“I am being sued by capital one for a credit card debt…I’m unemployed…will I still have to pay if I lose in court?”

Someone posted this question to me.  I never know what the enemy may do, but, here are the possibilities:

So here comes the long winded answer about money judgments in St. Clair Shores and everywhere else in Michigan.

For a creditor, bank, credit card company, whoever, to get a judgment against you, they have to sue you in a court.  The court has to be in the city or county where you live.

Bankruptcy stops lawsuits, so, if you file, that is the end of the lawsuit.

If not, you have 21 days if served personally, or 28 days if served by certified mail, to file a written answer with the court.  You, not the court, also have to send a copy to the lawyer suing.

If you do not answer within the allowed time, you get no more notice of proceedings in the court.  The court assumes you have chosen not to participate.

A default judgment will be entered against you.  That is a paper the judge signs that says you owe the money.  The significance is, after the appeal time runs, your wages can be garnished.  In Michigan, they can also get bank accounts in your name and state, not federal, tax refunds.

The court can issue an execution on the judgment, against non-exempt property.  A judgment lien can be recorded against your house.  This lien is behind government liens, like property taxes, and mortgages.

Garnishment and execution papers are supposed to be served on you as well.

The judge can stop a wage garnishment based on a default judgment if you file a petition for partial payments and it is granted.  The motion must show your income and living expenses, and how much you can afford.  If you get the order, you pay the amount you asked for TO THE COURT.  As long as the money comes in, the court will not issue any further wage garnishments.

This discussion assumes you do owe the money and have no defense to the lawsuit.  If you do have a defense, you might win a trial and not have a judgment against you.

It is not a defense that you do not owe the money.  The only issue for the court is, is there a contract and did you breach it?

If yes, then it is just a matter of figuring out how much you owe.

photo credit daniel moyle

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Credit cards are neither good nor bad; they have no intrinsic moral quality.

Just like a baseball bat; depends how you use it.  Hit a home run?  Cool.  Break someone’s head? Not so much.

Yes, that one is subjective.

It is possible to use credit cards without going overboard, pay the balance every month, get the Costco discount or airline miles or bonus points or reward options or hotel discounts, and so on.

Though, with the recent big increase in credit card debt, that does not seem to be the case in the USA>

The question is:  what kind of personality do you have?

Will your self-discipline break down, in the face of overwhelming cultural pressure, and the urge for instant gratification.

Like FREE credit cards.

Right at registration for classes and all the other groups you can join at a college.

Makes you feel grown up, like an adult.

Cool.

We humans seek pleasure and avoid pain.

Sign your name, design your credit card, use it now for what you “need”,  and pay later.

The later you pay, the more it cost.

That is when the pain comes.

But we want to keep up with the Joneses.

All we can see are their toys, we do not know how many mortgages are owed on that nice house, how big the car payments are, if student loan debt is lurking there in the background.

Got a call yesterday from yet another fellow bankruptcy attorney looking to retain me, to file her own bankruptcy.

I can count over a dozen in the court I practice in who have trod the same path.

Hey, NOBODY plans to file bankruptcy.

$700 per month luxury car payment?

Bet it felt good driving that thing around.

Did not feel so good calling me.

Figure out who you are before you get your first card, even if it is zero percent for the first year.

Fell for that one myself, more than once.

Write down how you will use the card, and how you will make the payments.

If and when you fall off that schedule, concede defeat and cancel the damn card.

Stay out of bankruptcy court.

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No, it does not mean you have no property, that you lost everything by filing Chapter 7.

Actually, it means that the trustee found no assets to be liquidated for the benefit of creditors.

Which is a good thing, you keep everything you had before you filed. Subject to paying any liens on the property, like the mortgage on your house or a car payment.

Exemptions are available for you to take in your property, to exempt it from creditors and the trustee.

In Michigan, we can choose between the Federal and state exemptions; usually the federal exemptions are better.

So, the legal fiction is, that the bankruptcy estate is created when the case is filed, and title to all of your property passes to the trustee appointed by the Court.

Nothing is moved physically, everything looks just the same.

And you exempt the property back from the trustee.

The exemptions you claim are filed as part of your bankruptcy schedules.

The 341 hearing, or creditors’ meeting, is scheduled, by the bankruptcy court for about 35 days after you file. The trustee presides over this hearing.

And has 30 days from the hearing to object to your exemptions.

If you have a house worth $100,000, but owe $100,000 on it (or, more likely these days, more than $100,000) there is no equity there, no asset, nothing to exempt.

A bankruptcy trustee basically has no greater rights in property than you have, so, if the mortgage was duly perfected under state law, it is effective against the trustee, who would have to pay it if he took over the house.

Now, trustees get a percentage of what they bring into a bankruptcy estate, so their incentive is to find property or claims that can be reduced to cash for the benefit of the creditors. That is the trustee’s job.

And, each case has to stand by itself. They cannot get paid for work they do on your case from money they made on another case.

So, they do not want to waste time chasing nothing.

They are not going to go after property unless they are sure there is money in it for the creditors.

So, what if your house is worth $100,000, and you only owe $80,000 on it?

So you have $20,000 equity, 100 minus 80.

That amount can be claimed exempt, you get to keep it.

Claiming exemptions is not something you should do on your own, rely on an expert.

Image credit:  Dreamstime

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In the Eastern District of Michigan Bankruptcy Court, Detroit, ten percent of the Chapter 7 cases filed are by people without attorneys.

Many of the bankruptcy petition preparers abuse the process.

First, they charge more than allowed.

All of the Judges in the Eastern District of Michigan Bankruptcy Court have signed an order limiting bankruptcy petition preparer compensation to $100.

Bankruptcy courts have always had the power to regulate the fees of attorneys and other professionals who practice in front of them.

In addition, dozens have so ripped of customers and disrupted the court that they have been prohibited from filing ANY petitions.

The list of prohibited preparers is available here.

Petition preparers are supposed to do just that, prepare the paperwork.

They are NOT allowed to give legal advice.

Besides violating bankruptcy law, which is federal, the unauthorized practice of law is illegal in Michigan, by state law.

Why hire a bankruptcy petition preparer?

I think the only reason is people think they will save money.

Partly, this depends on what your time is worth.

After a petition is filed, there is a required 341 hearing appearance, and additional documents that must be sent to the trustee BEFORE that hearing, and a financial management class must be taken before  a discharge can be issued.

If you have not sent the correct documents to the right person on time, you may have to come back again, or, ultimately, have your case dismissed.

You risk losing property that is not properly exempted.

I always tell people, I do not want to take your money for something you can do yourself.

You can write a letter to the creditor offering a partial settlement; others are really not  impressed if a letter comes from an attorney instead of you.

You can get a free consultation, from me, or many other attorneys, so it cost you nothing to find out the truth about the process before you go to a hustler who just wants your money.

image credit:  www.office.com

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What can I keep paying for if I file bankruptcy?

What bills do I have to stop paying if I file bankruptcy?

These are common questions I get from people.

Too much to cover in one post, so more later.

First, let’s discuss mortgage payments.

In chapter 7, if you want to keep your house, keep making the mortgage payments and insurance and taxes.

The first questions I ask anyone, do you have or are you buying a house?

What is it worth?

Yes, I mean today, as is, no painting or fix up, what you could sell it for.

We all like to think our stuff is worth more than it is.

Hey, it is our stuff.

So, homes, like anything else, are not worth what you paid for them, what the tax assessor says, whatever the mortgage company says, a home is worth what a willing buyer will pay you for it tomorrow.

So, if your home is underwater, say you owe $72,000 on a house worth $45,000, like the client I spoke to this morning, and, with your current income, you cannot both make the payment and eat, may be best to stop paying.

Right away.

In Michigan, it can take a year or longer to foreclose.

Stay for free and save your money for your next residence.

Unless the mortgage company can prove you committed some type of fraud in getting the loan, your mortgage debt will be discharged in the chapter 7 bankruptcy.

That means, you owe nothing, no matter what is done with the house.

Now, filing chapter 7 bankruptcy by itself does NOT take the house out of your name.

You will still be liable as the owner until it goes out of your name.

By foreclosure, or you deeding it back to the mortgage company, or the state taking it for taxes.

But something else besides the bankruptcy has to happen to get your name off the title.

The House Payment In Bankruptcy Story

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DISCLAIMER:  NOTHING IN THIS POST IS MEANT AS TAX ADVICE, CONSULT A PROFESSIONAL

I was shocked to hear that some of my clients were about to pay income tax because of 1099-C forms received on rental properties they had abandoned.

Being my clients, they had already filed Chapter 7 and received discharges.

Which means, no personal liability on their debts.

Yet, creditors had sent them a 1099-C form, indicating the creditor had forgiven debt, resulting in income to my client.

I AM NOT A TAX ADVISER.

However, I do know that there is no income from discharge of a debt.

Which is the first box to check on IRS form 982 (available at www.IRS.gov):

“1 a Discharge of indebtedness in a title 11 case”

Title 11 is the Bankruptcy Code.

So, if you got or get one of these 1099 forms, and you filed bankruptcy, and discharged the debt, file the 982 form so the IRS knows.

Well, somewhere in there they know, as, for reasons that escape me, a notice of every bankruptcy filing is sent to the IRS.

Whether you owe them money and list them as a creditor, or not.

What if you did NOT file bankruptcy?

Form 982 1 e is for “qualified principal residence indebtedness.”

With the explosion of the real estate bubble, lots of homes are worth less than the mortgages owed on them.

Congress passed this exception, under President Bush, so if your home is foreclosed for $150,000, but you owed $300,000 on it, you do not have $150,000 of debt forgiveness income.

IF you qualify.

Basically, this exception is for money used to buy or improve your home.

If you took out a second mortgage to put money into your business, that will not qualify.

There are other exceptions, if you are insolvent but have not obtained a bankruptcy discharge, 1 b applies.

You have to go through the worksheet to see if this applies, but chances are it does if you are so far behind the creditor has charged off the debt and filed a 1099.

DISCLAIMER:  NOTHING IN THIS POST IS MEANT AS TAX ADVICE, CONSULT A PROFESSIONAL

The Truth About Bankruptcy And Forgiveness Of Debt Income

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The Real Truth About Mortgages (Part Two)

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I saw something in Court a couple of weeks ago that I see all too often, a lawyer asking a Judge to allow the Chapter 7 bankruptcy debtor toreaffirm a mortgage.

This case involved a second mortgage, and the debtor had already reaffirmed the first mortgage.

Malpractice!

Yikes, I wonder what people are thinking.

Reaffirmation is the only way the law provides to keep you personally liable for a debt.

So, if you reaffirm in your Chapter 7,  and later the loan is foreclosed, you are on the hook for any unpaid balance that is still due and owing to the bank.

Maybe the lawyers think their clients have to reaffirm to keep the house.

Not so!

Certainly not in Michigan, foreclosure law is state law, so check with a lawyer licensed in your state, but, if you keep making the payments, and keep insurance, and pay the taxes, there will be no foreclosure.

The mortgage companies have too many houses already; they do not want more.

And homes in Michigan continue to decline in value, and probably will keep doing so for, as they say, the foreseeable future.

Over half the homes in Michigan, that have a mortgage, are underwater.

So why would you sign a paper that keeps you liable on what is probably your biggest debt?

A debt that is likely to grow, even as you continue to make payments?

What I mean is, the value of your home will probably go down faster than the principal gets reduced by your payments.

Reaffirming a second mortgage makes even less sense.

The second cannot get your house unless they pay off the first.

Not likely that will happen.

In my view, if you reaffirmed in a Chapter 7, and you get sued by that bank after your bankruptcy, you have grounds for a malpractice suit against your bankruptcy lawyer.

Did You Reaffirm Your Mortgage?

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Reaffirming is the only way to remain liable on a debt that is otherwise dischargeable in a Chapter 7 bankruptcy.

At least in Michigan, signing a reaffirmation agreement is never a good idea, unless the bank is changing the terms to your advantage.

If you keep up the taxes and insurance, and make the payments, the bank cannot foreclose, you keep your home without the risk of being sued if someday you can no longer make the payments.

(Hey, I like this photo, so I used it on both my blog sites)

So, it says here, reaffirming a mortgage is malpractice.

Even if you reaffirm, bankruptcy law allows the debtor 60 days to change his mind.

Just file a rescission of the reaffirmation agreement, you are off the hook, and it is just like you never signed.

This process was added to the law in 1979.

In the bad old days, if a creditor tricked you into paying even one cent on a debt discharged in bankruptcy, that revived the entire debt, just as if you had never filed.

So the reaffirmation process was instituted to protect debtors.

A recent Tennessee case shows some debtors may need protection from their lawyers.

Not only did this attorney have his clients reaffirm a mortgage, he botched the rescission of the agreement, after his clients decided to give up their home.

In re Graham, 430 B.R. 473, (E.D. TN 2010) involved a reaffirmation of a mortgage with a credit union, of a second mortgage, for $27,230.22.

Why this was done, I have no idea.

A second mortgage cannot take your house unless they pay off the first mortgage.

Not likely these days.

Hey, if you like your credit union, and want to send them your money, by all means, have at it.

But you can send any creditor money, without signing a reaffirmation that legally binds you again, and allows the creditor to sue you if you don’t hold up your end of the agreement.

Just to complete the idiocy, the debtors apparently kept their checking and savings accounts at the credit union.

So, after they signed the reaffirmation, but before the creditor got around to filing it with the court, they changed their minds, and filed an amended Statement of Intent that they were surrendering the house.

The bankruptcy court held, that amended form is NOT a rescission, so the credit union can seized the debtors’ accounts, and do whatever else is legal in Tennessee to collect the $27,230.22 they now owe on a house they gave up.

Rescinding Reaffirmation

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After you file Chapter 7 bankruptcy, you may be asked to reaffirm your mortgage.

Asked by who?  Why, the mortgage company, of course.

Here in Michigan, most homes with mortgages are underwater, worth less than what is owed on them.

So, you file Chapter 7 bankruptcy, your house is worth $100,000, and you owe $#120,000 on it.

This is a time you can walk away from the house, you will be discharged in the Chapter 7 bankruptcy from having to pay anything on the mortgage note.  (Unless the mortgage company sues you in the bankruptcy court, by filing an adversary proceeding and proving you committed fraud in obtaining the mortgage)

But, like most of my clients, you want to keep your house.

Of course, you have to be able to make the mortgage payment after your Chapter 7 bankruptcy.

And keep paying the taxes and keep it insured, just like you did before you filed bankruptcy.

Do you have to reaffirm, to sign a binding reaffirmation agreement, that makes you personally liable on that mortgage note as if you had never filed bankruptcy?

No.

I have yet to see a mortgage company in Michigan foreclose on someone who was keeping the taxes and payments made, and had the home insured, just for not signing a reaffirmation.

It borders on malpractice for an attorney to sign off on a client reaffirming a debt that is more than the value of the home.

I look at upside, downside.

I see no downside to not reaffirming.

Now, some of the mortgage companies say they will not tell the credit reporting agencies that you are making the payments on time.

So?  You have the right to include accurate information in your credit report.

You can add that at least once a year, yourself, without them.

They are required to give you at least annual statements.

The downside?

You sign, something else goes wrong, and you cannot make the payments, they foreclose for the $100,000 the home is worth, and sue you for the $20,000 difference.

Unless they are giving you some fantastic modification, DON’T DO IT!

In Chapter 7 Bankruptcy, Reaffirm My Mortgage?

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