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Bankruptcy Glossary
A
adversary proceeding
A lawsuit arising in or related to a bankruptcy case that is commenced by filing a complaint with the court. A nonexclusive list of adversary proceedings is set forth in Fed. R. Bankr. P. 7001.
assume
An agreement to continue performing duties under a contract or lease.
automatic stay
An injunction that automatically stops lawsuits, foreclosures, garnishments, and all collection activity against the debtor the moment a bankruptcy petition is filed.
Bbankruptcy
A legal procedure for dealing with debt problems of individuals and businesses; specifically, a case filed under one of the chapters of title 11 of the United States Code (the Bankruptcy Code).
Bankruptcy Code
The informal name for title 11 of the United States Code (11 U.S.C. §§ 101-1330), the federal bankruptcy law.
bankruptcy court
The bankruptcy judges in regular active service in each district; a unit of the district court.
bankruptcy estate
All legal or equitable interests of the debtor in property at the time of the bankruptcy filing. (The estate includes all property in which the debtor has an interest, even if it is owned or held by another person.)
bankruptcy judge
A judicial officer of the United States district court who is the court official with decision-making power over federal bankruptcy cases.
bankruptcy petition
The document filed by the debtor (in a voluntary case) or by creditors (in an involuntary case) by which opens the bankruptcy case. (There are official forms for bankruptcy petitions.)
Cchapter 7
The chapter of the Bankruptcy Code providing for "liquidation,"(i.e., the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors.)
chapter 9
The chapter of the Bankruptcy Code providing for reorganization of municipalities (which includes cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts).
chapter 11
The chapter of the Bankruptcy Code providing (generally) for reorganization, usually involving a corporation or partnership. (A chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. People in business or individuals can also seek relief in chapter 11.)
chapter 12
The chapter of the Bankruptcy Code providing for adjustment of debts of a "family farmer," or a "family fisherman" as those terms are defined in the Bankruptcy Code.
chapter 13
The chapter of the Bankruptcy Code providing for adjustment of debts of an individual with regular income. (Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.)
chapter 15
The chapter of the Bankruptcy Code dealing with cases of cross-border insolvency.
claim
A creditor's assertion of a right to payment from the debtor or the debtor's property.
confirmation
Bankruptcy judges's approval of a plan of reorganization or liquidation in chapter 11, or payment plan in chapter 12 or 13.
consumer debtor
A debtor whose debts are primarily consumer debts.
consumer debts
Debts incurred for personal, as opposed to business, needs.
contested matter
Those matters, other than objections to claims, that are disputed but are not within the definition of adversary proceeding contained in Rule 7001.
contingent claim
A claim that may be owed by the debtor under certain circumstances, e.g., where the debtor is a cosigner on another person's loan and that person fails to pay.
creditor
One to whom the debtor owes money or who claims to be owed money by the debtor.
credit counseling
Generally refers to two events in individual bankruptcy cases: (1) the "individual or group briefing" from a nonprofit budget and credit counseling agency that individual debtors must attend prior to filing under any chapter of the Bankruptcy Code; and (2) the "instructional course in personal financial management" in chapters 7 and 13 that an individual debtor must complete before a discharge is entered. There are exceptions to both requirements for certain categories of debtors, exigent circumstances, or if the U.S. trustee or bankruptcy administrator have determined that there are insufficient approved credit counseling agencies available to provide the necessary counseling.
creditors' meeting
see 341 meeting
current monthly income
The average monthly income received by the debtor over the six calendar months before commencement of the bankruptcy case, including regular contributions to household expenses from nondebtors and income from the debtor's spouse if the petition is a joint petition, but not including social security income and certain other payments made because the debtor is the victim of certain crimes. 11 U.S.C. § 101(10A).
Ddebtor
A person who has filed a petition for relief under the Bankruptcy Code.
debtor education
see credit counseling
defendant
An individual (or business) against whom a lawsuit is filed.
discharge
A release of a debtor from personal liability for certain dischargeable debts set forth in the Bankruptcy Code. (A discharge releases a debtor from personal liability for certain debts known as dischargeable debts and prevents the creditors owed those debts from taking any action against the debtor to collect the debts. The discharge also prohibits creditors from communicating with the debtor regarding the debt, including telephone calls, letters, and personal contact.)
dischargeable debt
A debt for which the Bankruptcy Code allows the debtor's personal liability to be eliminated.
disclosure statement
A written document prepared by the chapter 11 debtor or other plan proponent that is designed to provide "adequate information" to creditors to enable them to evaluate the chapter 11 plan of reorganization.
Eequity
The value of a debtor's interest in property that remains after liens and other creditors' interests are considered. (Example: If a house valued at $100,000 is subject to a $80,000 mortgage, there is $20,000 of equity.)
executory contract or lease
Generally includes contracts or leases under which both parties to the agreement have duties remaining to be performed. (If a contract or lease is executory, a debtor may assume it or reject it.)
exemptions, exempt property
Certain property owned by an individual debtor that the Bankruptcy Code or applicable state law permits the debtor to keep from unsecured creditors. For example, in some states the debtor may be able to exempt all or a portion of the equity in the debtor's primary residence (homestead exemption), or some or all "tools of the trade" used by the debtor to make a living (i.e., auto tools for an auto mechanic or dental tools for a dentist). The availability and amount of property the debtor may exempt depends on the state the debtor lives in.
I
insider (of individual debtor)
Any relative of the debtor or of a general partner of the debtor; partnership in which the debtor is a general partner; general partner of the debtor; or a corporation of which the debtor is a director, officer, or person in control.
insider (of corporate debtor)
A director, officer, or person in control of the debtor; a partnership in which the debtor is a general partner; a general partner of the debtor; or a relative of a general partner, director, officer, or person in control of the debtor.
Jjoint administration
A court-approved mechanism under which two or more cases can be administered together. (Assuming no conflicts of interest, these separate businesses or individuals can pool their resources, hire the same professionals, etc.)
joint petition
One bankruptcy petition filed by a husband and wife together.
L
lienThe right to take and hold or sell the property of a debtor as security or payment for a debt or duty.
liquidation
A sale of a debtor's property with the proceeds to be used for the benefit of creditors.
liquidated claim
A creditor's claim for a fixed amount of money.
Mmeans test
Section 707(b)(2) of the Bankruptcy Code applies a "means test" to determine whether an individual debtor's chapter 7 filing is presumed to be an abuse of the Bankruptcy Code requiring dismissal or conversion of the case (generally to chapter 13). Abuse is presumed if the debtor's aggregate current monthly income (see definition above) over 5 years, net of certain statutorily allowed expenses is more than (i) $10,950, or (ii) 25% of the debtor's nonpriority unsecured debt, as long as that amount is at least $6,575. The debtor may rebut a presumption of abuse only by a showing of special circumstances that justify additional expenses or adjustments of current monthly income.
motion to lift the automatic stay
A request by a creditor to allow the creditor to take action against the debtor or the debtor's property that would otherwise be prohibited by the automatic stay.
Nno-asset case
A chapter 7 case where there are no assets available to satisfy any portion of the creditors' unsecured claims.
nondischargeable debt
A debt that cannot be eliminated in bankruptcy. Examples include a home mortgage, debts for alimony or child support, certain taxes, debts for most government funded or guaranteed educational loans or benefit overpayments, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine included in a sentence on the debtor's conviction of a crime. Some debts, such as debts for money or property obtained by false pretenses and debts for fraud or defalcation while acting in a fiduciary capacity may be declared nondischargeable only if a creditor timely files and prevails in a nondischargeability action.
O
objection to dischargeability
A trustee's or creditor's objection to the debtor being released from personal liability for certain dischargeable debts. Common reasons include allegations that the debt to be discharged was incurred by false pretenses or that debt arose because of the debtor's fraud while acting as a fiduciary.
objection to exemptions
A trustee's or creditor's objection to the debtor's attempt to claim certain property as exempt from liquidation by the trustee to creditors.
Pparty in interestA party who has standing to be heard by the court in a matter to be decided in the bankruptcy case. The debtor, the U.S. trustee or bankruptcy administrator, the case trustee and creditors are parties in interest for most matters.
petition preparer
A business not authorized to practice law that prepares bankruptcy petitions.
plan
A debtor's detailed description of how the debtor proposes to pay creditors' claims over a fixed period of time.
plaintiff
A person or business that files a formal complaint with the court.
postpetition transfer
A transfer of the debtor's property made after the commencement of the case.
prebankruptcy planning
The arrangement (or rearrangement) of a debtor's property to allow the debtor to take maximum advantage of exemptions. (Prebankruptcy planning typically includes converting nonexempt assets into exempt assets.)
preference or preferential debt payment
A debt payment made to a creditor in the 90-day period before a debtor files bankruptcy (or within one year if the creditor was an insider) that gives the creditor more than the creditor would receive in the debtor's chapter 7 case.
presumption of abuse
see means test
priority
The Bankruptcy Code's statutory ranking of unsecured claims that determines the order in which unsecured claims will be paid if there is not enough money to pay all unsecured claims in full. For example, under the Bankruptcy Code's priority scheme, money owed to the case trustee or for prepetition alimony and/or child support must be paid in full before any general unsecured debt (i.e. trade debt or credit card debt) is paid.
priority claim
An unsecured claim that is entitled to be paid ahead of other unsecured claims that are not entitled to priority status. Priority refers to the order in which these unsecured claims are to be paid.
proof of claim
A written statement and verifying documentation filed by a creditor that describes the reason the debtor owes the creditor money. (There is an official form for this purpose.)
property of the estate
All legal or equitable interests of the debtor in property as of the commencement of the case.
Rreaffirmation agreement
An agreement by a chapter 7 debtor to continue paying a dischargeable debt (such as an auto loan) after the bankruptcy, usually for the purpose of keeping collateral (i.e. the car) that would otherwise be subject to repossession.
Sschedules
Detailed lists filed by the debtor along with (or shortly after filing) the petition showing the debtor's assets, liabilities, and other financial information. (There are official forms a debtor must use.)
secured creditor
A creditor holding a claim against the debtor who has the right to take and hold or sell certain property of the debtor in satisfaction of some or all of the claim.
secured debt
Debt backed by a mortgage, pledge of collateral, or other lien; debt for which the creditor has the right to pursue specific pledged property upon default. Examples include home mortgages, auto loans and tax liens.
small business case
A special type of chapter 11 case in which there is no creditors' committee (or the creditors' committee is deemed inactive by the court) and in which the debtor is subject to more oversight by the U.S. trustee than other chapter 11 debtors. The Bankruptcy Code contains certain provisions designed to reduce the time a small business debtor is in bankruptcy.
statement of financial affairs
A series of questions the debtor must answer in writing concerning sources of income, transfers of property, lawsuits by creditors, etc. (There is an official form a debtor must use.)
statement of intention
A declaration made by a chapter 7 debtor concerning plans for dealing with consumer debts that are secured by property of the estate.
substantive consolidation
Putting the assets and liabilities of two or more related debtors into a single pool to pay creditors. (Courts are reluctant to allow substantive consolidation since the action must not only justify the benefit that one set of creditors receives, but also the harm that other creditors suffer as a result.)
341 meeting
The meeting of creditors required by section 341 of the Bankruptcy Code at which the debtor is questioned under oath by creditors, a trustee, examiner, or the U.S. trustee about his/her financial affairs. Also called creditors' meeting.
T
transfer
Any mode or means by which a debtor disposes of or parts with his/her property.
trustee
The representative of the bankruptcy estate who exercises statutory powers, principally for the benefit of the unsecured creditors, under the general supervision of the court and the direct supervision of the U.S. trustee or bankruptcy administrator. The trustee is a private individual or corporation appointed in all chapter 7, chapter 12, and chapter 13 cases and some chapter 11 cases. The trustee's responsibilities include reviewing the debtor's petition and schedules and bringing actions against creditors or the debtor to recover property of the bankruptcy estate. In chapter 7, the trustee liquidates property of the estate, and makes distributions to creditors. Trustees in chapter 12 and 13 have similar duties to a chapter 7 trustee and the additional responsibilities of overseeing the debtor's plan, receiving payments from debtors, and disbursing plan payments to creditors.
U
U.S. trustee
An officer of the Justice Department responsible for supervising the administration of bankruptcy cases, estates, and trustees; monitoring plans and disclosure statements; monitoring creditors' committees; monitoring fee applications; and performing other statutory duties. Compare, bankruptcy
administrator.
undersecured claim
A debt secured by property that is worth less than the full amount of the debt.
unliquidated claim
A claim for which a specific value has not been determined.
unscheduled debt
A debt that should have been listed by the debtor in the schedules filed with the court but was not. (Depending on the circumstances, an unscheduled debt may or may not be discharged.)
unsecured claim
A claim or debt for which a creditor holds no special assurance of payment, such as a mortgage or lien; a debt for which credit was extended based solely upon the creditor's assessment of the debtor's future ability to pay.
VVoluntary transfer
A transfer of a debtor's property with the debtor's consent.
Jordan E. Bublick, Miami and Palm Beach, Florida, Attorney at Law, Practice Limited to Bankruptcy Law, Member of the Florida Bar since 1983
Can You File Bankruptcy If You Have Unfiled Tax Returns? Yes, but it’s a bad idea. However, there is a solution. In addition to practicing bankruptcy law, I am a tax lawyer as well. I can prepare and file your tax returns for you, and make sure that your case is setup to handle any tax issues.
If you think that you owe back taxes the IRS, we need to get your tax returns filed as soon as possible. There are a variety of solutions to tax debt that are available to you, but they all require you to get all of your late returns filed.
Chapter 7
You can file a chapter 7 bankruptcy and receive a discharge, even if you have unfiled tax returns. You don’t have to file the tax returns to get a discharge of your debts in bankruptcy; but, you should file your tax returns.
There are four very good reasons that you should get all of your tax returns filed before you file a chapter 7 bankruptcy:
- You can go to jail for failing to file a tax return.
- If the tax return isn’t filed, you can’t discharge the debts on that tax year. If you owe taxes for that year, then the sooner you get the return filed, the sooner you can discharge that tax debt.
- If you have priority tax debts and a high income, then those priority tax debts can help you pass the means test and qualify for a chapter 7.
- I can’t help you structure your case to take care of tax issues, until all of your late tax returns are filed.
The biggest issue is the tax discharge waiting period. You can discharge taxes in chapter 7, but there are various waiting periods after you file the tax return, after the tax return is accepted, and after any additional tax is assessed.
The bottom line is that the sooner we can get your tax returns filed, the sooner those waiting periods will run out, and the sooner, I can take care of your debts.
Chapter 13
You can file a chapter 13 before your tax returns are filed; but it’s not a good idea. In addition to the reasons that you should file all of your tax returns before you file a chapter 7, there are some chapter 13 specific issues as well:
- If you do not have all of your tax returns filed within 120 days of filing your chapter 13 petition, your case will be automatically dismissed.
- Your chapter 13 plan payment is based in part on priority tax debts. If you have unfiled tax returns, it is impossible to determine how much priority tax debt you actually have; and therefore, it is impossible to accurately predict your chapter 13 plan payment.
Missing Prior Year Tax Documents
If you are missing documents for your prior year tax returns, that is not a problem. I can obtain transcripts of all W-2, 1099, and other income documents from the IRS. In addition, I can help you reconstruct your deductions and exemptions for prior years if you itemize your deductions or have business expenses or depreciation expenses.
What To Do About Unfiled Tax Returns
I prepare tax returns on a flat fee per return basis. If you are a chapter 13 client, this fee may be rolled into your plan payment if you qualify. My tax preparation fees are competitive with all of the major tax preparation companies. I do not outsource the tax return preparation.
If you owe back taxes on unfiled tax returns, I can present you with a variety of options for taking care of that tax debt either through the bankruptcy discharge or through direct negotiation with the IRS.
Filing a bankruptcy case is the first step in stopping a foreclosure on your home and the imposition of the “automatic stay” on collection activity stops the mortgage lender dead in their tracks, but for how long? Not long enough unless you do what the Bankruptcy Code requires. Make your post petition mortgage payments on [...]The post So you stopped that foreclosure by filing a bankruptcy case. Now what? appeared first on National Bankruptcy Forum.
Chapter 13 bankruptcy cases filed in the Northern District of Georgia cannot be confirmed by the bankruptcy court judge if the IRS or State of Georgia files documentation reporting unfiled tax returns. The reason? If you have unfiled tax returns, your potential tax liability is unknown. Since Chapter 13 consists of a payment plan that must fit within five years, an unknown liability means that there is no way to calculate whether your proposed plan payment will work.Further, prior to your Section341 hearing your Chapter 13 trustee will want to see a copy of last year’s tax return to (a) confirm that you have filed it, and (b) to cross check the annual income figure reported on Schedule B of your petition with the income figures shown on your tax return.As you can see, therefore, your Chapter 13 cannot get past the trustee or the judge if you have unfiled returns. Currently the IRS reports unfiled tax returns over the past 10+ years, so you should not assume that if your unfiled returns date back many years, you are in the clear. In fact, the statute of limitations to determine when tax debt may be discharged in bankruptcy as stale does not begin to run until your returns have been filed.What can you do, however, if you need to file Chapter 13 to stop a foreclosure, repossession or other emergency, and you have unfiled tax returns?You can still file Chapter 13, but you need to move quickly to get those returns filed as soon as possible. Tax return preparers can download the forms from previous years and if you do not have your 1099′s or W-2s you can get copies of these documents from the IRS directly.I know several very capable tax preparers who can produce returns for past years. You will have to pay a bit more than you would for an on-time return for this service, but if you plan to make your Chapter 13 work you have no choice.Often I find that the past due tax return preparer may need several weeks to gather and process the tax return. If I see that the return preparation is in progress, I can file an objection to the IRS or Georgia proof of claim and use that objection as the basis to request a reset of the confirmation hearing. This will keep your case alive.However, the Chapter 13 trustees in our district expect that you will make a diligent and timely effort to get your overdue tax returns filed. If you do owe money, we may have to recalculate your plan payment. If you are due a refund, that money may go in whole or in part to the trustee.If you did not earn enough money to require the filing of a return, you can execute an affidavit to that effect or file a return showing your limited income. Either way, move quickly.Finally, recognize that the IRS gets automatic notification of every Chapter 13 bankruptcy case filing, so if you have been flying under the radar, your bankruptcy filing will put your case file on an IRS staffer’s desk.The post Unfiled Tax Returns and Chapter 13 appeared first on theBKBlog.
Government-sponsored enterprise Fannie Mae, which owns or guarantees a substantial proportion of U.S. home loans, lists and explains the Fannie Mae loss mitigation options available to borrowers experiencing financial hardship. The 20-page table can be found online here, but I provided brief rundowns of the options are below. Fannie Mae suggests considering the options in the order they appear but notes that some options may better fit particular situations. See the table for more detailed descriptions, eligibility criteria, terms and conditions, reporting requirements, and costs.
Retention Options
The first several options are home retention:
Forbearance
Forbearance temporarily reduces or suspends payments on a mortgage loan for a specified period. Forbearance is considered when the default results from particular financial hardships related to things like natural disasters or a temporary loss of income.
Repayment Plan
A repayment plan is an agreement where a borrower will repay outstanding arrears while still making regularly scheduled payments. Repayment terms may include monthly payments that are multiples of regular installments, a regular payment one month and multiple payments the next, more frequent payments, or other terms.
HAMP
HAMP is the Fannie Mae Home Affordable Modification Program. This program uses a uniform loan modification process to provide eligible borrowers with affordable monthly payments. This is done to bring the borrower’s monthly payments down to 31% of the borrower’s gross monthly income. The eligibility criteria are extensive and include the ability to document a valid long-term or permanent hardship. HAMP will close to new borrowers at the end of the year.
2MP
2MP is the Fannie Mae Second Lien Modification Program. It is designed to work with HAMP to help borrowers by lowering payments on first lien and second lien mortgage loans. Among the eligibility criteria, a loan must be a second lien with corresponding first lien modified under HAMP, originating on or before January 1, 2009, and have an unpaid principal balance of more than $5,000.
Standard Modification
Standard modification is designed to help borrowers who are ineligible for HAMP or who defaulted on a HAMP modification (and, sometimes, another Fannie Mae modification). While the standard modification eligibility criteria are detailed in the table, Fannie Mae will consider exceptions to those criteria when there are extenuating circumstances. The modification changes some terms of a mortgage loan to make it more affordable.
Liquidation Options
The following options are liquidation options:
Standard Short Sale
A short sale is when a borrower sells her home for less than the balance remaining on the mortgage, the proceeds pay off what is possible on the mortgage, and the lien against the property is then released. It can be initiated for eligible borrowers who are delinquent or facing imminent default, can no longer afford the mortgage or do not qualify for retention workout options, and want to avoid foreclosure.
Mortgage Release
A Mortgage Release occurs when a borrower transfers title to and possession of her property to Fannie Mae to satisfy the mortgage loan debt and avoid foreclosure. A Mortgage Release may be appropriate for borrowers who do not qualify for a home retention solution and for whom a short sale is not a viable foreclosure prevention alternative.
HAFA Cases in Progress
The HAFA program expired on December 31, 2012. For HAFA agreements executed prior to that date, the transaction must be closed or settled on or before September 30, 2013.
In addition to these Fannie Mae options, homeowners who can afford their regular monthly mortagage payment, but just need a chance to get caught up with past due amounts, may benefit from a Chapter 13 bankruptcy plan to stop foreclosure and work out the past due amounts.
See Related Blog Posts:
What is a Qualified Mortgage?
Good News for Distressed Property Owners
The post Fannie Mae Loss Mitigation Options appeared first on AKB.
Bankruptcy gets you out of debts you don’t want, but not stuff you don’t want.
It doesn’t force the finance company to tow your car. Or the timeshare people to foreclose the timeshare. And it doesn’t make the bankruptcy court take anything.
Sue got a bad car loan and a bad car from a “buy here, pay here” car dealer. The car is a 1999 Oldsmobile and it doesn’t run. Sue still owes $6590. Before, the dealer called Sue day and night, demanding payment, and threatening to garnish her and repossess the car.
Filing bankruptcy does not force the finance company to tow that junk car that won't run. Bankruptcy gets you out of debts. It does not get rid of stuff nobody wants.
Sue WANTED him to repo the car–because she can’t afford to fix it. But he never does. He knew it wasn’t worth much when he sold it and he now knows it’s not worth towing away.
Now, the dealer can’t call Sue. He can’t garnish her pay. BUT he still won’t pick up the car. She still can’t afford to fix it–and now its drawing tickets because the inspection has expired.
Sorry, Sue, you still have that problem. Bankruptcy got rid of the debt, but it does not get rid of stuff nobody wants.
Mike owns a campground timeshare. Made sense when he bought it–but hasn’t used it in years and it’s not worth the $550 annual maintenance fee.
When Mike filed bankruptcy, he was two years behind–and they were calling and threatening to garnish him. Now that he’s filed, they’ve stopped calling, and they can’t sue. But on January 1, they sent him a bill for another years annual maintenance.
Sorry, Mike, you still have that problem. Bankruptcy got rid of the debt you didn’t want. But it does NOT get rid of the stuff nobody wants.
Is there any help for Sue and Mike?
Usually, people like Sue can find a junk yard or small repair shop which will take the car off her hands–if she pays them a small fee. But she can’t force anybody.
In the same way, the timeshare people will usually accept a deed in lieu –so they can turn around and sell that campground to someone else. But Mike can’t force them. If you own stuff that you want to get rid of, there’s no bankruptcy junkyard where you can just “surrender property.” You need to talk your way–or buy your way–out of the problem.
Good luck!
Today’s post isn’t really about bankruptcy per se, but as a bankruptcy attorney in California, as you might imagine, I have had an up front and personal perspective on the mortgage crisis over the last several years. I was listening to the California Report on my San Francisco Bay Area NPR affiliate, KQED, last week when I heard something that struck me as so preposterous, so deceitful in its specious logic, that it stuck with me for days. The reporter, Rachael Myrow, was interviewing one Ed Gerding, the “Senior Fraud & Risk Consultant for CoreLogic,” which, according to its website, supplies “data, analytics and services” to “financial services and real estate professionals.” The piece was about mortgage fraud in California. Again, as a bankruptcy lawyer, my ears pricked up. I’ve had occasion to witness more than a few “option ARM,” “neg am” and other teaser mortgage loans in recent years as well as the inevitable foreclosures and short sales that resulted from them. And I’ve had the unique perspective of getting to know all the details of the financial lives of hundreds of homeowners stuck with these albatrosses.
I think any of us who learned anything about what led to the Great Recession will recall that the root cause was Wall Street’s invention of mortgage-backed securities, and how lenders like Countrywide, World Savings, et al., encouraged mortgage brokers (literally telling them: “Docs? We don’t want docs anymore”) across the country to peddle absurdly dubious teaser loans to unsophisticated borrowers so they could immediately package them into these exotic derivative securities and sell them to pension funds, etc. That was mortgage fraud to be sure.
But the intro to the story promised that “while you might be inclined to pin Big Blame on Big Banks, plenty of individuals are scamming the system, too.” From that little teaser, the listener was encouraged to immediately assume that we should spread the blame around equally. Individuals—you know, with all their outsized market influence, bargaining power and insight—must have been just as much to blame, right? And what is chief among Mr. Gerding’s examples of such insidious mortgage fraud supposedly so widespread that is today being perpetrated by individuals?
Short sales. That’s right, short sales.
As I said, I’m a consumer bankruptcy attorney. I work for individual debtors. I have now seen hundreds of clients who could not afford the mortgage loan they were sold in the 2000s. The one they were told at the time not to worry about because before the payment readjusted the property would have appreciated so much it would be easy to later refinance at a low fixed rate. I think I have some perspective on short sales and foreclosures in California. According to the story, a short sale is “a boon to a hard up homeowner – or someone pretending to be hard up who wants to stop paying for a house he’s underwater on.” Right there. That’s my problem. That statement is so asinine I don’t even know where to start. But I’ll take a deep breath and try.
What, pray tell exactly, is wrong, immoral, unethical or any other negative adjective implying dishonesty, with someone who wants to stop paying for a house he’s underwater on? Let’s back up here and think about some basic legal principles in contract law and economics. First of all it is a firmly established principle in contract law that where continuing to perform on a contract will lead to economic waste—like paying on a loan that grossly exceeds the value of the collateral secured by it—that to breach the contract is often the most economically efficient thing to do. Corporations quite intentionally breach contracts all the time precisely because for whatever reason—a changed economic climate, for example—it makes more economic sense for the contract to be broken than to carry on performing it. Generally, the agreement itself may contain the consequences for such a breach—by specifying liquidated damages, for example. Or, a statute may impose a different or additional penalty for breaching the contract. The point is that after calculating such economic consequences, it still makes more economic sense to breach the contract than to be enslaved to it. Conservative economists, who generally cling to the quasi-religious notion that all economic actors act with rationality all the time, cheer the idea that in capitalism, efficient use of capital often requires the breaching of contracts. The point here is that simply breaching an economic contract has nothing to do with morality.
But I digress. Back to the context of a short sale. The alternative to a short sale is a foreclosure. In California, a foreclosure is almost always carried out through a nonjudicial process, and the lender exercising their rights to foreclose under a deed of trust has no recourse beyond that process to later sue the borrower for any deficiency for any balance owed on the original note. California is, in other words, a “non-recourse” state at least with respect to first mortgages and nonjudicial foreclosures. Junior non-purchase money loans such as home equity lines are another matter, and I’ve covered these elsewhere.
Given that the alternative to a short sale is a foreclosure, which will invariably cost the lender much more than agreeing to a short sale at the current fair market value of the home, I have long felt that a short sale is nothing short of an enormous favor to the bank. Likewise, it’s a huge favor to the lender of any junior loan where they might not receive anything at all after a foreclosure. By requesting approval of a short sale, the homeowner is, in effect, finding that bank a ready, wiling and able buyer, wrapping them up in wrapping paper with a big bow on top and delivering them on a silver platter to the bank. The fact that banks will sometimes refuse to approve such a gift is beyond flabbergasting. It’s stupid. In the years between 2008-2012, I witnessed dozens of clients who had attempted to get approval of a short sale, have it refused by a hold-out lender, only later to then inevitably let the home foreclose. The foreclosure may then have taken 18 to 24 months to complete simply because the bank didn’t want the property.
While the California Report and Mr. Gerding of CoreLogic implied some widespread fraud on the part of homeowners in California trying to short sell a property they likewise implied that somehow homeowners who cannot or do not want to pay for a grossly underwater property see no negative consequences as a result of a short sale. Wrong again. Remember that to the extent that the lender does not receive the full payoff balance of the original loan, such “canceled” debt is later taxable as income to the homeowner—with just a few exceptions. For example, where the property is not the borrower’s primary residence, and unless a bankruptcy or the IRS-defined “insolvency” exception applies, the borrower will have to pay taxes on the difference between what they owed on the loan and what the bank received from the short sale. The bank gets a nice write off and the borrower may owe income taxes on debt cancellation. Hardly a windfall to the borrower. And we haven’t even touched upon the damage to the borrower’s credit that results from a short sale.
Not to be disingenuous, I am perfectly aware that Mr. Gerding, in his elaboration of what constitutes “mortgage fraud” in the context of California short sales, was talking about situations in which the homeowner is someone “pretending to be hard up” presumably in order to qualify for a lender’s capricious hardship requirements for approval of a short sale.
My point is that a homeowner’s ability to continue to pay on a mortgage that is 30% or 50% or 100% greater than the current fair market value of the property should have nothing to do with whether the bank can approve or disapprove of the short sale. A short sale should not require, and often does not require, depending on the lender, any showing of economic hardship on the part of the borrower. If there is any such “fraud” out there, then it is a fraud manufactured by the mortgage lender to the extent that it has created a barrier to a short sale that shouldn’t exist. I am certainly not advocating lying to a lender in order to get their approval. Remember, if the bank won’t approve a short sale, then the borrower can always just let them foreclose. And they don’t have to provide any proof of financial hardship for that.
The fact is now the property is worth much less than when the bank made the original loan. Either that bank or its predecessor lender they bought that loan from made a decision to lend some inflated amount that today in hindsight looks foolish. They contributed to the property value bubble in the first place in their rush to lend and then sell mortgage backed securities. Lending is a risky business. They know that. It’s not the borrower’s fault that now the house is worth far less. And it is absurd to paint homeowners as fraudsters when they make what is sometimes the most economically rational decision to let such a property go.
Last year, the United States saw ecommerce spending jump to $194.3 billion, up 16.1% from $167.3 billion in 2010. The majority of these purchases were likely made on credit cards, and credit card debt is often cited as a reason why people file Chapter 7 and Chapter 13 bankruptcy.
Americans in general are definitely online shoppers, but which type of online shopper are you?
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The Seeker
- They’re on the lookout for specific items.
- Know exactly what they want, and are ready to buy.
- They’ll shop multiple stores until they find what they seek.
The Frugal Finder
- They’re always on the lookout for the best deal.
- They look for online coupon codes, sales, and free shipping promotions.
- They’ll comparison shop among multiple online stores to get the most bang for their buck.
The Researcher
- They have a goal in mind, but haven’t settled on a particular product or brand. Researchers browse with the intention of finding information until they decide on a product.
- They take their time, reading product descriptions and reviews to gather as much information as possible before making a purchase.
The Window Shopper
- The online equivalent to people who walk by a retail store without stopping.
- They don’t really have a product or purpose in mind.
- They could be looking to entertain themselves, or browsing to gather research for a future purchase.
The Mobiler
- They love shopping online, but rarely find themselves sitting in front of their computer. Instead, they use smartphones or tablets to take care of all their online shopping needs.
- They know what they want and where to get it. They make purchases with the app of their choice in just a few clicks.
The Hermit
- They avoid traditional brick-and-mortar stores as often as possible.
- They sign up for all the deals, newsletters and alerts to make sure they’re shopping at the right time and using the Internet to their fullest advantage.
- Serious Hermits sign up for auto-refill programs to make sure they always have stock on hand.
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Filing Chapter 13 bankruptcy will soon be an option for people with larger debts. On April 1, 2013 the law will adjust to allow people with unsecured debts of up to $383,175 and secured debts of up to $1,149,525 to file Chapter 13.
Chapter 13 Not For Everyone
Chapter 13 is not for everyone. By design, not everyone meets the rules for filing a chapter 13 bankruptcy. Chapter 13 bankruptcy law is designed to be limited to simpler, 
straightforward debt reorganization. For that reason only people and married couples may file Chapter 13. Your corporation or limited liability company are not allowed to file Chapter 13. The Chapter 13 debt limits are another method of excluding more complex cases from Chapter 13.
Option for More People
Many more people who want to take advantage of the benefits of a chapter 13 bankruptcy and get caught up on back house payments, get rid of second mortgages, or protect property that would be lost in Chapter 7 will soon meet the rules and be allowed to file Chapter 13.
Debt Limits Increase April 1, 2013
Every three years the debt limits for chapter 13 change. These revisions are based on changes in the consumer price index. Effective 04/01/2013 the new limits for unsecured debt are $383,175 and the limit for secured debt is $1,149,525.
Debt Limits Subject to Dispute
Anyone who has more than than these limits may not file a chapter 13 bankruptcy. However, as with anything in the law, it’s not always clear whether a particular debt should be counted toward these limits.
The bankruptcy code provides that a debt be non-contingent and liquidated to count toward the unsecured debt limit. Plenty of legal battles have been fought over whether a particular debt meets this rule. Before making a hasty judgment that you do not qualify for chapter 13 be sure to talk to an experienced Arizona bankruptcy lawyer.
Original article: Chapter 13 Bankruptcy Debt Limits Change in 2013©2013 Arizona Bankruptcy Lawyer. All Rights Reserved.The post Chapter 13 Bankruptcy Debt Limits Change in 2013 appeared first on Arizona Bankruptcy Lawyer.
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