The foreclosure sale is over and the bank now owns the home.
You’re now living in someone else’s property.
What next?
If you were the homeowner in California, here are your choices after the foreclosure:
How To Make Mortgage Lender ‘Fess Up
What have they been doing with my mortgage payments?
The client has been making a mortgage payment according to the HAMP formula for almost 18 months of her Chapter 13.
Yet without a 1098 form, her very capable tax preparer told her she couldn’t deduct mortgage interest on her tax return.
Never fear.
We have a new tool to get an answer to her question, thanks to the Consumer Financial Protection Bureau and the Dodd-Frank Act: the Request For Information.
Your request has clout
The Request for Information is one of the new tools that sets my heart aflutter.
Unlike previous law where a Qualified Written Request presumed you knew what the problem is, with a RFI you don’t have to know that there’s a problem.
We will ask my client’s loan servicer how they have applied her payments during 2014. Dollars to doughnuts, the payments have been applied to interest, not principal.
Of course, we may find that the servicer is holding all of the payments in some kind of suspense account and hasn’t credited them to any element of her loan.
But whatever it is, we are entitled to a response within 30 business days of making the request.
The CFPB even has sample letters to your servicer you can use for the purpose. [Read more…]
The Tortoise Is The Mascot Of Retirement Savings
Every campaign needs a logo.
Make the logo of your financial planning a turtle, rampant.
Rampant, you say? Turtle?
In the Middle Ages, knights put their ID’s on their shields in elaborate heraldry that told bystanders who he was, what his birth order was, and which side of the blanket he was born on.
Heraldry featured animals, real and mythic, on coats of arms. While they were sometimes lying down (couchant), striding (passant), or sitting (sejant), most four legged animals were shown rearing (rampant).
While not very heroic, consider the power of the rearing turtle, or slow and steady, in your modern day battle for financial security.
Tortoise and the hare
The fable about the tortoise and the hare ( why isn’t it the turtle and the rabbit?) stands for the success of slow and steady in the big picture.
Though no one in the collection world talks about it in those terms, our California exemption law work the same way. [Read more…]
Dividing Debts At Divorce: What You Need To Know
The division of the debts of a failed marriage, however carefully crafted at divorce, can be utterly destroyed if one of the former spouses files a Chapter 13 bankruptcy.
A Chapter 13 discharge is double barreled. It will eliminate the debts that the filing spouse owes to creditors. It also wipes out any obligation to the debtor’s former spouse to shield the ex from those debts.
It gets worse: any obligation of one party to pay the other to equalize the division of assets can be wiped out in a Chapter 13. (Support debts survive; they aren’t dischargeable anywhere, any time.)
All parties, the divorcing spouses and their family law attorneys, need to consider the impact on the division of assets and liabilities if either spouse drops the bankruptcy bombshell.
Debts divided and protection promised
Where both spouses are liable on a debt, the divorce agreement often does two things. It assigns the debt to one spouse for payment. Two, it imposes on that spouse an obligation to indemnify the other spouse.
“Idemnify” isn’t in most folks’ standard vocabulary. According to Merriam Webster, it means
to protect (someone) by promising to pay for the cost of possible future damage, loss, or injury
The spouse who’s to pay the debt promises to pay the former spouse if the creditor has to collect the debt from the other party. So, the divorce decree creates two duties for the spouse to whom the debt is assigned: pay the creditor, and if you don’t, protect your ex from that creditor.
Different chapters of bankruptcy treat the obligation to a former spouse for indemnification differently. In Chapter 7, that obligation is not dischargeable. In Chapter 13, it can be discharged.
But why, you ask, doesn’t the divorce judgment bind the creditor, too? [Read more…]
Social Security Safe In Bankruptcy
The Chapter 13 trustee objected to the debtors’ repayment plan because they did not plan to devote their Social Security income to repaying creditors.
And, he complained, they proposed to keep and pay for vehicles that are luxury items.
The plan is not proposed in good faith, he claimed, as required by the Bankruptcy Code.
The trustee fought for inclusion of the debtors’ Social Security payments through three different courtrooms. The 9th Circuit Court of Appeals decided in the debtors’ favor.
The good faith test for confirmation is not a back door around the statutory calculation of disposable income to be paid to creditors nor does it entitle courts to second guess which pre bankruptcy secured creditors the debtor pays through his plan.
Chapter 13 plans that meet the statutory tests for confirmation cannot be rejected under the catch all provision that they lack “good faith”. Drummond v. Welsh.
Good faith doesn’t require Social Security
The trustee in Welsh argued that the debtors’ plan was not confirmable because it excluded Mr. Welsh’s Social Security benefits from the plan. The plan was not proposed in good faith, the trustee claimed.
Not so, said the 9th Circuit.
With the 1984 amendments to the Bankruptcy Code, Congress created the best efforts test for confirmation of a plan.
With the formulation of that test, the amount of the payment to unsecured creditors was no longer a basis to challenge the debtor’s good faith.
The 9th Circuit held that BAPCPA and the means test introduced in those 2005 amendments refined the best efforts test. The law did not permit opposition to a plan that argued for larger payments than the Form b-22 calculations, at least where those larger payments would have to be funded by Social Security.
Good faith could not be stretched to gather into the Chapter 13 plan the debtors’ Social Security. [Read more…]
Melania Trump Sold The American Dream Short
The infamous Melania Trump speech at the Republican convention shared more than a paragraph or so with Michelle Obama.
It shared Michelle’s aspirational thought that in America, any child with hard work and perseverance can succeed.
“The only limit to your achievements is the strength of your dreams and your willingness to work hard for them.”
For those who are exceptional, driven, and lucky, it’s true.
But what about those with significant, or even average, talents who don’t have luck or all consuming drive? Our self satisfaction over the dramatic rags-to-riches story masks the loss to our communities of the less exceptional. [Read more…]
File Bankruptcy All Alone: No Spouse Required
We’re so used to thinking about married folk as a couple, rather than as two individuals: George and Gracie; Bill and Hillary; John and Abigail.
The Bankruptcy Code feeds that perception when it allows a married couple to file a joint case. Two people, one set of papers, one filing fee.
But while filing together is permitted, it is not required.
You don’t need your mate’s consent or participation to get relief from your debts. 
You can file bankruptcy without your spouse.
Likewise, your mate can file bankruptcy whether you approve or not.
Complications in single spouse bankruptcy
Things can get dicey when the non filing partner is absolutely non cooperative.
Since 2005, the bankruptcy means test requires analysis of the last six months of paystubs for both parties, if they live together. There’s no uniform approach by judges if the non filer won’t provide information.
Then there’s the issue of jointly owned property. File bankruptcy and all the assets of the person filing are brought into the bankruptcy estate. The estate could include an operating business if the business is run by the non filer as a proprietorship, rather than a corporation or LLC.
Bankruptcy law allows a trustee to sell assets where the debtor (the person who filed bankruptcy) owns only a partial interest in the asset.
Then, in community property states like California, a bankruptcy filing by one spouse brings all of the community property into play. (In exchange, all future community property of the couple is protected from the debts the filer discharges.)
The secret bankruptcy discharge for married Californians
Advantages of one spouse filing
I frequently recommend that only one spouse file bankruptcy. The reasons and advantages are many in a community property state like California.
All of the couple’s community property is protected from creditors, regardless of which spouse files the case. One advantage to filing alone is to preserve the other’s right to file bankruptcy later, should there be debts that aren’t dischargeable in the first case.
I think of the right to file bankruptcy as a valuable commodity which shouldn’t be squandered when there might be a need for debt relief for the couple sooner than the Bankruptcy Code permits another filing.
I use single spouse filings to get couples below the Chapter 13 debt limits, or to protect an underwater home while the couple seeks a loan modification.
So whether your spouse is game to file or not, you can, and perhaps should, file bankruptcy alone.
More
When your estranged spouse files bankruptcy
Debts of the marriage under California’s community property system.
How to interview a bankruptcy lawyer
Image courtesy of rez atkinson.
Dead Debts Haunt Home Purchase
Eternal vigilance is the price of freedom.
It’s also the price of freedom from old debts, as my former bankruptcy client learned.
He was about to close escrow on a new home a couple of years after his discharge.
But the sale came to a screaming halt when an old, discharged debt reappeared on his credit report.
It hadn’t been there before; it shouldn’t have reappeared. But “shouldn’t” didn’t keep it from happening.
Meet zombie debt
As we fought to save the deal for his new home, we figured out that the debt that had reappeared long after the bankruptcy was a junior loan on a property he’d owned before bankruptcy.
The servicer on the loan had changed, and the servicer was clueless
- That the property had been foreclosed years ago; and
- That the bankruptcy had eliminated my client’s liability for the debt
But being clueless didn’t keep the servicer from reporting that this mortgage debt was enforceable and delinquent. All of which threatened my client’s ability to get a new loan, or the price he’d pay for that loan. [Read more…]
Why Creditors Should Get Less in Chapter 13
Spending every dollar they make, and then some, is often how our Chapter 13 clients got into financial trouble.
Yet Chapter 13, as practiced, validates the practice of continuing to spend 100% of each month’s income during the life of the plan. In doing so, we squander the chance to use Chapter 13 to teach new budgeting habits.
Shame on us.
It was more obvious before BAPCPA: we calculated the debtor’s projected income and living expenses, and all of what was on the bottom line was paid into the plan.
Now, we use Congress’ objective measure of what it should cost to live, and pay 100% of the arbitrary formula into the plan. There is no provision in the Chapter 13 means test for savings other than long term retirement savings required by an employer.
I’m not knocking saving for retirement. In fact, as debtor’s counsel, my most oft-repeated reason for clients reluctant to take the plunge and file bankruptcy is to provide for retirement.
American Express does not have to retire, and you do. What have you saved for that day?
But every household needs some savings for today, for tomorrow, and next month.
The Supreme Court’s Ransom decision reinforces the sense that saving is not a financial virtue.
A debtor with a paid for car is not reminded that the old car will need to be replaced, and saving toward that inevitability is a good thing. Rather, the car is paid for and we’ll indulge in the idea that the car will last another 5 years and devote that cash flow to unsecured creditors.
We have effectively mandated that, instead of putting a serious down payment on the next car, our client will again finance the next purchase at whatever interest rate is available to the newly discharged. The cycle of borrowing is perpetuated.
Debtors are required to take a class in personal financial management to get their discharge. Those classes surely do not promote consuming 100% of one’s income. Short term saving is needed to provide for the unexpected and the infrequent. Otherwise, you continue to live on the financial brink.
It is ironic, but true, that a Chapter 7 debtor can begin reforming the way she handles money almost immediately after filing bankruptcy. A Chapter 13 debtor lives for 3 to 5 years with a budget that makes no provision for an emergency fund.
I would like to think that Chapter 13 is rehabilitative, that it uses the duration of the plan to build new and better habits of money management. That isn’t what’s happening. As it is, the system’s distaste for savings while debts are unpaid perpetuates budgeting to spend every single dollar the debtor handles.
The language of our confirmation order provides that the debtor’s post petition income is submitted to the supervision and control of the Chapter 13 trustee. What kind of financial professional is the Chapter 13 trustee if that supervision and control doesn’t encourage some level of savings?
Or is the required financial management class just window dressing whose lessons don’t really apply until the creditors have gotten their pound of flesh?
This article was originally written for the Variety of Views feature at ConsiderChapter 13.org.
Image courtesy of kenteegardin
At Risk Of Arrest For Not Paying Your Debts?
This fake arrest warrant is wrong in so many ways.
Repeat after me: we don’t jail people for debt.
