News You Can Use
Myth #1: If I’ve already received a foreclosure notice, it’s too late to save my house.
Too often, people become resigned to their fate once they receive a foreclosure notice from the mortgage company. Whether you have a variable-rate mortgage with monthly payments that have ballooned beyond your reach, or whether you’ve simply fallen a few payments behind, you still have options – both inside and outside of bankruptcy. A few of those options include:
(a) Reinstating the mortgage. If you now have the funds to make up the missed payments, usually through a lump-sum payment that includes interest and late fees, you may ask the mortgage company to let you reinstate your mortgage. When that happens, on curing the arrears you are restored to good standing under the same contract terms as before.
(b) Forbearance. In some instances, if you don’t have enough money to pay all past-due amounts, the mortgage company may allow you to continue making your regular monthly mortgage payments, plus an additional amount per month that is designed to “catch up” the mortgage arrears over a period of time.
(c) Loan modification. Times are hard. A recent report stated that nearly 25% of all mortgages in Michigan are currently in foreclosure. Combined with the sluggish housing market, conditions are ripe for mortgage companies to find creative ways to bring existing customers back into good standing. With loan modification, the mortgage arrears might be added to the back of the loan, the loan term might be extended, or the interest rate might be adjusted, with the end result that your monthly mortgage payments are lower. Depending on your current financial circumstances and your payment history with that particular lender, if you have a house that you definitely want to keep, then loan modification is one way to do that.
(d) Michigan’s “Step Forward” Mortgage Rescue Program. There are significant grant monies available to help Michigan residents avoid foreclosure and stay in their homes. If you’re currently unemployed, the program may contribute up to $20,000 to cure your mortgage arrears and may pay up to one-half of your regular monthly mortgage payments for a year. If you’ve recently experienced financial hardship but are now recovered, you may be eligible for a one-time payment of up to $20,000 to help reinstate your mortgage. Or if you’re underwater, that is, you owe more than your house is worth, the program may “pay down” up to $10,000 of your mortgage balance (with up to $10,000 in matching funds from your lender), thereby improving your ability to obtain a mortgage modification and lower your monthly payment. To find out more about the specific programs available and whether your mortgage company is a participating lender, go to www.stepforwardmichigan.org.
(e) Bankruptcy. If you file bankruptcy, as long as the sheriff’s sale has not yet taken place, the mortgage company must stop its foreclosure proceedings – at least temporarily. Filing bankruptcy gives you time to discuss your options with the bank. Usually, in a chapter 7 case, you must bring your mortgage payments current to keep the house. But in a chapter 13 case, you may resume making your regular monthly mortgage payments while curing any arrears over the life of the repayment plan. What’s more, if you happen to have a second or third mortgage that is wholly unsecured (i.e., your home is worth the same or less than what you owe on the first mortgage), you may actually be able to get rid of the second or third mortgage by the end of the plan. It’s called “lien stripping,” and it’s perfectly legal under the right circumstances.
Myth #2: If the bank takes my house or repos my car, I’ll still owe the bank for any loan amounts not covered by selling the collateral.
Whether this statement is true depends on whether you file bankruptcy or not. If you do not file bankruptcy, and if the bank does not receive enough money from the sale of your home or car, then you remain liable for any deficiency in the sale proceeds. In that case, the bank can sue you for the difference and can garnish your wages if you’re working.
But if you file bankruptcy, even if the bank does not receive enough money to pay off the loan with the sale proceeds, you are no longer personally obligated to pay the loan. It doesn’t matter how much money the bank gets from a later sale of the home or car, you will never owe another dime on that mortgage or car loan.
Myth #3: It’s harder to file bankruptcy or less people qualify for bankruptcy since the laws changed in 2005.
Not true. While there was a sharp upswing in bankruptcy filings immediately before the bankruptcy reform laws took effect, followed by a sharp drop immediately afterward, the decline was not necessarily because fewer people qualified for bankruptcy. Bankruptcy filings went down 70% from 2005 (the year bankruptcy reforms took effect) to 2006, but filings went back up 38% from 2006 to 2007. And filings in March 2008 were up 30% from March 2007.
So what does all this mean? It means that it took attorneys, judges, and trustees some time to figure out the new laws and how to interpret them. While there are a few more technical hurdles – and definitely more paperwork – the general bankruptcy process is the same as it always was. In fact, most consumer attorneys agree that the bankruptcy reform laws really haven’t changed the kind of case that gets filed: if a person would have qualified for a chapter 7 case in the past, that person would still qualify for chapter 7 case now. Below is a summary of some of the major changes implemented with the reform laws:
(a) Credit Counseling and Debtor Education. There are now two “counseling” sessions that every debtor must complete before receiving a bankruptcy discharge. These counseling sessions are offered through an approved provider (your attorney will give you a list of approved providers or you can follow the links to the U.S. Trustee’s office found on my Helpful Links page), and a certificate of completion must be filed with the court for each session.
The pre-filing counseling session usually involves a toll-free telephone call or completion of an online questionnaire. During that process, you will be asked about your debts and your budget. Some providers will discuss whether you qualify for a debt-repayment plan, but most just complete the forms and forward the certificate to your attorney. The pre-filing counseling must be completed before you file bankruptcy and must be filed with the other bankruptcy paperwork. The certificate is good for 6 months, so you can complete the session anytime within the 6 months before you file. If you’re leaning toward bankruptcy, it doesn’t hurt to get this counseling session out of the way early.
The debtor-education course is usually completed online, although it can be mailed to you as well. It usually involves reading through some materials on smart money management and completion of a multiple-choice test. Or, in the case of the provider that I use, you watch a DVD and fill out a “code sheet” that proves you completed the course. When this process is complete, the provider again sends the certificate of completion to your attorney for filing with the court. The debtor-education course must be completed sometime after you file bankruptcy but before you receive a discharge.
The cost of these two counseling sessions varies by provider. The cost can range from $25-50 for credit counseling for one person, and from $15-50 for debtor education for one person. Some providers charge slightly more for a married couple to complete the training together, while other providers just charge one price regardless of whether an individual or a couple is taking the course. Also, if your income (based on family size) is at or below 150% of federal poverty guidelines, you may qualify for a waiver of the counseling fees. This must be discussed with the provider at the beginning of the session, and the final charge is determined by the provider.
(b) Completion of a “Means Test.” The bankruptcy reform laws created a new form called the “means test.” In theory, the purpose of the form was to screen out individuals who were filing a chapter 7 case when they actually had enough money left over each month to participate in a chapter 13 repayment plan. The form starts by computing your average monthly income over the last 6 months and compares that number to the state median income for your family size. If you make more, then you have to complete the rest of the form to determine how much money you have left over (in an average month) after deducting certain allowed expenses. The concept is similar to completing a tax return (and sometimes just as painful!). If you make less than the state median income for your family size, then you can go ahead and file a chapter 7 case. This form is very complex, and you should have a bankruptcy attorney who keeps up on recent bankruptcy litigation to help you complete the form in a way that benefits you most.
(c) More Time Between Bankruptcy Filings. If you’ve filed a bankruptcy in the past, you may have to wait longer before you can file again. You must wait 8 years between chapter 7 cases, and 2 years between chapter 13 cases. But if you filed a chapter 7 case before and want to file a chapter 13 case now, you only need to wait 4 years. And if you filed a chapter 13 case before but want to file a chapter 7 case now, you have to wait 6 years. Got it? There are exceptions to these rules, but that’s another topic that is best discussed with your attorney. You should always be up front about the fact that you’ve filed bankruptcy before.
(d) More requirements if you want to keep collateral. “Collateral” is any property that is pledged as security for a loan. If you default on the loan, the bank has the right to repossess the collateral and sell it to pay off all or part of the remaining loan balance. Outside of bankruptcy, if the sale proceeds are insufficient to pay off the loan balance, the bank can sue you for any deficiency (the amount that remains unpaid). But if you’ve filed bankruptcy, your right to keep the collateral and whether you owe any deficiency after repossession depends on the steps you elect to take in your bankruptcy.
In the “old days,” if you wanted to keep your car after filing bankruptcy, all you had to do was keep making your regular car payments. This was called “retain and pay” or “ride through.” And if you later defaulted in your payments, the bank could only repossess the collateral – it could never sue you for any deficiency.
But based on the reform laws, you now have more limited options: (1) you can “redeem” the collateral by making a lump-sum payment to the bank that is equal to the fair market value of the collateral (there are even some companies that offer financing to individuals in bankruptcy expressly for this purpose); (2) you can “reaffirm” the debt, which amounts to entering into a new promise to pay the entire amount of the debt even if you default after bankruptcy; or (3) you can surrender the collateral without any further obligation to make payments or pay any deficiency on the loan. For most individuals with car loans, option (2) is the most likely choice for keeping the collateral. The downside is that if you later default on the loan and the bank repossesses the collateral, you may be personally liable for any deficiency in the sale proceeds.
Most practitioners agree that you can still keep your home (if you’re current in your mortgage payments) without reaffirming the debt. But there are pros and cons to doing so. If you do not reaffirm your mortgage, many lenders refuse to send monthly statements and will no longer report your on-time payment history to the major credit bureaus. (Although you can dispute any inaccurate reporting and update your payment history directly with the credit bureaus from time to time.) But if you do reaffirm your mortgage, the bank is more likely to report the loan to the credit bureaus as being in good standing. Some mortgage companies even require that you reaffirm the debt before they will discuss a long-term mortgage modification with you.
The decision regarding whether or not to reaffirm a debt is an important one that should be discussed with an experienced bankruptcy practitioner.
(e) More debts are nondischargeable in bankruptcy. The reform laws have made it nearly impossible to discharge student-loan debts unless you are permanently disabled and have no hope of ever repaying the debts. While many hope that the federal government will adopt new legislation to deal with this burgeoning national debt crisis, for now you can expect to be saddled with repaying your student loans indefinitely, even if you file bankruptcy. (However, if you have student loans that are serviced by the U.S. Department of Education, you may qualify for a disability discharge after 3 years of continuous disability, even without filing bankruptcy.) Even though student loans are generally nondischargeable, you may be able to force the bank to accept a different, more favorable repayment schedule while you complete a chapter 13 repayment plan.
In a chapter 7 bankruptcy case, most debts assumed in a property settlement or final divorce decree are also nondischargeable (i.e., you would still have to reimburse your former spouse for those debts), as long as the court order contains a “hold harmless” provision. But in a chapter 13 bankruptcy case, debts assumed in a divorce proceeding are usually dischargeable.
Finally, if you own a home that the bank simply refuses to foreclose on, you may still be liable for homeowners association dues or condo fees that arise after you file bankruptcy, even if you stop living there or offer to give your home back to the bank. You can’t force the bank to “take back” your home, and this change to the Bankruptcy Code has created serious financial hardship for the unwary homeowner filing bankruptcy.
If you have the kinds of debt discussed here, you should talk to a bankruptcy attorney to find out whether and under what circumstances the debts might be dischargeable.
Myth #4: If I file bankruptcy, I won’t be able to get new credit for 7-10 years.
This is probably one of the most enduring myths about bankruptcy. Like many myths, it’s partially grounded in fact. That’s because negative credit history remains on your credit report for 7-10 years. By law, credit reporting agencies must remove entries that are more than 7 years old. But that doesn’t always happen – and if you have good credit in the distant past, of course you wouldn’t object to that credit remaining on your report indefinitely! But bad credit needs to be removed in a timely manner. If it isn’t, your FICO score will not increase as it should over time.
I provide my clients with detailed information about how FICO scores are calculated; how to go about disputing inaccurate, incomplete, or misleading entries on your credit report; and how to establish new credit in a way that allows your FICO score to recover as quickly as possible from bankruptcy.
One common mistake people make when they’ve filed bankruptcy is to say, “No more credit for me – it’s cash or nothing!” But living on a cash basis will leave your FICO score where it ended up after bankruptcy. Since your FICO score is a measure of your credit risk in the future, if you do not rebuild your credit (by cleaning up your credit report, establishing new credit, and always paying early or on time), then there is no basis for determining whether you’ve recovered from the financial conditions that caused your bankruptcy in the first place.
FICO scores affect many areas of our lives, beyond merely getting new credit. Did you know that insurance premiums in Michigan are based, in part, on your FICO score? A lower FICO score means you may end up paying more for your car insurance – regardless of your driving record or accident-free past.
But if you use the right techniques, you should be able to get a new secured credit card or secured line of credit immediately after filing bankruptcy, a new car loan within 6 months to a year after filing bankruptcy, and a new or refinanced mortgage within 3 years of your bankruptcy discharge. If you file a chapter 13 case and make all of your plan payments on time for 12 consecutive months, you may even qualify for a mortgage buyout or a new home mortgage while you’re still in bankruptcy! The point to remember is that, although filing bankruptcy can be painful – it feels like defeat, darn it! – it’s not the end of the road. In fact, it’s a fresh start.
Myth #5: If I’m married, my spouse and I must file bankruptcy together.
False. If you’re married, you have the option of filing bankruptcy jointly (husband and wife file one bankruptcy case) or individually (only one spouse files). Although a married couple may file a joint bankruptcy petition, you can never drag an unwilling spouse into bankruptcy.
To determine whether a joint bankruptcy case is right for you, you must look at your debts: does one spouse owe most of the debts or are both spouses equally indebted? Generally, if only one spouse has most of the debts, only that spouse needs to file bankruptcy. If most of your debts are jointly held (i.e., your spouse is a co-borrower, cosigner, or guarantor), then a joint bankruptcy petition may be the best way to go.
The kind of bankruptcy you file also makes a difference. The moment you file bankruptcy, you’re protected by the automatic stay. The “stay” is simply a court order that prevents all creditors from taking any further steps to collect from you. No one can call you, send a letter, sue you, garnish your account, or even send you a billing statement after the stay is in effect. If a creditor does violate the stay, you can ask the court to award sanctions, including your attorney fees. In some cases, you can even get punitive damages. The stay is one of the most powerful tools in your bankruptcy arsenal, and I take every step to make sure that it is strictly enforced.
But the extent of protection offered by the automatic stay is different, depending on whether you file a chapter 7 case (straight bankruptcy) or chapter 13 case (wage-earner repayment plan). If you’re married and only one of you files a chapter 7 case, then the stay only protects the spouse who filed bankruptcy. That means that if you and your spouse are jointly responsible for any debts, your creditors can go after the non-filing spouse for payment. Not a nice scenario. But if only one spouse files a chapter 13 case, the stay protects both the filing spouse and the nonfiling spouse who may be jointly responsible for the debts. That way, the repayment plan dictates how your creditors will be paid and your creditors can’t hound the nonfiling spouse while the plan is in place.
Even if you are contemplating or are currently going through a divorce, it may be beneficial to file a joint bankruptcy case with your soon-to-be former spouse. This can be done any time before the divorce is finalized. It eliminates the often-frustrating task of dividing the debts between you and allows you to focus on more important things like spousal or child support, or simply restructuring your budget as a single individual.
Whether you should file bankruptcy jointly with your spouse is an important question to discuss with your attorney before any paperwork is completed.
Myth #6: If I file bankruptcy, I’ll have to give up all my property.
So many people are worried that they’ll lose their property if they file bankruptcy. Sometimes, it causes people to do dumb things – like transferring title over to someone else or giving away property on the eve of bankruptcy. It is never a good idea to hide or transfer assets on the eve of bankruptcy. Nor should you pay off certain creditors that you don’t want to include in the bankruptcy or repay loans from family members – these are called preferences, and the bankruptcy trustee can sue the creditor (or your family member!) to get those payments back.
Essentially, you can’t pay any one creditor more than $600 in the 90 days before filing bankruptcy (unless you are making regular monthly payments and don’t deviate from the payment schedule). Also, you can’t pay any family member more than $600 in the year before filing bankruptcy. If you’ve done either of those things, you need to discuss with your attorney how to handle the situation in your bankruptcy. Don’t try to undo unwise payments or transfers without talking to an attorney first.
The good news is that the Bankruptcy Code allows you to keep a lot of property, so that you can truly get a fresh start. If you’re an individual, you can exempt (keep out of the bankruptcy estate) up to $22,975 in home equity, up to $12,250 in household goods and furnishings, up to $1,550 in jewelry, and up to $3,675 of equity in a car. If you don’t use all of your homestead exemption, you can also keep an additional $12,725 worth of property. And if you file a joint bankruptcy petition with your spouse, you can basically double those amounts!
The smartest thing to do is to fully disclose everything you own to your attorney, and let your attorney help you decide the best way to protect and keep the property you value most.
Myth #7: I can pick and choose which debts I want to file bankruptcy on.
I can’t tell you how many times I’ve had someone tell me that they just want to “file bankruptcy on their credit cards,” or that they don’t want to “file bankruptcy on their house.” The cold, hard fact is that if you file bankruptcy, you must list all of your debts (i.e., you must list all people you owe money to), regardless of whether the debt involves your home or whether you owe the money to a family member. To exclude a debt from your bankruptcy may result in a federal felony conviction and deprive you of the discharge you so desperately need! The important thing is to disclose all of your debts to your bankruptcy attorney and discuss the best way to protect family members, keep your home and car (if you so desire), and get the fresh start you deserve. With proper pre-bankruptcy planning, you can usually “have your cake and eat it too.”