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Posts Tagged ‘chapter 7’

The G20 Tackles Global Financial Crisis – You Can Tackle Yours

Wednesday, July 14th, 2010

One of the major themes of the recent G20 held in Toronto, Canada was the worldwide financial crisis.  The G20 endorsed the goal of the richest nations, including the US, of cutting their deficits in half within 3 years.

In their closing statement, the G20 leaders recognized that serious challenges remain in the world’s economic recovery.  The leaders said that growth is occurring, but that recovery is “uneven and fragile,” and unemployment in many countries remains at unacceptable levels.  The G20 leaders said to sustain recovery, nations must follow existing stimulus plans and work to create conditions for “robust private demand”.

The parallels between the global financial crisis and personal financial crisis’ are clear.  At a meeting around the dining room table, we acknowledge we’re in crisis.  Cutting our deficits would change our entire world and would restore peace to our lives and our families.  We can see a faint light at the end of the tunnel.

The good news is that we have one tool available that the G20 nations don’t – bankruptcy.  Our family can receive a fresh start.  We can erase past choices and make new ones.  We can take the wisdom we’ve acquired and put ourselves in the best position to exceed this year and beyond.

Loan Modifications in Bankruptcy – The Wild West Comes to Court

Thursday, May 27th, 2010

The process of loan modification closely resembles the Wild West.  There’s a sheriff in town, but he’s likely hiding behind an overturned stagecoach when the real shooting begins.  For the myriad of people engaged in discussions, discussions and more discussions with their lenders, it’s hard to get the timing of the loan modification and bankruptcy in sync.

Ideally a loan modification should be complete before filing either Chapter 7 or Chapter 13 bankruptcy, but when stuck in endless rounds of paperwork coupled with the glacial pace of most banks, often the bankruptcy becomes pressing as other creditors actively pursue lawsuits, wage garnishments and liens.

Have no fear, there’s a new sheriff in town.  If you’ve filed bankruptcy, all is not lost on the loan modification front.  You are still free to enter into an agreement with your mortgage company as your bankruptcy progresses to discharge. (*specific Chapter 13 information).

More good news from the land of tumbleweeds; all is not lost if the bankruptcy is completed before the loan modification.  Once on the other side of bankruptcy, armed with a discharge of your debts, your debt to income ratio for the purposes of determining whether you qualify for a loan modification is much improved.  Many Los Angeles and Orange County bankruptcy clients find they get more favorable loan modifications after the bankruptcy than were in the works before.

* In a Chapter 13, once a loan modification is negotiated, it must be approved by the court and the Chapter 13 Trustee.  The Trustee may demand that if the loan modification results in a lower payment, that difference be added into the Chapter 13 plan payment as excess income.   The Trustee may reject the loan modification if it would increase the monthly mortgage payment and debtors wish to lower their plan payment to make the payments (which, from the Trustee’s point of view leaves less for unsecured creditors like credit cards).

Note that the above does not apply to instances where the creditor of a property has been granted relief from the automatic stay by the court.  In those instances, the property is removed from the bankruptcy estate.  This usually occurs when the debtors have defaulted on a mortgage payment after the bankruptcy has been filed.  With the estate removed from bankruptcy, some mortgage creditors have expressed willingness to work out some arrangement outside the bankruptcy court if they believe the default is not a future concern.

“Chapters” Explained

Friday, May 14th, 2010

The term “chapter” appears to be more relevant to Oprah novels than San Diego Bankruptcy Law and Los Angeles bankruptcy law firms, but an understanding of the organization of The United States Code, aka the U.S.C., is helpful for understanding the terminology.

The United States Code is the federal law of the United States.  It’s divided into 50 titles, organized by subject matter.  The titles are then divided into subtitles, parts, subparts, chapters, and subchapters.  Title 11 is the Bankruptcy portion of the United States Code and Chapters 7 & 13 you hear so much about are portions of Title 11.

There are a few other Chapters referred to in bankruptcy circles, but the likelihood they apply to you is small:

  • Chapter 11 is commonly used for businesses that want to reorganize to stay in business.  Also, people whose assets and debts exceed the limits for Chapter 13 must file Chapter 11 if Chapter 7 liquidation doesn’t work for them.  Chapter 11 is much more expensive and complicated than Chapters 7 and 13, and so it really isn’t cost effective for most people.
  • Chapter 12 was a special form of bankruptcy for the family farmer that was phased out in 2008.
  • Chapter 9 is limited to cities, towns, and municipalities.
  • Chapter 15 is used for multinational bankruptcy cases, for example when a debtor files a case in a foreign country, but has debts in the US as well.

Too Many Benjamins for Chapter 7?

Monday, April 19th, 2010

If you’ve done some light reading on the subject of bankruptcy, you may have come across the “Means Test” and all the confusion it brings.  The idea that you might be struggling under a six figure load of debt, but make too much to file for chapter 7 bankruptcy appears to be an oxymoron like jumbo shrimp, pretty ugly, and kosher ham.  The means test does not preclude bankruptcy filing, but requires debtors (with primarily consumer debt) with good incomes to file under chapter 13 rather than 7.

Here are the three steps in the overarching aerial view of the means test.  To get a hard and fast answer, you need to lace up your hiking boots and walk the terrain of specifics, but this will give you a good idea of where you stand.  The first step compares your income to the median income in your state for the same sized family over the last six months.  You can find the current tables here.  If your income is lower than the median, you are free to file chapter 7.  If your income is higher, you move on to the next step, the means test.

In the means test, you determine if you have extra money left over at the end of each month to pay creditors.  Here’s where your research and further math skills come into play, because it’s the IRS standards that determine the budget categories and amounts.  You can find those numbers here.  If you have less than $100 left at the end of the month, you are free to file chapter 7.  If you have more than $166.67, you’ll be a chapter 13.  If you fall between the two, you carry on to the third and final step.  For the third step, you compare the monthly amount paid over 5 years to the total amount of your unsecured debt.  If it’s less than 25%, you can file chapter 7.  If it’s more than 25%, you are a chapter 13.

As you can see, the means test with its multiple questions and heavy reliance on math can be overwhelming for anyone without a PhD in differential equations or a seat in Congress.  If your head is spinning and your calculator is smoking, you can come see us at the Doan Law Firm and we’ll do the calculations for you.  As a bonus, we’ll answer all your other Orange County and los Angeles bankruptcy questions and prove the oxymoron – honest lawyers.

Keeping Your House Through Mortgage Lien Stripping

Tuesday, March 16th, 2010

Mortgage stripping is not well known outside of the bankruptcy community, but it is a highly useful mechanism that can help a debtor to keep her home without paying second mortgages or liens. When a second mortgage or other lien is wholly unsecured, bankruptcy law allows it to be stripped away and treated like an unsecured debt – like a credit card or medical bill – and paid pro rata with the other unsecured debt instead of being paid off in full. For most people in bankruptcy, this means that you can pay your second mortgage off for pennies on the dollar, provided that you meet certain qualifications.

Mortgage lien stripping is most often done in association with a foreclosure, but you don’t have to be in foreclosure or even in distress to take advantage of this remedy. You do have to file a Chapter 13 Bankruptcy, though, which means that you will have to submit a payment plan to repay part of your debts. The amount you pay varies but is tied to your disposable income – your ability to pay. Lien stripping is not available outside of bankruptcy or though the Chapter 7 liquidation process.

I believe that mortgage lien stripping is necessary more often than lots of people like to admit. Some people don’t want to file bankruptcy, or don’t want to deal with the problems they face. Perhaps it’s easier just to keep making the payments. And that’s fine. But I question whether you want to keep paying a first, and second, and sometimes third mortgage where you have no hope of paying it off and where there will be no value in it

for years, if ever. I don’t see a point in paying mortgages that are double what the house next door rents for when the homeowner isn’t gaining any equity and is stretches as far as she can go just to stay afloat. We can do better for you.

Some of my clients have told me that they “feel bad” about agreeing to pay and then not following through. I point out to them that they bank doesn’t feel bad when they kick up your interest rates. The bank doesn’t feel bad when it forecloses. And the bank doesn’t feel bad when they screw up so badly that the government has to bail them out. The bank even has an advantage over most consumers – knowledge – and were still knocked down

by our real estate bubble. If your lender is going to take advantage of all remedies at its disposal – and then additional remedies created after the fact for them by a pliant Congress – then, as I see it, so should you.

Remember, you can stop a foreclosure by filing bankruptcy at any time before the foreclosure sale – even after judgment is entered.

Mortgage lien stripping was seldom seen in bankruptcy before the economic downturn. This is because the mortgage(s) to be stripped must be “wholly unsecured.” For example, if you bought a house for $200,000 with 80/20 financing, you have a mortgage for about $160,000 and another for $40,000. If your property dropped in value to $150,000, your first mortgage is mostly secured but second mortgage is now wholly unsecured and can

be stripped. The second mortgage is secured on paper, but in practical terms the sale of the home would not pay a penny to the second mortgage, and as a result it is seen an unsecured in bankruptcy. In a market with accelerating home values, this neverhappened: in fact, one could simply sell the home at a higher price to the next seller, pay the mortgages, and profit. Obviously, this is not the case today.

Fortunately, that does not mean that all is lost. If you own real estate with a second or other mortgage or lien after your first, it may be possible to remove that lien in a Chapter 13 Bankruptcy Case. By doing so, you can change your mortgage payment from a sketchy proposition and questionable investment into the good investment you had always thought it would be.

There are also several other ways to avoid second mortgages in Bankruptcy. A debtor can strip a lien when:

  • The second mortgage is wholly unsecured, which is the most common occurrence today and was discussed above;
  • There is a balloon payment due on the mortgage during the life of the Chapter 13 case;
  • The second mortgage is secured by other assets in addition to the house; or
  • The property is not the “debtor’s principal residence.”

Generally speaking, debtors leave bankruptcy and the mortgage lien stripping process without a second mortgage, with their home, and with a more affordable mortgage payment. Of course, if you can’t afford your first mortgage payment by itself, you may still have a problem – you will probably want to consider surrendering your home and using the Chapter 7 liquidation process instead – but for a lot of debtors mortgage lien stripping can be highly useful and effective.

Instead of, or before, you decide to do nothing and just surrender your real estate back to your lender, consider discussing this option with an attorney who works with these issues. Doan Law Firm, your bankruptcy attorneys in Orange County, Riverside and Los Angeles Counties, offer a free 45 minute consultation and would be happy to assist you in these matters.

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