How to save money by refinancing your home

Often times, consumers are faced with daunting bills from credit cards,
mortgage payments, utility bills and other financial obligations. We all
incur these debt with the best of intentions to pay back our creditors
when the bills are due. However, over time debts can out of control and
our ability to budget appropriately becomes more and more difficult due
to limited income and all of our creditor looking to get paid. Surely
there must a way to stretch our money so that we can pay everyone.

Well, there is a way to reduce the money going out the door by leveraging
assets many of us already own. One of the best ways to save money to
help stay current on all of your bills by refinancing the mortgage on
your house. This can benefit you in one of two ways; first, you may be
able to pull out equity from your home to pay down higher interest bills
thereby reducing the monthly payment or eliminating balances on credit
cards. Alternatively, you may be able to reduce the interest rates on
your largest bill, the mortgage, thereby increasing your monthly income
to pay other bills. In addition in some situations, you may be able to
even shorten the term to pay back your mortgage and as a result, build
new equity in your home faster.

Although this may be a good way to help reduce your monthly payments and
make it easier to handle all of those pesky credit cards and utility
bills, you should weight the benefits against the drawbacks. When you
refinance your home, you are starting from scratch. That is, you will be
getting a brand new mortgage and incurring possible closing costs. If
there are costs associated with the refinance, you should find out if
those costs will be added to the mortgage payment, which could change the
dynamics for you. You also want to ensure that your current mortgage
does not have a prepayment penalty hidden in the fine print. If it does,
you will want to add that to the closing costs to be sure you know what
your new mortgage balance will be. In some cases, even though you will
be reducing your monthly payment, you may actually increase the principal
owed on the mortgage, so you do want to make an informed decision as to
what end result best meets your current financial needs and goals.

Bankruptcy Process Infographic

Infographic on the bankruptcy process

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What is Bankruptcy?

What is Bankruptcy

Can I use money in my bank account during a bankruptcy case?

Bank AccountOften times when someone files for bankruptcy, they do still have some money in their bank account. However, as soon as you file your case, an estate is created that contains everything you own. What this means is that you will no longer be in control over your assets for a period of time, typically 3 months during a standard Chapter 7 bankruptcy case. However, much of your assets, including money in your checking or savings accounts is protected and can be used by you if properly claimed as exempt from the bankruptcy estate.

After you file your bankruptcy case, there will be a person called a Trustee who is responsible for administering the estate. This Trustee is tasked with liquidating any assets you have which cannot be protected by the bankruptcy code, See 11 U.S.C. § 522(D). With this said, you do have a duty to disclose how much money you have in financial institutions on your personal property schedule (schedule B). Once you do this, depending upon the state which you are filing and what exemptions are available to you, and whether you have any equity in your home, you may be able to protect up to and use as much as $11,975.00. However, in other situations, you can only protect a very limited amount, depending upon what other assets you have and if you need to use part of your exemptions to protect them, such as a tax refund, equity in a vehicle or other such things.

As with most things in the law, every case is extremely fact specific and unique. To that end, you will want to consult with an experienced bankruptcy attorney who can advise you on whether or not you can exempt and use funds in your bank.

Can second mortgages be stripped in Chapter 13 without a discharge?

There are several situations where a homeowner needs to file for bankruptcy, and due to a lack of substantial income qualifies to file under Chapter 7, rather than Chapter 13.  This is important because in a Chapter 7 case, all of a filer’s unsecured debt such as credit cards, medical bills and other non-secured debts can be eliminated.  One of the major problems with this is that if the homeowner has a second mortgage or home equity line that is worth less than the value of the real estate, they can not be stripped from the property.   Another issue that arises from time to time are debts that cannot be discharged in Chapter 7, such as mortgage arrears and taxes incurred within 3 years of filing.  When one of these non-discharable debts is present, often times a good bankruptcy attorney will suggest filing a “chapter 20”, which is to say, file the Chapter 7 and get a discharge of all unsecured debts and then the next day after the case is closed file a Chapter 13 to reorganize and get 5 years to pay back the other debt.

A significant benefit of a Chapter 13 in addition to getting time to pay back those non-dischargable debts is also the ability to strip a lien (mortgage) from the property entirely.  This is done by demonstrating to the Court that there is no equity in the property to secure against a junior lien.  For example, the house is worth $250,000.  The first mortgage is for $300,000, and a second mortgage is for $40,000.  In this case, a Debtor could argue that at a foreclosure, the second mortgage holder would not receive any money, because the first would get everything and still be owed part of their loan.

The problem that many people in this situation have is that they are not entitled to a second discharge of debt for many years after the Chapter 7.  However, the Bankruptcy Court’s have recently ruled that a discharge is not necessarily needed to strip a second mortgage.

The United States Supreme Court has ruled that a debtor can include a mortgage lien in a chapter 13 plan if the personal obligation secured by the mortgaged property had been discharged in a prior chapter 7 case.  Johnson v. Home State Bank, 501 U.S. 78 (1991).  Moreover, many appellate courts and bankruptcy appellate panels have held that § 1322(b)(2)’s anti-modification provision does not bar a chapter 13 debtor from stripping off a wholly unsecured lien on the debtor’s principal residence.  See, e.g. Griffey v. U.S. Bank (In re Griffey), 335 B.R. 166, 167-70 (10th Cir. BAP 2005); Domestic Bank v. Mann (In re Mann), 249 B.R. 831, 840 (1st Cir. BAP 2000);

In summary, Section 1328(f)(1) merely precludes a chapter 13 debtor from receiving a discharge if the debtor received a discharge in a chapter 7 case filed within four years of the chapter 13 case. But that section in no way limits any other rights available to the debtor under the Bankruptcy Code, such as the right to strip off unsecured junior liens under § 506(a) and § 1322.  This decision has most recently been affirmed by the 11th circuit in Wells Fargo Bank v. Scantling, No. 13-10558 (11th Cir. June 18, 2014).  The bottom line is this, even if you filed for bankruptcy and received a discharge of debt, there is nothing stopping you from refiling a Chapter 13 to remove a second mortgage or home equity loan right away.


How to calculate disposable income for a Chapter 13 Plan

Often times a consumer realizes that they will need to file a Chapter 13 bankruptcy in order to catch up on some missed payment to their mortgage, car loan, or simply need to file due to the fact that their household income exceeds the median income in their state.  The biggest question that needs to be asked at this point is, how much do I have to pay into the reorganization plan each month?  The answer to this question is not always a simple calculation.  There are a few things that need to be taken into account in order to determine how much one must pay to propose a confirmable Chapter 13 plan.

The first issue to analyze is whether the Debtor has any arrears which must be paid back.  What this means is that if there are any missed payments to a mortgage, car loan or some other type of secured debt, the Debtor must propose to pay back 100% of those missed payments if they want to retain the property.  Additionally, if there are any taxes or other priority debt in arrears, those must also be paid back in full, interest and penalty free over the course of the plan.

The second issue to consider is whether the Debtor owns any property that is not exempt in a Chapter 7 case.  For example, if the Debtor has an investment property that has $30,000 of equity, which cannot be protected with any applicable exemptions under either state law or Section 522 of the Bankruptcy Code, then the Debtor must propose to pay his or her creditors through the plan at least as much as the non-exempt equity is valued.  This test is called the liquidation analysis.

The final step that must be taken is to determine how much actual disposable income a Debtor has available to fund his or her Chapter 13 Plan payment.  What this means is that any income left over after payroll deductions, and reasonable living expenses are taken into account, how much money is left to pay into the plan each month.  A Debtor is required to propose 100% of that disposable income in order to meet the best interest of the Creditors test.  This final step is where many people run into problems, in that your disposable income must demonstrate you can fund a plan to at least meet the requirements under the first to issues of secured debt and non-exempt assets.

It is clear from this blog post that in order to calculate a Chapter 13 bankruptcy plan, one must understand not only how much debt they owe, but also what kind of debt and how much their assets are valued in order to move their case forward.  For this reason, it is important when filing a Chapter 13 case to consult with an experienced bankruptcy attorney before filing anything.

Can Bankruptcy Help If Your Offer In Compromise Fails?

Discharge Tax DebtI heard the story all too many times. You filed an Offer in Compromise over 12 months ago and you received a letter simply rejecting your offer. The explanation for the rejection makes no sense to you for this was the best offer you could make to resolve your tax liability. I will tell you that you are not alone in your experience for only about quarter of Offers get approval each year. This means that nearly 75% of the people who have faith In the Federal Government to help them in a bad situation with their taxes are in for a rude awakening.

Offer in Compromises are a nice idea and a great way for the Internal Revenue Service (IRS) to extend the three year statute of limitations to collect against a tax debtor. Once an Offer is submitted the statute of limitations is stayed in order to allow the IRS the 12 to 24 months to process your Offer. Meanwhile, the tax debtor’s life is put on hold and the IRS is able to prevent the tax debtor from pursuing options that will discharge tax debt.

So what can you do if your Offer is rejected and that the odds are not in your favor to get an Offer actually accepted?

We see a lot of people in our office with tax issues and a lot of people completely devastated by rejections of Offers. If we had our chance to meet with anyone considering putting all the work into submitting an Offer in Compromise, we would save the tax debtor the time, energy, and frustration. Offers statistics clearly indicate that this process is not going to be a success for the tax debtor. If the IRS was a sports team, the fans would be complaining to get a new coach with nearly 75% rate of loss.

Nevertheless, there is a successful option for tax debtors and the success rate is in the control of the tax debtor and not some third party IRS agent pushing paper. A Chapter 13 bankruptcy case is your best option for tax debt. Now, I know the word “bankruptcy” scares people off which is unfortunate for it is the only Federal Government law that can with absolutely cure a tax debt issue without question.

Why a Chapter 13 case is the best option is because Title 11 allows a tax debtor to cure tax debt over a payment plan of 60 months without the threat of the IRS collecting against the debtor. That is right you put up a big STOP SIGN to the IRS thanks to the automatic stay pursuant to 11 U.S.C. §362. So no more worries of threatening IRS debt or increasing of your overall tax debt due to the fact that the IRS is stayed from issuing out penalties of interest while you are in a Chapter 13 case.

Additionally, a Chapter 13 case allows you to treat the interest and penalties as unsecured debt. In other words, you will pay a minimum amount like maybe 5% (this amount depends on your disposable income) and the rest of the interest and penalties will be discharged. So all that interest and penalties tact upon your tax debt will not need to be paid in full and will no longer hinder your ability to cure your debt.

Finally in a Chapter 13, you can avoid tax liens. Anyone with a tax lien knows how trapped you feel. Often tax liens lead to levying of your bank accounts as well as your wages. Chapter 13 stops all levies on bank account as well as wages. So you can have your life back as you knew it was before you got into tax debt.

The reasons to file a Chapter 13 bankruptcy case is overwhelming. You the tax debtor are in control and you can have 100% success rate.

Can You Remove A Tax Lien In A Chapter 13 Bankruptcy: YES YOU CAN

Many people think that a tax lien is a permanent matter and can never be removed or even dealt with. So what do people do? They avoid the issue and find a way to work around the lien so that they can continue to live. I am writing this blog so that you avoiders trying to find a way around your tax liens can understand what a tax lien really means and what you can do about it so you need not be an avoider.

Let us start by understanding what a tax lien really means. I am going to use the IRS lien definition because state governments use the IRS a guide to liens and the law to enforce liens. The IRS defines a lien as Sec. 6321. LIEN FOR TAXES:

“If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belong to such person.”

What does this mean? It means that if you fall behind on your taxes and avoid the issue, the IRS will place a lien on everything you own. You might say, “I only have my personal goods and my car and no house.” The problem with that way of thinking is that they still have the liens against your personal property and any future property you buy. What I mean is that everything you own—books, ipad, clothes, computer, food and etc. You get the point.

Tax liens are serious business. Do not ignore the reality you are in. The problem with Tax Liens is that they are good for 10 years and the IRS/State can renew them for another 10 years. The IRS/State will renew them if they have not heard from you or if the options to remove the liens are not taken.

The options to remove a Tax Lien are several folds. You can pay the taxes owed in full and the IRS/State will gladly remove the liens. IRS Suggestions On Resolving Tax Liens. Of course, they will. You can look at the link noted and see how the IRS is suggesting that assets be sold and how they can help you do so in order to get the tax debt paid and lien removed.

You see, the IRS/State want paid and will take your assets to do so. How can this be and how can you stop it? The first step is not ignoring the reality you are in. A Tax Lien destroys your credit even if you find a way to work around it and continue to live. You say “I can deal with the way I am living.” The problem is that the IRS/State will catch up with you and will force you to sell property or even worst you will never own property in your lifetime. You have to ask yourself is living a life working around bad credit so to avoid dealing with your reality worth it?

How you can stop a Tax Lien and live a life of Financial Health is simple but you need to seriously consider filing a Chapter 13 bankruptcy case. In a Chapter 13 bankruptcy case, Tax Liens can be stripped from both personal and real property. BANKRUPTCY STRIPPING CODE. Pursuant to section 506 of the Bankruptcy code, Tax Liens can be removed from personal property and real property in a Chapter 13 case. Once the lien is removed from your property, often the taxes owed are fully unsecured and dischargeable without the need to make one payment towards them but for the unsecured portion you agreed to through your plan. What is the unsecured portion? It is a percentage of the total unsecured debt you owe that you can afford. Such as 10% owed on a total debt of $40,000.00. The amount to be paid would be $4000.00 over 60 months for a total monthly payment of $67.00 a month. At the end of 60 months, your entire tax debt would be discharged and you can live a life debt free and Tax Lien free.

Another way of dealing with tax liens is an offer in compromise. An offer in compromise may lead to the removal of a Tax Lien. Why I say “maybe” is because an offer in compromise is not regulated by a court order like in a Chapter 13 case. Offer in compromises are usually resolved within a department and are subject to that departments decision on how to deal with the liens and your payment arrangement in order to get the liens removed. Remember the IRS/State’s goal is to be paid; therefore, the option is a good one to consider but is less absolute for it is not govern by law and court order.

If you have a Tax Lien, it is a permanent thing if you do not take up one of your options to deal with it. A Chapter 13 case is the best way to deal with a Tax Lien for it strips the Tax Lien from your property and allows to save your property and debt with your Tax Lien and debt once and for all. As always, you should seek professional help for your particular circumstances.

The Horror of HAMP Is Upon Us

My father always said, “Uncontrolled pleasure always comes with a price.”  He was talking about drinking too much in college and getting a hangover but this learning lesson is best way of explaining why we are facing the horror of HAMP which is going to hurt like a hangover.  I know many people hearing the title of this blog would disagree because they are in their homes due to a HAMP modification.  However, I would say to those people do you really know what a mortgage modification with HAMP means?

Most people were so happy to actually get a modification that they did not stop and think what actually is this modification that I am getting?  In February 2009, the Home Affordable Modification Program began with the first of the modification being executed in September 2009. These modification were designed to have a five year life span.  The structure designed with a low interest rate for the first year and steady raise in rate over the next five years until full interest rate and terms were resumed.

What does that all mean?  It means that a modification with HAMP is a band aid.  It was great.  If a homeowner simply needed a five year gap of help and can now go back to 2009 and pay the amount of the mortgage payments and interest that were expected by the original terms of the mortgage, including the full amount owed on the mortgage.  However, it means horror for the person who began to live their lives on the new lower payments and now are expected to pay the original terms of the mortgage and still face the reality that their homes are still underwater.

So you see why the horror is upon us.  HAMP modifications were never intended to be a permanent fix for any homeowner but only a temporary fix.  Unfortunately, I do not believe that homeowners who got modifications really understand this fact.  I think homeowners think that the mortgage companies owed them to reduce their interest rate and the amount owed on the mortgages.

I do not disagree with the idea that mortgage companies should be responsible for the loose mortgage practices that produced a shark like effect and cause some good people to get screwed.  However, the good people ultimately gave into their desires and signed the agreements.  The price to pay for the pleasure of having the home that you cannot quite afford was delayed by HAMP but the price is upon you now.

If you still do to want to believe, let me put the horror into more specific terms.  Hope Now, a non-profit organization recommended by HAMP, has noted that they have helped over 6.5 million homeowners with modifications under HAMP.  Hope Now is one of the more successful organizations with modifications but is one of many that helped homeowners under HAMP.  Think about the potential for a horror movie with just 6.5 million people not prepared to tackle their mortgages as they were before or even if they worked out a better terms than the original mortgage the terms, payments are going up.

Further, think about the fact that even if homeowners were able to get new employment, it is likely that the income was much less than what the homeowners were making when they purchase the home.  Additionally, there are other hurtles to consider.  The Mortgage Forgiveness Debt Relief Act and Debt Cancellation Act was not renewed in December 2013.  Also see our Short Sales Are Dead Blog.  What does this all mean?  It means that a homeowner cannot expect to seek forgiveness of mortgage debt not retrieved by a mortgage company in a foreclosure sale or short sale.  As a result, the homeowner will now be 100% liable to pay for any deficiency from either a short sale or foreclosure sale.

The impact is a horror situation for homeowners who could make it through on the modified terms of the HAMP agreement but now cannot make payments.  The options for these homeowners is either let the home go to foreclosure sale or short sale the home for the home is likely to still be underwater.  These options no longer are just one dimensional decisions rather the factor of deficiency amounts must be considered by the homeowner.  The homeowner will now be liable either by being forced to pay the deficiency amount or by being forced to take the deficiency amount as income for that year and face large tax consequences.

HAMP’s intent was good but like my father said a price must be paid in the end.  Politicians are not realizing the overall effect of not renewing the Mortgage Forgiveness Debt Relief Act and Debt Cancellation Act and the first homeowners coming out of their modification agreements.  Also, politicians are not looking at the impact that this could have on independent modification agreements by other mortgage companies.  Remember modifications are optional for mortgage companies and there are no specific laws that outline a process that must be followed.

I think you get the full picture of the horror of HAMP which is upon us.  My advice is that if you have a HAMP modification and were actually able to keep your payments up, but are not sure if you are going to be able to make the payments once your HAMP modification expires, you need to get prepared now. You need to seek professional help and determine your options that are still available to you.

Can you Make A Second Mortgage Go Away In A Chapter 7 Bankruptcy?

There have recently been many consumer debt bloggers discussing the possibility that lien strips in their entirety may start to extend to Chapter 7 case, where previously, only those Debtors in a Chapter 13 or 11 reorganization could eliminate an entire second mortgage or home equity loan in a chapter 7 case if no equity existed for the junior lien holder as of the date of the bankruptcy petition filing.

This hope and optimism was generated in great part by the Eleventh Circuit Court of Appeals in a 2012 ruling on this issue where the Court held in McNeal v. GMAC Mortg., L.L.C. (In re McNeal), 477 F. App’x 562, 563 (11th Cir. 2012) that it is in fact allowed to avoid a junior lien in a Chapter 7 bankruptcy, reasoning that the United States Supreme Court did not fully address the issue of completely eliminating a junior lien in their famous Dewsnup, 502 U.S. 410, 413 (1992) holding that a partial avoidance or “cram down” can not be done in a Chapter 7 case.

This optimism may have just been tempered though due to a Bankruptcy holding in New York, on the issue of lien stripping in chapter 7 as a case of first impression. The Court in Ramiz Saric & Sahiza Saric, 2013 WL 6536752 (Bankr. N.D.N.Y. 2013), denied the Debtors’ motion to avoid the junior lien, even though the Debtors demonstrated there no equity as of the petition date in the real estate. The court reasoned that the creditor would still have an “allowed secured claim” as the term is used in section 502(d) because the claim was generally “secured by a lien with recourse to the underlying collateral.”

The real issue with these types of decisions is that without a grand sweeping holding, the issue of whether a junior lien can be stripped in any given court will be on a jurisdiction by jurisdiction basis. In the jurisdictions that our firm practices (1st Circuit and the 4th Circuit) these issues have yet to be challenged. However, in at least one Massachusetts case in the last year, the McNeal holding has been recognized by Judge Hoffman in a Chapter 13 challenge to a Mortgage. Is should be interesting to see how the issues play out over the next year or two as more latch on to the hope of NcNeal and test the waters in their states.

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