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How do you make your second mortgage disappear?

Many people live with financial decisions causing them to hold assets, such as houses, automobiles and boats, whose values have plummeted. Consumers are living in properties whose values have dropped far below the mortgages or driving cars, which are valued at a third of the loans. Those individuals with financial difficulties are looking for assistance through the bankruptcy courts in an attempt to get out from underneath all of the debts and liens acquired, which now vastly exceed their current assets.There are two types of liens, which can be attached to an individual’s property or assets. The first is a voluntary lien, which is basically a situation where you have agreed to use the asset as collateral for a debt, i.e. mortgages and auto loans. A non-voluntary lien is one that a creditor imposes on you and that gives them the right to force you to sell the asset so that they can be paid, for example: judgments against you or tax liens. These liens are either secured or unsecured as to the asset they are attached to.

The most common issue for an consumers nowadays is the situation where a homeowner who has a first and second mortgage on a primary residence is facing bankruptcy and wondering if they have the ability to save the family home. As real estate markets fall and the fair market values of the homes fall, homeowners are left with mortgages that far exceed the current fair market value of their homes. There is a process which could be of help to many in this situation and it is called “lien stripping”.

“Lien stripping” refers to the process of reducing a secured claim to the value of the underlying collateral. It uses the combined effect of 11 U.S.C.A. § 506(a) and 11 U.S.C.A. § 506(d) to bifurcate the lien into secured and unsecured. The secured lien is allowed in the amount up to the fair market value of the property at the time of the stripping. The balance of the lien, which exceeds the fair market value of the property, is now deemed unsecured.

Liens can be stripped off of the debtor’s assets in Chapter 11 or Chapter 13 when there is not enough equity in the assets. Section 506(a) and 506(d) of the Bankruptcy Code acknowledges that a lien is only a secured claim to the extent there is value in the asset to which it attaches. To the extent that the claim exceeds the value of the collateral, that portion of the lien is now unsecured. The most common application of lien stripping is the reduction of car loan liens to the present value of the vehicle however it is currently used more often with home mortgages in bankruptcy situations. Lien stripping with car loans has been limited to vehicles purchased over 910 days.

The Bankruptcy Code does permit a bankruptcy plan to “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence”. Section 1322 (b)(2). This section provides protection to the holder of a claim secured only by a lien on the debtor’s principal residence by prohibiting any modification of the terms, however the issue arose as to if this section precluded “lien stripping” of undersecured residential mortgages in the face of Bankruptcy Code section 506 which appears to permit bifurcation of undersecured mortgages and voiding of unsecured portions of the mortgage lien. At least two bankruptcy court judges sitting in Massachusetts have permitted such bifurcations, see In re Brown, 175 B.R. 129 and In re Richards, 151 B.R. 8.

In any event, there is an exception as to the lien on a principal residence lien and that is if there is a second or third lien on the same property. In this instance those liens, lien stripping is available to render them totally unsecured if the first mortgage balance equals or exceeds the value of the personal residence. The exception is only if there are two distinct mortgages on the property, not a refinancing situation. It should also be noted that the limitation of lien stripping of first mortgages only apply to personal residences, it will be allowed for a mortgage on a building used for business or renting.

As always, all situations relative to a strategy for bankruptcy and lien stripping should be discussed in detail with a bankruptcy attorney to understand all your avenues open to you.

Don’t let Debt Settlement companies mislead you.

The old saying is true, you can’t believe everything you see on TV, especially when listening to these “debt settlement experts”.  Many Creditor rights and debt settlement companies are making statements about bankruptcy that are at best inaccurate, and at worst an attempt to dissuade Debtors from filing bankruptcy in lieu of loosing their home and entering into long-term pay back plans with Creditors that are not in a Debtor’s best interest.   For example, I read one blog article, What No One Tells You About Bankruptcy, Foreclosure and Your Credit, that suggests filing bankruptcy will not always stop a foreclosure, or that your credit score will be harmed beyond repair for a decade by filing a Chapter 13 case.  With all due respect to these positions on bankruptcy and its effect on credit, I would suggest that most homeowners facing foreclosure are already at the bottom of the credit score spectrum.  Additionally, the only way to guarantee that a foreclosure is stopped is by filing a bankruptcy.  Pursuant to section 362(a) of Title 11, once a bankruptcy case is filed, the foreclosure MUST be stopped, and the only way a creditor can continue is by filing a motion for relief from the automatic stay.  In order for a creditor to do this, the homeowner must fail to make there subsequent payments.  As I say many times on the phone when dealing with these type of people, where did you get your law degree?

I will grant you that some Chapter 13 cases do fail, but the reason they do not work is that unrealistic plans are proposed, and underestimating a Debtor’s expenses on schedule J, or an artificially inflated income on schedule I based upon untrue revenues from self employment creates an unrealistic expectation.

What I have found in my bankruptcy law practice is that a Debtor needs to take a hard look at there situation and determine if their house is (1) worth saving, and (2) if the homeowner has enough income to stay current and pay back their missed armaments over a 5 year period.

With respect to the contention that one’s credit score will decrease with the filing of a bankruptcy and be harmed for up to 10 years, that is a very dangerous statement to make.  In fact, it is actually possible for your FICO score to increase after your bankruptcy discharge.  The reason for this is very simple, approximately 35% of your credit score is based upon the amount of debt.  If you discharge thousands of dollars in debt, then that part of the calculation can only increase.  Another approximately 35% of the FICO score is based upon your payment history.  If by filing a bankruptcy, you no longer have debts to be in arrears on, then again you can only go up, over time as you make your chapter 13 plan payments.  This is not to say that filing of a bankruptcy does not take a negative toll on your credit score, but it is balanced by the positives.  In many situations, Debtors, especially those with a mortgage can rebuild their credit with in 24 – 30 months to the point of obtaining new secured debt loans.  I do however, caution my clients to be careful not to fall into their old bad habits which created the need for the bankruptcy filing.

The bottom lines is that if you are facing a foreclosure or have a significant amount of unsecured debt, it is always a good idea to talk to a bankruptcy attorney or consumer debt advocate in your area before making any decision.  Most of these attorneys such as me do not charge a consultation fee for the initial meeting and can provide you with a great deal of insight.

How to protect your tax refund from the Trustee

When someone who is facing financial difficulty decides to file for bankruptcy there are many secondary choices they must make.  They may be able to decide which chapter of bankruptcy they should file, Chapter 7 liquidation or Chapter 13 reorganization.  Once that decision has been made the Debtor then needs to decide, should they keep their home; should they keep their boat?  Depending on their income and assets though the biggest choices typically revolves around their more liquid assets though.  Which assets should they protect from the Trustee in a Chapter 7 bankruptcy case, and which ones should they expose.

In many situations there is no choice, due to the fact that a cap has been hit on an asset, such as a bank account, lost wages in a law suit or equity in a car.  However, one such asset that is typically very difficult to exempt, unless a Debtor uses the Federal exemptions and has a wild card available is an anticipated or even realized tax refund.  Under 11 U.S.C. § 542(a), any property that the Debtor held prior to filing his or her bankruptcy becomes property of the estate and is subject to turnover to the Trustee upon request.

In the past, if a Debtor has money owed to him from the Internal Revenue Service, such an asset must be listed on Schedule B of the bankruptcy petition and generally, the Trustee will look to take those funds as part of the liquidated bankruptcy estate, or demand that the unsecured Creditors be paid at least that amount in a Chapter 13 plan based upon the B22 analysis.  This was true until very recently when an ingenious Debtor, James Winslow Graves and his bankruptcy attorney beat the system.  You see, a Trustee is only entitled to demand an asset which the Debtor has a right to.  This is no different then the legal theory “you can only give title to what you own”.

What this Debtor did was simply allow the IRS to take his tax refund and hold it in their possession until such time as he may need to pay taxes in the future.  Now this may sound almost like a fraudulent transfer, but the IRS code is very clear on the matter.  Under the tax code, once a tax payer elects to leave those funds on deposit with the United States and apply the overpayment to his or her future tax liability, that decision is irrevocable, or as my six year old child would say, “no take backs”!  More specifically, the tax code states, “no claim for credit or refund of such overpayment shall be allowed for the taxable year in which the overpayment arises.” 26 U.S.C. § 6513(d).

The Trustee in this case argued the position that the refund amount was property of the estate under 11 U.S.C. § 541(a)(1), and that, since Debtors were receiving the benefit of the application of the refund, the funds should be treated as an account receivable of the Debtors, and Debtors should therefore be required to turn over an equivalent amount to the estate.  However, both the Bankruptcy Court and the 10th Circuit Federal Court held that the tax code is clear and specific in its language and intent.  The courts held the Debtor once he filed his taxes, had no rights to the tax refund and as a result could not “take it back”.  If you find yourself in a similar position, The Florida case of In Re Graves, Docket Number. 08-1462  and In re Graves, 396 B.R. at 73 is the case to cite.  The Creditors and the Trustee may think it unfair and even borderline deceptive, but the courts have spoken  with its full opinon.