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Bankruptcy and Mortgage Deficiency Basics	<br />Chapter 7 and Chapter 13<br />
What is bankruptcy?<br />Federal court process by which a debtor can discharge or reorganize their debts. <br />Intended t...
Why file bankruptcy?(Or, what are the upsides?)<br />Automatic stay of all debt collection action.  (Including lawsuits, f...
Why not file bankruptcy?(Or, what are the downsides?)<br />FICO hit (immediate but recoverable).<br />Stays on credit for ...
Chapter 7	<br />“Straight” bankruptcy. <br />“Liquidation” of non-exempt assets, sale and distribution to unsecured credit...
Chapter 7 Eligibility<br />Must “pass” means test.<br />Adjusted income after below median for state.<br />Must take “cred...
Chapter 13<br />3 to 5 year process in which “some” debts are repaid with “disposable income.”<br />Disposable income is c...
Chapter 13 Eligibility<br />No more than $360,475 in unsecured debt, and $1,081,400 in secured debt.<br />Must have “regul...
Keeping your property in bankruptcy<br />It’s simple:  Stay current on the payments!!!!<br />Houses and cars treated simil...
Exemptions	(“Home Owner”)	<br />Depends on your situation:<br />If you have equity in your home above the value of all com...
Exemptions (“Non-Home Owner”)<br />$24,250 “wild card”  Can be used for anything:  cash, securities, property, art.<br />U...
Other Exemptions and Concepts		<br />All “post petition” wages and income<br />All IRA,s 401k’s, 529’s  (some limits may a...
Can I “keep” anything out of bankruptcy?<br />No!!!!  All financial affairs (assets, debts, etc.) must be fully disclosed....
Consequences of bankruptcy non-disclosures?	<br />Possible loss of discharge<br />May be charged with a crime.<br />Just d...
Bankruptcy Process and Procedures<br />Starts with filing a “Petition and Schedules” with the Bankruptcy Court.<br />Which...
Cost and Attorneys fees(Unfortunately, it ain't free to go broke.)  <br />Fees are highly variable, depending on location,...
Can I represent myself?<br />Sure.  You can also do your own knee surgery. <br />Generally not a good ideabecause the requ...
What about “bankruptcy petition preparers?”<br />Another bad idea<br />They’re not lawyers.  They’re form fillers. <br />T...
Loan Modification in Bankruptcy	<br /><ul><li>Yes you CAN modify mortgages while in bankruptcy.  The question is whether t...
Who’s doing it?<br />Mortgage Bankers Association of America walked away from a $79 million obligation in 2010.<br />Studi...
Why?<br />“Clean break” from the bank and avoids the months and months of uncertainty and negotiation with a large lending...
Mortgage Deficiencies<br />What is it?<br />The amount of the unpaid mortgage debt that remains after foreclosure, short s...
Can the bank get a deficiency from me?	<br />Under some circumstances.  <br />Is a question of state law, even in a federa...
Most likely deficiency problems	<br />Investment property second deed of trusts (“DOT”).<br />Personal residence HELOCs, (...
How to deal with deficiencies<br />Pay it.<br />Discharge it in bankruptcy<br />Negotiate a discount.  <br />Banks typical...
Conclusions<br />Don’t do your own knee surgery.  These issues are not easy to sort out.  Talk to a lawyer (and a tax acco...
Bankruptcy and Deficiency Basics	<br />Chapter 7 and Chapter 13<br />David C. Winton, Esq.<br />2 Ranch Drive, Suite 8<br ...
Bankruptcy Slide Show
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Bankruptcy Slide Show

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Bankruptcy Slide Show

  1. 1. Bankruptcy and Mortgage Deficiency Basics <br />Chapter 7 and Chapter 13<br />
  2. 2. What is bankruptcy?<br />Federal court process by which a debtor can discharge or reorganize their debts. <br />Intended to provide the honest but unfortunate debtor with a “fresh start.”<br />
  3. 3. Why file bankruptcy?(Or, what are the upsides?)<br />Automatic stay of all debt collection action. (Including lawsuits, foreclosures, collection calls, etc.)<br />Financial “reboot”<br />Discharge all dischargeable debts<br />Eliminate risk of deficiency (where it exists)<br />Eliminate some tax debts<br />Eliminate credit card debt<br />Get a “fresh start”<br />Look better to lenders (yes, it’s true!)<br />
  4. 4. Why not file bankruptcy?(Or, what are the downsides?)<br />FICO hit (immediate but recoverable).<br />Stays on credit for 10 years.<br />Some debts can't be discharged (student loans especially).<br />May have to part with some property (rare, but it happens).<br />Financial affairs will be scrutinized to some degree.<br />Expense and time. <br />
  5. 5. Chapter 7 <br />“Straight” bankruptcy. <br />“Liquidation” of non-exempt assets, sale and distribution to unsecured creditors.<br />About 3 months (in most circumstances)<br />Rarely loss of property.<br />Keep home if loans stay current.<br />Yes you CAN discharge some taxes. (“Old and moldy” rule)<br />
  6. 6. Chapter 7 Eligibility<br />Must “pass” means test.<br />Adjusted income after below median for state.<br />Must take “credit counseling” class. (Sort of like traffic school for bankruptcy only much shorter.)<br />
  7. 7. Chapter 13<br />3 to 5 year process in which “some” debts are repaid with “disposable income.”<br />Disposable income is calculated by a strict formula.<br />Good: “Super discharge” Can provide discharges of some debts that a Chapter 7 may not.<br />Good: May allow homeowner in default to keep their home.<br />Good: May allow a homeowner to “lien strip” junior deeds of trust that are “wholly unsecured.”<br />Bad: Keeps the debtor in the bankruptcy system for the whole time. <br />
  8. 8. Chapter 13 Eligibility<br />No more than $360,475 in unsecured debt, and $1,081,400 in secured debt.<br />Must have “regular source of income.”<br />
  9. 9. Keeping your property in bankruptcy<br />It’s simple: Stay current on the payments!!!!<br />Houses and cars treated similarly with minor differences in “reaffirmation” requirements.<br />As a practical matter, statutory exemptions protect most property.<br />Redemption of property back from trustee.<br />Chapter 13 keeps everything unless Ch 13 plan doesn’t pay out as much as a liquidation. <br />
  10. 10. Exemptions (“Home Owner”) <br />Depends on your situation:<br />If you have equity in your home above the value of all combined loans:<br />$75k if single<br />$100k if “head of household<br />$175k IF<br />>65 years old<br />Mentally or physically disabled, or<br />>55 years with household income <$15k<br />
  11. 11. Exemptions (“Non-Home Owner”)<br />$24,250 “wild card” Can be used for anything: cash, securities, property, art.<br />Usually covers most personal property<br />Timing of filing can be managed to protect certain items<br />All “post petition” wages and income<br />
  12. 12. Other Exemptions and Concepts <br />All “post petition” wages and income<br />All IRA,s 401k’s, 529’s (some limits may apply)<br />Most cars, jewelry, art, clothing, furniture, etc.<br />
  13. 13. Can I “keep” anything out of bankruptcy?<br />No!!!! All financial affairs (assets, debts, etc.) must be fully disclosed.<br />Intentional omissions or misrepresentations in Bankruptcy is a federal crime.<br />But it’s a disclosure issue: You can pay anyone you want. <br />If you want to lose a piece of property, the easiest way to do that is to fail to disclose in in your schedules.<br />Recent client who “assumed” that taxes had nothing to do with bankruptcy.<br />Another client who “forgot” she owned a house that she’d recently sold. Indicted. <br />
  14. 14. Consequences of bankruptcy non-disclosures? <br />Possible loss of discharge<br />May be charged with a crime.<br />Just don’t do it.<br />A good bankruptcy lawyer can fix ANYTHING but a lie.<br />
  15. 15. Bankruptcy Process and Procedures<br />Starts with filing a “Petition and Schedules” with the Bankruptcy Court.<br />Which Court depends on your residence.<br />All filings online through CM/ECF system.<br />Usually only one appearance at “meeting of creditors.”<br />Chapter 7: Usually done three months from filing unless there is property to be administered by the trustee.<br />Chapter 13: Can take up to 5 years to payoff the plan and get the discharge.<br />
  16. 16. Cost and Attorneys fees(Unfortunately, it ain't free to go broke.) <br />Fees are highly variable, depending on location, attorney’s experience, attorney’s other business. <br />You WILL get what you pay for. (At least on the low end. Few things more dangerous than an underemployed attorney.) <br />Do your best to get an “all in” arrangement.<br />Under most circumstances Chapter 7 MUST be paid pre-filing. (Your attorney can't be a “creditor”).<br />Chapter 7: “Simple” cases, anywhere from $1,700 to $3,500 depending on complexity of assets and debts.<br />Chapter 13: $3,500 to $7,000, again, depending on complexity of assets and debts.<br />Chapter 11? $20,000 to….<br />
  17. 17. Can I represent myself?<br />Sure. You can also do your own knee surgery. <br />Generally not a good ideabecause the requirements are highly technical and the penalties for error can be very costly. <br />Lots of calls from people who have spent 6 to 12 months screwing up their own bankruptcy. <br />Costs way more in the long run.<br />Do it right. Do it once. <br />
  18. 18. What about “bankruptcy petition preparers?”<br />Another bad idea<br />They’re not lawyers. They’re form fillers. <br />They can’t give legal advice.<br />
  19. 19. Loan Modification in Bankruptcy <br /><ul><li>Yes you CAN modify mortgages while in bankruptcy. The question is whether the bank will do it.</li></ul>_____________________________________<br /><ul><li>Remember: Banks are stupid. They are not able to hold two concepts in their brain at the same time. Like loan modification and bankruptcy. It causes their wires to cross. </li></li></ul><li>Strategic Defaults<br />The conscious and deliberate decision to “walk away” from a mortgage.<br />Usually because the loss in market value means that the investment no longer makes any sense. <br />Can be stressful. <br />But, it can also bail you out of a very bad financial position. <br />Controversial.<br />
  20. 20. Who’s doing it?<br />Mortgage Bankers Association of America walked away from a $79 million obligation in 2010.<br />Studies show that: <br />20% of homeowners will walk away when the loan-to-value ratio drops below 75%.<br />63% of people will walk away when deficiency hits $300k.<br />Estimates are that 15% of all foreclosures are “strategic.”<br />
  21. 21. Why?<br />“Clean break” from the bank and avoids the months and months of uncertainty and negotiation with a large lending institution that probably doesn’t really want to modify the loan anyhow. <br />If there is any risk of a deficiency, the foreclosure will in all likelihood nuke that lien, and a bankruptcy will discharge the underlying obligation.<br />Starts financial rehab faster.<br />May have better tax implications than a short sale or deed in lieu.<br />Loan mod can make the homeowner stuck in a house that may never recover its value.<br />See 60 Minutes piece by Morley Safer on May 9, 2010.<br />
  22. 22. Mortgage Deficiencies<br />What is it?<br />The amount of the unpaid mortgage debt that remains after foreclosure, short sale, trustee’s sale or deed in lieu.<br />Example: House worth $400k. Mortgage of $475k. If bank takes property valued at $400k back, deficiency will be $75k.<br />
  23. 23. Can the bank get a deficiency from me? <br />Under some circumstances. <br />Is a question of state law, even in a federal bankruptcy. <br />California law only:<br />Not allowed for “Purchase Money Mortgages.” Literally the mortgage (or HELOC) that was obtained for the purpose of, and actually used for, the purchase of the property.<br />Not allowed for loans in which the bank actually takes the property back by non-judicial foreclosure.<br />Not allowed on first mortgages in which the lender has agreed to a short sale.<br />
  24. 24. Most likely deficiency problems <br />Investment property second deed of trusts (“DOT”).<br />Personal residence HELOCs, (seconds or thirds) obtained AFTER purchase of property. E.g. Home improvement loans, home equity loans taken out to pull some cash out of the property.<br />May present tax problems in the form of “cancellation of debt” (“COD”) income. <br />Cancellation of a debt is taxable as ordinary income unless<br />Debt is cancelled in bankruptcy.<br />Property is primary residence. (At least until 2013)<br />Debtor is balance sheet “insolvent” when debt is canceled.<br />
  25. 25. How to deal with deficiencies<br />Pay it.<br />Discharge it in bankruptcy<br />Negotiate a discount. <br />Banks typically sell this debt “by the pound.” Meaning that they aggregate large portfolios and sell the lot to bottom feeders and collection agencies. Usually for 3 to 5 cents on the dollar. Anything over that is gravy.<br />Success with this will depend on how likely the owner of the debt thinks they will be able to get more.<br />High income or significant wealth? You’ll pay more. <br />
  26. 26. Conclusions<br />Don’t do your own knee surgery. These issues are not easy to sort out. Talk to a lawyer (and a tax accountant).<br />Even so, in the hands of a qualified and experienced attorney, mostof these problems have relatively simple legal and financial solutions. <br />Simple doesn't mean easy: Can be very stressful, and can make you feel like you’re quite alone.<br />Only regret any client has ever expressed is that it took them so long to take the plunge.<br />
  27. 27. Bankruptcy and Deficiency Basics <br />Chapter 7 and Chapter 13<br />David C. Winton, Esq.<br />2 Ranch Drive, Suite 8<br />Novato, CA 94945<br />Tel: 415.421.5800<br />www.dcwintonlaw.com<br />Email: david@dcwintonlaw.com<br />Thank you.<br />

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