How Bankruptcy Can Help if You are Behind on Your Mortgage Payments

If you happen to fall behind on your mortgage payments, then filing Bankruptcy may provide an option to help you catch up and get current on your mortgage.  Specifically, a Chapter 13 Bankruptcy will help the debtor reorganize their creditors and provide for the mortgage arrears to be paid out over a period of 36 to 60 months.  In addition, the Bankruptcy filing would prevent or delay an upcoming foreclosure if the case is filed prior to the sale date. 

Once a debtor files for bankruptcy, an automatic stay is immediately put into place.  The automatic stay, as provided under Section 362 of the Bankruptcy Code, prohibits creditors from continuing collection activity against the debtor during their bankruptcy case.  After the bankruptcy case is filed, the debtor, who may be at risk of foreclosure, must make payments to their Chapter 13 Trustee according to the terms of their Chapter 13 Plan.  The Chapter 13 plan will provide for the payment of the mortgage arrears, along with other creditors if applicable depending on a case by case situation.  If the debtor fails to make the payments according to the Chapter 13 Plan, then the bankruptcy court dismiss the case, or the creditor may petition the court to allow foreclosure proceedings to resume.

Chapter 13 allows the debtor to reorganize their debts and pay them off through a three to five year repayment plan.  If the debtor continues to pay each month, then filing for a Chapter 13 bankruptcy will provide an efficient way to prevent foreclosure and catch up on missed payments.  The debtor must be able to pay the Chapter 13 Plan payments and their regular mortgage payments each month, depending on the jurisdiction which their Bankruptcy case is filed. 

Filing a Chapter 13 bankruptcy is extremely beneficial if you are behind on your mortgage payments.  Due to the automatic stay, creditors will be unable to continue collection activities. You can focus on reorganizing your debts and create a payment plan that will satisfy all of your creditors. 

Can Creditors Harass You After You File Bankruptcy?

When you file bankruptcy, an automatic stay is put into effect under Section 362 of the Bankruptcy Code.  The automatic stay prevents all collection activity while the bankruptcy case is active without an order of the Court.  The protection provided by the automatic stay prohibits creditors from contacting the debtor, which allows the debtor to have some breathing room during the bankruptcy process.  

Creditors will receive a notice from the Court that the debtor has filed for bankruptcy.  However, some creditors ignore the bankruptcy case and continue to call or pursue collection activities.  If this occurs, the creditor is in violation of the automatic stay.  If a creditor initially violates the automatic stay, then it is likely out of error.  Generally, the debtor informs the creditor of the open bankruptcy case, which will stop all further calls.  If a creditor continues to call after they have received the notice of bankruptcy filing and after the debtor has informed them of the bankruptcy case, then the debtor should notify their attorney or the bankruptcy court. The bankruptcy court has the power to sanction creditors for violating of the automatic stay, which could result in fines or monetary damages against the creditor.  

Under Section 362 of the Bankruptcy Code, the creditor is absolutely prohibited from harassing the debtor after a bankruptcy case has been filed.  The automatic stay was put in place upon filing, and creditors who violate the automatic stay could face sever ramifications.

Should I Take Money Out of My 401K to Pay Off Debts?

Your retirement fund, also known as 401K, is something that you work your entire life for. The last thing you want is for bankruptcy to swipe all of your retirement savings out from underneath you. Luckily, under state and federal law, your 401K plan is considered “exempt” or a protected asset in bankruptcy. No creditor can legally touch any funds in your 401K.

However, under no circumstances should you ever take money out of your 401K to pay off debts or use as cash to cover everyday expenses. Money that you pull out of your 401K is not protected if you file for bankruptcy and it will eventually have to be paid back into your retirement plan or it will be taxed. Therefore, your bankruptcy trustee will treat the money that you loaned from your 401K as a debt obligation.

In addition, money withdrawn from your 401k or other retirement account will count as additional income for income tax purposes as well as income to determine your eligibility for filing bankruptcy.  If you withdraw from your 401k within six months from filing bankruptcy, the withdrawal will be used in the calculation for means tests purposes.  Prior to touching your retirement, consult with your attorney or account to make sure you understand the potential ramifications.   

Be very careful if you are considering taking any money out of 401K. Not only may hinder your bankruptcy case, but it can also affect your taxes. If you take funds out of your 401K then you will be taxed on the amount at a higher rate, and if you take a loan from your 401K, then you will be charged interest that is going back into your retirement account (so you are essentially paying yourself back). If you need to retrieve access into your 401K balance early, then you are probably in a jeopardizing financial situation and will most likely not have the means to reimburse your 401K at a later date. 

Delay on Foreclosure due to Chapter 13 Bankruptcy

Foreclosure on homes often happens when lenders want to retrieve the remaining balance of a loan from the homeowner who has stopped making payments. Normally, the lenders will not begin the legal process until the homeowner skipped out on 3 or 4 months worth of payments.  Keep in mind, the foreclosure process varies in each state.  In Texas, foreclosures only take place on the first Tuesday of the month.  In addition, the creditor must provide certain notices informing you of the sale prior to any foreclosure date.  Although there are loss mitigation options available through some lenders, Chapter 13 Bankruptcy also provides an option to delay or prevent foreclosure while providing an avenue for you to catch up on the mortgage arrears.

Chapter 13 is often called “Reorganization Bankruptcy” because it allows you to reorganize your debts and prepare a payment plan. If your home is being foreclosed, then you can file for Chapter 13 and extend your repayment length.  Typical Chapter 13 cases range from 36 to 60 months and arrange monthly payments to your priority, secured, and in certain situations, unsecured creditors.  For many, Chapter 13 provides a beneficial option for people to catch up on the arrears by including the arrears in the Plan and spreading the amount out over five years.  While in Chapter 13, all payments must be made on time, including the regular on-going mortgage payments if they are not part of the Bankruptcy Plan. When the debtor completes all plan payments, the arrears on the mortgage will be cured and the debtor will exit the bankruptcy current on their mortgage.  

Will Filing Bankruptcy Effect my Job?

The stress of filing for bankruptcy is extremely hard on individuals and families. Most individuals going through the bankruptcy process are stressed, tired of creditors calling and just want to get their financial situation in order. The last thing that you want to worry about the effects that bankruptcy has on your job and employment opportunities.  

If you file for a Chapter 7, then most employers will not find out about the case.  While Court documents are typically public information, the only way an employer will generally find out is if you tell them, or if a creditor has began the process to garnish your wages.  Although there is no wage garnishment in Texas for consumer debt, filing for bankruptcy will stop withholding your wages. If you file for a Chapter 13, then there is a possibility that the judge will order your Chapter 13 payments to be deducted from your earned income. In that case, your employer will be notified.

Filing for bankruptcy has no impact on your employment.  According to 11 U.S.C. § 525(b), no private employer may terminate employment, or discriminate, against an employee for filing bankruptcy. You cannot get fired nor will you be refused a position due to filing for bankruptcy. However, it may be wise to speak to your employer about your financial situation. Some people who have a lot of debt or are considering bankruptcy have a lot of weight on their shoulders. Being open and honest with your employer will allow them to create an environment that is comfortable for you to resolve your personal matters. 

Can a Bank Freeze Your Account After Filing Bankruptcy?

Filing bankruptcy does not “stop” or “freeze” your finances. The bankruptcy law recognizes that you have an on-going need to pay for gas, food, the rent, etc. This implies money is available, which can be a problem if the money is in a checking or savings account at a bank where you owe money.

When Your Bank is a Creditor

After you file bankruptcy, if you have a deposit account at a bank where you owe money, the bank has a right of setoff. Simply, the bank may be able to apply money from your checking or savings account to pay a bank-held debt, like an overdraft or a defaulted loan. The 1995 US Supreme Court case of Citizens Bank of Maryland v. Strumpf, 516 US 16 (1995) holds that a bank can freeze an account and withhold funds so that it has time to make a request for setoff from the bankruptcy court. Once an account is frozen for setoff purposes, the money is likely gone for good.

If you have a deposit account at a bank where you owe money, it is probably a good idea to switch banks before filing bankruptcy. You should keep the old bank account open, but only maintain a small balance. Remember to change any direct deposit to the new bank account and cancel all monthly direct debits.

When Your Bank is Not a Creditor

When a bankruptcy is filed, the clerk of the court sends a notice to the bank regarding the case. It usually takes a few days for the bank to receive notice, however some larger banks compare the list of recent bankruptcy filings against their accounts. If an account holder has filed bankruptcy, some banks will freeze the account immediately, whether it is owed money or not. Wells Fargo Bank reportedly does this, calling it an “administrative hold.” However, many courts are finding that Wells Fargo’s practice is a violation of the automatic stay, since Wells Fargo does not turn the money over to the bankruptcy trustee nor seek direction from the bankruptcy court. See Mwangi v. Wells Fargo Bank, N.A., 432 B.R. 812 (B.A.P. 9th Cir. 2010); see also In re Weidenbenner, 521 B.R. 74 (Bankr. S.D. N.Y., 2014)(distinguishing Strumpf saying that because Wells Fargo was not a creditor in the debtors’ case, it had no setoff right and could not freeze the debtors’ bank accounts).

Filing Tax Return after the Deadline May Lead to Bankruptcy Trap

A troubling trend has now turned into a full-blown minority opinion in the bankruptcy world. Some bankruptcy and appellate courts are reading the Federal Bankruptcy Code to exclude late-filed tax returns from the definition of a “tax return.”

It has long been held that recent income tax debts are not dischargeable in bankruptcy, but older tax debts (that otherwise qualify under the Bankruptcy Code) may be discharged. Some courts, including the First, Fifth, and Tenth Circuit Court of Appeals, now find that changes to the Bankruptcy Code in 2005 exclude certain late-filed returns from discharge. These courts point to a “hanging paragraph” located at the end of Section 523(a) which defines a “return” as a tax filing “that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” That paragraph specifies that returns filed by the IRS with debtor cooperation under 6020(a) are “returns,” but those filed by the IRS without debtor cooperation under 6020(b) are not.  

Recently the First Circuit in the case of In re Fahey, --- F.3d --- (1st Cir. Feb. 18, 2015), joined other courts in finding that “applicable filing requirements” includes meeting the tax filing deadline. In other words, a late filed return, even by as little as one day past the deadline, is not a “return” and is therefore not a dischargeable debt in either Chapter 7 or Chapter 13.

The First Circuit joins the Fifth Circuit (McCoy v. Mississippi State Tax Comm'n, 666 F.3d 924 (5th Cir. 2012)) and the Tenth Circuit (In re Mallo, 2014 WL 7360130 (10th Cir. Dec. 29, 2014)) in finding that the plain language of the Bankruptcy Code directs this interpretation. Basing its decision on plain language, the Fahey court found that a tax deadline is an “applicable filing requirement,” thereby rendering a return filed outside that time nondischargeable unless filed under 6020(a). The dissent in Fahey points out that permitting only late-filed returns under section 6020(a) absurdly rewards the tax debtor who sits on his hands and awaits IRS invitation to complete the return while punishing the debtor who voluntarily files his own return even one day late.

Bad Legal Advice Will Not Save Your Bankruptcy Case

When something bad happens in your bankruptcy case, who gets the blame?

You do.

The responsibility for your bankruptcy case is first and foremost squarely on your own shoulders. Your attorney works on your case. It is not your lawyer’s case – it is your case. Sure, when something goes wrong you can complain about your attorney. You may even sue your attorney or cry “foul” to the office of chief disciplinary counsel. Unfortunately, none of that will get you out of trouble.

Just ask Teresa Giudice who is suing her former bankruptcy lawyer for $5 million. The Real Housewives of New Jersey star claims it is the malpractice of her attorney that is responsible for her sentence of 15 months in federal prison for fraud. Giudice’s husband, Joe, was also convicted of federal fraud. But claims of malpractice or a lawsuit against her lawyer will not stop Ms. Giudice or her husband from serving their sentences.

Pointing the finger at your attorney is not usually a defense to a criminal act; in fact, it is often evidence of your own culpability and guilt. Your bankruptcy petition and schedules are signed under threat of perjury. Testimony at a 341 Meeting of Creditors or in court is given under oath and recorded. Signing your name and giving testimony are your own free acts, so be sure that you are stating the full and complete truth.

Consider the case of James Roti. After a creditor obtained a $400,000 judgment against him, Mr. Roti hid his assets and lied to his creditors, to the federal bankruptcy court, and to the bankruptcy trustee. Roti was charged with bankruptcy fraud. At trial Roti testified that his lawyer put him up to it. He argued that he should be acquitted of bankruptcy fraud charges because he was following the advice of counsel, and that his attorney managed the scheme’s details.

The jury rejected Roti’s defense of “not me, him” because it is not a defense at all. In fact, Roti freely admitted committing bankruptcy fraud. Roti was convicted of bankruptcy fraud and of concealing assets from the bankruptcy trustee. He was sentenced to 21 months’ imprisonment.

If you are considering lying, hiding assets, or some other dishonest act during bankruptcy – don’t do it! Once you are discovered you will pay the price and no amount of blaming your attorney will help you. 

Many Americans Walking on the Edge of Financial Ruin

Recently Bankrate.com released a survey suggesting that many American adults are walking the edge of financial disaster. Bankrate surveyed more than 1,000 adults and discovered that 37% had credit card debt that equals or exceeds their emergency savings. 

Credit card debt is old news to most Americans. According to Federal Reserve statistics from December 2014, Americans owe more than $880 billion on credit cards. The average American household (with a credit card balance) owes more than $15,000 to credit cards. 

What this all means is simple: many Americans are living day-to-day hoping that nothing goes wrong. One thing is for certain: unexpected expenses should be expected. A 2014 survey by American Express found that half of all Americans had experienced an unforeseen expense in the past year: 44% reporting an unforeseen health care expense and 46% for car trouble. 

Does this sound like you? 

There are many ways to turn your finances around, including reducing or eliminating monthly expenses; paying off credit cards; contributing to a savings account; or taking extra work or a second job to pay down debts. If your finances are seriously upside down, it is a good idea to obtain a free consultation with a bankruptcy professional before taking extreme actions to correct your finances. Certain provisions of Bankruptcy Code can actually work against the well-intended debtor. For instance:

  • Reducing or eliminating monthly expenses prior to filing bankruptcy may result in an increase of disposable income, which can lead to a greater repayment for unsecured creditors who may be otherwise discharged outright.
  • A debt that is paid off immediately prior to filing bankruptcy may be recouped by a Chapter 7 bankruptcy trustee. This is a common trap, especially when the repayment is to a friend or family member.
  • Contributing to a savings account may lead to non-exempt property that may be taken by a Chapter 7 trustee and distributed to creditors.
  • By temporarily increasing your income to pay down debts, you are also increasing your average income for the six month period prior to filing bankruptcy. This can mean disqualification from filing Chapter 7 or increased monthly payments in a Chapter 13.

 Debt is serious business and major changes in your family finances should be made only after consulting with a seasoned professional. While it is important to “right your ship” and provide for a better financial future for your family, don’t make things worse by acting rashly. Call today for a free consultation with an experienced bankruptcy professional, consider your options, and make the best plan for your family.

Save Money Today

Many families who struggle to make ends meet talk about establishing a family budget and reducing expenses. Some suggest “sacrificing” and “tightening the belt” to save money. While admirable, sometimes it is not necessary to do without in order to save money. Below are three easy ways to immediately save money without changing your lifestyle.

Pay TV

The entertainment world is changing. Last year almost 200,000 Americans cancelled their pay TV subscriptions. More and more people are moving away from pay TV and using internet services such as Hulu, Amazon, and Netflix for cheaper entertainment. The younger a person is, the more likely that person is to watch shows on a wireless device or computer and not subscribe to pay TV. The consequence is that satellite providers, cable companies, and even phone companies are hurting for business.

You can save money today by starting a bidding war for your dollars. Contact Dish TV, DirecTV, your area cable company, and your local phone/internet television providers and tell them that you are willing to subscribe to company with the best deal. Be sure to get the offer in writing (by email or otherwise) and review any contract before signing up.

Cell Phone

The cellular carrier marketplace is crowded. The prize these companies covet is the two-year plan -- the customer that obligates for two years of service. Some companies will even buy out an existing obligation at a competitor, just to earn your business. This all adds up to a powerful bargaining position for you.

If you are a “free agent” without a contract, then you can shop around for the best deal. Be sure to investigate additional hidden discounts such as company or military discounts. If you are not a free agent, research competitor deals that include buying out your contract, then use that information to negotiate better terms with your cellular company’s customer retention department.

Gasoline

Gas prices are lower, that’s good. However, you can still save more money at the pumps by being a watchful consumer. A ten cent difference in price per gallon between filling stations can mean a $1.60 savings for a 16 gallon tank. Fill up once a week and that’s $83.20 a year. “Big deal,” you say? Well, it’s your money.

GasBuddy, a free cell phone app can save you money with each fill up. GasBuddy uses user feedback to track the current prices of local gas stations, making it easy to quickly find the best deal. GasBuddy is especially useful for premium gas, where prices may not be displayed on a road sign and can vary by $.20 or more between stations.