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About Cathy Moran

I'm a veteran bankruptcy lawyer and consumer advocate in California's Silicon Valley. I write, teach, and speak in the hopes of expanding understanding of how bankruptcy can make life better in a family's future.

Why Bankruptcy Means Test Is Paper Tiger In Bay Area

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Bankruptcy’s means test is a paper tiger in the San Francisco Bay Area.

Really!

You can see why few Bay Area residents are constrained by the means test when you compare the latest median income figures  used in the means test with the allowed cost of rental housing here.

To review:  Congress  in 2005 tried to write a universal formula to limit bankruptcy relief to those who “needed” it. Bankruptcy judges were to be stripped of discretion in favor of a formula that would be universal.

Those whose average income in the past six months exceeded the median for their state would have to show that they had little more than $200 a month left over after subtracting some standardized allowances for food, clothing and housing and their actual projected expenses for other allowed costs of living.

Never fear, the cost of housing in the Bay Area stands this formula on its head.  (While the exact numbers have changed since 2016, when this piece debuted, the principle remains the same.)

The means test numbers

The means test starts with the median income in the state for a family of each size.  Income numbers and the fixed deductions from income are updated twice a year.

The new numbers become effective for cases filed April 1, 2016 or after.  

Newer numbers don’t change the story

Our survey says, the median income in California for a single person household is $ 50, 579.  Make a dollar more than that and you have to pass the means test to file Chapter 7.

That median income translates to a monthly gross income of $4215 for one person.

How does that work in the Bay Area?

Bankruptcy in San Mateo County

Apply the new cost of housing numbers, and passing the means test is a piece of cake:

The allowed deduction for rent for a single person in San Mateo County is $2508.  Non rent costs of housing like utilities add $461 a month to the cost of putting a roof over your head.

Seventy percent of a median income single worker’s gross income goes to housing! Most financial advisors target 31-35% of gross income for the cost of housing.

A single person in San Mateo County would have to gross nearly $9000 a month before their housing expenses were only one third of their gross monthly income.

Since the numbers vary by the size of the family, let’s look at a hypothetical  family of four in San Mateo County.

Median income for a family of four in California is $81,837, or $6820 a month, before taxes and other deductions.

Rent in San Mateo County for those four people is $3462, with an additional $636 in additional housing expense.

Our median income family is paying 53% of their gross income for housing.  They’d have to gross $12,418  before the allowed cost of housing was only one third of their income.

With slight variations, the result is the same for all Bay Area counties.

What the numbers mean for Bay Area debtors

It’s no news that it costs a lot to live in the Bay Area.

After you’ve put a roof over your head, there isn’t a lot left for all the other things that you need, like food, transportation and health care.  All of those things are deductible on the means test as well.

Not to mention reserves for the unexpected, savings for college, and provision for retirement.

So, if you are servicing credit card debt, you are probably spending money on long ago purchases that is desperately needed  for current expenses.

Know that the means test is not likely to bar you from bankruptcy.

Only you know what is keeping you from a fresh start.

More about deciding about debt

Alternatives to bankruptcy

What holds you back

Bankruptcy makes the future better

Image:  licensed under Creative Commons license by Cucchiaio

Updated with April, 2016 numbers.

The Judgment Lien That Escaped Your Bankruptcy

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I Have Forgotten Something

What do you do when you discover old judgment liens on your home long after you filed bankruptcy?

Your bankruptcy case is closed.

You’re recovering nicely.

Then you find there’s a judgment lien on your house that you didn’t know about.

And the law says that liens survive a bankruptcy case, unless the bankruptcy court orders otherwise.

Is there anything you can do to get rid of the lien?

Most likely, yes.

Can the lien be avoided

The debtor (that’s you, the person who filed the bankruptcy) can ask the bankruptcy court to void a lien on their property if

  • The debt existed when the bankruptcy case was first filed
  • The lien is a judgment lien
  • The property to which the lien attaches was claimed exempt
  • The property had too little value to pay any senior liens, the judgment lien, and your exemption

Let’s look at each requirement for an avoidable lien, found in Bankruptcy Code 522(f).

1. Predates the bankruptcy

Bankruptcy impacts only debts that predate the filing of the case.  That doesn’t mean that there has to be a default on the debt or a lawsuit filed.

But the events that create the debt have to have happened before the bankruptcy was filed:  you used the credit card;  you were involved in an accident; or you were transported by ambulance.

Your bankruptcy case potentially effects all debts arising before you filed.  But the legal rights involved can’t have arisen since your bankruptcy was filed.

2. Lien secures a judgment

Liens that can be wiped out because they impair exemptions must be judicial liens, that is a lien created by a lawsuit.

Voluntary liens, like mortgages and home equity lines of credit can’t be eliminated because they interfere with exemptions. This section of the law deals only with involuntary liens.

You can’t eliminate statutory liens, either.  Tax liens are created by statute.  They aren’t covered by this provision of the bankruptcy code.

3. Property was claimed exempt

Because this part of the law is focused on seeing that you get the full benefits of the exemptions you claimed, the property affected by the lien must have been claimed exempt.

Some courts will avoid a lien if the property in question could have been claimed exempt.

4. Lien frustrates claim of exemption

To meet this condition for avoidance, some math is required.

As of the day the case was originally filed, the value of the property then had to have been insufficient to pay the balance of any voluntary liens on the property, the exemption, and the lien you want to avoid.

It may be that the lien at issue is avoidable only in part, if the value of the house would pay mortgages and the exemption, and something beyond.

The fact that there is no value in excess of the voluntary liens doesn’t prevent you from avoiding the lien. It’s not an all or nothing thing.

Revisiting your case

So, what do you do when old judgment liens are discovered well after your bankruptcy case is over?  Reopen the case, and ask the court to avoid the lien or liens that impair your exemption.

Your motion to reopen needs to tell the court what you want to achieve.  Usually, you attach your motion to avoid the lien to the motion to reopen the case.

Most courts will want you to pay a new filing fee, to pay for the new work the court is going to do.  You can ask that the fee be refunded, but usually, you’ll have to pay up front to get started.

This isn’t a new bankruptcy case. You aren’t endangering the financial recovery you’ve made since your bankruptcy.  You are revisiting the old case to take care of old business.

The lawyer who helped you with the original case can handle the lien avoidance, or you can engage another bankruptcy lawyer to accomplish this task.

When time is tight

The overlooked judgment lien usually pops up when you are ready to sell your home or to refinance it.

Often that means you are working to deadlines.

A motion to reopen and to avoid a lien is likely to take 45-60 days before you have a bankruptcy court order in hand, voiding the lien.

If you find yourself short of time, consider negotiating for the escrow to hold the money that would otherwise go to the holder of the lien when the deal closes, while you go back to bankruptcy court.

If you didn’t check the public record before you filed your bankruptcy case to check for judgment liens, do it now.  Don’t wait for a time crunch.

Thankfully, bankruptcy courts are accustomed to helping with the overlooked lien.

More

Tax liens after bankruptcy

What was discharged in my bankruptcy case

Stripping off mortgage liens

Post bankruptcy check list

Image: Fotolia.com

 

Does This Struggling Business Have A Future?

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virus damaged business

Long after the human patients recover from the coronavirus, small businesses will still be struggling.

And long nights will be spent deciding whether to try to stay in business.

Here are some things to weigh as you consider the future of a struggling small business.

The desire to continue

The most important part of most small businesses is the owner. The owner supplies the vision and the drive that makes the business run.

If you are drained of vision and drive, then allow yourself to exit. Soldiering on just so you don’t have to admit you’re done is unlikely to have a good result.

If you’re game to continue, there are more questions.

Is the business viable

When the lock-down is over, and we creep back to the new “normal”, the next gating question is whether there’s a post pandemic market for the business’s product .

And if there is continuing demand for the product, how long is the ramp up?  What financial resources does it take to survive the ramp up? And what’s the likely volume of business to be expected over the short run? The longer run?

Reorganize for survival

The pandemic has forced change and re evaluation on all of us.  When things are already disrupted, considering change seems less overwhelming. And more essential.

Could the business continue with

  • fewer owners
  • fewer employees
  • no brick and mortar premises
  • narrower market
  • broader market
  • partnered with others

Embrace the disruption and move the pieces around the board, at least in your mind.

New debt and lingering death

Business loans seem to be at the center of the government’s recovery strategy. Distressingly, the rules about when/if those loans need to be repaid are unclear, incomplete, and subject to change.

It’s worth some thought as to whether the business can handle more debt. What is the current debt structure, and were you paying that debt down before the pandemic?

Another way to think about more borrowing is that it may be essential as a short term strategy to keep food on the table until you have more options outside of the current business.

Wind down and move on

Writing the existing  business off as a lost cause isn’t necessarily an all or nothing choice.

Perhaps you fold the existing business but remain in the same industry, as a proprietor rather than an entity, or as an entity after a personal bankruptcy.

Dangers inherent in corporate Chapter 7

Maybe, this is the time to change industries, take a salaried job, return to school, or ????

Challenges for all

The issues are complex and intertwined. And with the virus still shadowing our lives, uncertainty abounds. Allow yourself some time to consider how you move forward.

More

Collected posts on coronavirus impact on personal finances

Separating yourself from your business

Bankruptcy Is Not Your Last Resort

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Facing financial trouble, there are three circumstances when it makes sense to file bankruptcy.

None of them is labeled “last resort”.

Yet financial-advice gurus keep saying, bankruptcy should be your last resort.

That kind of thinking keeps people suffering too long.  Delay risks wasting money when repayment is a lost cause.  The resulting stress imperils health.

Putting emotions to the side, let’s walk through those three situations when filing bankruptcy is the right choice, not your “last resort”.

1.  You have a crisis

Foreclosure, repossession, or wage garnishment threaten the foundation of your finances.  Without a house, a car, and a paycheck, not much about day-to-day life is manageable.

Bankruptcy is may allow you to keep something that you would otherwise lose to creditors without bankruptcy.

Bankruptcy provides the “time-out” that stops all collection action.

The automatic stay triggered by filing bankruptcy has the force of law to make everyone stop in their tracks and move the action to bankruptcy court.

Sometimes, just getting served with a collection lawsuit seems like a crisis.

10 things to know about judgments

A lawsuit, after all,  is the precursor to a judgment that leads to garnishment, liens, or levies on your assets.

Being served isn’t really a crisis, but it’s a wake-up call that trouble looms ahead.

Usually, actually getting sued is often just a symptom of a much larger problem:  it’s not just the creditor who filed this suit, but the bunch of  other creditors who aren’t getting paid either.

Bankruptcy gets you a moment to consider the big picture, and provides the legal forgiveness of most unsecured debts.  It’s the long term effect of the discharge that is precious.

2.  You see the big picture

It doesn’t require a crisis to look at your balance sheet and realize you can’t dig your way out of a financial hole.

A lifetime of minimum payments on suffocating debt is no life.  Keep making minimum payments and the debt doesn’t even die of old age, because payments extend the statute of limitations.

Healthy finances include a reserve for emergencies and serious savings for your old age.  Keep feeding VISA and AMEX and you’ll be eating cat food at 70.

Bankruptcy exists because lawmakers understood that the economy is better off when people aren’t driven into the economic underground, and when families have the chance to be self sufficient.

It doesn’t matter how got you into debt: most bankruptcies result from events the individual didn’t control, like job loss, illness, or divorce.

Whether you’re in financial trouble because of bad luck or bad judgment, a fresh financial start is energizing.

3.  You’re worrying yourself sick

How we feel about owing money has a huge impact on physical and mental health.

It’s unfortunate in a way that our societal tendency to lionize those who doggedly pay off their debts:  the heroic story of slaying debts blinds us to the fact that stress kills.

True story of retired couple who made wrong choices about who to pay

And stress makes us stupid:  actually, measurably less likely to make good decisions going forward.  Collection pressures force too many folks make foolish choices about which creditor to pay.

So, when money worries interfere with sleep, digestion, work or relationships, it’s worth considering whether a bankruptcy discharge would improve the situation.

Even elders and the disabled, who are often legally protected from collection by non bankruptcy laws, decide to discharge debts so the bills are gone legally, for all time. And they enjoy peace at home.

Reasons for bankruptcy overlap

These three reasons for filing bankruptcy aren’t mutually exclusive:  you can have a crisis and see the big picture.

But the idea that bankruptcy is only a last resort, when you’ve exhausted all other avenues, is just flat wrong.

Bankruptcy should not be taken lightly, but neither should it be the last option.

The sooner you look at the big picture provided by bankruptcy, the less likely you are to waste money trying to pay impossible debts or make catastrophic decisions like invading retirement or borrowing against your house to pay dischargeable debts.

More

Does debt settlement work?

The real causes of bankruptcy

Why bankruptcy seems scary

When Is The Right Time To File Bankruptcy

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when to file bankruptcy

It can be hard to know when it’s the right time to file bankruptcy. But I was blown away by the man who called my law office.

Should I wait until all of my savings are gone to file bankruptcy?, the caller asked.

And he didn’t mean, until my net worth is greatly reduced; he meant, until my bank balance is zero.

One has to admire the resolve of those who propose to pay on debts that they can never repay up to the point where they literally have nothing.

My advice, of course, is “no“. There is no point in making further payments when you can see you’re heading for bankruptcy.

Bankruptcy exemptions allow you to keep a collection of assets necessary for a fresh start.  In California, we have exemptions that will even shelter meaningful cash in the bank.

In Chapter 13, you can keep everything you own.

There is not even a requirement  that you be destitute or even insolvent to file bankruptcy.  You simply need to be willing to play by the rules of the bankruptcy chapter you choose.

Those rules are centered on making full financial disclosure.

When to consider bankruptcy

The short answer is probably now.  

If you are reading this, you probably wonder if bankruptcy could help you out of a hole.  Instead of wondering, see a bankruptcy lawyer. (I’ll tell you a secret:  bankruptcy lawyers don’t bite.)

So often I wish clients had come to me earlier:

  • before they borrowed against their retirement to pay credit cards;
  • before they took bad home loans that imperil their home;
  • before they borrowed from one credit card to pay on another.

Don’t take big financial steps til you see a lawyer

The right time to consider bankruptcy is when you suspect that you can’t really repay your debts in full in 3-5 years, on your own.

Or, when the stress of being in debt interferes with your health or your relationships.  Or, when you have no reserves should things get worse. 

Stress kills

Seeing a bankruptcy lawyer doesn’t commit you to filing.  It just arms you with information about what your options are.

Most people who see a good bankruptcy lawyer are surprised that bankruptcy relief is relatively simply and very effective for almost everyone.

Information is power….become more powerful. Figure out if now is the right time to file bankruptcy.

Read on

Picking a bankruptcy lawyer

Alternatives to bankruptcy

What you keep through bankruptcy

Who Gets Grannie’s Cash – Grannie Or The Bankruptcy Trustee?

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joint accounts bankruptcy

When there’s a joint bank account and a bankruptcy filing, good intentions can quickly go sour.

The bankruptcy trustee sees a pile of money in the bank to which the debtor has access, even though the account also bears the name of someone not in bankruptcy.

If the debtor can get the money, the trustee contends, so can a bankruptcy trustee for the benefit of creditors.

Well and good, if the money belongs to the debtor. But what if it’s really someone else’s money?

Do it yourself elder care

Who doesn’t have a joint bank account with someone they care about?

Most often, it’s the adult child’s name on an elder’s bank account.  It’s simple, convenient, and reassuring that if the elder loses capacity, a trusted party has access to pay the elder’s bills.

But if the trusted party loses a lawsuit, or files bankruptcy, all bets are off.  The elder’s money in a joint account  looks like money that belongs to the child.

And the elder’s funds are at risk of being seized to pay someone else’s debts.

Who gets the cash?

The answer lies in state law, since state law determines what the debtor owns, while bankruptcy law determines what happens to that property.

In California, the answer lies in Probate Code 5100 and the statutes following.

“[a]n account belongs, during the lifetime of all parties, to the parties in proportion to the net contributions by each to the sums on deposit, unless there is clear and convincing evidence of a different intent.” (Cal Probate Code, § 5301, subd. (a))1
 
“In the absence of proof otherwise” the net contribution of each of the parties is deemed to be an equal amount. § 5134, subd. (b)(2).
 
That’s a vast improvement over the prior law that presumed that the people named on the account owned the money equally.
 
California’s statute is based on the Uniform Probate Code, which drafts laws for adoption by the states to make law more uniform.
 
So, the result of the “joint account in bankruptcy” issue may be different in other states.
 

Avoid a fight over joint bank account

More important than who wins a legal battle is the chance to skip the fight altogether.

Debtors need to disclose joint accounts to their attorneys.  Don’t fall into the “it’s not my money” trap and keep quiet about it.  As I said, that’s a trap.

Why you don’t want your attorney to fight for you

Attorneys need to quiz their clients about such arrangements and get all the bank account statements.  See what the situation will look like to the trustee.

Know what state law says on the subject.

Consider, if the money in fact is traceable to someone other than the debtor, having that person withdraw it from the joint account before filing.

Make it your goal not to have someone else’s money in an bank account to which the bankruptcy debtor has access.

All involved might consider use of a revocable trust as a vehicle for the elder to empower another to manage their money in the face of incapacity.

This post draws on the always-comprehensive observations of Oakland bankruptcy attorney Larry Szabo.  Thanks, Larry, for your boundless willingness to share.

Image courtesy of Flickr & Duncan Hull

Facing Foreclosure, You Need A Plan B

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foreclosure defense

Bankruptcy stops foreclosures, with certainty.

It’s the surefire defense to a scheduled foreclosure sale.

Then why do homeowners keep waiting til the day before the sale to find a bankruptcy lawyer?

Most of the other ways to stop a foreclosure sale require either gobs of money or an agreement with the existing lender or a new lender to dig you out of the hole.

And you don’t control either the other party’s decision making nor the timeline on which decisions are made.

So, two homeowners called my office last week, with foreclosure sales scheduled within a day or two.

One expected a modification of the troubled loan.

The other expected a refinance.

Neither came through and they were both shopping for bankruptcy lawyers at the 11th hour.

Last minute foreclosure defense

Filing bankruptcy, even a skeleton filing (the bare bones of the needed papers) takes time. If you don’t do the credit counseling briefing before you file bankruptcy, your case can be thrown out of court. How do you choose the right chapter?

But more important than the necessary papers, you’re going to need the help of an experienced bankruptcy lawyer to figure out what happens next.

The automatic stay, the injunction that comes automatically when you file bankruptcy, just stops everything related to your debts, including foreclosures.

But, then what?

What next step is going to save your house? That’s where your bankruptcy lawyer comes in.

  • Do you qualify for Chapter 13?
  • Can you cure the default over time?
  • Is a third party sale the best available options?

Last lawyer on the bench

last lawyer to stop foreclosure

If you wait til the last minute to find a lawyer to file your bankruptcy case, you’ve limited your options.

Only a lawyer who has nothing else meaningful to do this afternoon is available to take your case on short notice.

Do you really want the fate of your home to lie in the hands of a random lawyer whose most appealing quality is that he’s got time on his hands?

The better the bankruptcy lawyer, the more likely they’ve got other cases to work on and may not be willing/able to drop everything to save your house.

Line up help ahead of time

If you are pursuing non bankruptcy solutions to your foreclosure problem, shop for a bankruptcy lawyer at the same time.

How to interview a bankruptcy lawyer

Interview possible candidates and know what your lawyer will need to file a case for you. Understand your options and the implications on other parts of your financial life while you have time.

If everything works out as you hope, you won’t need to file bankruptcy to stop the foreclosure. But if you hit roadblocks, you’ve staffed your team of helpers with a lawyer, and you can move smoothly to Plan B.

More

On foreclosure and procrastination

You want more than a lawyer willing to fight for you

Make no changes til you see a lawyer

How 13 Works To Save Your House From Foreclosure

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save house

Saving a house from foreclosure is the single reason most people file bankruptcy.

Bankruptcy stops foreclosure- that’s a given.

But then what?

How can bankruptcy save the house from foreclosure,  rather than just putting off the inevitable loss?

After all, the mortgage lender has a lien on the house, and liens aren’t discharged in bankruptcy.

So, how does bankruptcy help?  Meet Chapter 13 of the Bankruptcy Code.

Chapter 13 bankruptcy is the chapter of choice if your goal is to keep living in the house, as opposed to selling it to realize equity or to avoid the credit hit of a foreclosure.

Chapter 13 imposes a payment plan on lender

Chapter 13 is built to allow the homeowener to cure defaults on long term debts like mortgages.

Gone is the ability of the lender to refuse to take catch-up payments or to insist on cure in a single payment.

This is federal law, and the homeowner is at the helm of this ship.

The homeowner in Chapter 13 proposes a plan for payments to the Chapter 13 trustee.  The trustee, in turn, pays creditors according to the plan.  The usual distribution scheme pays secured claims, like home loans, first.

So, if you are, say, $24,000 behind on your mortgage, your plan can provide that you pay the trustee a monthly payment that catches up on that default.  Chapter 13 plans last a minimum of three years and a maximum of five years.

Your plan will need to provide that you make the on going payments on the mortgage as well.  Each district has its own protocol as to whether you write the check to the mortgage lender for ongoing payments or whether you pay the trustee, who pays the lender.

Once your plan is confirmed, the lender is required to accept the payments.  Absent some post filing breach on your part, the lender is unlikely to have any way to push back against the payment plan.

Trustee challenges to confirmation

Because the confirmed Chapter 13 plan has such power, both the Chapter 13 trustee and the mortgage lender have opportunity and incentive to object to your plan.

coins in a stackThe trustee’s objection is often focused on feasibility.  Does your projected budget show that you can pay enough into the plan to do what’s required?

Remember that the amount necessary to fund the plan is not just the $24,000 that our hypothetical debtor owes on the mortgage.

The Chapter 13 trustee gets a commission on the money she handles in the case.  So, to get $1000 to the mortgage lender, you have to pay the trustee $1100, where the trustee’s commission is the 10% maximum.

Also, if you owe priority taxes, the Bankruptcy Code requires that those taxes be paid in full over the life of the plan.  Likewise,  any delinquent family support claims must be paid in full.

So, the total payments to creditors through the plan may need to cover other creditors as well.  It depends on the means test or the net value of your assets.

The trustee will look at the total amount your plan provides over the life of the plan and comparing it to your projected income on schedules I and J.  Does it look like you can pay your current living expenses and the amount required by the plan?  If you propose to increase plan payments in future months, is there reason to think you will have the money to do that?

If not, your plan may not be feasible.  If it’s not feasible, it doesn’t get confirmed.

Mortgage creditor fights back

The mortgage creditor has standing to oppose confirmation as well.

Even if the secured creditor doesn’t challenge feasibility or good faith, both required for confirmation, the secured creditor has another, less direct weapon.

When you file bankruptcy, the secured creditor gets to claim not only the missed mortgage payments, but any money the lender has advanced for taxes or insurance.  And, they may have an escrow shortage projected for the current year’s payments.  That’s not to mention foreclosure costs and other fees.

So the lender’s claim may be larger than you expected.

The beauty of Chapter 13 is that the lender has to make full disclosure of those claims and you get to challenge whether the accounting is correct.  You can also challenge whether the fees sought are really allowed by the mortgage.

Mortgage check up at plan’s end

So let’s assume that you get your plan confirmed and faithfully make all the payments required.

New bankruptcy rules work to make sure that you emerge from Chapter 13 fully current on your home loan.

Bankruptcy Rule 3002.1 requires a lender secured by a principal residence to give notice to the court, the trustee and the homeowner of payment changes that occur during the case.

Also, if the required escrow payment changes, or any fees get added to the loan during the case, the lender has to file a notice describing the change.

And the homeowner can challenge changes or additions to the debt.  If it doesn’t get sorted out, a judge will look at the situation and make a ruling.

After the last payment to the plan, if the lender contends you aren’t fully current on the loan, it has to file a detailed accounting showing how much it claims is unpaid.  That accounting is subject to challenge.

Debtor’s rights after 13 is over

mortgage tools for homeownersOne of the few good things included in the 2005 amendments to the Bankruptcy Code, in my opinion, are the provisions that make it a violation of the debtor’s discharge to improperly credit payments made pursuant to a Chapter 13 plan.

All too often, the lender or mortgage servicer either has two sets of books on a loan, or the entries it has made for payments during the plan get altered after the Chapter 13 is over.

Bingo, the lender now claims the borrower is in default, and foreclosure looms.

The bankruptcy court is now a forum for challenging those contentions and getting redress, including the borrower’s attorneys fees to make it happen.

Chapter 13 saves houses

The power of Chapter 13 goes far beyond the automatic stay in giving homeowners a chance to save their homes from foreclosure.

Not only does it get the homeowner some law to counter balance the endless rights of the lender in the loan documents, it gives the homeowner a referee in the form of a bankruptcy judge who can resolve disputes.

Because bankruptcy judges over the last decade have seen some much of the mortgage meltdown and the deterioration of mortgage servicing up close, they are familiar with the problems and less and less tolerant of lender abuses.

Chapter 13 can be a struggling homeowner’s lucky number to save their house from foreclosure.

More

Our best advice on keeping your house

Image copyright Fotolia and Jakub Krechowicz

How To Wipe Out Tax Penalties In Bankruptcy

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217/365 August 5 - Found MoneyTax penalties seem like a further insult when you’re having trouble paying the tax itself.

Everything seems subject to an additional penalty:  failure to file timely;  failure to pre pay sufficiently;  failure to be accurate.

They mount up quickly, often equaling the unpaid tax.

Bankruptcy can not only eliminate your liability for certain taxes, it can wipe out the tax penalties as well.

Here’s how it works.

Three rules for discharging tax penalties

Penalties for dischargeable taxes are dischargeable

Tax penalties are tied to a particular tax year.  If the tax for that year is dischargeable in bankruptcy, the discharge wipes out the penalties too.

The formula for a dischargeable tax, roughly speaking, says you can get rid of an unsecured tax if  1) the return for that year was due more than three years before the bankruptcy was filed;  2) if the return wasn’t filed on time, it’s been on file for at least two years; and 3) the tax for that year was assessed at least 240 days before bankruptcy.

Discharge the tax, discharge the penalty.

Penalties tied to events more than three years before filing are dischargeable

If the failure that triggered the penalty happened more than three years before filing, the penalty is dischargeable.

It’s dischargeable even if the the tax for that year isn’t dischargeable, for instance, because the returns weren’t filed on time. see 11 U.S.C. 523(a)(7).

All tax penalties wiped out in Chapter 13

That’s right:  all tax penalties are discharged by a Chapter 13 discharge.  Hard to beat, right?

Chapter 13 requires that you pay in full the priority taxes and the interest that accrued up to the date the bankruptcy case was filed.  But at the end of the case, all tax penalties are wiped out, even on the priority taxes.  More on taxes in Chapter 13.

Fraught with rules

So much of discharging taxes depends on knowing the maze of rules that apply to taxes in bankruptcy.  It’s critical to get a tax transcript to verify the dates of all the important transactions.

Get experienced legal help if you want to discharge taxes and tax penalties.  This is not the time or place for the cheapest or closest bankruptcy lawyer in town.

Image courtesy Flickr and Sharon Drummond

Mortgage Forbearance For Non-government Backed Loans

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Covid 19 home loan forbearance

Are you one of the homeowners whose mortgage isn’t eligible for the government’s COVID forbearance protections?

Home loans not backed by the federal government are excluded from the protections for borrowers implemented by FHFA .

But as much as one third of US home loans are not backed by the federal government. If that includes you, here’s what the National Consumer Law Center has to say about your options in times of COVID-19.

Assisting Homeowners Who Do NOT Have a Federally Backed Mortgage Loan

If a homeowner has a mortgage loan that does not meet the definition of “federally backed mortgage loan,” CARES Act protections do not apply (except for the credit reporting provisions in CARES Act § 4021, discussed above).

State Foreclosure Relief

Many states have adopted broad foreclosure moratoriums that protect borrowers regardless of loan type, and some states have instituted mortgage loan forbearance programs.

For a continuously updated list, showing which actions are still current, see Covid-19 State Foreclosure Moratoriums and Stays.

Voluntary Federal Guidance

Federal bank regulators have issued guidance encouraging institutions to work with borrowers and relaxing some standards that may previously have limited a servicer’s flexibility to offer relief.

How to Get Non-CARES Act Relief and What to Ask For

Borrowers should contact their servicer by phone or online. Online may be the faster option as servicers are currently overwhelmed by the number of calls they are receiving. Log in to the borrower’s account and see what options the servicer is offering. It may be possible to apply online.

Borrowers can also request assistance by writing to the servicer. Check the servicer’s website or a recent account statement for the appropriate mailing address. Letters to the wrong address may be delayed or lost (or not effective if intended as a Request for Information).

Frame the letter as a Request for Information (RFI) about loss mitigation options. Such a letter will be governed by the response rules in RESPA’s Regulation X.

A sample RFI borrowers may use to ask about available loss mitigation options can be found here (PDF version) (MS Word). A sample RFI that advocates may use for information about a loss mitigation application can be found at of NCLC’s Mortgage Servicing and Loan Modifications Appx. E.2.7.

There is a private right of action to enforce these rules.

Used with permission. The entire NCLC article is found here.

Protecting your home

For those with loans not backed by the government, the options are clearly going to be less standardized and less predictable.

It’s worth watching the news for further government programs that impact non-federal home loans: the situation is certainly in flux.

Know that if you can’t reach an acceptable deal with your servicer, Chapter 13 is a workable tool for curing mortgage arrears while being protected from forclosure.

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How Chapter 13 works to save your home

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