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25

Mar 2010

After bankruptcy what if I don’t pay my second mortgage?

Posted by / in Chapter 7 Bankruptcy / 584 comments

After chapter 7 bankruptcy, I often advise my clients, just don’t pay the second mortgage.

Now, if you don’t file bankruptcy and stop paying the second mortgage, two things would happen.  They will call you day and night; and eventually they would sue you and garnish you.  Bankruptcy keeps them from doing either of those.

Will they foreclose you?  That’s the big question.    The second mortgage can sell your house to a new homeowner only if they pay off the first mortgage.  If the value of your house has dropped below what you owe on the first, that’s just a way for them to lose more money.  They are not going to do that.

Virginia Bankruptcy Lawyer Robert Weed

I often advise my clients, just don’t pay the second mortgage. This is a strategy that takes nerves of steel.

To put it another way, the second mortgage won’t kick you out of your house just to be mean.  They will only do it to make money.  If they can’t make money, they won’t do it.

So, what are they going to do?  They will wait patiently for you to keep paying the first, and hope the value comes back up (and the balance on the first drops) that at some point you have equity that they can grab.

So, if you follow this just-don’t-pay-the-second strategy, you know you will never have any equity in your house.  If you go to sell five years or twenty years down the road, the second will still be sitting there.   (With five or twenty years of interest and late fees.)

So when does this just-don’t-pay make sense?  Suppose you have five more years before your youngest is out of high school.  Once that’s done, you might want to move to a smaller place anyway.  Then you can stop paying the first mortgage too, and move out.  The bankruptcy still protects you from both of the mortgages.  (You’d have to keep paying the HOA until the first mortgage forecloses.)

Does this strategy hurt your credit?  It does and it doesn’t.  It doesn’t hurt your credit score, because that second mortgage will  just show bankruptcy and can’t show any late payments after that.  (For my clients, we check to be sure.)  But it does hurt your being able to buy again.

For loans like car loans–or interest rates on your credit cards–your credit score pretty much controls, so you’ll be able to get a care loan at a good rate.  Your score will be good, if you’ve built up new, good credit.

But to get a mortgage, a different rule applies.  The March 2, 2010 manual released by Fannie Mae, (link here https://www.efanniemae.com/sf/guides/ssg/sgpdf.jsp) says what you have to do to get an insured mortgage. You have to be two years after the bankruptcy (with extenuating circumstances), but you have to be three years after a foreclosure.   Even though there will not be a foreclosure on your credit report, there will be one on the land records, and a mortgage lender will check there, too.

So if you follow this just-don’t-pay-the-second strategy, you keep the house for three or five or seven years; then you have to plan to rent for three years or so.  Then you’d be able to buy again.

If real estate goes up a lot over the next ten years, you’d be better financially to move out of the house right after the bankruptcy, rent for three years right away, and then buy again.  (If real estate stays flat, then not being able to buy for ten years doesn’t lose you anything.)

But if you want to keep your children in the same school and the same house, just-don’t-pay-the-second is a good plan.

What if you want to keep this house long term?  One way to do that would be with a second mortgage relief Chapter 13.  See my website on that.  http://virginiasecondmortgagerelief.com/

Or, you can not pay the second for a couple years, save some money, and then offer them a cash settlement.  Say you owe $75,000 on the second mortgage, file chapter 7 bankruptcy, and pay them nothing for three years.   If the value of your house is still less than you owe on the first, and you offer them $7000 to call it even, they might agree.   If you move out, they get nothing.

That strategy takes nerves of steel.  And it works best if you go for several years of not paying them–you want them to get used to getting nothing, so your offer of 10 cents on the dollar looks good.  I’ve seen it work.

Here’s an example where Chase, after getting nothing for four years, offers to settle at $20,000 second mortgage for $2000.  And here’s an example of HSBC offering to settle as $126,000 second mortgage for $12,600.

Here’s an offer to settle at $28,500 for $4250.  My client filed bankruptcy in 2010–this offer came in 2014.

 

PS  In January 2015, Bank of America forgives the whole amount.

Ahmad filed bankruptcy with me in 2011.  He got the best possible deal–Bank of America offered to forgive the whole amount of his seocnd mortgage.

 We had a BOA home equity line of credit for around $33K that was included in our BK back in 2011. I received a letter today from BOA that they have agreed to forgive this amount and we don’t owe them a penny on that. I had a question will that show up in our credit and will it hurt our credit in any way? It took us few years to build our credit and get back up and we don’t want this to damage our credit but we are grateful that is being forgiven…..

Don’t worry, Ahmad, this will nto hit your credit.  and not have any tax consequences either.  And I’ll straighten it out if it does.

This nerves of steel strategy does not always work; but it works a lot.

 

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09

Mar 2010

After bankruptcy, what's this from Weltman, Weinberg & Reis? Or Bass and Associates

Posted by / in After Bankruptcy / 1 comment

If you buy furniture, appliances or jewelry on store credit, they have a right to get it back after your bankruptcy is over.  (Unless you keep paying, of course.)

In Virginia, and most states, that right is found in the Uniform Commercial Code. http://www.law.cornell.edu/ucc/9/overview.html.  That law–lawyers call it the UCC–also gives the bank the right to repossess your car if you stop making car payments.  http://www.law.cornell.edu/ucc/9/9-503.html.

The fact is, they are more likely to come after your car, if you stop paying, than to come after your big screen TV.  Two reasons for that.

First, the car is parked out on the street, where they can get to it.  Second, the market for used cars is a lot better than the market for used TV’s.

Still, if they want to, after bankruptcy they can file a legal paper, called a detinue in Virginia law, and ask you to turn over the TV, jewelry or whatever.   I’ve done twelve thousand bankruptcies, and I haven’t seen two dozen detinue.  I’ve seen two or three for jewelry worth more than five thousand dollars.  And the rest were filed mainly by USA Discounters, a furniture and appliance outfit located mainly near military bases.

OK, so who are Weltman, Weinberg & Reis?  This is a law firm that after bankruptcy, will write to you about something you bought at Best Buy or Kay Jewelry and a few other places.   They say they want you to call 800-837-6008 to arrange to turn back in their “collateral.”

You’ll notice they don’t even tell you what the “collateral”–the stuff–is.  That tells you the “collateral” isn’t really what they want.  They want you to call and offer them a payment.

Don’t do it.

My rule is this.  If they contact my clients with a list of what you bought and when you bought it, send that to me.  (Assuming I’m your bankruptcy lawyer.)  I’ll contact them and work something out.  That hardly ever happens.

As for their typical letter.  “We want our stuff back”–without telling you what it is.  Just toss those out.

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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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NORTHERN VIRGINIA BANKRUPTCY LAW OFFICES