Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

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.

Better To Live With Debts Than File Bankruptcy?

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living in debt

Locked up in debt?

Should you file bankruptcy?

Or, is it better to live with your debt and keep making minimum payments?

Does life get better or worse if you file bankruptcy?

That question sums up most people’s fears about shedding their debt through bankruptcy.

What will life be like, after bankruptcy?

Good questions.  And I applaud people who realize that debt and debt relief each have future consequences.  I’ve talked about it before.

People fear the “bankruptcy unknown”, closing their eyes to the precariousness of their current situation as though doing nothing is a worthy choice.

But let’s turn the question around:  what will life be like if you continue on as you’re doing now?

Life in debt

Servicing debt from the past cuts down your future options.  Your paycheck is already committed before it hits the bank.

Whether it’s payday loans or credit cards for this month’s necessities, you’re locked in.

A slight bump in the road, and you’re really in the soup.  Most Americans say they couldn’t handle a $500 emergency without borrowing.

But absolutely most compelling for me, you’re probably making no provisions for your old age.

Lots of folk tell me they don’t think they’ll ever retire. Some say it because they enjoy work;  most say it because they can’t make ends meet without a job.

But they will get old, working or not.  The job choices will contract, and their ability to be productive will diminish.  I see it personally with the elders I’m caring for now;  they can’t handle the mental or the physical sides of a job.

Of course, the stress of being in debt may shorten your life.  Stress impairs your decision making.  That’s a terrible way to meet the challenges of funding your old age.

After bankruptcy

So, what if you broke out of debt by filing bankruptcy.  What happens in the real world?

Let’s list the negatives of filing for bankruptcy.

  • Credit in the immediate future is more expensive
  • Bankruptcy shows up on your credit report
  • If you are a renter, some landlords are uncomfortable
  • Some new employers are put off

These negatives fade in importance over time.

They need to be weighed against the equally real consequences of not solving a debt problem.

For most considering bankruptcy, their credit record is already blotched; a bankruptcy filing is not going to be the first adverse entry on their credit report.

Your credit heals over time

But credit scores, the predictive formula, rather than the history that’s a credit report, may improve instantly:  your debt to income ratio gets better.

Bankruptcy benefits

Bankruptcy might be the first step to improved financial health.  You can start with more financial alternatives and the chance to do things differently.

Bankruptcy may even be a step in better physical health. Stress is a killer.

Bankruptcy enables saving.  You’ve proved you can live on what’s left after minimum payments.

Use that same discipline to set money aside for the unexpected, and for the inevitable old age.

Live long and prosper.

More

Keeping the house for the kids

What you need to ask a bankruptcy lawyer

What should bankruptcy cost

Bankruptcy terms, simplified

Do You Get The Bankruptcy Grubstake Exemption?

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How bankruptcy grubstake exemption works

The word grubstake never appears in the Bankruptcy Code or the California Code of Civil Procedure where the exemptions available in bankruptcy cases filed in California are found.

Yet every bankruptcy lawyer uses the phrase; and seemingly, every bankruptcy debtor struggles to understand it.

What’s a bankruptcy grubstake

Here’s the standard English definition of grubstake.

1.provisions, gear, etc., furnished to a prospector on condition of participating in the profits of any discoveries.
2.money or other assistance furnished at a time of need or of starting an enterprise.
The miner’s grubstake allowed him to buy food and feed his burro while prospecting.  The bankruptcy grubstake does the same:  it furnishes the wherewithal for a fresh start.

The grubstake exemption is sometimes called the wildcard exemption. The exemption is expressed as a dollar amount. 

In a California case, that amount is currently $30,825.  That’s the total of the amounts provided in sections  Code of Civil Procedure 703.140(b)(1) and (b)(5).  Here’s the Judicial Council list of exemption amounts.

While other exemptions in the California bankruptcy exemption statute are limited to particular kinds of property ($1425 for jewelry, $4800 for equity in a car, etc.) the grubstake can be applied to any kind of property.

More importantly, it can be divided among different kinds of assets.

For example, a person filing Chapter 7 or Chapter 13  can use part of the grubstake to protect extra value in a car; part for the balance in a bank account, or stocks held for investment; or part for a timeshare or business interest.

Any kind of asset is fair game, so long as the total grubstake claims doesn’t exceed  $30,825.

Contrast with state exemptions

The exemptions found in CCP 703.140 are available only in a California bankruptcy.  They aren’t available to protect assets from collection of a money judgment outside of bankruptcy.

The standard California exemption system is found in CCP 704.  Those exemptions do apply in state law proceedings and are an alternative choice for a Californian filing bankruptcy.

The debtor in a case under Title 11  must choose either the 703 or the 704 system of exemptions as a whole.  You cannot combine the two systems or choose one exemption from this system and another exemption from the other system.

The California state exemptions include the generous homestead exemption that protects a specified amount of equity in property used as the debtor’s home.  The grubstake in the California bankruptcy exemptions is a much smaller sop to the family that doesn’t have equity in a home.

Making use of the grubstake

One of the most important services a bankruptcy attorney provides is choosing the exemption system and allocating  the grubstake among the client’s assets so as to protect as much property as possible.  It’s not usually possible to select exemptions until the client has provided a list of what they own, any debt secured by that asset, and an estimate of the present sale value of the property.

More

Getting your bankruptcy papers right

Secret exemptions

Pay creditors or file bankruptcy

Image courtesy of scrambldmeggs

Updated November, 2020

Stupid Moves Before Seeing A Bankruptcy Lawyer

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before bankruptcy

Don’t tidy up your financial affairs before consulting a bankruptcy lawyer.

Your current mess may present opportunities to plan your bankruptcy for a better outcome.

You may waste money or lose bankruptcy options when you make last minute changes to your situation without understanding how that situation plays out in bankruptcy.

You’ll have the widest set of options for a fresh start if your lawyer sees the situation as it is today.

What looks to you like complexity and disorder may look to your bankruptcy lawyer as opportunity and advantage.

The high cost of financial housecleaning

My heart sinks when a new client tells me that they’ve just paid off the loan their parents made them before seeing me.

Why your bankruptcy lawyer shouldn’t fight for you

Or borrowed against their retirement to fund debt management.

Or paid off the taxes so that all the remaining debt is credit cards.

For different reasons in each instance, those actions complicate a bankruptcy or squander assets that could have been saved in bankruptcy.

Payments to family

Paying off a loan from family seems instinctive.

We want to take care of those closest to us.  Sometimes, paying off help from family is driven by the desire to hide a bankruptcy from them.  Sometimes, it’s the desire to make sure they get whatever assets you have before you submit to the scrutiny of a bankruptcy trustee.

But more likely, paying off a debt to an insider (that’s bankruptcy lingo for close relatives, real or business related) hurts more than helps.  The bankruptcy trustee in a Chapter 7 can sue insiders who get paid during the 12 months before the bankruptcy filing to recover the money.

The theory of recovering preferences is to make a fair distribution of your assets to all creditors, not just the ones you favor.

Often, the exemptions that are available in bankruptcy will allow you to keep more money than you expect.  You can repay that debt to Mom after the filing, when it has no adverse consequences to Mom. The California grubstake (or wild card exemption) protects about $28,000 in any kind of property, in addition to other exemptions for specific kinds of property.

So, hold on to your checkbook, until we’ve talked.

Settlements before bankruptcy are wasted

The saddest thing I’ve seen recently was the family that soldiered through a five year debt settlement program before we met.  They had paid tens of thousands of dollars to creditors, but didn’t realize that not all their debts were included in the plan.

We had to file bankruptcy for them despite their heroic efforts to pay their debts.  They got no credit or advantage from the money they spent retiring credit cards while their property taxes and student loan debts fell into default.

The better situations are when clients ask if they should accept a settlement offer from a collector before filing.  There, at least, I get to ask what benefit they get from paying that money, money that could otherwise go to funding an IRA or paying down student loans?

In general, your bankruptcy is no simpler or cheaper or less damaging if you have a few creditors as opposed to many creditors.   If the situation requires bankruptcy, reducing the number of creditors or amount of the debt doesn’t benefit you at all.

Tax debt has its uses

While it isn’t generally thought to be a good thing to owe money to the tax collector, it may be an asset if your income is above the median for your state.

The means test is a formula that is supposed to weed out those families who make too much money to file Chapter 7. One of the ironies is that one of the allowed deductions in figuring whether you have too much income to file Chapter 7 is that you can deduct taxes you owe from the income.

It’s the same with mortgage arrearages and property taxes on your home.

These debts are useful deductions in getting a client into the bankruptcy chapter of their choice.

Pay it off before we meet and I have fewer tools to shape the means test.

Put down that broom

So, resist the temptation to clean up your finances before you meet with a bankruptcy lawyer.  Don’t sweep debts under the carpet or out the door before you understand the bigger picture.

Make any advantageous changes in consultation with your lawyer.

More

What your lawyer can’t tell you

The secret alternative to bankruptcy

Cheat sheet for interviewing a bankruptcy lawyer

Image courtesy of Flickr and Spengy. 

10 Must-Know Things About Money Judgments

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judgment at law

What does it mean when a judgment is entered against you in a lawsuit?

It’s not the end of the world, but it has serious financial repercussions.

Here are 10 critical things you need to know about legal judgments.

  • cup-1010916_640_optJudgment picks a winner in a civil lawsuit.

    A judgment picks the winner in a judicial contest.  It is the determination of which side prevails, how much money is owed from the judgment debtor to the judgment creditor.

  • sheriffs-star-160082_640_optA judgment creditor can use  law enforcement to collect

    Having won a judgment, the creditor can levy bank accounts, garnish wages, and install a receiver in a business in order to collect the debt.  The creditor can make you show up in court and testify about your assets and their locations.

    • graph-163509_640_optA judgment can grow after it’s entered

      The costs, fees and sometimes the attorneys fees a creditor spends to collect a judgment get added to the judgment.  Judgments accrue interest as well.  In California, the statutory interest rate on judgments is 10%, far more than money earns anywhere else.

    • credit-40671_640_optJudgment appears on your credit report

      A judgment is shown in the public records section of your credit report.  Its effect is particularly strong, since it alerts the reader that some creditor already has a legal right to swoop in on your assets and your earnings, disrupting your ability to pay other creditors.

    • puzzle-654963_640Go missing and you  lose

      Unless you file a written answer with the court and show up to make your defense, a judgment can be entered against you without your side of the story.  All that due process requires is that you get good notice that you are being sued.  Do nothing and the plaintiff wins.

    • Tutela legale, giustizia, avvocato, leggeDefaults may be set aside

      A judgment entered when the person sued doesn’t appear and defend is a default.  Default judgments can be set aside for some period of time, depending on state law.  Swift action is essential to get out from under a default judgment.

    • APPEALJudgments can be appealed

      A judgment isn’t final until the time period for an appeal has expired.  Generally, you can appeal errors of law, but not the factual determinations that a trial court, or a jury, makes.  You don’t get to introduce new evidence.

    • pie-chart-153903_640_optJudgments entitle the creditor to a lien on your assets

      A judgment lien is an interest in your property that follows the property wherever it is transferred. The lien is only released by payment or agreement with the judgment creditor.

    • eraser-795771_640_optJudgments are dischargeable in bankruptcy

      Debts reduced to judgments can be wiped out in bankruptcy just as the debt that lies behind the judgment could.  Bankruptcy looks at the nature of the debt behind the judgment to determine if you can escape it, not to the procedural status of the debt.

    • flower-1156533_640_optJudgments die of old age

      Judgments have a life span provided by state law.  In California, a judgment lasts for 10 years and can be renewed at the end of that period.  But eventually, a judgment becomes unenforceable.

More

What to do when you’ve been sued

Fighting a wage garnishment

Protecting your assets from creditors

Do you need to file bankruptcy

When You Can’t Make Your Chapter 13 Payments

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going nowhere

When your wallet’s as flat as this tire and you can’t make your Chapter 13 plan payments, what do  you do?

Chapter 13 promised a chance to reorganize, keep what’s important, and get out of a financial hole.

But it just isn’t working. What now?

In good lawyer style, I’ve got to tell you:  it depends.

It depends on why you’re in Chapter 13;  what’s happened that you can’t make the Chapter 13 plan payment; and what your goals are/were for your bankruptcy case.

Is the money problem going to last?

First question:  is the problem with your cash flow temporary or longer term?  When the problem is an unexpected expense or a short interruption in income, your case may be easily salvageable.

CARES Act legislation allows confirmed Chapter 13 plans to extend their duration to 7 years, instead of five.

Some trustees allow an informal suspension of payments, or a plan to catch up on the court approved payment plan.

Others may require a formal plan modification, that confirms a payment schedule different than the one originally proposed.

Asset or income driven?

The degree of flexibility you have to adjust your plan payments depends in part on how the amount you’re paying to unsecured creditors was calculated.

To be confirmed, a plan has to provide unsecured creditors the larger of

  • what they would get if you had filed Chapter 7 instead of 13,

OR

  • your monthly disposable income calculated under the means test

If your plan is income driven, and your income goes down, it’s relatively easy to modify your plan.

On the other hand, if your plan is driven by the value of your non exempt assets, to get a Chapter 13 discharge, creditors need to get the total distribution originally calculated.  So, modification can restructure the payments, but the sum of those payments remains unchanged.

Goals of your Chapter 13

Over-optimism causes lots of plan breakdowns.

Often, those in bankruptcy start out determined to save the house from foreclosure, or to keep the timeshare, or the pricey car.  Reality, or later changes, may say that it simply isn’t possible.

Your goals may have to change if the income available simply doesn’t stretch that far.

Chapter 13 plan fixes

You’ve got four basic alternatives if you can’t catch up quickly and informally.

Modify your plan – figure out which goals are feasible and how much income is available.  Propose a plan that’s consistent.

Convert to Chapter 7 – consider whether under the present facts, you’d be better off in Chapter 7.

Dismiss your case – dismissal is always available in Chapter 13.  That’s why I like 13 so much.  Dismissal could be a chance to start a new case, with new timelines and new values.

Hardship discharge –  under certain circumstances, you can get the benefits of the Chapter 13 discharge without completing the payment plan.

So, the good news is that there are choices.  Get help from your bankruptcy lawyer evaluating which works best for you.

More

Changing lawyers mid case

Image courtesy of Michael Sclaldone under a Creative Commons license.

Which Bankruptcy Chapter Is Right For Me?

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choose bankruptcy chapter

Seven or Thirteen?

13 or 7?

When you have a choice, how do you decide which chapter of bankruptcy works best?

Usually, the choice is driven by the scope of the discharge and the kind of debts you have.

More kinds of  debts are dischargeable in Chapter 13 and the automatic stay protects you for the 60 month duration of the case.

So why did the client this week choose to walk out of Chapter 7 with fewer debts discharged than if he’d chosen 13?

It’s all about his  future.  And who will get to share in his growing earning capacity.

Chapter 7 over Chapter 13

On the surface, this client seemed a great candidate for Chapter 13, which is my favorite  bankruptcy chapter.

Some of his debts were only dischargeable in Chapter 13;  in Chapter 7, he’d emerge still owing some debts from a divorce.

So why choose the smaller discharge?

Because his earnings were likely to double or triple over the life of a Chapter 13 case.

If that happened, we anticipated that a Chapter 13 trustee would move to modify his payment plan to pay more to general unsecured creditors.

Credit card debt, which would get nothing in a Chapter 7, might well get a substantial repayment from his increased earnings.

He’d pay fewer dollars paying  the non dischargeable debt that survives a Chapter 7  directly than he would paying in a larger slice of his paycheck  to all of his creditors in a Chapter 13 plan.

Chapter 13 after confirmation

Judges approve Chapter 13 plans based on the situation when the bankruptcy case is filed.  The means test looks at recent income.  The liquidation test looks at non exempt assets at filing.

For this client, each of those numbers was modest and a repayment plan would be relatively cheap.

But Chapter 13 involves committing your future income to the supervision of the Chapter 13 trustee.

Now, that supervision is pretty minimal:  it usually means the trustee monitors your tax returns to see in your income has increased.

If there’s a significant increase, the trustee can file a motion with the court proposing increased monthly payments going forward.

The debtor gets to respond with updated expense schedules, and if the parties can’t reach a deal, a judge decides whether payments change.

In the Bay Area, this happens very infrequently.  I’ve seen it less than a half dozen times in 20+ years of doing lots of 13’s.

But it can happen, and for this client, it seemed quite likely that a new job in his usual profession would dramatically increase his income.

Chapter 7 looks at today

If Chapter 13 is a years long process, Chapter 7 is a single event.

The rights of the debtor and the creditors are determined by the situation on the day the case is filed.

If the means test says that Chapter 7 is an option, then the creditors get only what the debtor owns at the filing of the case.

And what the creditors share in is only what’s left after the debtor chooses his exempt property.  Most Chapter 7 cases make no distribution to creditors.

Future income belongs to the debtor.  The Chapter 7 trustee can’t come back a year later and ask for a slice of a larger paycheck.

So, much to my surprise, when we looked at this client’s current situation and his prospects, the more limited discharge was a better deal than Chapter 13.

He’ll get to enjoy a larger share of his future earnings and a fresh start.

More

Cheat sheet for passing the means test

Figuring what you pay in Chapter 13

How to make your divorce bankruptcy-proof

When your ex files bankruptcy

Dividing debts in divorce

Give More Than Thanks

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share at Thanksgiving

Ever feel the disconnect between buying your groceries for the Thanksgiving meal, then dropping some loose change into the kettle for the needy?

Lots for my family, but leftovers for those who are hungry

That seems to be the message.

Those of us who are prospering are doing well, but lots of neighbors and elders struggle mightily.  Food insecurity is everywhere.

Even before the pandemic, one in six Americans goes hungry.   The average Social Security check is less than $1300 a month, for instance. Families with children struggle even more than elders.

This year, need is everywhere.

So, I write a check to my local food bank equal to my spending on my family’s Thanksgiving dinner.

I challenge you to do the same.

It’s one day and one check.  But for that day,  there can be parity between what we give ourselves and what we give others.

It is inexcusable and callous that there are hungry kids around us. Your loose change isn’t going to make much of a dent.

Take up the challenge and give more than thanks at Thanksgiving. Give dollar for dollar.

Then let’s devote ourselves to implementing solutions to pervasive hunger in a country so rich.

How Filing Bankruptcy Can Benefits Your Heirs

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rocking-chairs-522757_1280_opt

Elders in California enjoy enhanced state exemptions that protect them from debt collectors.

Those protections often make it unnecessary for a debt-laden senior to file bankruptcy.

But no one talks about one consequence of relying on exemption law to fend off creditors.

California exemption laws that  fully protect the assets of seniors provide no protection to the heirs.

The elder who elects to rely on state law exemptions during his lifetime may be leaving his estate , in effect, to his creditors.

Probate pays creditors

Probate is a proceeding to assure that the property of the decedent (the person who has passed away) goes to the correct parties.

Payment of the decedent’s debts comes before payment to heirs.

In probate, creditors have a short period to file their claims.

Once the allowed claims are paid, the heirs have no liability to the decedent’s creditors, even those who didn’t file a claim.

Exemptions in probate

Probate law provides for a homestead exemption, giving the surviving spouse and any minor children a place to live.  Cal. Probate C. 6520 and following.

The protection of the probate homestead lasts only as long as the probate administration and the property remains liable for the debts of the debtor.  Probate C. 6526.

The probate court can likewise set aside other assets for payment of a family allowance for a surviving spouse, minor children and adult children who are incapacitated and dependent on the decedent.

The family allowance also ends with the final order in the probate.

Revocable trusts expose heirs

The revocable trust, or living trust, is a popular way around the expense and delay of probate.  But it comes with a little discussed exposure to creditors.

When the trustor (the person who creates the trust) dies, the assets of the trust are distributed by the successor trustee as the document provides.  No probate is required for trust assets.

But, unless the successor trustee opens a court proceeding to administer the trust estate and gives notice to creditors, any gift to heirs from the trust comes with personal liability for the debts of the decedent.  Probate C. 19400.  That liability is capped by the amount of the gift.

Creditors have one year from the death of the trustor to file suit against the heirs to collect the debt.  Cal. C. Civ. Pro. 366.2.

Ouch!

Bankruptcy eliminates the debts

If the senior elects to file a bankruptcy case,  he can use the generous bankruptcy exemptions available to Californians to protect the assets he has, including up to $175,000 in equity in his residence.

California homestead exemption increases January 1, 2021 to a minimum of $300,000 for all homeowners.

Most unsecured debts are wiped out for all time.  Any accumulations after bankruptcy are free from the claims of the pre bankruptcy creditors.

And, at the senior’s passing, discharged creditors  have no claim against the estate or the trust heirs.  Whatever assets the senior has flow to those of his choosing, rather than the creditors eliminated in bankruptcy.

That point, alone, might tip the scales in favor of a bankruptcy filing even for the collection-proof senior.

More

Exemptions at work

More about homesteads

Going to court in your bankruptcy case.

California’s New Exemptions For Money In The Bank

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california exemptions


California has finally created a state law exemption for cash in the bank.

Californians filing bankruptcy no longer face loss of all the funds in their bank accounts when they choose California’s generous homestead, thanks to changes in exemption law.

Two exemption statutes , new in 2020 , provide protection for cash in the bank from levy under state law or turnover to a bankruptcy trustee.

The absence of protection for cash other than current wages was a gaping hole in California’s standard exemptions. State exemptions protected significant equity in a home, but next to nothing for the cash necessary to make the next mortgage payment.

That has changed, with the creation of Code of Civil Procedure 704.220 and 704.225, both newly effective in 2020.

Money for basic needs

CCP 704.220 creates an exemption in sum of money equal to a month’s living expenses calculated under a state welfare formula. Currently, that amount is $1788.

The statute reads:

(a) Money in the judgment debtor’s deposit account in an amount equal to or less than the minimum basic standard of adequate care for a family of four for Region 1, established by Section 11452 of the Welfare and Institutions Code and as annually adjusted by the State Department of Social Services pursuant to Section 11453 of the Welfare and Institutions Code, is exempt without making a claim. ….

The exemption has exceptions. In state law, it doesn’t apply to a levy to collect the following:

  • wages owed to another
  • child support or spousal support
  • debts to the state for taxes, unemployment, etc.

We’ll have to see how those exceptions apply in bankruptcy.

Amounts needed for support

The second of the new exemptions , CCP 704.225, appears on its face far broader.

CCP 704.225 Money in a judgment debtor’s deposit account that is not otherwise exempt under this chapter is exempt to the extent necessary for the support of the judgment debtor and the spouse and dependents of the judgment debtor.

This exemption promises the possibility of protecting a sum considerably larger than the formula used to calculate CCP 704.220. But it also opens up opportunities for litigation over support for how long, and at what level of comfort.

Both protect deposit accounts

So, what’s a “deposit account”? This becomes one of the all-too-common treasure hunts through the law, each statute referring you on to another.

CCP 481.081 says “Deposit account” means “deposit account” as defined in paragraph (29) of subdivision (a) of Section 9102 of the Commercial Code.

And the Commercial Code , in subsection 29, provides:

“Deposit account” means a demand, time, savings, passbook, or similar account maintained with a bank. The term does not include investment property or accounts evidenced by an instrument.”

You can take it to the bank

So, in creating a California cash exemption, the legislature has finally recognized, and acted on the idea, that it takes both a roof over your head and some money in the bank to have genuine protection from creditors.

More

California homestead gets a major update to reflect the real cost of housing.

5 Essential Tips To Understand Your Mortgage Loan

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mortgage debt

Figuring out what your home loan balance is can be harder than a calculus exam.

For most people, their mortgage is their biggest debt.  And their home is their most important asset.

Yet, the people accounting for your payments are increasingly incapable of the very basics of their job.  And that makes your job, as borrower and homeowner, more challenging.

Not your parents’ home loan

Things have changed since the local bank made you a loan to buy a house and collected the payments you made on that loan.

Now, home loans get sold to someone else the moment the deal closes.  The right to collect the loan payments is bought and sold separately from the right to the payment amount.

And increasingly, the servicers make mistakes as they cut  corners to make a buck.

What do you need to know to assess whether your loan servicer has got the numbers right?

1.  Principal balance isn’t what you owe

Ask someone what they owe on their mortgage and they’ll recite the principal balance.  The principal balance is the remaining part of the amount originally borrowed that is still unpaid.

Yet you may well owe additional sums:  delinquent payments that are mostly interest;  late fees;  escrow advances; or the junk fees that most delinquent loans are larded with.

Finding the principal balance gets trickier yet if the loan has been modified to include a non-interest bearing amount or some other, non standard adjustment.

So the amount necessary to pay off the loan upon sale, or refinance, may well include charges from the past, plus fees for calculating what you need to pay to satisfy the debt.

2.  Payments are credited to oldest month unpaid

If you fall behind on a home loan, then resume making payments, your payment is credited to the oldest month still unpaid.

So the payment you make in June may be credited to February if you haven’t paid the payment that first came due in February.

And the servicer will report that you remain due for June, even though you sent a check in June.  It’s all in the rules about how payments are credited under the terms of the note.

3.  Payments may not be credited

Loan servicers seem to have a separate “pocket” labeled “Suspense”  into which they sometimes dump your payment. They’ve got your money, they just haven’t credited it to the amount you owe. The money is in “Suspense”.

The only reason for putting funds in suspense that seems justified is when the payment is too little to make a full payment on the loan.  Servicers don’t have to credit partial payments.

So, they put the money in suspense until they receive enough money to make the regular payment.

For reasons no servicer has ever adequately explained, I’ve seen suspense accounts in the tens or even a hundred thousand dollars.

So, a mortgage statement that doesn’t address any funds held in suspense doesn’t tell the whole story.

4.  Escrow accounts are padded

If your property taxes and hazard insurance are paid by the lender, you have an escrow account.

Under federal law, the lender is allowed to collect more than the sum of the year’s taxes and insurance as protection against the borrower’s non payment.

The extra money, the “cushion”, can be no more than 1/6 th of the annual expenditures.  It remains your money, it’s just held by the servicer should it have to pay when you haven’t paid.

You should get an annual escrow analysis that shows income and expenses in the past year’s escrow account and a projection of the coming year’s expenses.

That projection will determine what you pay in escrow payments going forward.

5.  Statement doesn’t come from owner of note

Ever since loans were bundled up and sold on Wall Street to investment trusts, the work of collecting your payments has been handed off to loan “servicers”.

The owner of the note pays a company to deposit your payments, keep track of fees and expenses, and take action if you don’t pay.

The servicer seldom owns the note, they just own the right to collect the money for the holder of the note.

And servicers change.  Sometimes as often as we change the oil in our car.

When there’s a loan handoff from one servicer to a new servicer, details about anything unusual in the loan account sometimes get lost.

Get behind the monthly statement

The problem of finding out what the servicer thinks you owe became such a problem that regulations written pursuant to the Dodd-Frank act gave borrowers some clout.

Now, a borrower with a home loan can make a Request For Information about their loan and expect answers within a shorter period than under the old law.

If the servicing of the loan has changed hands, the borrower has a window in which to request information from the old servicer, to compare with what the new servicer thinks.

Find the “how-to” for a Request for Information.

More

Your mortgage and your credit report after Chapter 13

Bad mortgage accounting violates your Chapter 13 discharge

Get tax credit for curing mortgage defaults in Chapter 13

How Chapter 13 works

643 Bair Island Road
Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

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