Don’t sign a Reaffirmation Agreement Without a Really Compelling Reason

Nothing is better than being debt free.

The title of this blog post is a nearly exact quote of what I just told a client in a Chapter 7 case.  In that case over the course of a week I had received a proposed reaffirmation agreement from a credit union for a car loan and another one from a bank for a second mortgage.

I told my client that I thought she should sign the first one but that I was really against her signing the second one.  Why such seemingly contradictory advice?  Here’s a summary, with names and other identifying specifics omitted, of how I explained it in an email to my client:

There’s a lot of stuff I need to tell you about.  None of it is bad news,  just routine.  Here goes.

A reaffirmation agreement is a contract which, when filed with the bankruptcy court before the discharge date, reinstates a particular debt as if the bankruptcy never took place.  I usually advise against signing them, but if you really want to you can do it anyway.  I can’t stop you.  I don’t like reaffirmation agreements because they usually have language in them that says paying will not be a hardship or problem for you at all.  This contradicts everything else we have said in your bankruptcy petition, so I don’t want to have you sign unless there is a really compelling reason.

In the past couple of days I have received proposed reaffirmation agreements from (the bank holding the second mortgage) and from (the credit union holding the car loan). The (agreements are) attached …….

The thing with (the credit union with the car loan) is simple.  If you don’t sign it they will probably repossess your car.  So my advice as to that one is you better go ahead and sign it.  I would call that a compelling reason.  The time frame on that is that they have 60 days from the date of our ….. hearing (or meeting of creditors) to get it filed with the court.  What I would like to do is sit down with you, go over it and get your signature on all the right signature lines on it when I see you on (the date of the meeting of creditors); and then I’ll take care of sending it back to (the credit union).  They won’t do anything nasty if they have it in time to get it filed before the discharge, which is 60 days after the hearing.

As to (the bank holding the third mortgage), my advice is the exact opposite.  (Under Minnesota Law )They can’t foreclose as long as you keep making the payments.  The law (in Minnesota) concerning cars is way different from the law concerning homes.  The worst consequence (In Minnesota) of not reaffirming is that they won’t report your payments to the credit bureaus.  You can deal with that problem by keeping good records of your own so you can prove the payments have been made.  I just spoke with …….., the person whose name is on the letter that came with the reaffirmation agreement.  She says it is likely that (the bank holding the second mortgage) will resume sending monthly statements if they get a letter from me asking for that after the case has been discharged.  I will plan on doing that when that time comes.  I just put a note to myself on the front of your file to remind myself. 

We will no doubt go over all this and discuss it when I see you on …….. – after we’re done with the hearing.  There’s a conference room we can probably use at the courthouse, or we can go to the coffee shop on the main floor and talk there.

For now be sure you continue to make your car payments and the payments on both mortgages.  These creditors might stop sending monthly statements, but that doesn’t mean you don’t have to pay.  If you still want to keep the house and keep the car, you have to make the payments.  Every now and then I have a client who gets behind in the payments because the monthly statements stopped.  Don’t let that be you. 

Creditors like this usually resume sending statements after the discharge, either on their own or in response to a request.  After a bankruptcy the statements usually look a little different.  Somewhere on the bill they will say something like “We know you don’t owe this any more but we thought we would send this in case you still wanted to pay.  This is not an attempt to collect a debt.” 

Of course once you reaffirm (with the credit union holding the car loan) you will owe the debt again, so  their statements will look like they always did.

I didn’t get into it with this client, but the main reason I hate reaffirmation agreements is that they tend to defeat the whole purpose of the bankruptcy, which is to make debts go away and stay gone.  Even with a car loan, where technically the creditor does have a right to repossess just because the debt was not reaffirmed, I try to avoid having my client sign.  I make it my practice to call the lender and ask what they will do if my client does not reaffirm but continues to make payments.  If a reliable person speaking on behalf of the lender says the lender doesn’t  care about the reaffirmation as long as the payments continue to be made, I will tell  my client that I think he or she can get along without the reaffirmation and my advice is don’t sign it.

I found myself inserting “in Minnesota” several places above, because I want it to be clear that what I am saying may not apply in another state.  While bankruptcy is based on a federal statute that is supposed to apply nation wide, the law incorporates and relies a lot on local laws and local practices.  If you are not a resident of Minnesota, please ignore and do not rely on anything said here.  You need to consult a lawyer in your own state and your own community about matters like this.

This post is for general information purposes only, 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.

 

 

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.

Can Bankruptcy Stop Foreclosure?

Rental property and personal bankruptcy

Can Bankruptcy Stop ForeclosureForeclosures 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.

 

Eligibility Requirements for Filing a Chapter 7 Bankruptcy Petition

Debt Relief, MN Bankruptcy

Debt Relief, MN BankruptcyIf you are one of many people across the country who are suffering from more debts and obligations than your budget can seem to handle, you are probably thinking about seeking the protection of a Chapter 7 bankruptcy. Like most, you may also be wondering if there are specific rules or regulations that determine your eligibility to file a petition.

In order to file a petition for a Chapter 7 bankruptcy, you need to meet certain conditions defined within the bankruptcy codes. To begin with, your level of income must fall below a specific amount, and if so, you next have to pass another set of eligibility standards called the ‘means test’. However, the bankruptcy laws also state that the bankruptcy court can dismiss your petition if you have previously filed for bankruptcy during a specific length of time. The bankruptcy court can also dismiss your petition if feels you might be defrauding your creditors.

In previous bankruptcy laws prior to 2005, the judge presiding over the case could dismiss any Chapter 7 petition if you had enough disposable income to finance a Chapter 13 Bankruptcy repayment schedule to your creditors. With the new bankruptcy laws in effect, there are much clearer guidelines that determine if you will be allowed to remain in Chapter 7 bankruptcy, or if you might be required to petition for a Chapter 13. Only disabled veterans who have built up debts while on active duty, and people who have taken on too much debt because of a struggling business are allowed to submit an uncontested Chapter 7 petition.

These new guidelines for filing a Chapter 7 petition begin by determining how your ‘current monthly income’ amount compares to a standard or ‘median’ income level, and is it also based on your particular household size in your state. This amount is also calculated by averaging your total earnings during the previous six months prior to filing your petition. If your earnings happen to fall below or are equal to this median amount, you will certainly be able to qualify for a Chapter 7 petition.

On the other hand, if your earnings are above this median figure, then you must meet the next challenge by passing the ‘means test’ required in the up-dated bankruptcy guidelines. The means test is used to find out whether you have enough disposable income, after deducting living expenses and other debts like child support or alimony for instance, to repay your creditors over a three to five year repayment plan in a Chapter 13 petition. These guidelines were designed to keep people with higher levels of income from filing for a Chapter 7 bankruptcy.

The new bankruptcy laws also state that you may not file a Chapter 7 petition if you have already received a discharge of your debts in a Chapter 7 case within the previous 8 years, or in a Chapter 13 within the previous 6 years. In addition, you cannot file if either a previous 7 or a 13 was dismissed anytime within the previous six months because you violated a court order, you committed any fraudulent activities, or you dismissed your case because a creditor sought relief from the protection provided by the automatic stay.
Finally, the bankruptcy court can also have your case dismissed if it is felt you attempted to commit fraud against your creditors, or tried to conceal your assets or personal property from the bankruptcy court in order to avoid the liquidation process. The liquidation of your assets is necessary so that the court-appointed trustee on your case can repay as much of your unsecured debts as possible to your creditors.

It is important to remember that simply because you qualify under the means test guidelines does not mean you should automatically file a petition for a Chapter 7 bankruptcy. The test is only intended to confirm that you are eligible to file. Any decision to file for Chapter 7 bankruptcy should be made only after considering all other options and possible alternatives, and only after discussing these options with knowledgeable and qualified bankruptcy attorney.

If your would like to know more about Chapter 7 Bankruptcy and your Eligibility, Call David Kelly Today at: 952-544-6356

Or Fill Out Our Online Contact Form

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