Home Foreclosures and Deficiency Judgments
Many people are concerned about the consequences of home foreclosures. They have heard through friends or relatives that the mortgage company can sue them after a foreclosure for a deficiency judgment or that they will be taxed on the debt forgiven from the foreclosure. While this may be technically true for some situations, there are exceptions that most people can utilize that prevent a deficiency judgment from a mortgage foreclosure.
Let’s take a look at how the rules are applied to foreclosures and home loans, using an example of a home with 2 mortgages. John’s home is worth $100,000. He has a 1st mortgage of $150,000.00 and a 2nd mortgage of $25,000.00.
John’s home is foreclosed by advertisement by the 1st mortgage company and purchased at the sheriff’s sale for $100,000.00. This means that the 1st mortgage company didn’t receive $50,000.00 they were owed, and the 2nd mortgage company didn’t receive the $25,000.00 they were owed. This is what is known as a deficiency.
A foreclosure by advertisement means that the homeowner was sent notices in the mail notifying them of their delinquency and that the home would be sold at a sheriff’s sale. The other option is a foreclosure by action, which means the mortgage company will actually sue John in court to be allowed to foreclose.
Minnesota is often called a “non-deficiency” state. Many people will tell you that this means that the mortgage companies cannot sue you for the deficiency from a foreclosure. This is VERY misleading; it only applies to 1st mortgages on homesteads foreclosed by advertisement. The 2nd mortgage company is free to sue John for the $25,000.00 they are owed.
Second Mortgages are often times what forces people in to bankruptcy, namely to get rid of the debt from a second mortgage.
If you have questions about bankruptcy in Minnesota or debt and foreclosures please feel free to contact me, James Anderson at Weikel & Boyd Law Firm at JamesAnderson@weikellaw.com.
Bankruptcy is a powerful tool for individuals and businesses. It stops lawsuits, prevents creditors from collecting and gets rid of many types of debts. However, with these great powers comes rules that can cause problems in a bankruptcy.
This article will discuss the top 10 issues confronted by debtors, and how with careful bankruptcy planning, they can be avoided.
1: Using credit cards within 90 days of filing your case:
Any use of credit cards within 90 days of filing your bankruptcy can be seen as intentionally incurring debt in anticipation of filing bankruptcy. The creditor has the option to object to the discharge of the debt. If they are successful the debtor will have to pay that debt back after the bankruptcy is over.
2: Paying close friends or family members back within 1 year of filing bankruptcy.
Any time a close friend or family member is paid back within 1 year of a bankruptcy filing the court considers that a preference payment. The debtor has preferred the close friend or family member over other creditors. The court will collect the money paid to the close friend or family member, by lawsuit if necessary.
3: Paying back an unsecured creditor more than $600 in the 90 days before a bankruptcy filing. This is another form of a preference payment. Again the court will recover the money paid to an unsecured creditor (credit cards, medical bills etc…).
4: Giving property away property to prevent creditors from being able to collect on their debts prior to a bankruptcy filing.
The bankruptcy code specifically prohibits actions with an “intent to hinder, delay or defraud creditors.” This is a broad law that can cover many types of transfers and situations. The best way to determine if you may run afoul of this law is to ask yourself, “did I give away or sell an asset cheaply to make sure a creditor wouldn’t get it?”
5: Loosing a family doctor or dentist because their debt will be discharged in the bankruptcy.
Many people are concerned that they will no longer be able to go to a family doctor or dentist after they file bankruptcy. As we have noted if you pay them back before filing it could be a preference payment and the court
6: Removing money from a retirement account prior to filing bankruptcy.
Retirement accounts are generally exempt up to about $1 million. Many people try and forestall bankruptcy by paying debts out of their retirement funds. If this sounds like your case you should consult with a bankruptcy attorney ASAP to see if bankruptcy is a better option for you.
7: Spending cash because you may be close to or over your exemptions:
While you are limited to a certain amount of assets you can keep when you file bankruptcy it is a very bad idea to spend money on things that aren’t necessities shortly before your case is filed. This can be seen as wasting assets to prevent creditors from being able to recover them through the bankruptcy. You are allowed to continue to pay your reasonable necessary monthly living expenses however.
8: Having your 341 meeting (also known as a first meeting of creditors) rescheduled
The 341 meeting will be a short 1 time event for most people, however if you are not prepared with all of the necessary documents the trustee may require you to show up for a second 341 meeting. Trustees usually want all paystubs from the date of filing until the meeting, a bank statement showing the balance of bank accounts on the date of filing, a photo ID and a social security card. Check with your attorney to make sure you bring everything you need.
9: ”Forgetting to tell your attorney” about all of your assets. If it is discovered that you did not disclose all of your assets on your bankruptcy petition you risk having your discharge denied, and worse yet federal bankruptcy crimes. The rule of thumb is, if you want any chance of keeping your assets and receiving your discharge, tell your attorney about all of your assets.
10: Not thoroughly reviewing your documents before they are filed. It is of the utmost importance that you carefully review each page of your documents when your attorney gives you a draft. Those documents constitute testimony you are submitting to the court under penalty of perjury. Bankruptcy cases go a lot smoother when the client spends the time to review each item on the bankruptcy petition. Not reviewing everything can lead to surprises, which are never good.
If you would like more information on bankruptcy please feel free to contact the author of this post, James Anderson at JamesAnderson@weikellaw.com or via phone 763-515-1467.
Cathy Moran posted a great article at the Bankruptcy Law Network and it bears repeating; the best reason to file bankruptcy is to be able to retire some day.
A lot of my clients say they want to pay their debt, they feel a moral obligation to honor the contracts and agreements they entered in to. This moral obligation clients feel is a powerful motivator that drives people away form bankruptcy. However, when considering your long term financial health ask yourself this question. What will get me back on my feet and allow me to have the ability to comfortably support myself the soonest? Is it paying your debt for years or filing bankruptcy today?
For the vast majority of people bankruptcy is the quickest and cheapest route for them. Many people have tens of thousands of dollars of credit card debt with interest rates in the 30% range. Paying that off with minimum or even large payments will take years and cost them thousands in interest charges. They put off home repairs, saving for retirement, fixing their vehicles and worst of all they raid their IRA’s, 401k’s and other investment accounts to pay these bills. All they are doing is spending down the money they would have for retirement. Effectively selling their future to pay back credit card and other consumer debt.
Take a moment to think about your retirement savings, are they where you want them to be? Where will your savings be if you continue to pay these debts? Bankruptcy is the best option for many people with debt piling up. Don’t sell your future to feel a little better about paying your debts. If you don’t have the money to retire then someone else will have to pay for it.
If you would like to discuss how bankruptcy can help you please contact the author James Anderson via email at jamesanderson@weikellaw.com or via phone at 763-515-1467.
Qualified ERISA retirement plans such as a 401k are often a point of concern for debtors. Many people believe that if they file bankruptcy in Minnesota they will loose their retirement savings. This just is not true. The bankruptcy code (specifically 11 USC 522(n) states that individual retirement accounts are excluded from bankrupcy for all amounts up to about $1,000,000.00. This essentially means that if you have 401k’s etc. that total less than $1,000,000.00 you will be allowed to keep those accounts through your bankruptcy without loosing any of the money to the bankruptcy estate.
Like all things there are exceptions, such as single employee plans or self employment plans require a more detailed analysis. Your bankruptcy attorney will be able to assist you in determining if your retirement plans are covered under this code section.
If you would like to speak to a bankruptcy attorney please contact James Anderson via email at JamesAnderson@weikellaw.com or via phone 763-515-1467
Many clients are concerned about the income tax consequences of haveing debt forgiven. They have heard through friends or relatives that if debt is forgiven they will receive a 1099 from the loan company, and that the forgiven debt will be deemed taxable income by the IRS. While this may be technically true there are exceptions that most people can utilize to avoid having to pay income tax on debt that has been forgiven.
Lets take a look at how the rules are applied to foreclosures and home loans, using an example of a home with 2 mortgages.
If it was a straight up foreclosure by the 1st mortgage company and the 2nd mortgage company didn’t get it’s loan paid off through the foreclosure the debt wasn’t forgiven on the 2nd mortgage.
In most foreclosures with 2 mortgages the second mortgage is totally unsecured and receives nothing through the foreclosure. An example might make this more clear.
Let’s say the house is worth $100,000. The first mortgage is fore $120,000 and the second mortgage is for $15,000. In this situation the first mortgages forecloses, at the sheriff’s sale the first mortgage will bid the amount they are owed or the actual value of the property, whichever is less. In this case they would bid $100,000. If no one outbids them the first mortgage company owns the house.
Since the first mortgage company technically bought the house for $100,000, but they were owed $120,000 the homeowner has had $20,000 of that first mortgage forgiven. The IRS considers any forgiveness of debt as the same as income and must be reported and taxed as income. However, the Mortgage Debt relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt or forgiveness of debt in connection with a foreclosure.
So in the example above the former homeowner would not be taxed on the $20,000 worth of debt forgiven through the foreclosure. However, the second mortgage is altogether different. The second mortgage company did not receive anything in the foreclosure and has not forgiven or discharged the debt. Usually the 2nd mortgage company will sue the former homeowner for the amount of the second mortgage under a breach of contract. If the former homeowner fails to defend or answer the lawsuit the second mortgage company will receive a default judgment and will begin collecting on that judgment.
Second Mortgages are often times what forces people in to bankruptcy, namely to get rid of the debt from a second mortgage.
More information can be found at the irs website on this topic at http://www.irs.gov/individuals/article/0,,id=179414,00.html
If you have questions about bankruptcy in Minnesota or debt and foreclosures please feel free to contact me at JamesAnderson@weikellaw.com.
Many people have heard that Congress made changes to the Bankruptcy Code in 2005, believing that it is now a lot harder to qualify for a chapter 7. This isn’t necessarily true as the 2005 changes increased the documentation requirements but it wasn’t the radical change most people think it was. Myths about bankruptcy are pervasive and ever changing. In this post we will look at the most common myths about bankruptcy and the facts behind those myths.
Top 10 bankruptcy myths:
1) MYTH: Bankruptcy will prevent me from ever being able to get a car or home loan again.
FACT: As a general rule you will be able to get market interest rates on credit after 2 to 3 years after your case is complete.
2) MYTH: If I file bankruptcy I will have to give up all of my assets.
FACT: Bankruptcy exemptions allow you to keep a substantial amount of property through your bankruptcy. In fact most people don’t have to give up anything.
3) MYTH: Bankruptcy is only for people who don’t have any income.
FACT: Chapter 7 bankruptcy is available to most middle income debtors. The more people you have in your family the higher wage you can earn and still file a chapter 7
4) MYTH: I should max out my credit cards right before filing so I can keep all of the nice stuff and get rid of the debt.
FACT: Not only is this a terrible idea, but it is also in violation of the bankruptcy code and you risk endangering your discharge with such actions. NEVER DO THIS.
5) MYTH: It is impossible to discharge taxes through bankruptcy.
FACT: Income tax debt that was due more than 3 years ago is generally dischargeable in bankruptcy. However “trust fund taxes” like payroll liability are not dischargeable.
6) MYTH: Bankruptcy will always negatively affect my credit score.
FACT: Not necessarily. Bankruptcy moves everyone’s credit score towards the middle. High credit scores will fall and low credit scores will rise as soon as the bankruptcy is filed.
7) MYTH: The 2005 changes to the bankruptcy code makes it harder for people to qualify for bankruptcy.
FACT: The 2005 changes only made qualifying for bankruptcy harder for higher income earning families. Even if your income is too high for a chapter 7 you will still be able to file a chapter 13 or 11 bankruptcy.
8 ) MYTH: Everyone I know will find out about my bankruptcy.
FACT: While bankruptcy is technically a public process, only your creditors will be notified by the court of your filing.
9) MYTH: If I file bankruptcy I won’t be able to keep my car that has a loan on it.
FACT: You can keep the car if you can show that you can afford the payments.
10) MYTH: Filing bankruptcy will be the worst day of my life.
FACT: For most people the day they file bankruptcy is one of the most relieving days of their life. They can sleep at night knowing the calls from creditors will stop and they will have a second chance to actually have a life and not worry about next month’s medical or credit card payments.
These myths just scratch the surface of the myths that surround bankruptcy. A competent bankruptcy lawyer can help you better understand what bankruptcy has to offer and how it applies to your unique situation. If you would like to speak with a bankruptcy attorney at Weikel & Boyd Law Firm please contact James Anderson via email at JamesAnderson@weikellaw.com or via phone 763-515-1467.
Right now! You will be throwing money away, and here’s why.
Unless special circumstances exist, people who are going to file bankruptcy should stop paying their credit cards immediately.
This is due to one of the fundamentals of bankruptcy, treating all creditors equally. Paying some creditors back (here credit cards) and not others is seen as unfair. In bankruptcy we call this a “preference payment.” The bankruptcy client is preferring one creditor over another.
Any time you pay back credit cards, medical bills or other unsecured debt within 90 days of filing bankruptcy it is considered a preference payment. The bankruptcy court will get that money back from the unsecured creditor.
You are out the money, the credit card company no longer has the money; everyone loses. This is why bankruptcy clients shouldn’t pay back their unsecured creditors within 90 days of filing their case.
You should always speak to a bankruptcy attorney before you stop paying any bills to ensure that it won’t complicate your potential bankruptcy. If you would like to speak with James Anderson of Weikel & Boyd feel free to call him at 763-515-1467 or email him at JamesAnderson@weikellaw.com
In the previous post we learned that you have to list all of your assets and debts on your bankruptcy petition, and that medical bills will be discharged. This is a problem for some clients as many have family doctors they have been going to for years and are afraid that by discharging the debt owed to that doctor they won’t be able to go back there.
While it is true that the debt to the doctor will be discharged this scenario can be handled with relative ease. For my clients in this situation I have them simply call the doctor’s office and explain that they have to file bankruptcy, that the doctor will receive notice of the filing, but the clients intend to pay off the debt after their bankruptcy case is over. Furthermore, clients report that the doctors really appreciate the heads up and are often willing to set up affordable payment plans with the client.
This works because there is nothing in the bankruptcy code that prohibits clients from paying off debt (of any kind) after their bankruptcy case is over even though the client is no longer liable for the medical debt. The age old saying “when in doubt tell the truth” certainly applies here. The doctors appreciate being kept in the loop and the client’s willingness to pay off the debt after the bankruptcy.
There are many situations like this that arise with every bankruptcy case. An experienced bankruptcy attorney can help you figure out the best way to handle each situation. If you would like to speak with a bankruptcy attorney please contact James Anderson of the Weikel & Boyd Law Firm via email at JamesAnderson@weikellaw.com or via phone 763-515-1467.
YES! The bankruptcy code requires that ALL assets and ALL debts be disclosed on the bankruptcy petition. The rule of thumb is, if you want to keep your stuff and stay out of trouble with the court, then you should follow the rules and disclose everything.
It is important to remember that just because you list a debt doesn’t mean that it has, or even can, be discharged. A car loan for example must be listed in your bankruptcy, but if you want to keep the car, and can afford the payments, you will be able to do so.
Some people think that they can just not tell their bankruptcy attorney about certain debts that they don’t want discharged or don’t want the creditor to know that they have filed bankruptcy. This is a very, very bad idea. Not only are you endangering your discharge, but you are also risking being indicted on federal bankruptcy charges.
The next post will discuss how to handle debts that you want to repay after you receive your discharge.
If you would like to speak with an experienced bankruptcy attorney please contact James Anderson of the Weikel & Boyd Law Firm. James can be reached via email at JamesAnderson@weikellaw.com or by phone at 763-515-1467.
Bankruptcy often is thought of as the last painful step in the downward spiral of debt. When, in reality, it is actually the first step in getting back on your feet and out from under that mountain of stress and anxiety. Bankruptcy can provide huge benefits to clients. I have put together the top ten ways that bankruptcy can help you.
- Get rid of most types of unsecured debts such as medical bills, credit cards and personal loans
- Stop home foreclosure
- Stop wage garnishments
- Stop bank levies
- Stop the harassing phone calls from creditors and debt collectors
- Remove judgments from personal debt that is attached to your home
- Free up money to pay for necessary living expenses instead of minimum payments on debts
- Help your raise your credit score faster than just making minimum payments
- Get rid of personal guarantees on business debt
- Allow you to sleep easier at night knowing a qualified and caring bankruptcy attorney is handling your case
These ten items just scratch the surface of how bankruptcy can help people. If you would like to speak with a bankruptcy attorney please contact James Anderson at the Weikel & Boyd Law firm at JamesAnderson@weikellaw.com or by phone at 763-515-1467.
