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Chapter 7 Debtor Did Not Reaffirm Mortgage – Is Her Home Now at Risk?

By Jonathan on March 31, 2007

I have a few questions and I’m not sure how to get them answered so I decided to write to you after seeing your website. I really need some advice or guidelines and would appreciate your help. Please let me know your rates and I’ll be more than happy to pay as I need these answers for peace of mind.

My Chapter 7 bankruptcy was discharged in September, 2006 in Atlanta. At that time, my attorneys told me to stop checking the internet for information because it would just worry me and to leave it to them. The bottom line here is that I wanted to reaffirm my mortgage and stated this at the 341 hearing. I didn’t realize you had to actually sign an agreement for this to happen. I called my attorneys after I realized what should have happened and they told me they never think it is in the best interest to sign a reaffirmation on a home because the mortgage company will never come after it anyway if the loan is kept current. I’ve never been late with a payment. They acted like I was crazy to even worry about these things and reminded me that they told me to stop reading about it on the internet.

Since then I have always received a bill from my mortgage company (my house is an FHA loan-I don’t know if that has any bearing on any of this) that has a disclaimer stating the bill is being sent for informational purposes only and is not an attempt to collect, etc. It is also on my credit report as discharged.

My questions are as follows:

1) Will they ever come after it even if I remain current? Could they wait years until there’s equity in the home and then foreclose?

2) I’ve read that there are some ares of the country where keeping the house without a reaffirmation agreement has been protected by the Federal Court. Is this true, and if it is, is Northern Georgia one of those courts?

3) I just got married and will be changing my name. I’m afraid to even change it with them because I don’t even like to flag my situation, am I crazy?
Also, I wanted to Quit Claim half of it to my husband but this would really be flagging it- am I right to worry about that?
Should I even consider doing that?

Thank you for your time,

Julia

Jonathan Ginsberg responds: Julia, here is how I would analyze your situation. Bankruptcy Code Section 521 is entitled “Debtor’s Duties” and includes a requirement that you as the debtor must file a statement of intention with regard to property you wish to retain or surrender. Section 521(a)(6) provides that a Chapter 7 debtor must actually enter a reaffirmation agreement for a personal property secured creditor.

The Code is silent regarding a real property secured creditor.

By not reaffirming your home mortgage, I believe you could make an argument that you no longer have personal liability under that loan. Given that the mortgage company is sending you bills “for informational purposes only” it would appear that they recognize the discharge of personal liability as well.

I believe that they would still have a lien against the property – just not against you personally. This means, in theory, that if the house burned down and there was no insurance, they could not come after you personally.

Because you no longer have personal responsibility for paying this debt, your credit report will not reflect the benefit of regular payment.

I know several lawyers who regularly counsel their clients not to enter into residential reaffirmation agreements for the express purpose of eliminating personal liability. Personally, I think that the credit restoration benefits outweigh the risk of personal liability on a mortgage.

I think that the mortgage company would have a hard time trying to foreclose against you, say, 10 years from now based on a failure to reaffirm. There is a doctrine in law called “laches” which says that a party cannot sit on its rights for an extended period of time, then choose to exercise those rights later on. Here, it would hardly seem equitable for a mortgage company to do so. I think it is very unlikely that this would happen.

However, laches is a doctrine of equity and the last place you want to be is in court, paying a lawyer to argue on the basis of equity. At best you would be out several thousand dollars in legal fees and at worst, you lose.

I can’t really tell you what would happen if you tried to refinance or quitclaim. This uncertainty factor is why I prefer to reaffirm. You might want to look at trying to refinance for the purpose of getting your mortgage situation back to “normal.” Or, you could take your chances with a name change or quitclaim to your husband – as long as you are current with the payments, I think it is very unlikely that you would have any problem. I would at least talk to a mortgage broker first, just in case you had to move quickly to refinance.

Amount of Debt Permitted in Chapter 13 Goes Up on April 1, 2007

By Jonathan on March 20, 2007

When I meet with a new client, I always try to find a way to fit that client into Chapter 7 bankruptcy. I like Chapter 7 because it typically lasts no more than five or six months and, when it works properly, you end up completely debt free. I have represented debtors who have been burdended with $75,000, $100,000 even $200,000 of unsecured debt – and all that debt disappears in Chapter 7.

Unfortunately, the 2005 changes to the bankruptcy laws have dramatically tightened the qualifications for Chapter 7. Chapter 7 remains available, primarily for families with a modest household income. For example, I would hesitate to file a Chapter for a family of four with a $70,000 or higher household income, or an individual with a $45,000 or higher gross income.

A stated purpose of the new law is to drive more people into Chapter 13. However, not everybody will qualify for Chapter 13. One of the reasons you may not qualify for Chapter 13 is your total debt load.

Currently, you can only file Chapter 13 if your total unsecured debt is less than $307,625 and/or your secured debt is less than $922,975. These debt ceilings may seem very high, but I have seen several situations where a potential client was disqualified because of medical debt (unsecured), co-signed obligations for multiple homes (secured debt), judgments for co-signed debts (judgments are considered secured debts).

On April 1, 2007, the debt ceiling for Chapter 13 will increase to $336,900 for unsecured debts and $1,010,650 for secured debts. So, if you have been told previously that your debt totals were too high for Chapter 13, take another look.

I also find it interesting that the Bankruptcy Code recognizes that consumer debt can easily exceed $1.3 million. Hardworking people can find themselves in huge amounts of debt quickly and without a lot of warning. If you begin to sense that you have lost or are losing control of your debt, seek legal help sooner rather than later.

[tags] Chapter 13 bankruptcy, Chapter 7 bankruptcy, debt ceilings for bankruptcy, Chapter 7 vs. Chapter 13 [/tags]

Is Husband of a Disabled and Judgment Proof Wife Liable for Her Debts?

By Jonathan on March 14, 2007

My wife has about $13,000 in debt from a credit card that she held before we were married (no joint use, etc.). She is now disabled and has not paid on this account for over 4 years. Creditors filed a civil suit just yesterday for repayment and legal fees of over 3k. Am I liable for this debt? What can she do to discharge the debt since she is disabled and will not earn an income? She is not a joint account holder on any family accounts (mortgage, other ccs, etc.) Thanks for your insight!
–S

Jonathan Ginsberg responds: S, thank you for your question. You are not responsible for your wife’s debt – period. If she does not work and has no assets titled in her name, I would say that she is "judgment proof." The creditor can get a judgment, but there are no assets or wages to go after.

The potential issue – if she has a judgment against her, that judgment would attach to any property that she might acquire in the future. Similarly, if she ever did go back to work, her wages would be subject to garnishment (although the creditor does not get notified automatically – they would have to find out about any work).

Credit Card Offers on the Rise as Your Bankruptcy Options are Reduced

By Jonathan on March 11, 2007

Notice more credit card solicitations in your mailbox? If so, it is no illusion. Attorney Cathy Moran, writing in her informative "On the bankruptcy soapbox" bankruptcy blog reports that since the October, 2005 effective date of the new bankruptcy law, credit card companies have sent out 8 billion solicitations, an increase of 1.5 billion from the year before.

It seems that the credit card companies know what bankruptcy lawyers know all too well – under the current bankruptcy law filing for relief has become complicated, expensive and time consuming. With the doors to the bankruptcy courthouse closing, why not extend more credit to struggling families knowing that bankruptcy is less of an option.

The 2005 changes to the bankruptcy law has the Orwellian title – Bankruptcy Abuse and Consumer Protection Act of 2005. Maybe there’s some consumer protection in there somewhere – I just have not found it yet.

[tags] BAPCPA, credit card solicitations, credit card offers [/tags]

Social Security Benefit Checks are Exempt from Garnishment, but….

By Jonathan on March 7, 2007

My husband has been given benefits but we are being advise a judgement will be placed for medical procedures that insurance should have covered but didn’t. The facilty was subcontracted out by the doctor and was never given our insurance information to file on. Upon calling that insurance company, they have said that the claims is now too old for them to pay on. Can the attorney take my husbands social security benefits for the judgement.

Jonathan Ginsberg responds: Social Security benefits cannot be garnished by this type of civil judgment creditor. However, if you are using direct deposit and the Social Security funds are going into an account where you keep other money, your bank may inadvertently honor a fi fa on the judgment.

I would consider sending a letter to the lawyer who is representing the judgment creditor to advise him that your husband’s sole source of income is Social Security and therefore exempt from garnishment.
Be aware, however, that other assets – his house, other bank accounts, other assets – can still be at risk.

Another point to consider – does this creditor have a legal right to sue? Claims for breach of contract are subject to statutes of limitations. If this debt is ten years old, for example, it may be “stale” and no longer actionable. Recently, I have heard about a number of lawsuits filed on stale debt – if the defendant does not raise this issue, you could be stuck with judgments even when the underlying claim is bogus. There is a remedy to challenge this type of judgment called a “collateral attack on the judgment” but collateral attacks are expensive and time consuming.

If you receive a lawsuit on a debt that seems unusually old, it would probably be worth the time to run the case by a lawyer. My colleague Bill McLeod of Boston, regularly writes about Fair Debt Collection Practice horror stories. If you are under any illusion that collection agencies are trustworthy entities, some of the examples Bill cites of egregious actions by bill collectors will open your eyes.

If you have other assets at risk, and the judgment is large enough, a bankruptcy might be something to consider. As a rule, you are better off filing bankruptcy before a judgment is issued, but there is a procedure in bankruptcy practice called “avoiding the lien” where a judgment lien can be stripped and made into an unsecured debt.

Do You Have an Absolute Right to File Chapter 7 If You Pass the Means Test?

By Jonathan on March 1, 2007

Mr. Ginsberg – I am a regular reader of your bankruptcy blog, and appreciate your time and efforts. A recent post on another bankruptcy blog raised an interesting issue on which I am wondering if there is a consensus of legal opinion.

Essentially, the question is whether the revision of 707(b) under the BAPCPA effectively precludes a “double jeopardy” type situation in which a Chapter 7 debtor could be exempt from the “means test” but subsequently face a challenge on the basis of excess disposable income. In the interest of brevity, I’ve copied the posting below:

Attorney Kevin Chern writes…
707(b)(2) May Help Debtors Under the Median Income
Tuesday, September 06, 2005
Under the old bankruptcy law, the trustee could bring a 707(b) motion alleging abuse based on a debtor’s ability to repay debt with expendable income. Under BARF 707(b)(2), the judge, trustee or creditor can all bring a 707(b) motion to dismiss if the debtor’s household has more than the median income for a household of that size. Logic dictates that, under the same provision, neither a creditor, nor the judge, nor the trustee has a right to bring a motion to dismiss no matter how much expendable income the debtor has so long as the debtor’s household has less than the median income for a household of that size.

So, in some situations under BARF, this bright line median income test will help debtors escape 707(b) objections. Of course, the judge or trustee can still bring a motion based on 707(b)(3) alleging that the case was not filed in good faith, but, certainly, no presumption of abuse exists.

What are your thoughts on the issue? Any feedback you could provide would be appreciated.
–Chuck

Jonathan Ginsberg responds: Chuck, I would respectfully disagree with Kevin’s analysis. The median income/means test is a qualification test. It is based on a 6 month look back, not on reality. The Schedule I and J budget that you file with your actual Chapter 7 case reflects actual numbers as of the date of filing.

For example, a debtor physician may satisfy the median income/means test because he was unemployed July-December. If he gets a new job in January earning $200,000 a year, his Form B22 would show zero earnings and he would not trigger the presumption. However, his schedule I & J would likely show significant disposable income. I am not aware of any cases that support Kevin’s logic. Further, whether a case is successfully challenged as an abuse vs. one challenged under the good faith provision ends up at the same place – a dismissed case.

It would be interesting to see if any Court has considered the double jeopardy argument.

[tags] 707(b), substantial abuse, good faith, Chapter 7, dismissal of Chapter 7, Kevin Churn, means test, median income test [/tags]