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Skip mortgage payments to qualify for a loan modification program? Not if you want to keep your home.

By Jonathan on October 28, 2011

Homeowners trying to decide whether to try for a loan modification or file Chapter 13 are often informed that loan modifications are only available for borrowers who have fallen behind in their payments. The problem is that skipping mortgage payments in order to qualify for a loan modification program is almost a sure way to lose your home.

Here’s why:

The track record of loan modification programs is abysmal. Months go by while a loan modification application is “under review”. Borrowers consistently report that lenders repeatedly lose paperwork and ask for it over and over again. In the end, few loan modification requests are granted.

If the modification is granted, lenders often have added so much in interest and penalties that the outstanding balance of the “modified” loan has grown to the point that it would be impossible to pay, even if written at reduced interest rates over an extended term.

If the modification request is denied, the likelihood of the homeowner being able to catch up are slim indeed. Even if the lender has not piled on the intervening interest and penalties, few families in financial distress will have been able to set aside their monthly payments so that they can pay up on the arrearage. Furthermore, if you are behind even one month, the lender may choose to refuse payment and proceed with foreclosure.

If the arrearage has not grown too large while the modification application was pending, the house may still be saved by filing under Chapter 13 and paying off the arrearage over the five year course of the plan. However, if the accumulated arrearage has become too large, the required payments may be too high for the plan to be workable.

Effect of wife’s personal injury suit on husband’s individual bankruptcy

By Jonathan on October 20, 2011

I was recently asked, “My wife is hoping to settle her personal injury lawsuit. If I file bankruptcy individually will her settlement be safe?”

It is common to see bills pile up when one member of the family is seriously injured, resulting in large medical bills and often loss of income due to inability to work.

My first piece of advice is to keep any settlement proceeds in an entirely separate bank account in your wife’s name only. The money should not be commingled with any joint funds, nor should you be a joint holder of the account or have any rights to access to the money.

If most or all of debts are in your name only, it may make sense for you to file individually. However, if you have signed as the responsible party for some of your wife’s debts, such as her medical bills, or if you have joint accounts, you may be relieved of the debts, but she may still remain liable, in which case filing bankruptcy may not be as much help as you would like.

If your wife is also responsible for significant debt, such as her medical bills or joint liability for your home mortgage, filing individual bankruptcy may not resolve your problems. While your creditors may not be able to get at your wife’s settlement proceeds, the question of the extent to which her creditors can gain access to them is a question of state law. Many states have laws protecting such funds from attachment by creditors. (This is another reason to keep those funds separate.) Also, depending on state law, your wife’s medical insurance carrier or health providers may have legal claims with respect to proceeds from the lawsuit. You should ask her personal injury attorney about this.

Whether or not you decide to file, bankruptcy, separately or jointly, you would be well served to consult with a bankruptcy attorney on how to best protect the proceeds of the lawsuit.

Recent credit card use

By Jonathan on October 20, 2011

If you are in financial difficulty, chances are that you have been depending on credit to meet your ordinary living expenses. You probably already know that once you file bankruptcy, you may not continue using your credit cards.

But what about recent charges?

Credit obtained by fraud is not dischargeable. If a creditor alleges fraud, the creditor must file an adversary proceeding and provide evidence to prove it. Generally speaking, this means proving that the debts were incurred with no intent to repay them. Although the creditor has the burden of proof, a mere declaration of an intent to repay is not a defense. The question is whether there was a reasonable expectation of the ability to repay. In making this determination, factors to be taken into account include, whether new credit cards were obtained, whether the credit application contained false information, whether there were large cash advances, purchase of luxury items, whether the amounts, times, places and types of charges varied from past patterns, how much was charged, when and what for, whether the debtor was employed or otherwise able to pay, and whether the debtor has recently consulted with a bankruptcy attorney.

While the burden is generally on the creditor to prove fraud, certain transactions create a presumption of fraud, thereby putting the burden on the debtor to prove otherwise. These transactions include debts to a single creditor for luxury goods and services incurred within 90 days of filing totaling more than $600 and cash advances totaling more than $875 incurred within 70 days of filing. (These numbers are changed periodically.)

Keep in mind that this does not mean that smaller transactions will avoid scrutiny, nor that you can avoid trouble if you wait more than the specified number of days. Creditors (and the trustee) are likely to carefully review any recent credit card transaction, transfer of assets or debt obligation.

Lenders will also look at your credit applications. If you misrepresented your income (claiming, for example, an annual income of $125,000 when you actually earned $45,000 at that time) would be considered a fraudulent misrepresentation and could result in a denial of dischargeability of a debt, or even a dismissal of your case due to fraud.

If you are contemplating bankruptcy, the first thing you need to do is to stop using your credit cards. If this seems impossible (it's not). If bankruptcy is a possible source of relief for you, your bankruptcy attorney can help you develop a plan to avoid the appearance of fraud.

Student Loan Debt may be a Bigger Problem than Credit Card Debt

By Jonathan on October 20, 2011

USA Today recently reported that student loan debt in the United States, which totals $850 billion, now exceeds outstanding credit card debt in the U.S., which totals $828 billion.

USA Today gets its numbers from a web site publisher named Mark Kantrowitz, who publishes two scholarship matching services called FinAid.org and FastWeb.com. I was unable to independently verify Mr. Kantrowitz’ numbers but if you Google “total credit card debt in U.S.” and “total student loan debt in the U.S.” you will get numbers in the range quoted in the USA Today article.

I actually thought that a more interesting element of this issue has to do with the monthly repayment numbers facing borrowers. The USA Today article suggests that $30,000 of student loans, payable at 6.8% interest over ten years would amount to $350 per month. At this level of debt, the average person would need to earn at least $42,000 per year.

In my practice I have frequently seen student loan debt far in excess of $100,000, with monthly payments over $1,000.

In a bankruptcy context, student loan debt is not dischargeable except in cases of “undue hardship.” In the Northern District of Georgia, “extreme hardship” has essentially been limited to student loan debtors who have a medical issue that prevents them from working. At this point in time, debtors in the Northern District have not been successful in arguing for hardship discharge on the grounds that they cannot find a job that pays enough to support their student loan obligations. There was a recent Supreme Court decision involving student loans and bankruptcy, but that case did not address the substantive issue of what constitutes “undue hardship.” [Read more…] about Student Loan Debt may be a Bigger Problem than Credit Card Debt

Businesses that failed or only made a little money

By Jonathan on October 15, 2011

Some people have closed up a business that wasn’t making money. Others have has a part-time or home-based business that made very little (for example, selling Avon, Tupperware, Mary Kay, Amway, etc) and these folks often ask how much they have to report when they are filing for bankruptcy.

The Bankruptcy Code requires a full disclosure of the petitioner’s finances, including any business activities in the past six years, whether or not you made any money or even if the business is no longer operating. However, practically speaking, the only detailed information required is business and expense figures for the past 12 months and the prior tax year. Other than that, you must disclose who the officers and owners are and who has custody of the records. Unless there is reason to suspect that the business is being used to hide income or assets, that’s usually all you need to provide.

The disclosure requirement was brought home very clearly in a recent decision in the U.S. Court of Appeals for the Seventh Circuit (Stamat v Neary, No. 09-3448, March 24, 2011).

In the case of Dr. Nicholas Stamat, a medical doctor, and his wife Penny, who did his billing, Dr. and Mrs. Stamat made a number of false statements and omissions. The omissions included failure to list their interest in a couple of businesses, even though the assets had been sold 3 or 4 years prior to filing, no profit had been made and the businesses no longer existed.

The Court of Appeals, citing §727(a)(4)(A) of the Bankruptcy Code, affirmed the lower courts’ denial of discharge, on the grounds that the Stamats “knowingly and fraudulently, in or in connection with the case . . . made a false oath or account…”

As the Court pointed out, Question 18(a) of the Statement of Financial Affairs (the “SOFA”) portion of the bankruptcy petition, states:

If the debtor is an individual, list the names, addresses, taxpayer identification numbers, nature of the businesses, and beginning and ending dates of all businesses in which the debtor was an officer, director, partner, or managing executive of a corporation, partner in a partnership, sole proprietor, or was self-employed in a trade, profession, or other activity either full- or part-time within the six years immediately preceding the commencement of this case, or in which the debtor owned 5% or more of the voting or equity securities within the 6 years immediately preceding the commencement of this case.

Going even further, the Court pointed out that in addition to basic information, such as the name, address, tax ID, nature of the business and beginning and ending dates, individuals who have been in business in the past six years (except those who were only limited partners) must also provide detailed information about each such business required by Questions 19-25 of the SOFA, such as identifying keepers of financial records and auditors for the past two years, as well as the names and addresses of the other owners and officers.

In what was surely a surprise to the Stamats, the Court even held that while overstating their income (as compared to their tax return) was not by evidence of fraudulent intent, considering “the totality of the Stamats’ omissions and errors (the over-reporting) rises above mere negligence to the level of reckless disregard for the truth.”

The bottom line is this: If you are not sure whether or not to disclose some past or present business activity on your bankruptcy petition, it’s better to consult with your attorney than to risk denial of discharge.

Can I cram down a mobile home loan?

By Jonathan on October 12, 2011

You may have been told that first mortgages cannot be crammed down in a Chapter 13 bankruptcy. But is that true for a mobile home? That depends (at least in part) with whether the mobile home is considered personal property or real property in your state.

Section 506(a) allows bifurcation of claims in secured and unsecured portions, with the secured claim being limited to the value of the property, while Section 1322(b)(2) provides that a plan may modify the rights of holder of secured claims “other than a claim secured only by a security interest in real property that is the debtor’s principal residence. . . .” This is often referred to as the “anti-modification” exception, intended to protect the interest of residential home lenders. In other words, you can’t cram down your first mortgage. (You may be able to “strip” a second mortgage if the balance on the first mortgage exceeds the value of your house.)

Is a mobile home the debtor’s principal residence? Although Section 101(13A) provides that the term applies to both the structure and incidental property and includes mobile homes, whether it is the debtor’s principal residence is largely a matter of intent. (Vacation and recreational homes are not covered.)

Is the interest in real property? In the case of a conventional house, the answer is pretty clear. But whether a mobile home is considered real property is generally a matter of state law, and depends on whether there is a mobile home statute and may also require consideration of a number of other factors, such as whether the mobile home can be moved, whether there are permanent structures attached to it, whether there is a well and septic system, etc.

But what if the lender’s claim is secured by additional security in the form of an interest in other property, that is not only by an interest in “real property that is the debtor’s principal residence?

Some courts have held that the 1322(b)(2) exception does not apply if the lender also holds a security interest in escrow funds on the grounds that they are not considered real property under state law, even though escrow funds (and insurance proceeds) are defined by 101 (27B) of the Code as “incidental property” that is part of the debtor’s principal residence. Other courts have found an “exception to the exception” where half of a duplex was rented out as investment property, or where the bank held an interest in “machinery, furniture and equipment (whether fixtures or not)” or in rent proceeds or in credit life insurance proceeds. Other courts have considered typical “boilerplate” language, such as inclusion of household appliances and window shades, to be so nominal as to have no significant effect.

Even if bifurcation is permitted, the question remains as to whether that will mean that the principal is reduced but the term and interest (and therefore the amount of the monthly payment) stay the same, or whether the term stays the same and the principal and interest are reduced, thereby reducing the monthly payment. That depends on the inclination of the judge as well as the position taken by the unsecured creditors.