the property that is security for the debt; and
- the amount of nonrecourse debt that in excess of the fair market value of the property subject to the nonrecourse debt to the extent nonrecourse debt in excess of the fair market value of the property subject to the debt is forgiven.
I’m a lawyer who’s been working in this field for well over 15 years, and that makes my head spin a bit every time I read it.
There’s a worksheet in IRS Publication 4681, but it’s a better idea to work with a tax professional who understands debt cancellation issues to make sure you don’t botch the job.
In The Right Hands, This Could Work Out Just Fine
When someone calls me to settle a credit card debt, the first thing I do is run through their financial situation to see how the tax implications stack up. Then we talk about possible credit card debt settlement options – how they’ll pay any tax debt, how to balance the settlement with any amounts due, and the like.
It’s the smartest way to approach the problem, knowing in advance what you’re up against rather than scrambling at the end of the tax year. I recommend that you find a lawyer or tax professional who works this way, or in a similar vein.
Because it’s a real downer to settle a credit card debt only to find out later than you’re not done paying the piper.
Understand The Tax Implications Of Settling Credit Card Debt was originally published on Consumer Help Central. If you're seeing this message on another site, it has been stolen and is being used without permission. That's illegal, a violation of copyright, and just plain awful.
As a Virginia bankruptcy lawyer, people ask me almost every day, do I need to file bankruptcy after foreclosure? When I try to answer that question, we look at the credit reports. Usually, the first mortgage shows “foreclosed” with a zero balance. Does that mean you are safe? Does that mean you don’t owe the [...]The post Do I need to file bankruptcy after foreclosure–update! appeared first on Robert Weed.
In a recent decision, the United States Supreme Court provided guidance relating to the term “defalcation” of the Bankruptcy Code under Section 523(a)(4).1 In a unanimous decision, the Supreme Court held that the term “defalcation” of the Bankruptcy Code includes a “culpable state of mind requirement involving knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior.” Read More ›
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