What’s the Difference between a Debt and a Lien in Chapter 7 Bankruptcy?

I recently had a conversation with a person who had just received a discharge in a Chapter 7 bankruptcy.  He had also received what he thought was a very weird item from his mortgage company. The mortgage company had sent him a form for his signature which would give them permission to start sending monthly statements again even though the mortgage debt had been discharged. In the fine print on the back of the discharge there is a court order requiring all creditors – including the mortgage company – to make no attempt of any kind to collect the debt.   This includes mortgages, even if the homeowners want to keep the house.   But most homeowners who have mortgages want to continue paying the mortgage so they can keep their home.  Having a monthly mortgage statement helps a lot in keeping  track of that, but without permission to start sending statements again, the mortgage companies tend to be afraid to do so.

The permission to restart monthly statements form DOES look a little weird.  It usually will start off by saying something like: “Well, we know you’ve been discharged in a bankruptcy and you don’t owe this personally anymore, so don’t take this as attempt to collect a debt.  We were just wondering if maybe, not that you actually owe this anymore, you might still like updates on the status of the mortgage, for information purposes only, in case you might still want to make some payments on a strictly voluntary basis – not that we would really want the money or anything like that.”

This odd language is the result of there being two seemingly contradictory facts for a homeowner with a mortgage following a Chapter 7 bankruptcy discharge.  The first fact is that the personal obligation to pay the debt no longer exists.  The second fact is that the lender still has a mortgage lien on the house, and if you don’t pay the mortgage that lender will foreclose.

In the phone conversation I felt a bit put on the spot.  I was asked repeatedly to explain if the debt has been discharged, how can there still be a lien on the house that carries with it a right to foreclose.  I tired to explain that a mortgage lien is actually a property right  – a form of partial ownership – which the lender has.  The bankruptcy discharge takes away the personal obligation to pay the debt, but it does nothing to the ownership interest.  The discharge only affects personal obligations, not property interests.

So the bottom line is that when it comes to Chapter 7 bankruptcy, if you want to keep your house you better keep paying your mortgage or mortgages.

This was confirmed within the past few days by a decision of the U.S. Supreme Court issued on June 1, 2015.  In the case of Bank of America v. Caulkett, the court ruled that mortgage liens cannot be stripped off in a Chapter 7 Bankruptcy.  Under certain limited circumstances, the situation can be different in a Chapter 13 Bankruptcy.  More about that in my page about keeping your house.

This post is for general information purposes only and is not legal advice.  Interactions here do not create an attorney-client relationship.  Consult your own attorney concerning the details of your case.  I am a debt relief agency, helping people file for relief under the federal bankruptcy code.

Bankruptcy is Legal – But is it Moral?

I usually don’t give much thought to the question of whether filing a bankruptcy is the moral or ethical thing for a person to do.  I decided a long time ago that it  is, at least for my clients in the kind of cases that I accept.  For one thing, I don’t recommend bankruptcy unless it’s the last resort.  In other words, if the client has other alternatives, I recommend against filing bankruptcy and suggest that other avenues be tried first.  I have referred hundreds of people to Lutheran Social Services Financial Counseling and to Family Means financial counseling, my two favorite alternatives to bankruptcy.  Lots of debt settlement companies are operated by crooks, and you really have to watch out for them; but these two are strictly legitimate.

Most of my clients are absolutely overwhelmed and buried in debt.  If they are going to keep paying their unsecured debt, they don’t get to eat – and vice versa.  I believe that a person’s first duty is to himself or herself and his or  her family, and his or her second duty is to the community.  Under both duties, it is your obligation to take care of yourself well enough that you and your family don’t become homeless wards of the state.  If you can at least support yourself, you are saving the community the cost of supporting you. Your duty to continue paying your debts to a bunch of bankers is much lower on the hierarchy of values, and the value of self preservation will trump that every time.  If you need to file a bankruptcy to be able to properly care for yourself and your family, it could even be a moral obligation that you do so.

In biblical times all debts were canceled every seven years. (Deuteronomy 15:1-2) Everyone was given a fresh start at the same time every seven years whether they were current with their debts or not. Even citizens who had sold themselves into slavery were set free in the year of jubilee, which occurred every fifty years. (Leviticus 25: 10-13) Selling oneself or one’s family into slavery was apparently one approach to raising money to pay debt.  We no longer have slavery these days, but sometimes what I see my clients doing prior to filing bankruptcy seems to have similarities to slavery.  Seems like slavery to me if you spend all your time and resources working in the service of Capitol One or Discover.   It also seems to me that the sort of debt forgiveness practiced in Biblical times has similarities to bankruptcy today – except bankruptcy can usually be done only every eight years.

Here in the United States, bankruptcy is provided for in Article 1, Section 8, Clause 4 of the United States Constitution.  This authorizes  Congress to enact “uniform laws on the subject of Bankruptcies throughout the United States.”  Our founding fathers obviously thought that Congress should have the power to provide laws for the kind of safety net that is found in bankruptcy.  Under those laws for most individuals the only way to get your debts canceled is to file a Chapter 7 bankruptcy or Chapter 13 bankruptcy.  Even then some debts (most taxes, child support, alimony, most student loans, etc.) are not dischargeable.  

If things have gotten so bad that the debtor really can’t pay, bankruptcy is a good thing for the debtor and the creditor too, since the creditor is now able to stop wasting resources trying to collect. Large debts can be like quick sand. The harder one tries to get out, the deeper one gets.  Most bankruptcies seen in my office are filed long after they should have been.

This post is for general information purposes only, is not legal advice, and does not create an attorney-client relationship.

“Thank you” Recently Received from Client after Bankruptcy Discharge

During the holidays several of my clients received their bankruptcy discharge.  The discharge is a court order which states that the Debtor is no longer legally obligated to repay most if not all of  his or her debts.  In most cases the only debts that are not discharged are student loans and taxes.  Sometimes even taxes can be discharged, but that’s a topic for another blog post.

When that discharge comes out,  many of my clients thank me profusely.  For some reason I often have a hard time accepting thanks.  When I was growing up I think it was part of the culture to assume that when somebody was just doing their job, there was no need to thank  them.  And if somebody thanked me I tended to say “no need to thank me” or “it was nothing” or other similar words which more or less blew it off.  Later in life I learned that such responses diminish the importance of the gratitude being expressed and the person expressing it, and a simple “you’re welcome” is a much better way to respond.

Gratitude is one of the most noble of feelings and it should always be acknowledged – still it remains hard for me to do.  Even so, with the client’s permission I’d like to share with you the following somewhat poetic excerpt from an email I received from one of the clients who recently got that discharge:

“This is the best holiday present ever!
That difficult experience of the past few years can now finally be a ghost….So many sleepless nights.
Thank you David for helping us to straighten out our lives..
We still have a hard road a head to try to prepare for being too old to be employed…
It would have been impossible with the mess we were in and it is still a long shot but we do have better odds now.
You were our guiding light and we will always be grateful.
Many many thanks to you David, …….”

I tend to get a little emotional around the holidays anyway, but this email really touched me.

Questions Your Bankruptcy Trustee will Ask at the Meeting of Creditors

Hennepin County District Court

In most of my discussions with clients, the focus is on getting the bankruptcy petition filed.  Sometimes I am surprised to be asked by a client whether he or she will have to go to court.  This question always surprises me, because the answer is of course we have to make a court appearance.  I tend to thing everybody knows that, but obviously they don’t know about it if I don’t talk about it.  Filing a Chapter 7 or Chapter 13 bankruptcy petition is not like filing a tax return, where you file it and you’re done.  There’s a lot more to it than that.

After the bankruptcy petition is filed, you will receive a notice from the court of the scheduling of  a hearing called the meeting of creditors. The section of the bankruptcy code that requires it to take place is Section 341, so sometimes you will hear this hearing referred to as “the 341.”  The rules require that it be held no less than 20 and no more then 40 days after the case is filed.  It usually takes place about 30 days after filing.  Here’s a video I posted at YouTube recently where  I discuss what the trustee will be asking at this hearing.

Most attorneys have a handout listing the questions you can expect.  The trouble with such handouts is that every trustee has their own favorite questions and even special interests.  We have one trustee who seems to ask extra questions about whether somebody is going to die and leave you something.  Another trustee is very interested in jewelry and actually is known to carry a jeweler’s eye glass in her purse.  Some trustees always want copies of the car titles, while others don’t seem to care about them.  The questions in a Chapter 7 case will tend to be more focused on assets, while those in a Chapter 13 will have more about income and expenses.

Many of my clients expect that they will be given a chance to explain why they filed a bankruptcy.  They wish they could explain the series of events that led them to need a bankruptcy.  In my experience, the trustee almost never asks anything about that and probably does not what to hear about it.    Some of the questions may include something like the following:

  • Are you still living at the same address that is stated in your petition?
  • Have you read all the papers that you filed with the court?
  • Did you sign them?
  • Are they true and correct?
  • Are you personally familiar with what your papers contain?
  • Do you have any additions or corrections you wish to make at this time?
  • Did you list all your debts?
  • Did you list all your assets?
  • Have you filed for bankruptcy before?  When?  What kind of bankruptcy?  Were you discharged?
  • Do you have a domestic support obligation?
  • Have you sold or given anything away to a close friend or relative in the past six years?  Some trustees may ask for a shorter period of time.  If the answer is yes, there will additional follow-up questions.
  • Have you paid over $600 to any unsecured creditor within the 90 days before you filed your bankruptcy?
  • Have you operated a business any time in the past six years?
  • When did you purchase your home?  What was the purchase price?  How did you set the value of your home?  These are only asked if you own your home.

I start coaching my clients about what questions to expect almost as soon as I get hired. Then as we go through the process of preparing the petition, I can give a better idea as to what to expect based on the details of the case.  If you have a good lawyer, he or she will be making sure that you are prepared for everything that might be asked at this meeting of creditors.  Usually I just call it the “hearing,” because the last thing you are likely to see at the meeting of creditors is a creditor.

This post is for general information purposes only and is not legal advice. It does not create an attorney-client relationship. You need to talk with your own lawyer about this. The questions that one can expect vary from one part of the country to another, even though it’s set up under federal law. I am a debt relief agency. I help people file for relief under the federal bankruptcy code.

Dave Kelly

Kelly Law Office
11900 Wayzata Blvd. #116E
Minnetonka, MN 55305
952-544-6356
http://www.mn-bankruptcy.com

Don’t be Tricked by Misleading Bankruptcy Attorney Fee Advertising

Plan ahead before you sign the marriage license.

A lot of the advertising about attorney fees for bankruptcy is misleading – even tricky. Today I checked on a Google ad and the web page it leads to which says a certain law firm will file a bankruptcy after a payment toward the attorney fee of only $99.  I found this to be not exactly accurate.

The web page says that $99 toward the attorney fee, along with the court filing fee and counseling program fees, would be all one would have to pay prior to filing.  It was a slick web page, obviously done at considerable expense, where I found the following statement:

“You only have to pay the court filing fee of $335 and the credit report / credit course fees of $65 and an attorney fee of $99 to file.”  It also said:  “Only $99 Down, No Co-Signer Needed, File Now/Pay over Time, Affordable Payment Plans” in big blue letters.

I wondered how can these people can be doing this. I could never cover my office rent, malpractice insurance, phone and internet bills and office supplies if I didn’t charge a lot more than that.   So I went to the bankruptcy court web site and ran a search for actual cases they had filed.  This is not free, so I didn’t look very far.  All I did was check the last two cases this law firm filed to see what the attorney fee had been.  Attorney fees have to be disclosed on the bankruptcy petition.  What I found was that for the last two cases they filed, both Chapter 7s, their fee was $990. And the court filings also said they had received all of the $990 before filing the case.   That’s lower than what I would usually charge, but it’s a lot more than $99.

Now one thing you should understand about attorney fees in a Chapter 7 bankruptcy is this. If the attorney does not collect his or her fee prior to filing, any part of the fee that is still owing is just another debt in the bankruptcy case. The attorney is just another creditor.  The attorney, like all the other creditors, is under an immediate court order requiring that he or she do nothing to try to collect.  It is illegal and unethical for the attorney to collect anything from the client once the case is filed.  That’s why you may see references to a co-signer in some advertising.  The lawyer can still try to collect the fee from a co-signer as long as the co-signer is not his bankruptcy client.  This of course puts the bankruptcy lawyer in the position of being a bill collector. I don’t EVER want to be a bill collector.

I went back to the web page thinking it must be referring to Chapter 13 bankruptcy only. When it comes to paying attorney fees after the case is filed, a Chapter 13 bankruptcy is a very different animal from a Chapter 7. If you file a Chapter 13 bankruptcy it is possible to pay part of the attorney fee through the Chapter 13 payment plan.  I hit Control F to search the page and typed “13” into the search box.  No mention of “13” or “Chapter 13” appears anywhere on the page.  The page seems to be talking about Chapter 7.  The only filing fee the page mentions is $335, which is the Chapter 7  court filing fee. The court filing fee for a Chapter 13 is slightly lower.

When I look at their web page I can see that it is very slick, and at the bottom is the name of a web development company that designed the page.  I can remember a few years back when I hired a person to redesign my page.  The person I hired started adding all sorts of new key words and content, which was submitted to me for review.  There was a whole lot of it, and it was hard to keep up with what the designer was doing.  Is it possible that the web designer wrote up this stuff while the law firm was not paying attention?  It could happen.  I’m now back to doing all my own web design work. I found that having my web page in the hands of a professional design and marketing person was scary.

So maybe they just have a busy marketing person who they can’t keep up with.   Maybe it’s not entirely the law firm’s fault.  But I do want to suggest to you that you should be very wary when you see something like this and don’t be taken in by it. If it seems to good to be true, it probably is.

This posting is for general information purposes only and is not legal advice. It does not create an attorney-client relationship.  I am a debt relief agency. I help people file for relief under the federal bankruptcy code.

Dave Kelly, Kelly Law Office, Minnetonka, MN 952-544-6356

Close any Extra Bank Accounts Before you File Personal Bankruptcy

Minneapolis Federal Courthouse, where Hennpin County Bankruptcy cases are filed

When it comes to what bank accounts you have open at the time of filing a personal bankruptcy, the adage “keep it simple” certainly applies.  In either a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, the trustee is going to want to see a statement for every bank account that you have open on the day the case is filed. The more bank accounts you have, the more complicated that can get.  It seems as if every time I have a case where my client has more than three bank accounts, that client has trouble getting the required statement for at least one of them.

If the bank is also one of the creditors which you have listed in your case, you might find them particularly uncooperative when you try to get a statement. I was making a video on another subject when I made a few parenthetical remarks about how, before filing personal bankruptcy, you should close as many bank accounts as possible.  I thought the remarks were good enough to post them as a separate video on their own.  This is that video: There are enough other things that can go wrong in any bankruptcy case, without having to worry about not being able to get a statement from some obscure bank that has no offices nearby and which has shut down your on line access. In this video I explain that prior to filing a bankruptcy case, it is prudent to close as many of your bank accounts as possible. It’s best to go into your bankruptcy case with only has one bank account – a checking account at a bank or credit union which is not a creditor.

Your bankruptcy lawyer should know where the best places to bank are from a bankruptcy perspective. Some banks and some credit unions are more bankruptcy friendly than others. We have one bank in particular in the Twin Cities Minnesota area which will freeze your accounts when they find out you filed a bankruptcy, and they tend to do that whether you owe them money or not. That bank of course is to be avoided. This posting is for general information purposes only and is not legal advice. It does not create an attorney-client relationship.

I am a debt relief agency. I help people file for relief under the federal bankruptcy code.

Dave Kelly, Kelly Law Office, Minnetonka, MN 952-544-6356

Avoid Having your Bank Accounts Seized when you File Bankruptcy in MN

I don’t know what banks and credit unions are doing in other parts of the country.  I speak here only of what I have seen and heard about here locally in Minnesota, and specifically just the Twin Cities area. Here in Minnesota, in the Twin Cities area, there is a substantial danger that your savings and checking accounts will be seized or frozen by your bank or credit union when you file a personal bankruptcy.  I have always believed it to be a despicable thing to do.  Some banks and credit unions are worse than others at doing this.  When you choose a lawyer to handle your bankruptcy case, you might want to make sure that he or she is a person with enough experience to be aware of this problem and how to head it off before it happens.

The problem is this.  If the bank or credit union is one or your creditors, you can expect that institution to seize your accounts as soon as they are notified of the bankruptcy.  If this is not planned for it can result in quite a surprise – checks bouncing, a debit card that has stopped working, and the evaporation of money you thought you had.  There are some banks that are worse than others  when it comes to this problem.  They might freeze your account even if they are not a creditor, especially if your account has a fairly large sum of money – something in excess of $3,000.  I don’t want to mention them bank by name here, but I believe I did mention one in this video.

You should expect your bankruptcy attorney to coach and advise you as to how this is to be avoided. What I tell my clients is that if they have an account with a bank or credit union which they owe money to, that account should be closed well in advance of the filing of the bankruptcy case – whether it’s a Chapter 7 bankruptcy or a Chapter 13 bankruptcy. If you don’t close that account, the bank or credit union will claim a right of setoff against your money in the account, which is a fancy way of saying that they will seize the money.  There are certain banks where all accounts should be closed if at all possible, whether you owe them money or not. Once they seize the money you won’t get it back – or at least usually won’t.

So the thing to do is to close all such accounts before you file your bankruptcy case.  It takes planning of course. I’m not saying you should try to live without a checking account.  What you need to do is open an account at a bank which is NOT one of your creditors, and get all your automatic deposits and automatic withdrawals up and running with the new account before we file your bankruptcy case.  I believe that the best banks to use for this purpose are the small neighborhood banks – for example a bank with a name that starts with “State Bank of …” or “Citizens Bank of …” The process of getting the new account set up and getting the auto deposits and auto payments moved over to and set up at the new bank may take a few weeks, but I consider this to be part of the normal planning and preparation that goes into making your case as painless as possible.

Using the Federal Wild Card Bankruptcy Exemption in Minnesota

Your wild card exemption - no joke

In either a Chapter 7 or Chapter 13 bankruptcy in Minnesota, once it’s established that you qualify to use the federal exemptions, the most important exemption of all is probably the one they call the “wild card” exemption. It is also sometimes called the “catch all,” and is provided for in 11 USC 522 (d)(5).   You might hear me call it “the d 5.” Here’s a video I posted recently on the subject.

Yes, sorry the lighting and sound are terrible on this video, but I’ve leaving it up because the content is valuable.

The exemption has a minimum of $1,225 and a  maximum of $12,725.  Most of my clients qualify for the maximum.  It’s called the wild card or catch all because it can be applied to any asset.  Unlike all other exemptions, the asset does not have to fit into a particular category before it an be exempted under the wild card.  The best thing about it probably is that it can be used in combination with another exemption.

For example, say you have a car that has equity of $4,675.  It has a KBB private party value of $9,675, but there’s a car loan with a balance of $5,000.  First I would claim the federal automobile exemption which is $3,675.  Then I would apply $1,000 of the wild card to take up the slack.   Now the car is 100% exempt.  My client gets to keep the car.  The trustee can’t have it.  And my client still has $11,725 of wild card to apply to other assets.

In a joint filing by a married couple, each party has their own wild card exemption of up to $12,725.  If all the assets were joint, that would have the effect of doubling the wild card for them.  However, I’ve never seen a couple yet that owed everything jointly.  Most couples have a hodgepodge of assets – some his, some hers and and some theirs.  This would be worse yet if Minnesota were a community property state, but we’re not.  I often find that I have to take out a pad of paper and make columns listing his wild card items and her wild card items separately, so I can make sure that neither column exceeds the $12,725.  It’s quite unusual to see a situation where those limits are exceeded, but I have seen it happen.  Using a note pad is a pretty low tech way to figure it out, but my soft ware doesn’t do that job for me.

Getting the exemptions right is quite tricky. Be sure you have a lawyer who knows what he or she is doing, and don’t even think of trying to do the case yourself. Failure to properly exempt assets is one of the most common mistakes made by people who try to represent themselves in the bankruptcy court.

This is for general information only, is not legal advice, and does not create an attorney-client relationship.  I am a debt relief agency.  I help people file for relief under the federal bankruptcy code.

No Inflation in Housing, Home Furnishings or Car Costs Since 2012?

Every two years as long as I can remember the Minnesota exemptions were increased.  But guess what, this year – 2014 – the Minnesota Department of Commerce has announced that there will be no increase in the Minnesota State exemptions.  Here’s a video I recently posted about this.  Some day I’ll get the lighting right when I do these videos.

This is based on some statistics that they have showing that apparently there has not been enough inflation to trigger any increases. This would indicate that the cost of buying a car has not increased, the cost of buying a home has not increased, and the cost of household goods and furnishings and appliances has not gone up.

I am inviting your comments and feedback. Has there really been no increase in the cost of buying a house, the cost of buying a car or the cost of buying home furnishings and appliances during the past two years? If those costs have gone up in other parts of the county, have they not also increased in Minnesota?

Do you think the MN Department of Commerce is right, or have you experienced some price increases in the past two years?

This is for general information purposes only and is not legal advice.  It does not create an attorney-client relationship.  I am a debt relief agency.  I help people file for relief under the federal bankruptcy code.

 

What if You Have a Rental Property and Need to File Bankruptcy?

Rental property and personal bankruptcy

Here’s a video I posted at YouTube where I comment about how rental properties should be dealt with in a personal bankruptcy.  I talk primarily about Chapter 7 personal bankruptcy, but I also get into Chapter 13 bankruptcy to some extent.  Unless it is properly handled, the filing of a bankruptcy may result in the property being taken away from you. It’s complicated and you would be well advised to find and consult a good lawyer about the exact situation you have with your rental property.   The video is only three and a half minutes long, and only scratches the surface if it even does that.

These days it has become common for families to have a former home that they could not sell. Maybe they outgrew the old house, or maybe they had to move because of their employment. Not being able to sell the old place, the best they could do was to rent it out. It seems as if most of the time these places have a negative cash flow, although not always.

When the time comes to look into filing a personal Chapter 7 or Chapter 13 bankruptcy, the rental property can become quite a problem. Typically the trustee will not find it acceptable to say on your budget sheet that you intend to continue to pay the expenses of a property that is losing money.

Even if the place has a positive cash flow, trying to keep it in a bankruptcy situation tends to be more trouble than it’s worth. The extra income might be just enough to disqualify you from filing a Chapter 7 bankruptcy, especially if you have stopped paying the mortgage on the property.

The best way to hang on to a rental property, if that is something that you really want to do, may be to do a Chapter 13 bankruptcy instead of a Chapter 7. For that to work you would need to have the equity in the property not amount to much and to have it producing a positive cash flow.

Unless it is properly handled, the filing of a bankruptcy may result in the property being taken away from you. It’s complicated and you would be well advised to find and consult a good lawyer about the exact situation you have with your rental property.

This is for information purposes only and is not legal advice. Neither the video nor these comments create an attorney-client relationship. Please consult the attorney of your choice concerning the details of your case.  I am a debt relief agency. I help people file for relief under the federal bankruptcy code.