bankruptcy and mortgage deficiency basics
DESCRIPTION
Bankruptcy and Mortgage Deficiency Basics. Chapter 7 and Chapter 13. What is bankruptcy?. Federal court process by which a debtor can discharge or reorganize their debts. Intended to provide the honest but unfortunate debtor with a “fresh start.”. - PowerPoint PPT PresentationTRANSCRIPT
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Bankruptcy and Mortgage Deficiency BasicsChapter 7 and Chapter 13
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
What is bankruptcy?
Federal court process by which a debtor can discharge or reorganize their debts.
Intended to provide the honest but unfortunate debtor with a “fresh start.”
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Why file bankruptcy?(Or, what are the upsides?)
Automatic stay of all debt collection action. (Including lawsuits, foreclosures, collection calls, etc.)
Financial “reboot” Discharge all dischargeable debts Eliminate risk of deficiency (where it exists) Eliminate some tax debts Eliminate credit card debt Get a “fresh start” Look better to lenders (yes, it’s true!)
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Why not file bankruptcy?(Or, what are the downsides?)
FICO hit (immediate but recoverable).Stays on credit for 10 years.Some debts can't be discharged (student loans
especially).May have to part with some property (rare, but it
happens).Financial affairs will be scrutinized to some degree.Expense and time.
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Chapter 7
“Straight” bankruptcy. “Liquidation” of non-exempt assets, sale and
distribution to unsecured creditors.About 3 months (in most circumstances)Rarely loss of property.Keep home if loans stay current.Yes you CAN discharge some taxes. (“Old and
moldy” rule)
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Chapter 7 Eligibility
Must “pass” means test.Adjusted income after below median for
state.Must take “credit counseling” class. (Sort of
like traffic school for bankruptcy only much shorter.)
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Chapter 13 3 to 5 year process in which “some” debts are repaid with
“disposable income.” Disposable income is calculated by a strict formula. Good: “Super discharge” Can provide discharges of some
debts that a Chapter 7 may not. Good: May allow homeowner in default to keep their home. Good: May allow a homeowner to “lien strip” junior deeds
of trust that are “wholly unsecured.” Bad: Keeps the debtor in the bankruptcy system for the
whole time.
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Chapter 13 Eligibility
No more than $360,475 in unsecured debt, and $1,081,400 in secured debt.
Must have “regular source of income.”
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Keeping your property in bankruptcy
It’s simple: Stay current on the payments!!!!Houses and cars treated similarly with minor
differences in “reaffirmation” requirements.As a practical matter, statutory exemptions
protect most property.Redemption of property back from trustee.Chapter 13 keeps everything unless Ch 13
plan doesn’t pay out as much as a liquidation.
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Exemptions(“Home Owner”)
Depends on your situation: If you have equity in your home above the
value of all combined loans: $75k if single $100k if “head of household $175k IF
<65 years old Mentally or physically disabled, or <55 years with household income <$15k
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Exemptions (“Non-Home Owner”)
$24,250 “wild card” Can be used for anything: cash, securities, property, art.
Usually covers most personal propertyTiming of filing can be managed to protect
certain itemsAll “post petition” wages and income
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Other Exemptions and Concepts
All “post petition” wages and incomeAll IRA,s 401k’s, 529’s (some limits may
apply)Most cars, jewelry, art, clothing, furniture, etc.
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Can I “keep” anything out of bankruptcy?
No!!!! All financial affairs (assets, debts, etc.) must be fully disclosed.
Intentional omissions or misrepresentations in Bankruptcy is a federal crime.
But it’s a disclosure issue: You can pay anyone you want. If you want to lose a piece of property, the easiest way to
do that is to fail to disclose in in your schedules. Recent client who “assumed” that taxes had nothing to do
with bankruptcy. Another client who “forgot” she owned a house that she’d
recently sold. Indicted.
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Consequences of bankruptcy non-disclosures?
Possible loss of dischargeMay be charged with a crime.
Just don’t do it.
A good bankruptcy lawyer can fix ANYTHING but a lie.
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Bankruptcy Process and Procedures Starts with filing a “Petition and Schedules” with the
Bankruptcy Court. Which Court depends on your residence. All filings online through CM/ECF system. Usually only one appearance at “meeting of creditors.” Chapter 7: Usually done three months from filing unless
there is property to be administered by the trustee. Chapter 13: Can take up to 5 years to payoff the plan
and get the discharge.
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Cost and Attorneys fees(Unfortunately, it ain't free to go broke.)
Fees are highly variable, depending on location, attorney’s experience, attorney’s other business.
You WILL get what you pay for. (At least on the low end. Few things more dangerous than an underemployed attorney.)
Do your best to get an “all in” arrangement. Under most circumstances Chapter 7 MUST be paid pre-filing.
(Your attorney can't be a “creditor”). Chapter 7: “Simple” cases, anywhere from $1,700 to $3,500
depending on complexity of assets and debts. Chapter 13: $3,500 to $7,000, again, depending on complexity of
assets and debts. Chapter 11? $20,000 to….
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Can I represent myself?
Sure. You can also do your own knee surgery. Generally not a good idea because the
requirements are highly technical and the penalties for error can be very costly.
Lots of calls from people who have spent 6 to 12 months screwing up their own bankruptcy.
Costs way more in the long run.Do it right. Do it once.
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
What about “bankruptcy petition preparers?”
Another bad ideaThey’re not lawyers. They’re form fillers. They can’t give legal advice.
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Loan Modification in Bankruptcy
Yes you CAN modify mortgages while in bankruptcy. The question is whether the bank will do it.
_____________________________________ Remember: Banks are stupid. They are not able to
hold two concepts in their brain at the same time. Like loan modification and bankruptcy. It causes their wires to cross.
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Strategic Defaults
The conscious and deliberate decision to “walk away” from a mortgage.
Usually because the loss in market value means that the investment no longer makes any sense.
Can be stressful. But, it can also bail you out of a very bad
financial position. Controversial.
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Who’s doing it?
Mortgage Bankers Association of America walked away from a $79 million obligation in 2010.
Studies show that: 20% of homeowners will walk away when the
loan-to-value ratio drops below 75%. 63% of people will walk away when deficiency
hits $300k. Estimates are that 15% of all foreclosures are
“strategic.”
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Why? “Clean break” from the bank and avoids the months and months
of uncertainty and negotiation with a large lending institution that probably doesn’t really want to modify the loan anyhow.
If there is any risk of a deficiency, the foreclosure will in all likelihood nuke that lien, and a bankruptcy will discharge the underlying obligation.
Starts financial rehab faster. May have better tax implications than a short sale or deed in
lieu. Loan mod can make the homeowner stuck in a house that may
never recover its value. See 60 Minutes piece by Morley Safer on May 9, 2010.
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Mortgage Deficiencies
What is it? The amount of the unpaid mortgage debt that
remains after foreclosure, short sale, trustee’s sale or deed in lieu.
Example: House worth $400k. Mortgage of $475k. If bank takes property valued at $400k back, deficiency will be $75k.
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Can the bank get a deficiency from me?
Under some circumstances. Is a question of state law, even in a federal bankruptcy. California law only:
Not allowed for “Purchase Money Mortgages.” Literally the mortgage (or HELOC) that was obtained for the purpose of, and actually used for, the purchase of the property.
Not allowed for loans in which the bank actually takes the property back by non-judicial foreclosure.
Not allowed on first mortgages in which the lender has agreed to a short sale.
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Most likely deficiency problems
Investment property second deed of trusts (“DOT”). Personal residence HELOCs, (seconds or thirds) obtained AFTER
purchase of property. E.g. Home improvement loans, home equity loans taken out to pull some cash out of the property.
May present tax problems in the form of “cancellation of debt” (“COD”) income. Cancellation of a debt is taxable as ordinary income unless
Debt is cancelled in bankruptcy.
Property is primary residence. (At least until 2013)
Debtor is balance sheet “insolvent” when debt is canceled.
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
How to deal with deficiencies
Pay it. Discharge it in bankruptcy Negotiate a discount.
Banks typically sell this debt “by the pound.” Meaning that they aggregate large portfolios and sell the lot to bottom feeders and collection agencies. Usually for 3 to 5 cents on the dollar. Anything over that is gravy.
Success with this will depend on how likely the owner of the debt thinks they will be able to get more.
High income or significant wealth? You’ll pay more.
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
ConclusionsDon’t do your own knee surgery. These issues are not
easy to sort out. Talk to a lawyer (and a tax accountant).
Even so, in the hands of a qualified and experienced attorney, most of these problems have relatively simple legal and financial solutions.
Simple doesn't mean easy: Can be very stressful, and can make you feel like you’re quite alone.
Only regret any client has ever expressed is that it took them so long to take the plunge.
Law Offices of David C. Winton/(415) 421-5800/www.dcwintonlaw.com/[email protected]
Bankruptcy and Deficiency BasicsChapter 7 and Chapter 13
Thank you.
David C. Winton, Esq.2 Ranch Drive, Suite 8Novato, CA 94945Tel: 415.421.5800www.dcwintonlaw.comEmail: [email protected]