Chapter 13 Bankruptcy Information

My colleague, Jed Berliner, wrote recently about getting stuck with a home that your thought you surrendered in a bankruptcy case to your mortgage lender.  Yes, Virigina, the American dream is dead, dead, dead,

But there is a way to avoid getting stuck with real estate after a bankruptcy, but it all depends on where you live.  Unfortunately, this requires understanding a fine distinction in real estate law theory.  Stay with me folks, even a lot of lawyers missed this one in law school, but it is not so difficult to understand.

One of the leading causes of marital conflict involves money, or lack thereof.  If you and your spouse filed a joint bankruptcy and you are now considering divorce, your respective financial positions may be at odds with each other.  One person may want the house, one may not.  Both may want the same vehicle.  Who will pay, who will not.  Think about that for a moment, if you cannot agree to get along in marriage, will you be able to agree to do the things necessary to complete your case after you divorce.  This situation places the attorney squarely in a potential conflict of interest between both spouses.  An attorney cannot serve two masters.

Recently there was a case where several debtors asked a Bankruptcy Court to approve a lease agreement as if they were re-affirmation agreements.  From a procedural standpoint re-affirmation agreements require Bankruptcy Court intervention and lease assumptions do not, and therefore, the Courts denied this process.  In the past, several Bankruptcy Courts allowed this process, but in the recent case of In Re Perlman, Judge John K. Olson of the Southern District of Florida argues against the idea of seeking Court approval of lease agreements.  Judge Olson believes that the process of seeking Court approval of Lease Agreements is a waste of the Court’s time and resources and the Clerk’s office’s time and resources.

Bankruptcy can be affordable. 

It requires a lot of money to file for bankruptcy protections. It costs lots more than before the 2005 revisions, which doubled the expenses and work for no additional benefit. Here’s how to make it affordable.

Chapter 7 cases are over in three months. One has to save up the fees and costs before the filing. Legal fees not paid before the filing get discharged, just like credit cards. But it can be hard to save up the money – that’s why you’re thinking of bankruptcy in the first place. Duh.

Good lawyers will not recommend filing bankruptcy if the benefit is not clear.  If you are giving up your house with only one mortgage and no other significant debt, many of us will typically advise against it.  But in Missouri that could change if the banks start getting too greedy.

Unlike some states, Missouri allows a mortgage lender to collect a deficiency after foreclosure.  So if the house sells in foreclosure for less than is owed, the bank could sue you for the difference.   Junior mortgages and home equity lenders usually will do this.  But historically the first mortgage did not.  That might change for a classic reason — profit.

You might be able to pay off what you are behind on a mortgage over a three to five year period, but not all at once like your mortgage servicer is demanding. Chapter 13 provides the powerful right to force a payment plan on a mortgage lender who wants to foreclose. Once the decision to file Chapter 13 is made, the question arises: what must you pay back in your plan to make the mortgage lender whole. First, Section 506(b) of the Bankruptcy Code does not permit creditors with collateral worth less than their claims (i.e. “undersecured” creditors) to collect interest or fees from the bankruptcy estate. However, Section 1322(e) of the Bankruptcy Code provides:

Last time, we talked about how a mortgage modification could screw up your ability to avoid a second mortgage in a Chapter 13 bankruptcy.  If your principal balance is lowered on your first mortgage, your second mortgage may survive a Chapter 13.  But there are other dangers for Chapter 7 in the mortgage modification settlement.

Maybe your bank won’t reduce your principal balance.  That can be a good thing.  But, consider this: if your bank reduces your mortgage monthly payment, that may free up other portions of your income forcing you into a Chapter 13 bankruptcy case rather than just discharging your debts in Chapter 7.

Tax Refund for Bankruptcy

Tax refunds are soon due and so are people filing bankruptcy.  Expect to see a significant jump in bankruptcy filings as taxpayers get refunds from overpayment of their income taxes. According to a study by the National Bureau of Economic Research, as reported in a USA Today article on tax refunds and bankruptcy, more than 200,000 households will use their tax refunds to cover the costs of filing for debt relief this tax season. Small wonder; the economy remains in the doldrums and the costs of seeking legal help have increased due to additional requirements imposed on courts, lawyers and trustees by Congress.  In extensive 2005 legislation, the requirements for filing bankruptcy were dramatically increased and penalties were created for failure of lawyers to comply.

I just finished listening to a discussion on the radio about discharging student loans in bankruptcy, and it occurred to me that we could learn a lot from “The Middle Way” of Zen Buddhism in our approach to this issue.

“The Middle Way” is a term Siddhartha Guatama (hereafter “The Buddha”) used to describe the path to liberation.  In fact, he apparently taught this concept immediately after his “enlightenment” in The Setting in Motion of the Wheel of Dharma.  The idea of “The Middle Way” is that we should take a “path of moderation between the extremes of sensual indulgence and self-mortification.”  The Apostle Paul echoed this several centuries later by encouraging the early church to, “Let your moderation be known unto all.”  (Yes, I know I’m mixing religions here, but stay with me.)

Mothers are well known for dispensing good, common sense to their children, and the one piece of motherly advice that can be applied to your selection of a bankruptcy lawyer is, “You get what you pay for.”

Do you know what a lawyer has to do to be a “bankruptcy lawyer?”  Nothing!  Ten years ago, every general practice lawyer added bankruptcy to the list of things he or she did to make money.