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Dec 2010

After your bankruptcy trustee hearing–the goal line is in sight

Posted by / in Chapter 7 Bankruptcy / 222 comments

You’re in sight of the goal line.  It’s two months and two weeks ahead.

At your bankruptcy trustee hearing–called the section 341 hearing or “meeting of creditors”–two different trustees had a shot at you.

The Chapter 7 trustee looked at your papers to see if there was anything valuable to sell.  And the United States Trustee looked to see if you were a bankruptcy abuser–making too much money or dishonest in your bankruptcy papers.    If there was a problem with something, we probably would know on the spot.

Things are now on schedule for your bankruptcy to wrap up in about two weeks and two months.  No news is good news.  You don’t need to do anything.

Here are some deadlines we hope will pass with nothing happening.

The United States Trustee trustee has ten days to file a “statement of presumed abuse. ”  That would happen if he disagreed with the way I filled out your budgets–and they think you have too much money left over to be allowed to file Chapter 7.  If nobody showed up from their office to challenge me at your hearing, we expect this deadline to pass by.

Your Chapter 7 trustee has 30 days to object to your bankruptcy exemptions.  If the trustee thinks you have too much money in the bank, too much in paid for cars, too much real estate equity–or getting too much in a tax refund–that’s where problems would come from.  (Or, if you’ve moved in the last two years, there could be an argument about what law applies.)  Virginia has about the worst bankruptcy exemptions in the country.

If your exemptions are close, we would have spent a lot of time talking and planning when we first met.

Maybe one person in ten has an exemption problem.  The Chapter 7 trustee will almost always let us know at the hearing if it looks like there will be a problem with exemptions.

Your creditors have 60 days from the hearing to object.  (At least most of them do.  Debts like taxes–usually– and child support are not discharged by bankruptcy.  And they don’t have to do anything in the bankruptcy to prove that.  They can come after you whenever.)

Creditor objections come in two main kinds.  Credit card companies will object if they think you were running up your credit cards while you were getting ready to file bankruptcy.  One reason I like the Experian.com/reportaccess credit report is that it gives us balance history to look at together.  If I think there’s going to be a problem, we talk about putting off your bankruptcy for a few months.

Every year, only two or three of my bankruptcy clients (out of about seven hundred) have a creditor claim there was a run-up.  Usually we knew there would be a problem–but had to rush the bankruptcy for some other reason.   Now and then, someone will keep using the credit cards, after they see me and decide to file bankruptcy.  That will be trouble.

The other way we hear from creditors, is a claim that your whole debt is fraudulent.  Usually that’s what I call a “personal grudge creditor.”   Spouse or family member, former friend, or former business partner.     These personal grudge creditors can claim you lied to them when you got the debt–claimed it was for college but used it to buy drugs, for example.  Even worse, they claim you are lying to the court now–didn’t tell the court about the $80,000 in your overseas bank.

Those are tough for me to predict–I know a lot about the banks, but you know your friends.  (You also have an idea if your friends know something you didn’t tell me.) We hope there’s nothing like that out there.

The creditors’ deadline is 60 days from the date of bankruptcy trustee hearing.

We expect those 60 days will pass without anybody doing anything.  That’s true of nearly all my clients–and no news is good news.

When the 60 days are over, it takes the court about two more weeks to mail out your discharge.  The discharge is your final approval.

While you’re waiting, remember this.   The Supreme Court said just a few years ago, “the principal purpose of the Bankruptcy Code is to grant a fresh start to the honest but unfortunate debtor.”  549 U.S. 365 (2007).  That  “fresh start” the Court said, all the way back in the 19s0’s, is a “new opportunity in life and the clear field for future effort.”  292 US 234 (1934).

That’s what all this is about.  Your fresh start–your new opportunity and clear field–are just ahead.

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May 2010

At the bankruptcy attorneys convention, what I learned

Posted by / in Chapter 7 Bankruptcy / 1 comment

Attorney Leigh Faugust and I just got back from the annual convention of the National Association of Consumer Bankruptcy Attorneys.  We met in San Francico, along with twenty four other bankruptcy  attorneys from Virginia and 1600 attorneys from across the country.

We attended 14 hours of classes, had dinner with old and new friends, traded ideas and strategies late into the night.

One thing I learned that surprised me.

We heard it from Mark Redmiles,  Deputy Director of the Office of the United States Trustee.  He’s the top guy nationally in charge of enforcing the “means test”.  That’s the formula Congress put in place in 2005, to block chapter 7 bankruptcy for people who supposedly can afford to pay.

Redmiles reported that one only out of every eight chapter 7 bankruptcies approved nationally was filed by bankruptcy attorneys for people who did not have automatic Chapter 7 eligibility.

People have automatic eligibility if they earned less than the median income for their family size.  In Virginia, those median income numbers are:

Family size        one                two               three              four

Virginia         $48,190    $64,890     $73, 887    $85,633

Only one out of eight bankruptcies approved nationally as Chapter 7 are over the numbers for their state.

Five out of eight of my approved Chapter 7’s are over.  That’s five times the national average!

What is going on?  Northern Virginia is a high income and high cost of living area in a low income state.  The automatic eligibility formula that bankruptcy attorneys use to get most bankruptcies approved, usually doesn’t work here.

But experienced bankruptcy attorneys do get people here approved.  They get approved using the long formula means test–taking every time in your budget, compared to the allowances for that item, and using the ones we can to show the court why you can’t afford to pay.

The 2005 bankruptcy law made details very important.  But, they are more important here in Northern Virginia than almost anywhere else.   And it’s more important here than most places to have experienced bankruptcy attorneys on your side.

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Mar 2010

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

Posted by / in Chapter 7 Bankruptcy / 622 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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