In my last blog I showed how a short sale may be harder to pull off than expected, and how they can be dangerous if you do not get advice from knowledgeable professionals looking out for your interests. Simply put, you should not assume that any particular solution is the right one without knowing all your options. And that means asking whether the reasons you are pursuing one option might or might not actually be better served through a different option.

So here are some sensible reasons to consider doing a short sale:

1. You can’t afford the house anymore and so believe you have no choice but to get out.

If your income has been cut or the mortgage payments have gone up so that you cannot keep up those payments, and yet you can’t sell your house in the normal fashion because it’s worth less than the mortgage balances, then a short sale may be a good way to escape the house and its debt.

But maybe you have important reasons to stay in your home. Your family may benefit from staying for deep personal reasons—such as not leaving your kids’ school district or maintaining family stability. If you leave this home it may be a long time before you would have the financial means to buy again. So there may be ways to lower the cost of keeping your home. A mortgage modification may now be more available than in the last few years because of the recent large mortgage fraud settlement with the major banks, and other improved programs. A Chapter 13 case in bankruptcy court may enable you to eliminate or drastically reduce a second mortgage balance, and either eliminate, reduce, or delay payments on other liens on the house. And either a Chapter 7 or 13 could reduce or eliminate other debts so that you could better afford to pay the home obligations.

2. You’ve heard that bankruptcy does not allow “cram downs” of mortgages on your home. So you see no way out of your second mortgage other than getting them at least a partial payment through a short sale in return for writing off the rest of that debt.

You’ve been doing your homework if you understand that mortgages secured only by your primary residence cannot be “crammed down,” reduced in bankruptcy to the value of that residence, unlike lots of other kids of secured debts.

But there’s a big exception, one that keeps getting bigger as home values continue to decline in many areas. If your home is worth less than the balance of your first mortgage, so that there is no equity at all in your home for the second mortgage, then through a Chapter 13 case you can “strip” this lien off your home. That means that your second mortgage debt can be paid very little—sometimes even nothing—during your 3-to-5 year Chapter 13 case, and then written off completely. This not only saves you from paying the 2nd mortgage payment from then on, it reduces your debt on your home forever, making hanging onto your home economically more sensible. If this second mortgage strip applies to your situation, then you will pay less each month for a home with less debt on it.

3. You may be induced to do a short sale not just because of your voluntary mortgage debts on your home, but because of various other usually involuntary ones which have attached to your home’s title, like one or more tax, judgment, support, utility, or construction liens.

You may have found out that your title is saddled with other obligations, and in fact you may well be under a great deal of pressure to pay one or more of these obligations. The IRS and support enforcement agencies can be especially aggressive. So you would understandably feel that you have no choice but to sell your home to get that aggressive creditor paid. And since you have no equity in your home, you can only sell it on a short sale. But the problem is that the more lienholders you have, the more challenging a short sale becomes. And even if it does succeed, the troublesome lienholder may agree to sign off for less than the balance, leaving you still being pursued by it.

I can’t cover here how a Chapter 7 or Chapter 13 case would deal with each of these kinds of lienholders. That’s a many-blog discussion, and would depend on each person’s circumstances. But often you would have options that would give you more control over your home and over your financial life than would happen in a short sale. Considering what is at your stake, it certainly makes sense to consult an attorney who is ethically bound to explain all the options in terms of your own goals and best interests.

Here to serve,  Catherine King.  530 221 2640.

In a short sale, a house is sold by “shorting”—underpaying—one or more of the lienholders, because the value of the house, and thus the purchase price, is not enough to pay everyone in full. The liens can include not just voluntary ones such as the first and second mortgage, but also judgments, income taxes, support obligations, unpaid utilities, and property taxes. All lienholders must consent and release their liens, or the sale cannot occur. There may or may not be subsequent liability for the homeowners to those lienholders who were not paid in full.

The primary benefit of a short sale is that it avoids a foreclosure on the homeowner’s credit record—that is, it does so IF the short sale is successful. Even so, in the present economic climate there are some indications that there will be less credit record difference between a short sale and a foreclosure. So if you are using this credit record difference as the primary reason try to do a short sale, it may well not be your best course of action.

Short sales have two main problems.

First, they are generally much harder to pull off than expected, taking much longer, and often fail to close, putting the homeowners further behind, with dashed expectations. They usually don’t work because:

• Unhelpful and slow mortgage lenders: To accomplish a short sale, usually the first mortgage holder has to give up some money to a junior lienholder or two. The benefit to the first mortgage holder is that getting a little less out of the sale is better than incurring the delay and cost of foreclosure. But many mortgage companies are not well organized or staffed to handle such negotiations. You are often forced to work through a servicing company, whose financial incentives may well not encourage short sales. So they may drag their heels, and can even sabotage your efforts.
• Since all lienholders must agree, any one of them can kill the deal: Everybody wants their “fair share” of a pie that is too small to make everybody happy. Just when you think you have a deal among the main players , someone else crawls out of the woodwork demanding a payment and jeopardizing the closing. They all have a legal claim against the property, and can delay or undo the whole deal.
• The middlemen have the most to gain: Realtors and others in the real estate sales industry often benefit more from a short sale than you do.  Some “short sale specialists” are indeed expert in this type of transaction, and worth speaking with for their knowledge.

Second, short sales are dangerous:

• Potential liability from unpaid balances on the junior mortgages and liens: Although you may be told that you will not be liable, you need to be sure that the settlement documents and the applicable law in fact cut off any liability. Also be aware that sometimes in the midst of the negotiations, especially if a junior lienholder is playing tough, and the closing has been delayed for a long time, you may be feel forced to accept some liability in order for the closing to occur.
• Potential tax consequences: This issue deserves a whole blog by itself. The key principle is that debt forgiveness can be treated as income subject to taxation unless you fit within one of the exceptions. Make sure you talk with an appropriate tax specialist about this before investing any time or expectations in the short sale options.

Short sales are a tool that may or may not be useful is navigating your real estate strategies for transition or retention.  However, do consult with a bankruptcy attorney and accountant to ascertain the full range of impact for a short sale before committing in that direction.

Here to serve,  Catherine King.  530 221 2640.

Bankruptcy is a federal proceeding governed by federal law, but state law often plays into it as well. This question about stopping wage garnishments is a good example of the mix of federal and state law.

Except in rare circumstances (mostly involving income taxes and student loans), your wages cannot be garnished for repayment of a consumer debt before the creditor sues you in court and gets a judgment. That lawsuit will almost always be in state court, because the jurisdiction of federal courts is limited. The vast majority of the time debtors do not respond to such lawsuits by the legal deadlines, so the creditors win their judgments by default. Once your creditor has such a state court judgment in hand, it must then follow state law in collecting on it.

But states’ garnishment laws vary widely. Most states permit wage garnishment in some form, but a few restrict it to only very select kinds of debts (like child support, taxes, and/or student loans). California does not employ those restrictions however.   laws also differ on what part of a paycheck is subject to compared to the part that is “exempt,” or protected. And laws differ on the details of garnishment procedure, which can become critical as we return to the topic of this blog—how fast a bankruptcy stops a garnishment.

The moment your bankruptcy is filed, the “automatic stay” goes into effect. The filing itself operates as a “stay,” or a stopping, of virtually all collection activity. It operates as an immediate and one-sided court order against creditors, made effective by the very act of filing the bankruptcy case.  So the bankruptcy filing and the automatic stay stops a wage garnishment in its tracks.

If you are subject to garnishment, consult with a qualified attorney to determine if it would beneficial to file bankruptcy to eliminate the garnishment.

Here to serve,  Catherine King.  530 221 2640.

In my earlier blog I said that in keeping with getting a fresh start for the new year, I’d get down to basics.  There’s nothing more basic than getting immediate protection for you, your paycheck, your home, and your possessions. You get this protection the minute a bankruptcy is filed for you, either a “straight” Chapter 7 case or an “adjustment of debts” Chapter 13 one. Other than some very rare exceptions, all efforts by creditors against you or your property must come to an immediate stop. You’ll hear this referred to as the “automatic stay.”

“Stay” is just a legal word for “stop” or “freeze.” “Automatic” means that this “stay” goes into effect simultaneously with the filing of your bankruptcy petition. That filing itself, by virtue of the federal Bankruptcy Code, “operates as a stay” of virtually all creditors’ actions to pursue a debt or grab collateral. It doesn’t take a judge signing an order or even any further action by you or your attorney to impose the stay.

But although the automatic stay is instantaneous, practically speaking the creditors need to know about the filing of your case so that they can abide by the stay. Assuming your creditors are all listed in your schedules of creditors, they should all get informed by the bankruptcy court within about a week or so after your case is filed, without any other action by either you or your attorney. If you are not anticipating any action against you by any of your creditors sooner than that, usually letting them all be informed by the court is appropriate. But if you do expect some quick creditor action, be sure to talk with your attorney about it so you’re both on the same page about informing that creditor.

But what if a creditor unexpectedly takes some action in the days after your bankruptcy is filed but before it finds out about it? The automatic stay is so powerful that if this does happen, the creditor must undo whatever action it took against you, even if it did not know about your bankruptcy filing. So if after your bankruptcy is filed, a creditor, for example, files a lawsuit against you or turns its earlier lawsuit into a judgment, that lawsuit must be dismissed or the judgment must be set aside.

In my next blog I’ll tell you about how long this automatic stay protection lasts. If you can’t wait until that blog, give me a call or set up an appointment to see me. I’ll tell you all about it personally.

Here to help,  Catherine King.   530 221 2640

Most—but not all—debts are written off, or “discharged,” in a bankruptcy case. Is there a simple way to know what will and what will not be discharged?

As part of getting a fresh start for the new year, I’m covering the most basic concepts about bankruptcy in the first few blogs of the year. And there is nothing more basic than bankruptcy’s main purpose, getting a fresh financial start through the legal discharge of your debts.

Both kinds of consumer bankruptcy can discharge debts. But most Chapter 13s tend to have other purposes as well, and the discharge usually occurs only 3 to 5 years after the case is filed. In contrast, most Chapter 7 “straight bankruptcy” cases are filed for the sole purpose of discharging debts. And in most Chapter 7 cases, all debts that the debtors want to discharge are discharged, and it happens within just three months or so after your case is filed. So I’m focusing in this blog on Chapter 7 discharge of debts.

So is there a simple way of knowing what debts will and will not be discharged in a Chapter 7 case?

Sorry. Not really.

Folling however is a list of the categories of debts that can’t, or might not, be discharged (and will give you that list in a couple paragraphs), but some of those categories don’t have clear boundaries, and some depend on whether a creditor is going to challenge the discharge and how a judge might rule.

But why can’t it be simple? Because in the political tug of war between creditors and debtors over the years, there have been lots of compromises, leaving us today with a bunch of hair-splitting rules about what debts can and can’t be discharged.  Believe it or not, the original bankruptcy laws in England did not even include ANY discharge of debt, since bankruptcy was originally designed as a procedure to help creditors collect from debtors.

But I’m making it sound a lot worse than it is in practice. Here’s what you need to know:

#1:  All debts are discharged, EXCEPT for those that fit within an exception.

#2:  There ARE a lot of exceptions, BUT if you are thorough and candid with your attorney you will almost always know whether you have any debts that may not be discharged. Surprises are rare.

#3:  Some debts are never discharged, NO MATTER WHAT: for example, child or spousal support, criminal fines and fees, and withholding taxes.

#4:  Some debts are never discharged, but THAT’S ONLY IF the particular debt fits certain conditions: for example, income taxes, depending on conditions like how long ago the taxes were due and the tax return was filed; and student loans, as long as conditions of “undue hardship” are not met.

#5:  Some debts are discharged, UNLESS timely challenged by the creditor and resulting in a ruling by the judge that the debt meets certain conditions involving fraud, misrepresentation, larceny, embezzlement, or intentional injury to person or property.

#6:  A few debts (used to be many more) can’t be discharged in Chapter 7, BUT can be in Chapter 13: for example, divorce debts other than support.

The bad news: as simple as I would like to make it, determining what debts aren’t dischargeable is simply not simple. But there’s more good news than bad. First, for many people all the debts they want to discharge WILL be discharged. Second, an experienced bankruptcy attorney will be able to predict quite reliably whether all of your debts will be discharged. And third, if you have troublesome nondischargeable debts, Chapter 13 is often a decent way to keep those under control. More about that in my next blog about simple Chapter 13.

For those who have mostly credit card or medical debts, those are typically ALL discharged and if the amount is more than your reasonable budget and/or income can accomodate you may be in the “should or could” category of potential filers.  If you have other types of debt, do see your attorney to determine if in fact you should file – or should not!  If enough of your debt is dischargeable and the financial “weight” of those debts is debilitating then likely you should.  Do give us a call if you are wondering and we can help you analyze your circumstances to determine if bankruptcy is right for you. 

Here to serve,  Catherine King  221 2640.

Eligibility can turn on 1) who is filing the bankruptcy, 2) the kinds and amounts of debts, 3) the amount of income, and 4) the amount of expenses.

1) Who is filing the bankruptcy:

If you are a human being and of age, you can file either a Chapter 7 or 13 case.  If you are married, you can file together or separately.  If you are separated or divorced, you can file as an individual. 

If you are a part owner of a partnership or corporation, that partnership or corporation cannot file a Chapter 13 case. But it can file a Chapter 7 one. And it can do so whether or not you also file one individually.

2) The kinds and amounts of debts:

If you have “primarily consumer debts” (more than 50% by dollar amount), then you have to pass the “means test” to be allowed to be in a Chapter 7 case. (More about that below.)

Chapter 7 has no restriction on the amount of debt allowed. In contrast, Chapter 13 is restricted to cases with a maximum of $360,475 in unsecured debts and $1,081,400 in secured debts.  Your attorney can explain the Chapter 13 restrictions and whether they apply to you.

You can file on any amount of debt whether it be a small number or large.

3) Amount of income:

The “means test” in Chapter 7 is quickly satisfied if your income is no more than the published “median income” for your family size and state.

Chapter 13 requires “regular income,” which is defined in somewhat circular fashion to be income “sufficiently stable and regular” to enable you to “make payments under a [Chapter 13] plan.” Also, if the income is less than the “median income” applicable to your family size and state, then the plan will generally last three years; if the income is at the applicable “median income” amount or more, the plan will last five years.

4) The amount of expenses:

In Chapter 7, if you are not below “median income,” then you enter into a largely mathematical test involving your expenses to see if you pass the “means test” and are eligible for filing a Chapter 7 case.

In Chapter 13, a similar calculation largely determines the amount you must pay monthly into your plan to satisfy the requirements of Chapter 13.

Choosing between Chapter 7 and 13 can often be very simple and obvious. But there are at least a dozen major differences among them, ones that you may well not be aware of. So when you come in to see me or another attorney, be clear about your goals but also open-minded about how to reach them. You may well have tools available that you were not aware of!   If you own property, there are many tools and strategies and solutions in the bankruptcy context which could benefit you significantly to retain your property. 

We are happy to meet with you and discuss your particular situation.  Give us a call to set up a free consultation.  Here to serve,  Catherine King 221 2640.

Ironically, bankruptcy is much the same as New Years.  It gives you a chance to put the financial challenges behind you!  You’ve may have fallen behind with your creditors or are just about to. You’re anxious, trying to avoid thinking about it, angry that life is so tough, trying to build up the courage to face up to the realities. You wonder whether you really have any decent options and then how to figure out the best option and make it happen.

As we start the new year, I wanted to offer some basics about bankruptcy and how it could be an effective tool to give you a “new year” financially!

You’re financially in over your head. You don’t know what to do, or where to get help. To get started, you need 1) some general information and then 2) some personal advice.

1) General Information:

Everyone learns differently and so it is important to pursue basic information in a way that you learn it best.  Internet, books, question friends or family who have similar experience are all valid means of obtaining some general info to help get you thinking about whether you need to start over.

2) Personal Advice:

People thinking about bankruptcy can be reluctant to talk with an attorney for lots of reasons.   But often those reasons are false or misunderstood:

• “If I see an attorney, he or she will make me file a bankruptcy”:   Attorneys are legally and ethically obligated to represent YOU, and to lay out your options honestly, in an understandable way so that YOU can make an informed choice. It’s not my job to make you do anything, certainly not to file bankruptcy. Certainly I’ll tell you if you do not qualify for any particular option. And I’ll advise you why I think certain options look better than others, and may even make a strong recommendation towards a certain option. But the choice is ALWAYS yours.
•  “I’m not really ready to see an attorney yet”:  There is virtually no downside to getting advice early in the process and there are many ways to hurt yourself by getting it late.  It is extremely common for people to come in to see me after they have already acted (or failed to act) in ways that were against their best interest. If on the other hand they see me earlier than necessary, they still get good advice on what they should do in the meantime and they start a relationship with me in case they want to or need to help later.
• “I don’t think I can afford an attorney, and I don’t even know if I need one”:  You may be able to file a bankruptcy by yourself, or take some other appropriate action, but wouldn’t it be good to find out whether in your situation you can or should do so? An effective attorneys job is to give you unbiased, straight talk about your options, including what you can do on your own, how much services would cost if you decide to go forward, and options about how that could be paid. There may be ways that you can afford fees that you did not expect.  Explore your options.

The beginning of the year offers a chance to rethink and plan how this year can be better than the last.  If that includes overcoming financial challenges, don’t hesitate to schedule a FREE CONSULTATION to talk about how I can help you.  In the meantime, Happy New Year!

Here to help,  Catherine King.  530 221 2640

If your most important goal is to preserve your home, here’s how each kind of bankruptcy helps (or doesn’t help) in different circumstances.

1. If you’re current on your home mortgage(s) but struggling to keep that up, and are behind on some or many of your other debts:

Chapter 7:  Would likely discharge (legally write off) most if not all of your other debts, freeing up cash flow so that you can make your house payments. Would also stop those other debts from turning into judgments, which would likely be liens against your home. May also enable you to avoid falling behind on other obligations—income taxes, support payment, utility bills—which could also otherwise turn into liens against your home.

Chapter 13:  Does the same as above, plus is often a better way to deal with many other special debts, such as income taxes, back support payments, and vehicle loans. May be able to get rid of a second or third mortgage.  Is better at protecting assets, if you either have more equity in your home than your homestead exemption allows or have any other “non-exempt” asset(s).

2. If you’re not current on home mortgage(s) but are only very few payments behind, with no foreclosure started:

Chapter 7:  May buy you enough time to get current on your mortgage, if you’ve slipped only two or three payments behind. Most mortgage companies will agree to give you several months—sometimes up to a year—to catch up on your mortgage arrears. That’s a “forbearance agreement”—they agree to “forbear” from foreclosing as long as you make the agreed payments. Tends to work only if you have an unusual source of money (a generous relative or a pending legal settlement that’s exempt from the other creditors), or if the Chapter 7 filing will allow you to stop paying enough to other creditors so you will be able to pay off the mortgage arrearage quickly.

Chapter 13:  Even if you’re only a few thousand dollars behind, you may well not have enough extra money each month to catch up quickly on that mortgage arrearage.  Lenders seldom voluntarily give you more than 10-12 months to catch up, but a Chapter 13 forces them to give you a much longer period to do so—three to five years. That greatly reduces how much you need to pay towards the arrears every month, often turning the impossible into the achievable.

3. If you’re many payments behind on your mortgage(s), regardless whether a foreclosure has started:

Chapter 7:  Not helpful here unless you have some extraordinary means for paying off the large mortgage arrears. Buys only a few weeks of time, at most three months or so (if the mortgage lender chooses to do nothing while your bankruptcy case is pending). Also, cannot get rid of a second or third mortgage.

Chapter 13:  Again, gives you the option of up to five years to slowly but surely pay off the mortgage arrearage, during all of which time your home is protected from foreclosure as long as you maintain the agreed Chapter 13 Plan payments. Assumes that you can at least make the regular mortgage payment consistently, along with the arrearage catch-up payment. Does not, under current law, enable you to reduce the first mortgage payment amount, although again might be able to get you out of your second or third mortgage

If any of this looks like it could provide the help that your home needs, please give me a call. Remember: these are just general rules. There are lots of other twists and turns which may apply to you. To more fully understand the advantages and disadvantages of each option, and to get practical advice about what direction to go, see a qualified attorney. Let us show you how the law may help meet your needs.  FREE CONSULTATIONS

Here to help,

Catherine King   221 2640

Why has this been a problem? The public focus during this long foreclosure crisis has been on the millions of homeowners losing their single family homes. But many of these homes in foreclosure are in fact rented out to others. And there are also many foreclosures of multiunit residences—everything from duplexes to apartment buildings. In fact research by the National Low Income Housing Coalition estimated that “renters represent as many as 40% of the American families who will lose their homes in this crisis.”

While homeowners have long had an established set of protections during the foreclosure process, renters have had virtually none. Renters often had no idea that their landlord had fallen behind on mortgage payments and that their rented home was being foreclosed.  They found out only after the foreclosure sale had occurred and the bank or the new owner shocked them with eviction papers. The “Protecting Tenants at Foreclosure Act” provides at least a modest cushion of time in almost all situations, and the right to the full term of their lease for tenants who bargained for such longer leases.

This straightforward law contains very few exceptions. They are:

1.  It does not apply if the tenant is also the owner of the property being foreclosed, or the owner’s spouse, child, or parent.

2.  The rental agreement must be genuine, and must provide for payment of rent at about fair market value (or with a legitimate governmental subsidy).

3.  If after the foreclosure the new owner intends to live in the home as his or her primary residence, then the tenant must surrender the property after 90 days even he or she has a longer term.

Good news is that this law is temporary in that it was to expire at the end of 2012 but last year’s financial reform law has extended that expiration to the end of 2014.  The extension is telling in terms of the government’s forecast of our foreclosure crisis’s future and duration.

Maybe the most important part of the “Protecting Tenants at Foreclosure Act” is that it sets a threshold standard, but also explicitly states that it shall not “affect the requirements… of any State or local law that provides longer time periods or other additional protections for tenants.” During these last two years many states have recognized the need for tenant protections. If you are a tenant in a house or apartment that you are afraid is being foreclosed upon, contact our office to set up a consultation to discuss this and any other financial concerns you may have.  It’s important to have qualified counsel to strategize how you can regain your financial stability in these economically unstable times.  Here to serve,   Catherine King   530 221 2640.

While not an overwhelming help, it’s a start as they say…Starting in 2012, about 1.6 million student loan borrowers will be able to make smaller monthly payments, and make less of these payments before the remaining balances are forgiven. On October 26, 2011 President Obama announced these improvements to the Income-Based Repayment Plan.

The changes are simple.

1. Monthly payments: Under the Income-Based Repayment Plan, payments are capped “at an amount intended to be affordable based on your income and family size.” The payment amount has been 15% of your disposable income. It is now going down to 10% of disposable income. (Click on the above link for more details on how to determine your disposable income and payment amount.)

2. Repayment term: The current 25-year repayment period is being shortened to 20 years.

Although 20 years is still a very long time, if your income is low enough the monthly payments can be very low, or even $0, meaning that you may not have to pay very much during those 20 years.

Unfortunately, this new improved Income-Based Repayment Plan only applies to people who 1) graduate in 2012 or later, 2) took out their first student loan no earlier than 2008, and 3) will be taking out at least one new federal student loan during 2012 or later. It’s clearly designed for current and future student loan borrowers.

But even if you don’t qualify for the 10%/20-year improved version, the older 15%/25-year Plan can also be very helpful—saving you money right away in your monthly budget, and also potentially saving a lot of money in your lifetime budget.

However, there ARE other limitations: none of this, including the Income-Based Repayment Plan, applies to private student loans. You need to contact your private lender to find out your options. And even if you do have a federal student loan, you cannot be in default on the loan to qualify for this Plan. To find out what type of student loans you have and their default status, go to the National Student Loan Data System for this and related information.

While not a comprehensive solution to crushing student loan debt the new legislation may be of assistance in your circumstances.  As always we encourage you to seek qualified legal counsel if your overall debts beyond student loans are more than you can handle.  Piecemeal solutions to a bigger problem rarely bring true resolution.  Consultation with bankruptcy counsel can give you a clearer picture as to your options and strategies to regain your financial footing.  Here to serve,  Catherine King   530 221 2640.