Walking Away From Mortgage Debt

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Mortgage Debt

Given today’s economy and housing market, it is not surprising that many homeowners no longer view homeownership as the American dream.  Considering the decline in property values, glut of houses on the market, and few buyers qualifying to purchase homes, for many it’s become a nightmare.

Often when I am talking with a person struggling with these issues, the person will say “my neighbor said I should just walk away,” or “my cousin quit making mortgage payments, lived rent free until his house was foreclosed on, and then just walked away.”  What they mean is that they should just quit making their mortgage payments and move somewhere else.  While this is an option, “walking away” has consequences many people do not realize.

Generally, in North Carolina, there is no such thing as just “walking away.”  If you stop making mortgage payments, eventually the home will be foreclosed on.  However, that is not the last word.  Typically, after the house is foreclosed on, the mortgage lender will sue the former homeowner for thousands of dollars.  This is a deficiency action.  A deficiency is the difference between what the house brings at the foreclosure auction and the balance owed on the mortgage.  For example, John owes $100,000 on his house.  At the foreclosure sale, the bank buys it for $75,000.  The $25,000 difference is called a deficiency, and even though John does not own the house anymore, he still owes the $25,000.  The bank could sue him and get a judgment for that amount, which could be against him for the next twenty years (and could become a lien on any real estate John gets in the future).

What’s a homeowner who cannot make mortgage payments to do if they cannot walk away?  Consult with a bankruptcy attorney.  If the home cannot be saved from foreclosure, bankruptcy can wipe out the deficiency owed afterwards.  Often, a foreclosure and bankruptcy go hand in hand.

Can I get rid of tax debt in bankruptcy?

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If you owe the IRS or Department of Revenue a tax debt, the taxes may be dischargeable in bankruptcy.  Tax debts are complicated, and your bankruptcy attorney will discuss those issues with you.   The answer to “can I get rid of tax debt in bankruptcy” is “maybe.”

There are several rules that determine whether a tax debt can be forgiven in bankruptcy.  Such factors include the age of the tax debt, whether a tax return was timely filed, and the type of tax that is owed.  A competent bankruptcy lawyer will know these rules and will be able to analyze which tax years you may or may not be able to wipe out in bankruptcy.

Even if you cannot get rid of tax debt in bankruptcy, taxes that must be repaid can often be repaid through a Chapter 13 bankruptcy case.  Paying taxes through a Chapter 13 plan typically results in a much lower monthly payment than a debtor could get from the IRS, and it prevents the IRS from being able to assess any interest and penalties on the amount owed.  Cutting off interest and penalties can save a tax payer several thousand dollars.

Anyone owing a tax debt would benefit from a free consultation with a bankruptcy lawyer to determine options that may save them money and the hassle of dealing with the IRS and/or North Carolina Department of Revenue.

What is the meeting of creditors at the Bankruptcy Court?

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Meeting of Creditors at Bankruptcy Court

The one court appearance every debtor must attend is their meeting of creditors (also known as a 341 meeting).  While not in a courtroom, the hearing is conducted under oath and held in a meeting room at the bankruptcy court.  The debtor’s bankruptcy attorney will appear with them at their meeting of creditors.

It is called a meeting of creditors because any of the debtor’s creditors may appear and ask the debtor questions under oath.  Questions are typically geared toward gathering more information that the debtor has listed in the petition filed with the Bankruptcy Court.  However, that rarely happens.  Ninety-nine percent of the time, no creditor shows up, and the bankruptcy trustee asks the questions.  Typical questions asked by a bankruptcy trustee focus on ensuring that the information in a debtor’s bankruptcy petition is accurate and complete.

  • The meeting of creditors is typically held 4-6 weeks after the case is filed.
  • Debtors may wear casual clothes.
  • Debtors must bring a photo identification and proof of their social security number to the meeting of creditors.

As a practical matter, leave cell phones in the car.  The courthouse security will not allow any phones with cameras into the building.  If a debtor has a cell phone on them, they will be sent back to their car to leave it, and depending on what courthouse it is, that could be a long walk.

What is the role of a chapter 7 or chapter 13 bankruptcy trustee?

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The bankruptcy trustee steers the bankruptcy process much like the captain of a ship steers the ship.

The bankruptcy trustee is a third party appointed by the bankruptcy court to oversee a bankruptcy case.  Trustees are typically bankruptcy attorneys themselves.  The trustee has a responsibility to make sure that a debtor is complying with the bankruptcy rules and was honest on their petition.  Trustees evaluate the information the debtor lists in their bankruptcy petition and determines what is necessary to comply with the bankruptcy laws.  The bankruptcy trustee steers a case through the bankruptcy process.

Chapter 7 Trustees

A chapter 7 trustee looks at a debtor’s assets to determine if the debtor owns any assets above what she could keep.  If so, the trustee will generally sell the unprotected asset and give the money to the unsecured creditors in equal shares. The debtor can typically protect most or all of her property.

Chapter 13 Trustees

A chapter 13 trustee also reviews the debtor’s information for accuracy and reviews assets but has the additional responsibility of making monthly payments to the debtor’s creditors that are being paid in the chapter 13 case.  The chapter 13 trustee monitors the case to ensure that the debtor is paying what they should be each month.  The chapter 13 Trustee often works closely with the debtor’s bankruptcy attorney to resolve issues that come up in a case.

Information of chapter 13 trustees can be found at www.13network.com.

How are IRA and 401k accounts affected by bankruptcy?

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401k bankruptcy nest egg

Any money held in a 401k or IRA account is an exempt protected asset.  This means that it will be not be affected by a bankruptcy filing and none of the money in an IRA type account can be reached by creditors or the bankruptcy court.  A debtor could have a million dollars in an IRA account, and it would all be protected from his creditors.

A person thinking of filing bankruptcy should seek the advice of a bankruptcy attorney before withdrawing any portion of money from any retirement account. Once money has been withdrawn from the protection of an IRA, that money may be subject to being taken by creditors.

Additionally, there are often taxes and penalties owed on money withdrawn from a retirement account.  A bankruptcy lawyer can inform a debtor of these potential consequences as well.

A debtor should NEVER withdraw money from a retirement account to pay credit cards or other unsecured debt without first consulting a bankruptcy attorney.  I have often had clients come talk to me after they have exhausted all their options to pay their debts, including cashing out a 401(k) and using the money to try to get out of debt.  Unfortunately, that decision often results in the debtor still needing to file bankruptcy AND now owing the IRS or NDCOR taxes  and penalties which could have been completely avoided if the debtor had filed bankruptcy before withdrawing the money from her retirement account.

Save your retirement accounts for retirement and wipe out unsecured debts through bankruptcy.

If I file bankruptcy, will everyone know?

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Who will know if you file bankruptcy?  Has your neighbor filed bankruptcy?  You probably don’t know whether they have or not, and they won’t know if you do.

Bankruptcy –  the “B” word – carries a negative stigma.  Many people worry that if they file bankruptcy, everyone will know they are having financial problems.  The truth is, while a bankruptcy petition is a document that can be viewed by the public, few people know how or care enough to look up the information.

A list of names of people who have filed bankruptcy does not get published in the newspaper or listed anywhere else.

Unless you owe them money, the only way people are going to find out you filed bankruptcy is if you tell them.

You know several people who have filed bankruptcy.  You may not be aware of who they are, but some of your friends, relatives, and coworkers have filed bankruptcy and gotten help with their debts.  You may not know about it because they did not tell you.

Another thing I have found from being a bankruptcy lawyer for over a decade is that most people are too busy worrying about their own lives and problems to give too much thought to worrying about who among their peers has filed bankruptcy.

Don’t let fear of public embarrassment keep you from speaking with a bankruptcy attorney and determining whether bankruptcy could help you.

If I file bankruptcy, will I ever be able to get credit again?

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Credit Card

If you file bankruptcy, will you ever be able to get credit again?  What will happen to your credit score?

A person’s credit score determines whether they are more or less risky to lend money to.  A person with a low credit score is a high risk to lend to, whereas a person with a high credit score is less risky to lend money to.  It is your credit score that determines whether you can get credit and on what terms it will be (such as the interest rate).  For example, a person with a credit score of 800 may be able to obtain a mortgage loan with an interest rate of 4.0% whereas a person with a credit score of 650 may be able to borrow the same amount of money but at a 5.5% interest rate.

A common myth is that when a person files bankruptcy, she will never be able to buy anything on credit again, or it will be many years before she can do so.  This simply is, well, a myth.

When a debtor is behind on mortgage, car, or credit card payments, the result is the sending of negative information to the credit bureaus, which is hurting the debtor’s credit score repeatedly each month.  The bankruptcy filing stops all those monthly “dings” to your credit score.  Once bankruptcy is filed, a creditor cannot report an outstanding debt negatively.  Then in the months that follow, positive feedback is likely being sent to the credit bureaus.

While your credit score will initially drop, it will start to rise immediately after filing.  Your credit score alone determines whether a creditor will extend credit.  For better or worse, you will be able to get credit after a bankruptcy filing.  I’ve even had clients receive offers for extensions of credit during their bankruptcy cases.

What is a judgment?

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A judgment is the outcome of a lawsuit where the winning party is awarded a sum of money from the losing party.

In the bankruptcy context, a judgment typically results when a creditor sues and wins in court, i.e., Bank of America v. John and Jane Doe.

The judgment is the piece of paper that is docketed at the courthouse at the end of the case that says something like “John Doe owes Bank of America $15,000.”  Its effect can vary greatly depending on what property a debtor owns.

A judgment automatically becomes a lien on real property owned by the debtor in the county where the judgment is docketed.  It can also be moved to any other county where the debtor owns real property and attach to that property.   When I ask people who come in for a consultation about the debt owed on their home, they will tell me about any mortgages owed.  However, most of the time they do not realize that if they have real property, any judgment against them may be an additional lien on that property.

Additionally, the sheriff may come out to your home and look around for personal property that could be sold and the money applied to the judgment or seize money from a bank account.

Anyone sued by a creditor should consult with a bankruptcy attorney to determine what effect having a judgment entered against him would have.

What is a deficiency?

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A deficiency arises when a secured creditor sells its collateral and the money from the sell is not enough to pay off the debt in full.  Consider these scenarios:

Jane defaulted on her mortgage.  She owed $100,000, and the house was sold for $80,000 at the foreclosure sale.  The $20,000 difference is called a deficiency, and Jane still owes the money even though she no longer owns the house.

John owned a Honda.  It was repossessed when he defaulted in payments.  He owed $10,000 and the car sold for $6,000 at auction.  The $4,000 difference is a deficiency, and he still owes the money even though the car is gone.

The deficiency amount is still a personal debt owed by the debtor to the creditor after the collateral is sold, and the creditor may sue the debtor in an attempt to collect.  A deficiency is a main reason that people who lose their home or car typically need to file bankruptcy in order to clean up the entire debt.  Some people believe that losing the property is all that can happen if they do not make loan payments, but that is not true.

Bankruptcy can wipe out these deficiencies and should be considered any time a person loses property to a creditor.  A bankruptcy attorney will be able to determine what effect filing bankruptcy would have on any deficiencies owed.

 

How will filing bankruptcy affect my credit score?

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Bankruptcy Credit Score

The simple answer is that a chapter 7 bankruptcy filing stays on your credit report for 10 years and a chapter 13 for 7 years.  However, the negative effect on your credit score will likely be much shorter.

Most people do not have high credit scores when they file bankruptcy.  They have usually fallen behind on payments to creditors.  When you fall behind, each month every creditor that is behind hits your credit report with negative feedback, which could be several hits per month.  A bankruptcy filing dings your credit report negatively one time, but it stops all those repeated negative hits.  Once you file bankruptcy, creditors cannot report negatively on your credit report.  Thus, while bankruptcy will likely cause your credit score to decrease upon filing, every month thereafter when you are no longer getting repeated negative hits, you will be building your score back up.    It is not unusual for someone to have a higher credit score a year after filing bankruptcy than they had on the day they filed.

Also, the lower your credit score is, the less it can fall when you file bankruptcy.  Once bills start getting behind, your credit score is going to tank anyway.  Filing bankruptcy can stop the fall.

In reality, in many cases, filing bankruptcy results in an improved credit score.