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27

Feb 2010

I quit paying–how long after bankruptcy can I keep my house?

Posted by / in After Bankruptcy / 4 comments

Some people file bankruptcy just before the foreclosure .    They have given up trying to keep the house–just can’t afford it.  They want to get some time to save some money before they have to move.  They ask, how long do I have?

In Virginia, the short answer is at least three months.

When you file Chapter 7 bankruptcy, you are protected by the automatic stay.  A stay is a court order.  And the automatic stay is, automatic.  Everybody who is trying to take your money or property is automatically told to stop.    That includes the foreclosure.  http://en.wikipedia.org/wiki/Automatic_stay.

The foreclosure lawyers need to get permission from the bankruptcy judge to start the foreclosure again.  (This is called relief from the automatic stay–they will send you a copy of that court paper.)  Getting that permission from the judge will take them about six weeks.

Once they get permission it should take them five or six more weeks to put through the foreclosure sale. (Should is an important word in that sentence and we’ll come back to it.  Sometimes they take a lot longer.)

In Virginia the foreclosure  take effect on the date of foreclosure sale.   All your rights are gone.  (Some states give you months afterward to buy the house back.  Not here.)

Now you are a tenant without a lease in your own house.  (Somewhat better than a trespasser, but not much.)  Most people want to be out by that point.  That will be about three months after the  Chapter 7 bankruptcy was filed.

What about cash for keys?  If you are still in the house after the foreclosure sale, what happens next?  It partly depends on the new owner.  Sometimes the new owner will decide to buy your cooperation–to pay you cash for keys, to get you to move out promptly and leave the place clean.

You don’t have any legal right to cash for keys, but if the new owner thinks that’s the easiest way to go, you can sometimes get several thousand dollars.  Click here http://robertweed.com/resources/CashforKeys.pdf for s sample cash for keys letter.

What if I get a mean owner? If you get a mean new owner, they will evict you.  That’s a two step legal process.  First, they will file an unlawful detainer–a court paper saying you have to be out.  In Virginia they can do that in less than three weeks.   A couple weeks after that, if you are not gone, the sheriff will put you out.  Here’s how the Fairfax County sheriff’s office describes eviction.  http://www.fairfaxcounty.gov/sheriff/eviction.htm.

What if they don’t foreclose? I said earlier that they should foreclose you about six weeks after they get permission from the judge.  Fairly often it takes them longer; sometimes a whole lot longer.     

The main reason for that, I think, is that the foreclosure lawyers are overwhelmed. There are way more foreclosures today than there have ever been, and they are having trouble keeping up with the work.  So sometimes they don’t get to you for a while; and some people get lost in the shuffle.

A second reason can be the condo fees. Even after the bankruptcy you are still the owner until the foreclosure sale.   The condo fees are an after bankruptcy debt and you have to pay them.   If the bank thinks they’ll have a hard time selling your unit, they might rather let you pay the condo fees for the next six months, and then foreclose you when they think they could sell your condo quickly.

(Make no mistake, your condo association will sue you–fast–for those after bankruptcy condo fees.  The foreclosure crisis is really hurting the condo associations and they have no room in their budgets for being reasonable.)

With those two factors, I am sometimes seeing five or six months go by after the bankruptcy before the foreclosure sale.

How can I plan? Obviously planning is easier if you have a smaller family.  If you can get everything pretty much packed up, ready to move, you can keep living for free (except for the condo or HOA) for as long as they will let you.  Be ready to go when they actually set up a sale date; and wait to see if they offer you cash for keys.

With a bigger family, that’s harder.  Finding a place to move to will be harder and you have to pay more attention to things like school districts.  Of course, you don’t need me to tell you everything is harder when you have to take care of your kids;  you know that.

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23

Feb 2010

Your credit report after bankruptcy

Posted by / in After Bankruptcy / 16 comments

<h2>Your credit report after bankruptcy</h2>

Getting back to good credit is one of the three big reasons to file Chapter 7 bankruptcy.   (The other two are so your creditors can’t call you and so they can’t garnish you.)  Unfortunately,  probably half the people who go through bankruptcy don’t get their credit report fixed.

How should your credit report look?  In 1990, the Federal Trade Commission issued a staff commentary explaining what the credit bureaus had to do to meet the requirement that people’s credit reports be complete and accurate.  (UPDATE:  When the Consumer Finance Protection Bureau took over this area from the FTC, the FTC deleted their commentary.)

The Federal Trade Commission staff  said three things.

First, that a debt discharged in bankruptcy should show a zero balance.  ( “A consumer report may include an account that was discharged in bankruptcy (as well as the bankruptcy itself), as long as it reports a zero balance due to reflect the fact that the consumer is no longer liable for the discharged debt.” )

Second, that a debt discharged in bankruptcy should show a discharged in bankruptcy status.   (“Similarly, a consumer reporting agency may include delinquencies on debts discharged in bankruptcy in consumer reports, but must accurately note the status of the debt (e.g., discharged …”)

Third, that the credit bureaus need to stay on top the the creditors to make sure they send in the required updates–specifically to update past due accounts that are then included in bankruptcy.  (“A consumer reporting agency must employ reasonable procedures to keep its file current on past due accounts (e.g., by requiring its creditors to notify the credit bureau when a previously past due account has been paid or discharged in bankruptcy…”)

In spite of these three requirements, spelled out by the Federal Trade Commission, probably half the people who are discharged in a chapter 7 bankruptcy still have errors on their credit report.  It’s better than it was ten years ago, when probably seven out of ten people came out of bankruptcy with these kinds of errors.  But it still stinks.

The problem now is largely practices that were legalized by a class action lawsuit in California that was supposed to fix the problem.  This is the Terri White class action and it didn’t help much.  To settle the law suit, the credit bureaus agreed to stop things that had already been stopped.  And they were allowed to ignore smaller problems that are getting more and more common, now that they have an official ok.

The big problem, that had mostly stopped, was putting after bankruptcy “charge offs”–meaning you owe the money but aren’t paying–instead of “discharge,” meaning you don’t owe it any more.

Ten years ago, several major credit card issuers always reported charge off instead of discharge.  First USA, Bank One and Fleet were the worst, and the credit bureaus did nothing about it.

A handful of law firms around the country started suing them.   James L Manchee in Texas,  http://www.mancheelawfirm.com/, Kathy Cruz in Arkansas, http://cruzlaw.com/ and Charles Juntikka, in New York City http://www.cjalaw.com/ .  Jason Krumbein, http://www.krumbeinlaw.com/, and myself here in Virginia.

All three of those brands were taken over in big mergers.  First USA and Bank One became part of Chase.  Fleet was gobbled up by Bank of America.  The new owners of those credit card lines didn’t want the hassle.  By the time of judge in the Terri White case told the credit bureaus they needed to fix that problem, it had pretty much been fixed.

New problems were created.    The credit bureaus are not required to update accounts that have been sold.  HSBC, when they get notice of a bankruptcy, always “sells” their accounts.   (Who is buying bankruptcy accounts?)   Then they say–both HSBC and the credit bureaus–that they don’t have to show the account was discharged in the bankruptcy.  It just stays as a zombie account on your credit report.  You’ll notice this is the opposite of what the FTC said (although never enforced)–the the credit bureaus were supposed be sure the creditors told them when a past due account had been discharged in the bankruptcy.

The same rule applied to “minor” derogatories.   If the credit card is only 90 days past due, they can leave it as past due and never show the bankruptcy.

Even worse.  They can leave the bad credit sitting on your credit report if your account is closed.  More and more we are seeing bank and credit card companies just “close” your account when they get notice of the bankruptcy–and just park it on your credit, ignoring the fact that it was discharged by the bankruptcy.

What’s the lesson of all this.  When your bankruptcy is over, your credit report will probably not be right.  Unless you or your lawyers, check it, disputes it, and sues to protect your rights, it will look like some of your debts were missed by the bankruptcy.

That will drag down your credit score; and cause problems with future lenders, possible employers, and security clearance agents, who will want to know why this or that debt was not taken care of.

The bankruptcy is not really over until the credit report is right.

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18

Feb 2010

Can bankruptcy help with my student loans?

Posted by / in Chapter 13 / 17 comments

If you read the law, it says we can get rid of the student loans in bankruptcy if we can show “undue hardship.”

“Undue hardship” doesn’t sound so bad. It is. What most bankruptcy judges take that to mean is there is absolutely no hope that you will ever make enough money to pay anything toward the student loans.  “Certainty of hopelessness” is what they want to see.

As long as you are young and in good health, you can’t prove undue hardship. Meaning you can’t get rid of student loans.

Certainty of hopelessness needed to discharge student loans

In most bankruptcy courts, you can only get rid of student loans, if there is “certainty of hopelessness.” No chance that you will ever work again.

My recommendation, which I don’t like, is to put people into a Chapter 13 payment plan where you make a small to the bankruptcy court for five years.   The court sends that payment to the student loans. At the end of the five years the student loans are still there–bigger than ever–and you do it again.  

Maybe do that three or four or five times until we can get to the point where we can tell the judge there’s no hope of you making enough to pay much of anything and you have been paying under court supervision for fifteen or twenty years.  

At that point you should win, although plan B is another five year Chapter 13. Have I said I don’t like this? I don’t like it.   But especially for people with large “private” student loans, it can be your only hope of having a normal life.  (I like this a lot better for a married couple where only one has the student loan, so the other can do things like finance a car.)

(Michelle Singletary, consumer finance advisor, had a good article about this problem in the April 20, 2010 Washington Post.  She didn’t have any solution though.)

Before October 2005, the only government guaranteed and charitable student loans survived a bankruptcy.  Private student loans were like any other debt. I can see no good reason why Congress changed the law, but I do see a political reason: Rep. John Boehner, Republican Leader in the House of Representatives, always raises a lot of money from the student loan lenders–and passes it around to other Republicans.

These private student loans have a much higher interest rate than the government guaranteed student loans; and they do not offer the income sensitive payment plans that the government guaranteed loans do. If you get behind with them, they can wreck your life.  Thanks, Congressman Boehner.

PS A few bankruptcy judges have lightened up on the undue hardship requirement. That requirement goes back to a Ms Brunner, who tried to get rid of her student loans just one year after she finished grad school.  You can imagine the courts were not real sympathetic to her.

Especially because back in 1985, bankruptcy could get rid of your student loans like any other debt, if you had been in payment status for five years.  So you only needed to show that “certainty of hopelessness” is you wanted to use bankruptcy to get out of student loans in the first five years.

The five year rule is long gone, student loans are NEVER like a regular debt. But for most judges the “certainty of hopelessness” is still what you have to show.

Some judges are looking at that again, and saying an easier rule should apply now. The New York Times wrote about those judges, here. 

PPS  President Obama tried to change the Department of Education policy on student loans.  The Department to Education uses “loan servicers” to collect the student loans.  (Navient and Fedloan Servicing are the one I see the most.) Those servicers are the people who come to the bankruptcy court and argue, when people try to prove “undue hardship” to the Judge.  If nobody’s there arguing, then undue hardship should be easier to prove.  

The Obama White House asked The Department of Education to come up with a new policy.  Didn’t work.  

Department of Education came back with new instructions.  Same as the old instructions. They told the loan servicers to keep fighting the undue hardship cases.  The exact opposite of what the White House–and the bankruptcy lawyers–and you, probably–wanted.  

 

UPDATE  The Washington Post had a good article in August 2015, on the government’s income-driven repayment plans.  

MORE  If bankruptcy can’t get you out of student loans, can the student loans at least get you approved for bankruptcy on your other debts?  This case shows the few courts that have decided that, either way.  IRM 5.15.1.10 lists student loans as a necessary expense–if Federal and being paid.  (Before 11/17/2014 it referred to student loans “secured” by the Federal government.  Now it says, guaranteed by the federal government.  Since the bankrutpcy law is supposed to follow the IRS, that change should means something, but it’s not clear what.  The problem is in 707(b)(2)(A)(ii) “Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts.”

UPDATE  The Washington Post has a good article about how the student loans collection agencies are allowed to garnish you, without first going to court.  

UPDATE  The Consumer Finance Protection Bureau has a lot of good info on student loans.  Their page on the Obama Public Service student loan forgiveness program is the best I’ve seen anywhere.  You can see it here.  They estimate that 25% of Americans work in occupations eligible for that program; and they think most don’t know it.  I’ve talked to a lot of people who don’t know they are eligible.  

UPDATE: This morning, heard a talk by Hon. Stephen St John, Chief Judge of the Bankruptcy Court here. He said, until the Supreme Court does something about it, the door to getting your student loans discharged in bankruptcy is “nailed shut.” You might consider moving to another part of the country, but here in the 4th Circuit it is impossible to win on a student loan case.

UPDATE: The College Republican Federation of Virginia (I was state chairman of that group, more than 40 years ago) posted this “Valentine.” Apparently it was first published February 2016 by the College Republican National Committee.

student loan valentine

This “Valentine” was first published by the College Republican National Committee, in February 2016.

UPDATE:  Eugene Wedoff, a retired bankruptcy judge, took over the appeal, pro bono, of a Ms Conniff on a student loan in bankruptcy.  Ms Conniff is a school teacher in a poor county in Alabama; she has advanced degrees but has not been able to move into a position where the advanced degrees would mean more money; she has two children at home, and gets $500 a month in child support.

The bankruptcy court allowed her to get rid of the student loans in her bankruptcy, saying it was obvious she couldn’t pay them.  EMC appealed and the US District Court applied the “certainty of hopelessness” rule, and overruled the bankruptcy court.  Judge Wedoff, who is now Ms Conniff’s lawyer, was one of the best known bankruptcy judges in the country.  He has taken it to the 11th Circuit Court of Appeals. We’re hoping the Court of Appeals listens to him, and other judges start to lighten up on this, a little.  

You can read what Judge Wedoff said, hereappellants-brief-alexandra-elizabeth-conniff-wedoff

UPDATE:  May 2017, Congressman John Delaney (D-MD) and Congressman John Katco (R-NY) introduced a bill to allow student loans to be eliminated in bankruptcy, just like any other debts.  Their bill is H.R. 2366.  This is an important first step.

UPDATE:  June 2017. Bankruptcy Judge in Pennsylvania opens the door a little. He says it’s not necessary to show you can NEVER afford to pay the student loans—forever is a long time. Just that you can’t afford to pay for a “significant portion” of the repayment period on the loan. The student borrower in this case, Ms Price, was divorced with three small children.  The judge said it didn’t matter that maybe when the kids were grown she’d make enough money to start to pay.  Can’t pay now, can’t pay any time soon, and that’s all she needed to prove.

03

Feb 2010

Bankruptcy, foreclosure, 1099-A and 1099-C

Posted by / in General Information About Bankruptcy Law / 31 comments

You don’t need to worry about getting a 1099-A.

If the bank took over your house in a foreclosure, either before or after filing a bankruptcy,  you will receive a copy of a 1099-A.  Form 1099-A is a form the mortgage company is required to file to show that they acquired your property.  It’s what the IRS calls an informational return–it just gives information to the IRS.

You should not receive a 1099-C, which is a cancellation of debt return.  You should not, but you might anyway.  You should not, because there are NO tax consequences for debts discharged in bankruptcy.  So you are NOT taxed on what they didn’t get at the foreclosure sale.   The bankruptcy protects you from that tax.  Here’s the link to the IRS website that says that.    http://www.irs.gov/newsroom/article/0,,id=174034,00.html.

If you get a 1099-C anyway , the IRS may later write to you and say, hey, you owe us another $XX,000.00 because of the debt cancellation.    If you get that letter from the IRS, you need to write them back and say this debt was discharged in bankruptcy.  Send them a copy of your papers.  I’ve always seen that work.   I can get you another copy of your bankruptcy discharge, if you lost yours.

(One thing I should add; I’m assuming your property is here in Virginia or another state that has similar mortgage laws.   If your property is in a state like California, where the mortgage company cannot chase you after a foreclosure, in certain circumstances, it would be really important to file your bankruptcy before the foreclosure sale, not after.)

So, here’s the summary.

Get a 1099-A.  Expect to get one; no need to do anything.

Get a 1099-C.  Should not get one, if you do, expect to hear from the IRS.

IRS letter saying, you owe us all this money.  Write back and say, no I don’t, because of the bankruptcy.  There is a deadline for replying, so make sure you do write back and send them the bankruptcy info.   They are easy to deal with if you reply quickly, but get stubborn if you ignore it until they try to collect the money,

(If you want, you can fill in the IRS Form for this.  Check the very first box, 1a.  Title 11 means “bankruptcy.” )

PS If you get a 1099-C after a bankruptcy, there should be an A in box 6.  That’s explained here Letter Codes for Box 6 of the 1099. 1099-C, A in box 6, tells the IRS there’s no tax on the cancellation because the cancellation was a bankruptcy.

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28

Jan 2010

After foreclosure, do mortgage companies keep trying to collect?

Posted by / in Weekly Posts / No comments yet

Many people ask me what happens if they walk away from the house and don’t file bankruptcy.  Do the big banks and mortgage companies really keep trying to collect the rest of their money?

Well in some states, about half, they can’t.  For example, they can’t in California and it’s very difficult in Pennsylvania.  But here in Virginia, they can and do.

The Federal Deposit Insurance keeps track of that.  (The FDIC’s job is to be sure the banks have money in the bank when you need your, so they keep track of how much the banks collect on, among other things, charged off loans.)  The FDIC reports the banks collected one billion on charged off mortgages in the first nine months of last year–up from about $750 million the year before.  Another $400 million was collected from charged off home equity loans.  And that’s how much they got–the amount they tried to get from people (who then woke up and filed bankruptcy to stop them) would be much higher.

The FDIC total does not include money collected by debt collectors who bought the foreclosed loans from the banks and then tracked down the former home owners.   What’s the bottom line?  In Virginia you can’t just give back the house and figure they will call it square.  Sooner or later, they will come after you for the rest of their money.

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21

Jan 2010

The bankruptcy cram-down and the Massachusetts election

Posted by / in Weekly Posts / No comments yet

Today’s New York Times blames the Democratic defeat in the Massachusetts Senate election, in part on the failure of the Obama administration to help people reduce their mortgages to save their homes.  Copy this link:  http://www.nytimes.com/2010/01/21/opinion/21thur1.html

That’s the bankruptcy cram-down that candidate Barack Obama promised to support, but President Obama orphaned.  Without Presidential support, it passed the House of Representatives, but died in the Senate.  Before the election, based on his promise, I personally told a hundred people that they had a chance to save their homes if Obama was elected.  (That was my advice as their lawyer; personally, I voted for the other guy.)  Well, Obama got elected but he didn’t help and they lost their homes.

(The Washington Post January 9, 2010, had an excellent article by Kevin Huffman explaining why action is still needed, or foreclosures will continue and housing values will continue to fall.   Otherwise,  “this crisis could go on for years, dragging down the chance of real economic recovery.”  http://www.washingtonpost.com/wp-dyn/content/article/2010/01/08/AR2010010803377.html)

Obama’s failure to push the bankruptcy cram-down had at least  small impact in Massachusetts, and maybe a big one.   The small impact was that probably ten thousand homes went to foreclosure there that could have been saved.  Now, that by itself does not reverse a hundred thousand vote defeat.

The big impact would have been evidence that Obama’s recovery plan had something in it for the ordinary family.

Businesses have always been allowed to use bankruptcy to reduce what’s owed on an apartment or warehouse or office building.  Allowing people to do the same to save their homes would show that Obama’s recovery plan included something for the middle class.  Voters might would have been more willing to trust him on health care and the other issues, if he had fought for them on something they could see and understand.

So far, the only thing people can see that Obama has done is to throw money at the banks.  And that wasn’t change;  Republicans would have, and did, do the same thing.    Think it was Harry Truman who said, if there’s a choice between a Republican and a Republican, the Republican will win most every time.   That’s what happened in Massachusetts.

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