Texas Bankruptcy Blog : Texas Bankruptcy Lawyer & Attorney : Fears Nachawati law Firm : Chapter 7, Chapter 13, Consumer Bankrutpcy : Dallas, Fort Worth, Austin, Houston, San Antonio

The first few months of the year are a busy time for bankruptcy attorneys. There are two reasons for this: first. First, it is the start of a new year and a good time for a change. The holiday season has passed and families begin making plans for the future. When you take a look at your finances and an ugly pile of unpaid bills is looking back at you, it is probably time to consult with an experienced bankruptcy attorney.

The second reason is tax season. While filing for bankruptcy is cheap compared to many other legal services, finding extra cash to pay court fees, the credit counseling class, and your attorney's fees can be challenging. Many debtors use income tax refunds to pay bankruptcy fees.

The safest advice for a debtor expecting a tax refund is to postpone filing bankruptcy until after you have received and spent your income tax refund. Any expected refund that has not been received is property of the bankruptcy estate. The debtor must account for the expected refund and then apply a legal exemption to protect it. If you underestimate your refund, and do not have enough legal exemptions to protect it, you may lose a portion of your tax refund.

Taxes that have been received and spent before filing bankruptcy are not property of the bankruptcy estate. However, it is important to spend your income tax refund wisely. Any payment of over $600 to one creditor just prior to filing must be reported, and the bankruptcy trustee may ask the creditor to return the money. Gifts or loan payments to friends or family members can also be “avoided” by the trustee. Consult with your attorney before spending your income tax refund.

Tax season is a good time to file bankruptcy. Your income taxes have been recently prepared, and this information is needed for your bankruptcy case. Your attorney can advise you concerning the best time to file bankruptcy. Make your new year a fresh start on a better financial future. 

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 There are many myths surrounding bankruptcy. Fortunately, these myths can be quickly dispelled during a free consultation with an experienced bankruptcy attorney. One of the most serious myths is that an individual with a history of bankruptcy cannot qualify for a home loan. This myth can prevent someone deep in debt from obtaining needed relief.

The truth is that while banks hate bankruptcy, they love federal guarantees. The Federal Housing Administration (FHA) is a government agency that insures certain home loans, and its policy for qualifying for a home loan is very flexible. The FHA will guarantee a home loan after a bankruptcy when:
 

Twenty four months have passed since the bankruptcy has been discharged;
Any outstanding tax liens have been paid or the appropriate arrangements have been made via a repayment plan on file with the IRS or Department of Revenue;
 

Three years have passed since a foreclosure or a deed-in-lieu has been resolved; and
All judgments have been paid.

FHA-insured home mortgages are also available to Chapter 13 debtors during bankruptcy. The debtor must (1) have completed one year of payments as required while under Chapter 13 and (2) must obtain a letter from the Trustee of the court, stating the dollar amount the applicant can borrow.

In addition to the above, individuals must meet the mortgage lender’s criteria. This usually means showing a stable employment history, a manageable debt to income ratio, and a good credit score. Surprisingly, most debtors are able to improve their credit scores quickly after a bankruptcy discharge. Your credit score is weighted heavily on recent events, so when you file bankruptcy your score will immediate plummets. However, the farther you are from your bankruptcy discharge, the better your score will become. Additionally, an absence of credit delinquencies and a solid history of on-time payments after your bankruptcy case will boost your credit score.

Many debtors are able to purchase a home 24 months after a bankruptcy discharge. In many cases home ownership is only possible after debts have been discharged by the federal bankruptcy court. If you are struggling with debt and want to purchase a home, speak with an experienced attorney and learn how the federal bankruptcy laws can help.

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Debt settlement ads are very attractive to individuals struggling with debt. The promise is to reach an agreement you can afford to pay. The debtor agrees to pay a percentage of the debt (usually in a lump sum), and the creditor agrees to release the remaining obligation. Sounds simple, right?

Unfortunately, many times the debtor will receive a nasty surprise in the mail: an IRS Form 1099-C: “Cancellation of Debt.” You see, the U.S. Internal Revenue Service considers forgiven or canceled debt as part of your income. In fact, any creditor who agrees to accept at least $600 less than the original balance is required to file a 1099-C form with the IRS and to send debtors a canceled debt notice. If you have negotiated a debt settlement, you must report the forgiven or canceled debt as income on your federal income tax return. This usually causes a tax debt, since no money was withheld from this "income."

There is an exception to this situation. If you were insolvent at the time the debt was settled, the cancelled debt is not considered income. The IRS instructs the taxpayer to "determine your liabilities and the fair market value of your assets immediately before the cancellation of your debt to determine whether or not you are insolvent and the amount by which you are insolvent." Let's say your net assets after subtracting your liabilities amounts to $5,000. If you negotiate a debt settlement for $10,000, you must pay taxes on the first $5,000 of the cancelled debt. If your tax rate is 25%, you may Uncle Sam over a thousand dollars!

For debtors who have negotiated big savings through a debt settlement company, a large tax debt can be a slap in the face. Owing the federal government is much worse than owing a credit card company. Here are some interesting "facts" about owing the IRS:

* the IRS does not have to obtain a court judgment before garnishing your wages;
* recent tax debts are not dischargeable in bankruptcy;
* the IRS can intercept future tax refunds and even government benefits like social security to pay your income tax debt.

Congress has made sure that all debts discharged during bankruptcy are excluded from "Cancellation of Debt" income. If your debt is discharged, the debt cannot be collected from you in the future, and you owe no taxes on it. If you can afford to repay a part of a debt, a Chapter 13 bankruptcy will allow you to pay what you can afford, over three to five years, and the remaining debt is discharged without a "Cancellation of Debt" tax obligation. If you cannot afford to repay any part of the debt, a Chapter 7 can discharge the debt within a few short months.

Debt settlement often makes a bad situation worse. Before you commit to a settlement process to eliminate your debts, speak with an experienced bankruptcy attorney. You deserve to know all of the consequences before agreeing to any financial program - including any potential tax liability. Your attorney can explain the pros and cons of debt settlement and bankruptcy, and can help you decide on the best course of action.

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From time to time a Chapter 7 client will ask, “Can I keep a credit card with a zero balance?”

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 The bankruptcy automatic stay is an enormously broad and powerful legal protection. The stay is a temporary injunction that prohibits creditors from proceeding with collection actions against the debtor during the bankruptcy case. The bankruptcy debtor is entitled to this protection automatically from the moment the case is filed. Creditors are “stayed” (stopped) from collecting until either the bankruptcy court modifies this injunction, or the debtor receives a discharge.

Before a creditor can proceed to collect on a debt, it must receive permission from the bankruptcy court. This process is commonly referred to as “lifting the automatic stay.” A creditor that does not first obtain this permission acts in violation of the bankruptcy court injunction, and may be subject to federal contempt of court charges.

When a “motion to lift stay” is filed, the debtor is entitled to notice and a hearing. A secured creditor will often file this motion if the debtor is not making payments on the loan. The bankruptcy court generally grants these requests when payments are delinquent and there is no equity in the property. Defending this kind of motion is generally a matter of catching the payments up to date.

In cases where the collateral for a loan is not insured, or there is no assurance that future payments will be made, the creditor may complain that it is not “adequately protected.” These are fair concerns that can be overcome with evidence of insurance and/or evidence of future ability to pay.

Recently debtors have had success in defending motion to lift stay filed by mortgage companies. One common defense is that the mortgage company cannot prove that it is the rightful owner of the mortgage, and therefore is not legally entitled to lift the stay (also known as a “lack of standing”). This is especially true when a mortgage has been transferred several times over the years, and the original note has been lost.

Unsecured creditors and other parties at interest can ask the court to lift the stay. These requests are generally denied when the debt will be included in the discharge. On the other hand, the request is likely to be granted when it is excluded from the discharge. Debts commonly excluded from the bankruptcy discharge include child support obligations, spousal support, criminal restitution and fines.

A motion to lift stay is a common event in the bankruptcy courts and is generally very predictable. In many cases your bankruptcy attorney expects the motion and can discuss it with you even before your case is filed.

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When an individual chooses to file a Chapter 13 bankruptcy, debts are repaid over three to five years. The debtor pays unsecured creditors (e.g. medical bills, credit cards, etc.) whatever he or she can afford during this time, although many debtors end up paying nothing to unsecured creditors. At the end of the case, any remaining unsecured debt is discharged. The debtor can also pay secured debts through the Chapter 13 bankruptcy. Secured debts, like a home mortgage or car loan, are sometimes modified through the Chapter 13 repayment plan, either by cram-down or lien stripping. These bankruptcy tools can be very beneficial because many individuals are upside-down on secured property, meaning they owe more than the property is worth.

During a cram-down the debtor converts a portion of a debt from secured to unsecured status. The amount of the secured debt is “crammed-down” to the actual value of the property. For instance, a $15,000 car loan secured by a $10,000 car can be crammed-down to a $10,000 secured debt. Additionally, a high interest rate may be crammed-down to an interest rate approved by the bankruptcy court. This modified debt is paid over the life of the bankruptcy case. Any remaining unsecured debt receives the same payment status as other unsecured creditors. Cram-down is not allowed on a primary residence or a recent car loan (purchased within 910 days of the bankruptcy filing).

Lien stripping is the conversion of an entire debt from secured to unsecured status. When a lien on property is wholly unsecured, the lien may be stripped off and made unsecured. For instance, assume that a home has three debts: $100,000 is owed on a first mortgage, $20,000 is owed on a second mortgage and $5,000 is owed on a judgment lien for a total of $125,000. Also assume that the fair market value of the home is $99,000. The second mortgage and judgment lien are not secured by any value in the home. The bankruptcy court can convert the secured status of the second mortgage and judgment lien to unsecured status, and these stripped off debts receive the same payment treatment as other unsecured debts.

Lien stripping and cram-down are beneficial features of a Chapter 13 bankruptcy. The debtor can save thousands and keep their property. If you have upside-down loans, speak with an experienced bankruptcy attorney and discuss your options. Your attorney can use the power of the federal bankruptcy laws to improve your financial situation and put you back on the right track. 

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Who hasn’t fantasized about winning the lottery when you are cash strapped? It seems that winning the lottery would solve all of your financial problems.

Not so fast.

A March 2010 study by economists at the University of Kentucky, University of Pittsburgh, and Vanderbilt University suggests that winning the lottery does not reduce the likelihood of a future bankruptcy. The study examined data from 35,000 winners of Florida's Fantasy 5 lottery from 1993 to 2002, and compared this information with state bankruptcy records. The economists found that more than 1,900 lottery winners filed for bankruptcy relief within five years after winning, a rate double that of the general population during the study period. "The results show that giving $50,000 to $150,000 to people only postpones bankruptcy," the authors concluded.

Not every lottery winner will act like Callie Rogers, winner of a $3 million UK lottery in 2003. Callie spent every dime of her winnings on shopping, cocaine, friends and breast augmentation, and two years ago she was working as a maid. But then, Callie was probably not a skilled money manager, like the three co-workers who won a $254 million Powerball lottery in Connecticut. If you are lucky enough to win a large lottery, these professionals offer a blueprint on how to protect your money from yourself.

Financial management may seem like common sense, but Americans have many pressures to spend now and worry about the consequences in the future. It takes a reasoned approach and discipline to make a budget and stick to it. To help educate individuals and combat financial illiteracy, Congress amended the bankruptcy laws to require debtors to complete a course in financial management before the completion of the bankruptcy case. The hope is that by providing a bit of education, the debtor will take a more active interest in managing his or her finances and avoid future costly mistakes.

If you are battling insurmountable debt, don’t wish for a magical cure. Take charge of your finances and educate yourself about your options. Speaking with an experienced bankruptcy attorney is a solid first step in taking control and building a better future. 

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 What an unusual headline: “More Nuns in Bankruptcy Court.” That was the news story on Senior Housing News, a website that reports on the senior housing industry. This story, which was also reported on by Business Week, concerns Clare Oaks, a retirement community in a Chicago suburb. Clare Oaks filed for Chapter 11 bankruptcy protection to restructure its debts. What makes the story newsworthy is that Clare Oaks was founded by The Sisters of St. Joseph of the Third Order of St. Francis, a Roman Catholic religious institute.

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 The bankruptcy laws are confusing and complicated. Fortunately Congress and the US Supreme Court have given us a guidepost by stating that the bankruptcy laws exist to help debtors who are poor and honest. The bankruptcy trustee will investigate your case to determine whether you are both poor and honest. Excess money or equity in property can be taken to pay creditors, and efforts to hide money or assets will be punished. With this in mind, here are three bad mistakes you can make before filing bankruptcy:   

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 It is no secret that creditors want to be paid. Perhaps in a perfect world every debt would be paid in full and on time. Unfortunately, life happens and sometimes individuals are not able to pay their debts. Creditors are aware of this and try to protect themselves with binding contracts and agreements. One clause that regularly appears is the “bankruptcy waiver.” The debtor agrees that he or she will not discharge the debt in a future bankruptcy case.

Waivers of future bankruptcy rights are not enforceable. In drafting the bankruptcy code, Congress expressly stated that the bankruptcy discharge voids judgments and operates as an injunction against the continuation of any action against a debtor personally, “whether or not discharge of such debt is waived.” See 11 U.S.C. § 524(a)(1) and (2). The revision notes explain that this language is “intended to prevent waiver of discharge of a particular debt from defeating the purposes of this section.”

Congress found that it is against public policy to allow waivers of future bankruptcy rights. To do so would undermine the availability of the bankruptcy process, since every loan or extension of credit would contain a waiver of bankruptcy. That is not to say that the debtor has no power to exclude a debt from discharge. After filing bankruptcy, a debtor is permitted to waive the discharge of a debt under two circumstances: the debtor may reaffirm the debt under § 524(c); or the debtor can execute a waiver of discharge that is approved by the bankruptcy court under § 727(a)(10).

While an agreement to not file bankruptcy is universally considered void because it violates public policy, telling a creditor that you will not file bankruptcy when you actually intend to file is a serious matter. If you take a loan with the intention of discharging it through bankruptcy, and with no intention on repaying it, you may have committed fraud and even a criminal act! The creditor may ask the bankruptcy court to except the debt from the bankruptcy discharge, and may file a criminal complaint against you.

If you have executed a waiver of bankruptcy rights, discuss the matter with an experienced attorney. Your attorney can advise you as to the enforceability of this waiver. Don’t let creditors and debts control your life. Get the facts and explore your options to rid yourself of overwhelming debt.

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 Foreclosure is always ugly business, but public complaints from homeowners alleging sloppy research, unethical filings, and outright lies, have made law firms that specialize in foreclosure especially villainous in the public eye. While many foreclosure firms may conduct their work with the honesty and diligence that is expected when practicing law, there are some that are less than, well, “sympathetic” to homeowners experiencing financial difficulty.

Last October the New York Times published photos of a Halloween party at the law office of Steven J. Baum. The Baum law firm handled around 40 percent of the state’s 46,572 mortgage foreclosures in 2010. The photos show an office costume party in 2010 where employees dressed up as homeless people and squatters, and decorated the office to resemble foreclosed properties.

The Baum law firm has been notoriously called a foreclosure mill by the media, and has been the subject of several complaints. Recently the firm agreed to pay a $2 million settlement in response to allegations that it had “filed misleading pleadings, affidavits, and mortgage assignments in the state and federal courts in New York.” In November Fannie Mae and Freddie Mac cut off business with the firm, and this past week it announced that the Baum law firm is closing its offices.

Certainly not every foreclosure firm is heartless. However, when the wheels of the foreclosure machine are set into motion, it is often difficult to find a person who can stop it. If you are experiencing trouble paying your mortgage, there are options:

• Home Affordable Refinance Program (HARP) is a federal program that offers homeowners a chance to refinance with their banks before they default and the home goes into foreclosure.
• Chapter 13 bankruptcy. The bankruptcy court cannot modify your first mortgage, but it can eliminate your second under certain circumstances. Chapter 13 can also provide time to negotiate a modification with your lender, or repay mortgage arrears over three to five years.
• Chapter 7 bankruptcy: If discharging unsecured debt will free up money for your mortgage payment, Chapter 7 may be the answer. You are also able to discharge your home mortgage and walk away from the house.

Don’t be pressured by foreclosure firms! You have rights and options. An experienced bankruptcy attorney can explain your legal options and help you decide on a path that is right for you and your family.

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 Some unscrupulous non-attorneys take advantage of the poorest and most vulnerable by offering bankruptcy petition preparation services at a discount rate. Maybe you have seen their ads in free community newspapers. These services offer to prepare your bankruptcy petition and avoid the “high cost” of an attorney.

Sounds great, right?
Petition preparers are restricted by federal law to the level of a typing service. Preparers cannot represent you in bankruptcy court and are expressly forbidden from providing any legal advice regarding your bankruptcy case. That means a petition preparer cannot: discuss the benefits of the different bankruptcy chapters and how they apply to your case; explain certain legal exemption rights you may be entitled to in order to protect your property; or tell you what debts or assets must be included or may be omitted from your bankruptcy petition.
When you hire a petition preparer you must file your bankruptcy case yourself. Some petition preparers may try to entice you with promises of waiving the bankruptcy filing fee. The truth is that if you were able to pay a petition preparer, the court is unlikely to waive the filing fee.
While there are no special educational requirements for petition preparers, the federal law requires that they:
• Make a written disclosure of services and fees
• Charge a reasonable fee for services, usually limited by local bankruptcy law
• Not collect or process court filing fees
• File a written disclosure with the bankruptcy court regarding fees and services, including name and tax identification number
While the federal law allows preparers to type petitions, bankruptcy professionals, including judges and attorneys, despise this activity. A main objective of the bankruptcy process is to provide a deserving debtor with relief from crushing debt. In many cases, petition preparers only make matters worse. Debtors need legal counsel to receive the protections and benefits of the bankruptcy laws. Petition preparers are not attorneys and any legal advice they provide, while illegal, may also be devastatingly wrong. Many debtors relying on the assistance of petition preparers have had their cases dismissed, have lost property to creditors, or have experienced other unnecessary complication in their cases.
If you are hurting financially, discuss your situation with a bankruptcy attorney at a free consultation. Your attorney can advise you on your legal options and discuss how you can afford the different fees in bankruptcy.

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