Chapter 13 Archives - Page 3 of 3 - Better Call Dave

March 26, 2014

A few tips about Tax Refunds in Chapter 13 Plans

It’s tax time – again. For many, including myself, it can be a time of fear and loathing. Given a choice between having a colonoscopy or going to see my accountant to prepare my annual taxes, I would probably choose the former. I’m relieved to be able to say that mine are done and filed. So glad to have that over with. Since I’m self employed, I almost always have to pay in.

For my Chapter 13 clients tax time has another layer of complexity, trickiness might be a better word. Most Chapter 13 plans in Minnesota are required to have a provision that says the Debtors are to provide copies of all annual state and federal income tax returns to the Trustee’s office as soon as the returns are filed. If they are to receive a refund, the provision usually allows married debtors filing jointly to keep the first $2,000 of the refunds, and allows individual filers to keep the first $1,200 of the refunds. After those allowances, the balance of the refunds is to be paid into the Chapter 13 Plan as an additional contribution. This contribution benefits the creditors, but usually has no particular effect on the monthly payment plan for the Debtors. After making this extra contribution, in most cases the monthly payments under the Plan continue unchanged and on the same schedule.

The preferred method of sending the tax returns to the Trustee is now to make the return into a PDF and email it to an email address that the Trustee’s office has designated for that purpose. After that the Debtors should wait for a letter from the Trustee’s office which will tell them how much of the refund should be mailed in. The letter is usually sent promptly, although it comes by snail mail. Since I tend to be copied with both the emails and the snail mail, I have had quite of bit of this correspondence arriving on my desk over the past few days. So far this year there has been only one case where I disagreed with the way the Trustee’s office was calculating how much my clients were to send in. When that happens, I have always been able to straighten things out with a of series of email exchanges with the staff person who did the calculations.

Here’s a few important things to know about how they calculate exactly how much the extra contribution from the tax refunds is supposed to be. First of all, if you get a refund from one level of government – for example the feds – and have to pay in to the other level of government – for example the state, usually you can expect the amount you had to pay in to be deducted from the amount of the refund. If you paid to have an accountant or other preparer to do your returns, be sure to send the bill for the tax preparation in to the Trustee’s office along with the tax returns. At least this year I have been seeing the Trustee’s office allow a credit for the cost of tax preparation. In one letter that just arrived on my desk, they allowed a credit for a $96 processing fee from TurboTax.

If you find your refund to be a whole lot more than the part you are allowed to keep, I’ve never seen anybody get in trouble for adjusting their wage withholding so that next time the refund won’t be so large. Such adjustments can involve a lot of trial and error, however, and you might find it pretty hard to get it just right. It’s easy to overshoot the goal and wind up having to pay in to the IRS and Department of Revenue. Like Garrison Keillor says, be careful.

Keep in mind that everything I say here only applies to Minnesota cases. I would expect that practices vary quite a bit around the country concerning this topic. And as I always say, this post is for general information purposes only. It is not legal advice and does not create an attorney-client relationship. Please consult the attorney of your choice concerning the details of your case.

October 2, 2012

At the Bankruptcy Institute Today and Tomorrow

It’s that time of year again. Every October the bankruptcy section of the Minnesota State Bar Association puts on a two day continuing legal education program for the bankruptcy attorneys of the state. Unlike the meetings of the National Association of Consumer Bankruptcy Attorneys, to which I also belong, these sessions include lawyers for the creditors as well as lawyers for the debtors.

There were multiple classees to choose from, and nobody could attend them all without the ability to be in more than one place at the same time. First I attended a really boring session about amendments to the bankruptcy rules of procedure. Boring but important. I hate it but I need to know that stuff. There was then a sessioabout law office technology, where they had a geek who frankly I had trouble following. I think his presentation was aimed at law offices larger than what I operate.

The big excitement for the day, however, was the session on lien stripping. As we filed in and found a place to sit, they were playing an old hit, “The Stripper,” over the sound system. That lightened things up a bit. Following the disappointment with the decision in the Fisette case, to which I have devoted an earlier post, the big question is where does lien stripping go from here. It seems that the rules committee has finished work on a new local rule of procedure which outlines a proposed procedure for doing lien stripping in the District of Minnesota. The rule has now been presented to the judges for consideration. As they consider the rule, I expect they will ask for comments. The new rule seems to assume that lien stripping will be legal in Minnesota, which of course is still undecided – at least not decided permanently and for good. In my opinion the procedure will eventually become legal and common, but right now I’m still not sure what to make of it.

The proposed lien strip rule will require a motion prior to the confirmation of the Chapter 13 plan asking the court to issue an order establising the value of the home as compared to the amounts owing on the mortgage liens. This motion requirement appears to be an invitation to a fight with the lender and the lenders’ lawyers. I’m not absolutely sure, but the impression I have is that the bankers’ and lenders’ lawyers on the committee outnumber the consumer bankruptcy lawyers on the committee, so that the proposed rule is coming out leaning way in the direction of the bankers. If this rule is approved, it appears to me that it would make the procedure more risky and more expensive than what most of us were anticipating.

After the lien strip session I attended a session on how to prepare one’s law practice for a disaster, and another sessin about reaffirmation agreements.

So that’s what I learned in school today.

July 26, 2012

When Bankruptcy Won’t Work

Bankruptcy is considered the ultimate relief of financial burdens, but that does not mean that it is right for everyone. In some cases, even bankruptcy may not be able to help you out of your debts. Before you rely on this procedure to remove the pressure from your shoulders, you need to assess your life after bankruptcy. Do you think you could make it then? If not, going bankrupt may be a poor choice

You are usually allowed to keep your vehicle, home, and some other property when you file for bankruptcy, which means that you may still have loans to carry after the process is complete. If your income has been reduced to the point that you can no longer afford to pay for the home you live in and the car you drive, you need to first settle your finances before you can use bankruptcy for assistance. This means that you may have to give back your home, car, or both to get into something you can afford. You can then use the bankruptcy to wipe away any excess money owed to your former lending institutions.

Be realistic about your financial prospects so you do not end up in the same situation later on. After a successful Chapter 7 you will not be able to file Chapter 7 again for another eight years, and you certainly won’t be able to rebuild your credit if you have excessive loans to pay after the process. Rather than getting into that kind of bind, you need to figure out if bankruptcy is right for you at this point in time.

As you know by now, bankruptcy is not an option for everyone. Instead of jumping into this process with the hope of making your life better, you should assess the situation you will be in afterward. If your bills do not fit your current income, no bankruptcy specialist is going to be able to help you out.

July 2, 2012July 2, 2012

Can Bankruptcy Stop Foreclosure?

Foreclosures continue to occur at an alarming rate in many parts of the country. Many homeowners who obtained subprime mortgages earlier in the past decade or who now find themselves unemployed or underemployed because of the depressed economy are unable or unwilling to make their monthly mortgage payments

State and federal programs for distressed homeowners to assist in loan modifications are available to some but you may not qualify. For others, a short sale transaction is a way to extricate themselves from a home whose value is less than the loan amount, but these can be complicated and may not work for any number of reasons.

As a result, many people facing overwhelming financial pressures turn to bankruptcy as a solution, but can a bankruptcy stop foreclosure?

The Foreclosure Process

Once you miss at least 3-4 consecutive mortgage payments and the lender has sent you notices warning you of possible foreclosure, the lender will generally begin the process to repossess your home. This can take several months and in some instances more than one year.

Minnesota is a non-judicial foreclosure state, meaning that there is usually no court action. When the foreclosure is done without court action, it is called a “foreclosure by advertisement.” Mortgages typically have a power of sale clause allowing an attorney to foreclose on your home. A lender may choose, however, to go to court in a judicial foreclosure to obtain a judgment of foreclosure.

If your home is taken, there are certain reporting and notice requirements before the lender can sell it at an auction conducted by the sheriff, usually at a greatly reduced price. In Minnesota, as long as it’s a foreclosure by advertisement, you are not subject to a deficiency judgment if the sale is for less than the loan amount. This means that most of the time, as long as there is only one mortgage, a homeowner in Minnesota can walk away from a house free and clear. If there is a second mortgage, however, watch out. These days the holders of second mortgages are suing people in large numbers after the first mortgage has foreclosed. Sometimes they don’t even wait for the first mortgage to foreclose if the payments are not up to date.

Accordingly, if you are facing foreclosure, can a bankruptcy stop the foreclosure or benefit you in some way?

Can a Chapter 7 Bankruptcy Stop a Foreclosure?

Whenever you file for bankruptcy protection under a Chapter 7, an automatic stay of all legal proceedings, including foreclosures, goes into immediate effect. A Chapter 7, if you qualify, allows you to discharge most if not all of your debt.

Unfortunately, the lender is allowed to file a motion to lift the automatic stay as it pertains to your property as the lender can otherwise suffer economic harm. In this instance, a Chapter 7 will only temporarily delay the foreclosure.

It is very difficult to fight the motion to lift the automatic stay. About the only practical way to stop the motion is to get the payments up to date or make arrangements to bring the payments up to date. In a Chapter 7 the automatic stay ends when the discharge is granted, usually around three months after the case is filed. This means that most of the time lifting the stay doesn’t mean much anyway, because the stay was going away by itself.

At the least, you may be able to save thousands of dollars while not making any mortgage payments and take the time to look for alternative housing. Once the foreclosure is stopped, many lenders are very slow to get it started again. While the automatic stay officially only stops things for about three months, you will very likely gain much more time than that.

Can a Chapter 13 Bankruptcy Stop a Foreclosure?

The other bankruptcy filing available to a homeowner is Chapter 13. Under this plan, you must submit a repayment plan that includes all your creditors and that is approved by the bankruptcy trustee. The automatic stay also goes into immediate effect once you file.

Unlike a Chapter 7, this chapter allows you to keep your home but you must have proof of sufficient income to not only maintain the current mortgage payments but to make up the arrearages over the life of the repayment plan. Many repayment plans are for the maximum 60 months. Under a Chapter 13, then, you may be able to stop the foreclosure so long as the indicated conditions are met.

In a Chapter 13 it might also be possible to do a lien strip. We’ll know for sure when the Eighth Circuit Court of appeals finally decides the Fisette case. A lien strip would benefit homeowners with multiple mortgages. It would eliminate payments on all mortgages except the first one. If your home’s value has declined and the first mortgage has secured all the home’s equity, if any, then the other mortgages would be considered unsecured debt and will be discharged.

In any case involving a foreclosure, consult with an attorney to explore all your legal options.