Because Friends Don’t Let Friends Pay Credit Cards From Savings

Why Bankruptcy? Because Friends Don’t Let Friends Pay Credit Cards From Savings
Legal Notice: You are not my client, this is not legal advice, it’s a bunch of codswallop and hogwash, rely on it at your own peril, nor does reading this article make you my client. If you rely on this information and use it in your case and it goes badly for you, tough noogies.

So you’ve lost your job, broken your leg, gotten a divorce or someone has died.

You find out that on top of the $20K in credit card bills that you knew about, there’s another $30K that you didn’t.

I’ve heard all of this before.

Let this be a lesson to you, if you are letting your spouse do all of the finances, stop, wake up and smell the plastic. Go into the bills and read each one. If English is not your strong suit, bring a friend. Chances are, if only one spouse is ever doing all the accounting then that person may have bad things hiding in that pile of papers that he or she refers to affectionately as the bills.

No, it’s probably not a girlfriend or boyfriend, could be but probably not, but it could be a gambling problem or worse. And it could just be that after 15 years of spending $200 more per month than you earn, the total balances on all credit cards is now $36,000 higher than you thought. ($200 x 12months) x 15 yrs = $36,000. Of course it will be a bit smaller because of monthly payments or it could be a lot higher if some cards were used to pay other cards which usually happens after a few years of living that way.

I once had a client whose spouse had a gambling problem, that spouse had a friend who was a notary, who also had a gambling problem. They were partners in crime. While the innocent spouse was out to sea double entendre intended with the Navy, the stateside spouse and the in-cahoots-notary got together and created a 2nd mortgage and pulled all the equity out of the house and gambled it away while the innocent spouse was gone. Needless to say the innocent spouse also asked me if I do divorces, I don’t.

Face it, if you’re letting your spouse handle all of your finances, then guess what, eventually you’re going to end up alone and living la vida broke-a because you’ve only got a 50-50 chance of not getting divorced, but the other half end in death and either way, one or both of you ends up alone. I cannot begin to tell you how many widows and widowers I’ve met with who had no idea that the life insurance hadn’t been paid, had no idea that the cash value in the life insurance had been withdrawn and spent on girls, guns, boys, gambling, drugs, alcohol, and good times. More often, it’s like I stated in the first place, you’ve been living on $100 to $200 less per month and paying that difference with credit cards for the last 15 years, and I’ve seen that go on for 25 years as well. You’ve been just living a bit above your means, or your income.

So, you’re broke and alone and you realize that you’re not completely destitute, there’s some savings socked away somewhere.

Let’s say you find you’re left with $50K in debts on credit cards and unsecured loans, such as signature loans.

You’ve got $100K in your 401k plan, $20K in cash in the bank, some clothes, some furniture (no antiques or heirlooms), one 12 year old Honda Accord with a big rumple in the fender, you’ve got wedding rings that are 20 years old and you only paid $1000 for them back then (retail), your home is worth $200K and you’ve got a loan on it for $150K. And that’s all you’ve got.

You don’t have a job, you’re alone and you’re 50 years old, and you if you could get a job, you have no currently usable skills. Your only income is your dead spouse’s retirement which pays $1500/mo. What should you do? Please realize I can’t fit every scenario into one blog article. If you have specific questions you’ll have to call.

Most of your friends, Suze Orman and that buckets of money guy will probably tell you to pay off the credit cards with the cash and then tap into the 401k or pull some equity out of the house. Some of the financial pundits will get a little cheeky and say you should offer each credit card 30% or 40% and try to settle them for an average of about 35cents on the dollar. That way you could use the cash, not tap into the 401k or the house and still have a little left over. While it’s not a bad solution, remember that you still only have an income of about $1500/mo and your mortgage probably comes to about between $800/mo to $1200/mo depending on when it was refinanced last and many other factors. Even if your mortgage is low, how do you live on only $700/mo. It can be done but that’s a different article coming soon.

Why pay them even 35% when you could pay them 0%? After paying your bankruptcy attorney approximately $1500 in attorneys fees and the $300 filing fee for the case, you’ve only paid out about 3.5% of the total balances on the cards and loans. In CALIFORNIA you can keep the 401k, you can keep the equity in the house, you can keep the $20K in cash, you can keep the clothes and furniture, you can keep the little bit of jewelry, and yes, you can keep the old beater car. Is 3.5% better than 35%? No brainer.

In other words, you keep everything except the cost of filing the case. If any of the credit cards comes forward and says that that debt was created via fraud, you can say that it wasn’t your fraud, the missing spouse did it. And yes, even if the card is in your name, if it was identity theft, (your spouse stole your identity to create a card in your name), that’s not you committing fraud, it was your spouse. So sue him or her.

Bottom line, you’ve still got your 401k, your cash savings which must guard with your life because you don’t have a job. If you only spend $500/mo of it, it will last you 40 months on top of the $1500/mo in income that you do have in our little example above. You can see that if you can’t find a job in the next 40 months, then at least you had that much breathing room. If you paid out a 3rd of your savings to pay off credit cards then you’d have a year less than 40 months to find the next job. How much of a cushion is enough? With 40 months you could go back to school and finish a degree.

Sure they’ll tell you that employers are looking at your credit scores, and some do, but not if you have no interesting skills other than how to raise a family. I’ve got friends older than me who are working at Home Depot now. Great way to supplement the income but after years of raising a family there’s no other jobs they can do. I’m pretty sure credit was not an issue.

I’ll tell you about identity theft in another article.

For now, just realize that if you can keep all of your savings and file bankruptcy, why would you ever, ever do what the financial pundits tell you and pay off credit cards with savings when you don’t have a job? Anyone telling you to do that must have a freaking hole in their head. DON’T DO IT. Just Say NO. If you are not in California, go to the attorney of your choice and ask what you could keep if you filed a bankruptcy in that state. Also, if you live in Arizona, move to El Centro or the nearest California City closest to you and commute to work if you have a job or whatever you commute to and then file. That way you won’t be an Arizona resident when you file and, while you won’t get to keep $20K in cash like you would if you were from California, it will at least be substantially more than what Arizona will allow you to keep when you file.

How to Discharge Income Taxes in Bankruptcy

Before we get started, Disclaimer: Nothing in this article may be mistaken as legal advice. Attorney David Nelson, is licensed only in California, and this article is intended only for readers in California. This article is for entertainment, educational, extra-curricular, and medical purposes only.  If you decide to rely on this, heaven help you.

Chapter 7

Yes, you can discharge taxes in bankruptcy.  No, not all of them but some of them.  I hate to mention this part, when it comes to credit cards, medical bills and collection agencies, I only want one statement so that I have the addresses, account numbers and balances.  But with the IRS, Franchise Tax Board and Board of Equalization, I want you to bring every letter with you that they ever sent you.  In those letters are the answers to many of the questions and rules we will go over below.  California sales taxes are calculated against gross receipts and therefore discharge in bankruptcy under the same rules.

To discharge income taxes, whether Federal, State, or California Sales Taxes, many rules have to be followed.  Because this article only discusses income taxes, then it is important to remember that these are taxes that are assessed against gross income or gross receipts. See 11 USC 507 a 8 and 11 USC 523 a 1

There are several rules involved.  What’s worse is that the rules all involve the timing of the bankruptcy.  Often you’re in my office because of a lawsuit or a wage garnishment, or your bank account has recently been levied and you want to file immediately in order to stop the bank or your employer from sending your money to the Sheriff’s Office.

Problem is this, if you owe a bunch of money to the IRS and have to wait to file your bankruptcy in order to get rid of the tax, you’re going to have to decide whether the amount of tax to be discharged is more or less important than the amount of money the Sheriff is about to take away from you.  Notice that I said more important not bigger.

The Rules

  1. The tax year must be over.  Kind of a “No Duh” moment.
  2. The tax return (if required) must have been filed.  This is also a “No Duh” moment.  Prior to 2005 you used to be able to discharge the tax even you hadn’t filed if you chose to file a chapter 13 bankruptcy instead of a 7.  Many great things about the bankruptcy code were eviscerated in 2005 when republicans and democrats who had taken hundreds of millions of dollars in lobby money over the course a decade finally gave us bankruptcy reform.  Conveniently this happened right at the start of the economic downturn. Literally, the housing market went flat one month before the bankruptcy reforms went into effect. Hmm, I wonder how the banks knew it was finally time to get the bankruptcy reforms passed? Bottom line is, if you owe federal or state income taxes in California and you haven’t filed your returns, your bankruptcy is not going to help you get out of paying your taxes.  So file your tax returns, make sure you get proof that they received them, and call back in two years.  DISCLAIMER: Make sure that you speak with an attorney now and get this advice from an attorney as bona fide legal advice before you make your decision.  This article is not your legal advice.
  3. The tax return’s due date must have been more than 3 years prior to the filing date of your bankruptcy petition.  Notice it says “Return’s Due Date”. Commonly called the 3 year rule, this is where most people stumble and file their bankruptcy petition too early.  Tax Returns are due in April!  On top of that, if you got an extension to August, then they were due to be filed in August.  What if you extended to October?  If you cannot remember if you extended, contact the IRS and get an IRS Transcript for the tax year or years in question.  You can download the Transcript request from the IRS website. Alternatively if there is nothing else pressuring you to file you could just wait until October 20th to file.  I assume you can get a tax transcript from the Franchise Tax Board or Board of Equalization if you need one.
  4. If you filed your tax returns late, your returns had to have been filed with the IRS or other taxing agency at least 2 years prior to filing your case.  This is true whether you owe income taxes to the IRS or the State of California or whatever state you owe taxes too.
  5. Assuming you have beaten the 3 year rule, and the late filing rule, you still have to have beat this one.  The tax must be assessed at least 240 days prior to filing your bankruptcy petition. That’s about 9 months. Assessed means that they have decided you owe, how much and told you so.  In California, you get a letter that says: Notice of tax due.  It won’t say “assessment” and probably won’t say “assessed” either.  California’s notice of tax due is a weird animal, it does not become effective until 60 days after they send it.  So, in California, it’s a 300 day rule from the first letter.  Our Franchise Tax Board will send a 2nd letter stating that the notice is “final” and from there your 240 days starts. At this point people often ask the IRS, Franchise Tax Board or Board of Equalization if they will take less, give them a break.  Called an offer to compromise, if you’re going to file a bankruptcy, DON’T DO IT.  An offer to compromise delays the 240 day rule.  Sort of like the extensions on filing your tax returns under the 3 year rule.  You have to add 60 days to the time that your offer is pending plus the time that your offer is pending to the 240 days.  That can extend your 240 days automatically by 60 days even if you withdraw the offer to compromise the tax debt on the same day as you make the offer.  If you filed a bankruptcy previously during the 240 day period and it was dismissed and now you have to refile, you must add the amount of time your bankruptcy was pending to the 240 days plus another 90 days.  So, even if your previous bankruptcy was dismissed after a month you must add 4 months to the 9 months.  That’s an overdue baby.

A client, and no kidding his real name was Groucho Marx, (the names were changed to protect the innocent) owed $50,000 to the Board of Equalization, and $250,000 to the IRS. And no kidding, his rich uncle, (it wasn’t his uncle) died and left him some money, 15% of the total taxes owing.  After calling the IRS and talking them into taking a 15% pay off, the IRS put a condition on the deal, he had to get the State of California’s Board of Equalization to take the same deal.  Stupid condition but that’s what they told him.  So, he calls the BOE and says hey they’ll take 15% if you do, what do you say?  Unfortunately, they said, “we’ll get back to you.”  A week later they answered by taking all of his money out of his bank account.

The Board of Equalization and Franchise Tax Board in California are a bunch of rats clamoring over a cadaver with very little meat left on it’s bones.  If you ever make an offer to compromise a debt, never have the money in an account with your name on it.  Never have it in your wife’s account.  Never have it in your S Corp’s or your LLC’s name.  In fact, you might want to have it in a hole in your back yard before you make the call.

Chapter 13

The rules are nearly the same but you get to put the taxes you owe into a payment plan.  Plan details can be tricky but you no longer get the good benefits such as discharging taxes without filing the returns and so on.  Good luck to you.

Disclaimer: Nothing in this article may be mistaken as legal advice. Attorney David Nelson, is licensed only in California, and this article is intended only for readers in California. This article is for entertainment, educational, extra-curricular, and medical purposes only. If you decide to rely on this, heaven help you.

Bankruptcy Means Test Basics

Bankruptcy Means Test Basics

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Bankruptcy Means Test is the Chapter 7 Qualification Test. However, if you do not qualify for a 7, it is also used to determine the amount of your chapter 13 plan payment. Additionally, it determines the duration of you chapter 13 plan.

If your income is above the median income your chapter 13 payment plan must last for 5 years.  If below then only 3 years.

You can always file a chapter 13 which is often a much better idea than a debt consolidation. A chapter 13 is a type of debt consolidation however, you as the consumer have the upper hand.  You have the power.

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Reaffirmation Agreements

REAFFIRMATION AGREEMENTS

A Reaffirmation Agreement is a new promissory note to keep paying on an old contract for the purchase of goods where the lender can repossess or foreclose the goods.  Because you have signed a security agreement the lender has the right to repossess or foreclose if you do not pay for it.

Chapter 7 bankruptcy discharges your personal obligation to pay the loan, or in other words, you no longer have to legally pay on the note.  However, the lender still has a lien on the object(s) in question. Jewelry, refrigerators or large appliances, and most notably cars can be repossessed in this way.

What a reaffirmation agreement does: It allows you and the lender to agree that you may keep the goods so long as you continue to pay for them.  When executing a reaffirmation agreement with the lender sometimes the lender will reduce the balance owing, the interest rate or both.  As a result the payment and term can be reduced.

Nowadays most lenders will not reduce the interest rates and balances on cars.  Home mortgages never do.  You can often reduce the balance and interest rates on appliances, jewelry, computers and motorcycles.

If you do sign a reaffirmation agreement, you will have 60 days to change your mind and rescind it.  Rescissions must be in writing, served on the creditor and preferably filed with the court.

MORTGAGES

You would never reaffirm a mortgage.  Never.  Seldom but sometimes a mortgage lender will tell a client that the client’s post bankruptcy mortgage account would show up as good credit on their credit report if the client had just done a reaffirmation agreement.  It’s all the bankruptcy attorney’s fault that the client’s credit is not better than it is right now because he didn’t tell the poor client to reaffirm the mortgage.

Most mortgage companies will not do this to you, just a few.  Ones that do are unscrupulous and are aiming to get you to sign your life away.  They want you tied to that mortgage through the reaffirmation agreement come hell or high water.  If they can just do that, then if you foreclose, maybe they can sue you.  If you are in a worse position later, maybe you have to short sell, and when you do, they will ask you to pay them back sometimes, $10,000 to $50,000 in order for them to approve the short sale.

No, we don’t know what will happen, but I have a client right now who is being sued by a lender, his former first mortgage, who asked him to sign just such a promissory note in order to approve his short sale.  Fortunately for him, he did not do a reaffirmation on his mortgage during his bankruptcy.  Therefore, his mortgage company cannot in fact stick him with the debt, but for some reason they think that they can.  Wrong, they cannot.  We will be suing them soon for violating the Bankruptcy Discharge Order.

Because we do not have a crystal ball, and because the length of the term of a mortgage is so long, we NEVER sign a reaffirmation agreement on a mortgage.  This is the industry standard.

CARS AND VEHICLES

Legally, WITHOUT a reaffirmation agreement the lender can repossess your car, even if the car payments are current.  However, at this writing, the only companies who do are Ford Motor Credit & Jaguar Credit & California Coast Credit Union.   I cannot promise that other companies will not change their policies and begin behaving like Ford.

WITH a reaffirmation agreement, as long as the payments are current, then they cannot take the car just as before the bankruptcy.  However, just as before the bankruptcy, if you get behind in payments they will take the car AND sue you for a deficiency balance.

If you get behind, WITH or WITHOUT a reaffirmation agreement, they will definitely repossess the car.  So, the thing to do is to ask yourself, is the economy getting better or worse?  Answer:  Worse, my business is constantly picking up.  Everyone who comes in tells me that the business they work for is dropping off.  Fewer orders, fewer sales, employees are being let go.

So, if you just keep making the payments and don’t worry about it, you have a great probability of nothing changing, and eventually once the vehicle is paid off, they will still have to give you the pink slip.

If you sign and file a reaffirmation agreement, and then change your mind, you have 60 days to do so in writing and it must be in writing, signed and filed with the court.

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Chapter 13 2nd Mortgage Lien Stripping

Chapter 13 2nd Mortgage Lien Stripping

You may be able to strip your 2nd mortgage or home equity line of credit, Heloc, off of your home in a Chapter 13.  Not only can you discharge the loan, or promissory note that you signed when you executed the loan docs, but you may also be able to remove the lien from your home as well.  If the Bankruptcy Judge assigned to your case agrees, then once your chapter 13 case is over, the creditor must release the lien.

You may also be able to remove the 2nd mortgage from a rental property and in addition, you may also be able to reduce the 1st mortgage as well.  Rental property properties have different rules than residences do.  An important distinction, you must remember that if you live in the house, you have fewer options than if you have moved out and rented the place.

IT WORKS PRETTY MUCH LIKE THIS:

A 2nd mortgage, or home equity line of credit, has two things over you:

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a) the have the note that you signed promising to pay
b) they have a deed of trust or trust deed on the house which is a lien on the house
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Chapter 7 Bankruptcy discharges the Note or the Loan, but you still have the Lien or Trust Deed on your house.  Even after your bankruptcy, your 2nd mortgage lender can foreclose the lien, but in order to do so, it must first pay off the 1st mortgage and any unpaid property taxes.

This is a big difference between the two chapters of  Consumer Bankruptcy.  After a chapter 7 is over and completed, the 2nd mortgage could still foreclose on the house later.  Over time, the value of the property will go up. The house will appreciate.  After it’s value increases to a point where the value of the house is greater than the balance on the first mortgage, the 2nd mortgage would be in a position to foreclose the property.

So, what you do is:

1.  Get an appraisal.  We must be able to credibly state that the value of the home is significantly lower than the balance on the 1st mortgage.   If your value is lower but close, you run the risk of expensive litigation in order to strip your 2nd mortgage or home equity line of credit.  Of course, if the balance on the 2nd is large compared to the cost of the litigation, then it’s worth the effort.  As long as you know that the attorney’s fees could be significant as you’re going into the deal, then it’s fine if you want to spend the money.  Nevertheless, those attorney’s fees would be on a three to five year payment plan so it should be manageable.

2.  If the value of the home is lower than the balance on the first and it is significantly lower, then the mortgage lender on the 2nd mortgage or Heloc, Home Equity Line of Credit, won’t fight it, and you’ll win by default.

3.  If the value of the home is greater than the balance on the first, even just a little bit, then you lose and you’re stuck with the whole 2nd mortgage.   Remember however, there is a difference between your primary residence and your rental properties.  Respecting your primary residence, you can only remove your 2nd mortgage, or not.  Rental properties however, can have 2nd mortgages removed, 1st mortgages reduced, or if the value of the home is above the balance on the 1st mortgage, the 2nd mortgage (or heloc) could be reduced so that the total balances on all mortgages are equal to the value of the property.

Caution

Chapter 7s are risky. We don’t know how long it will take the values of our real estate to increase.  If you do a chapter 7, you will discharge the loan, or promissory note.  Nevertheless, you will still have the deed of trust still attached to the house.  So at some point you must settle that 2nd mortgage with that bank.

Chapter 13s are risky too.  They can allow you to strip the 2nd mortgage off the house completely.  Risky because chapter 13 (on your primary residence) requires that you immediately go back to paying your regularly scheduled monthly mortgage payments on your 1st.  If the 1st mortgage has not yet been modified on the date of filing the bankruptcy, then you’d be stuck with the unmodified mortgage payments.

All chapter 13s must be approved by the judge assigned to your case.  Called a confirmation order, many cases end up falling short because people who want to remove the 2nd mortgage often propose payment plans that are unrealistic.  In other words the budgets they propose for themselves are just too tight.  Your attorney will refer to such a budget as unfeasible.  Feasibility just means that you really can afford to make the monthly payment to the bankruptcy trustee on your case.  To be confirmed, a case must be feasible, and you must convince your judge and your bankruptcy trustee that you can afford to to make the chapter 13 plan payments.

Additionally, most chapter 13s never get completed once they are confirmed.  More than 70% don’t get a chapter 13 discharge because something happens that derails the payment plan such as a work stoppage or an illness, or even just a busted transmission.  Either your earning capacity has been reduced or your ability to pay has been eclipsed by a more pressing expense.

Stripping the 2nd mortgage off in a chapter 13 requires that you complete the payment plan.  If your hypothetical plan payment is $350/mo and you pay it for 2 1/2 years that’s a total of $350 x 30 months = $10,500.  What if you cannot pay it anymore because of a work stoppage, you get fired or laid off, you break your leg, your transmission goes bad? You’re not going to complete your chapter 13 payment plan.  Guess what, you just tossed $10,500 out the window.

So, to strip a 2nd mortgage off of your primary residence,

  1. the value of the property must be lower than the balance on your first mortgage
  2. you must be able to pay the 1st mortgage payment,
  3. you must get the judge to agree that you are able to afford the plan payment,
  4. and you must complete the plan which will be 3 to 5 years long.

How Much Will My Chapter 13 Plan Payment Be?

Plan payments depend on a couple things

  1. how much excess income you have at the end of the month
  2. how much the means test says you must pay
  3. how much you owe on unpaid mortgage payments from previously unpaid months called arrears
  4. back taxes and child support
  5. the balance owing on your car
  6. how much of your attorney’s fees were paid in advance
  7. how much you usually get as tax refunds
  8. and several other possible issues

You will have to call for a consultation on the issue in order to get an estimate.

Call 800 FILE AWAY or 800 345 3292, call right now for a consultation.

David L Nelson
Temecula Bankruptcy Attorney
Temecula bankruptcy attorney, Murrieta bankruptcy attorney, Lake Elsinore bankruptcy attorney, Canyon Lake bankruptcy attorney, Menifee bankruptcy attorney, Perris bankruptcy attorney, Riverside bankruptcy attorney, Corona bankruptcy attorney, San Diego bankruptcy attorney, Los Angeles bankruptcy attorney, LA, and Orange County bankruptcy attorney

Debt Freedom and Retirement

Debt Freedom is Required for Retirement

If you’re like most of us, you’re planning to retire on your 401k or other similar Retirement plan. And you’re wondering if Walmart and McDonalds will have too many “senior” team members when you get there.  Because you’re going end up with a lower income than the one that you presently cannot live on, you wonder what will you do then?  Do you really think social security will be available?  Even if it is, how much buying power will it have?  My mom used to get the equivalent of groceries and utilities, and that was it.

I will teach you how a 2nd Mortgage can be treated as though Stripped Off your home even in a Chapter 7, and how you can in fact strip a 2nd Mortgage off your home with a Chapter 13.

Because your retirement income will most likely be lower, than your current income: If you’re still in debt at retirement time, you’re going to file Bankruptcy.  Why not file right now?  Put those credit card payments into your retirement accounts instead.  I realize that for most of you, if you didn’t have to pay consumer debts, you would not likely be able to just switch portions of your budget over to retirement planning.  You’re eating white bread from Albertsons with non-fat milk and telling yourself that it’s because the non-fat is healthier.  Just to pay the gas expense, you’re wearing sweaters at night and walking to the not as good park because you can’t afford to drive to the nice one with the lake.  Telling yourself and your kids that walking is good for you even though the slides are broken isn’t making you feel any better. I get it.  However, what if you could have a more normal budget and maybe put at least some into savings?

RETIREMENT AND KEEPING YOUR HOME:

YOU MUST GET OUT OF DEBT. When it comes to Retirement, or Wealth Building, getting out of debt is not the FINAL step but the FIRST. Mortgages must be part of the formula. How can you Retire when you’re in debt?

Here’s what I see everyday: Your Mortgage payment is $1500/mo and your 2nd is $500/mo.  In Credit Cards you have $25,000 with payments of another $500/mo.  Both Mortgages have 30 year terms.  At year 10 you start up a 401k plan and a personal IRA.  But how much can you put into either?  You’ve got $1000 in debt service going out of your budget every month.  Each month before you eat, you have to pay $1000 to cyberspace or “The Man”.

Assuming you have an income of $6500/mo and take home $5300 after taxes and insurances, and that you’re married and you have 2 children living at home.  First, I’d recommend, one of you must get a better job or another job as soon as possible.

$5300 Net Pay Less
$2000 Mortgages
$500 Debts and Credit Cards
$2,800 Left after that. (the rest of the budget must be calculated.)
$700 Two Car Payments
$500 Gas and Travel for the two cars
$100 Car Insurance
$40 Medical Expenses out of pocket
$800 Groceries (and everything that comes from the store) and Fast Food on the way to and from work, school and at work and school.
$400 Day Care
$400 All Utilities including Internet $30, Cell Phones $150, Home Heating & Cooking $100,  TV $50, Water $70
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You can see that this family’s budget is already negative.  Add clothing & shoes $150 (for four), life insurance $80, hair cuts & beauty shop $40, tithing/charitable giving $40, laundry/dry cleaning $35 and home maintenance $20 and you’re toast.

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Bankrupt already, and you just didn’t know it.

Filing bankruptcy for this family would be a fantastic idea.  Just think about it.  Even if they were stuck with the 2nd mortgage when it was over, how much better off would they be if they could just get out of under the credit cards payments.

In a Chapter 7 Bankruptcy they must Qualify.  Called the Means Test, the qualification test starts with your gross income and asks first are you above it or below it?  If above, then there is an 8 page questionnaire that you must go through to see if you qualify or not, and in my experience, 97% of my clients have qualified by the time we are done with the 8 page questionnaire.  In our current test case, the family makes $6,500/mo which is $78,000/yr.  The Median Income for a family of 4 this year is $78,869.00 and they get to skip the 8 page test.  Part three of the Qualification Test, we go their budget to see if they have any money left over when it is all said and done.  Even adding that $500 from the credit cards back in leaves them negative $5.00/mo so they have qualified for a Chapter 7 Bankruptcy.

In Chapter 13 you must also Qualify, but the test is basically this, can you afford to make a payment?  Why would you want to do a Chapter 13?  If the value of the home is lower than the balance on the 1st mortgage, then this family could do a chapter 13 bankruptcy and strip that 2nd mortgage off of the house.  In this case, they would divert the $500/mo that they are paying to their 2nd mortgage, or perhaps even a bit less depending on circumstances, and at the end of three short years, (in this hypothetical case) the 2nd mortgage is gone, the lien is released, and that $500/mo payment is gone forever starting 17 years earlier than planned.

I cannot stress this enough, what happens in month 37?

Okay, probably after a short vacation so probably in Month 40 or 45, they can now put that $500/mo that had been going into the 2nd mortgage into their retirement planning.  If it goes into an IRA, Life Insurance, 401k, or whatever, at least it is now going into their future rather than huge bonuses to Citibank and Chase Mastercard’s CEOs.

I would pay the 1st Mortgage off at this point. 17 years x 12 months is 204 months x $500/mo is $102,000.  Any mortgage with a $1500 payment could probably be paid off before the 17 years is over when you combine the 2nd mortgage payment with the first and pay down the first with $2000/mo instead of only $1500.

If you put the $102,000 into an IRA or a 401k how much would you have at the end of 17 more years, it’s hard to say, it could easily be only the $102,000 or it could be $250,000.  What will the monthly payments be from a pot of $250,000 when you retire?  I’m not a retirement planner but I’m sure it would be less than $1500/mo.

So with a chapter 7 our hypothetical family might have some breathing room.

With a chapter 13 they might be able to pay off their 1st mortgage and save for retirement. HERE’S A CREDIBLE PLAN TO RETIRE EARLY THAT CAN ACTUALLY WORK WITHOUT SELLING STUFF TO YOUR FAMILY AND FRIENDS.  (Not that there’s anything wrong with that.)

It depends on the value of the house.

DO NOT WAIT, FILE NOW.  YOUR HOME’S VALUE WILL START HEADING BACK UP SOON IF IT HAS NOT ALREADY.  YOU MUST FILE NOW TO TAKE ADVANTAGE OF THIS.

Temecula bankruptcy attorney, Murrieta bankruptcy attorney, Lake Elsinore bankruptcy attorney, Canyon Lake bankruptcy attorney, Menifee bankruptcy attorney, Perris bankruptcy attorney, Riverside bankruptcy attorney, Corona bankruptcy attorney, San Diego bankruptcy attorney, Los Angeles bankruptcy attorney, LA, and Orange County bankruptcy attorney

Chapter 7 and Your 2nd Mortgage

Updated on June 13th, 2018.

Refinancing Your Second Mortgage

Yes, it may be an actual option. And as unlikely as it may seem or feel, if you have home equity now (at this writing in 2018) then a refinance may work but only if you have good enough credit. But how do you manage that after having filed a Chapter 7 Bankruptcy? Believe it or not, credit repair services use the same techniques outlined in the following Guide. The Attorney’s Guide to Credit Repair. It’s Fast, Easy and Guaranteed.

In fact many use the very same Guide. Follow this guide to repair your credit fast, including how to write letters to settle debts such as your 2nd Mortgage. Download it Now and Get Started Right Away with The Attorney’s Guide to Credit Repair. It’s Fast, Easy and Guaranteed.

Your 2nd Mortgage or Home Equity Line of Credit – Heloc

While it is true that you may be able to strip these off of your home in a Chapter 13, in a Chapter 7 you can’t, but, you may still be able to effectively ignore it (for a while) and keep your home.  However, the 2nd Mortgage or Heloc would still have a lien on the property.  You would then have to settle the lien or deal with it in some manner later on. Your 2nd or Heloc has two things over you

a) they have the promissory note that you signed promising to pay

b) they have a deed of trust or trust deed on the house which is a lien on the house also called a mortgage. 

If you have filed a Chapter 7 Bankruptcy, then the Chapter 7 discharges the Loan or Promissory Note, which means that the mortgage company or lending bank cannot collect money from you directly. They cannot sue you, garnish your wages, levy your bank account, or even ask you for money or anything like that.

If you still own the home, then you still have that 2nd Mortgage Lien called a Trust Deed or Mortgage on your property. Chapter 7 Bankruptcy does not remove that kind of lien from your house, not in the 9th Circuit Appeals Court’s jurisdiction. Therefore, if the value of the house is high enough, then your 2nd mortgage lender can foreclose that lien, but in order to do so, it must pay off the 1st mortgage and any unpaid property taxes first.

Some Things You Can Try Include, But Are Not Limited To: 

1.  Refinance Your Second Mortgage: Yes, it may be an actual option. But if you have bad credit, you will have to repair it first.

2.  If the Value of the house is higher than the balance on your 1st mortgage then you must deal with your 2nd mortgage now.  If it is lower than the balance on your first, then you don’t have to deal with them immediately, but you must deal with them eventually, because, remember, they have a lien on the house.

3.  If the value is relatively close to the balance on 1st mortgage then you will have to deal with the 2nd mortgage sooner rather than later because in not too much time, the value of the house will go up high enough for the 2nd mortgage company to be able to foreclose. If you cannot afford to settle it, you should consider trying a loan modification. 

4.  What most clients will do is make an offer to settle the 2nd mortgage lien in one payment, one time with no balance owing afterwards, and you must get that in writing from the bank before you mail your cashier’s check. You might have to take a massive 401k loan in order to be able to make such an offer, but if they take it, it would be worth it. 

5.  If you have previously filed a bankruptcy and then the 2nd mortgage lender cancels the debt and sends a 1099 for the “forgiven” balance next year, then you are able to deduct the amount because it was already previously “forgiven” or when you filed your chapter 7 bankruptcy and received your chapter 7 bankruptcy discharged. 

6.  Most clients will save as much as possible and then when they get a tax refund next year, they add that with the savings, and if possible, sell a car or some jewelry and then use that to make an offer to settle the lien. (Dear Reader, when I originally wrote this several years ago, most homes had much lower values and so it was so much easier to offer to settle such a second mortgage. However because home values have gone up considerably, it’s nearly impossible to do now.) 

7.  In any case, your Discharge Order from your Chapter 7 Bankruptcy prohibits  all kinds of collections.  Therefore, they cannot hound you, dunn you, or bother you, whether by phone, email or letters demanding payment of the loan or promissory note.  They have only one legal option, they can foreclose. It doesn’t mean that they won’t but knowing your rights, that they cannot, at least you can protect yourself.  REMEMBER however, that the 2nd Mortgage must pay off the 1st Mortgage in order to foreclose.

8.  If your home has significant value which it probably does, the loan modifications are an option to protect your home, and if necessary, selling your home as a method of preserving the home equity is also a great option. Not that those are the best options, but they are options. Additionally, Chapter 13 Bankruptcy may be a viable option as well.

THEREFORE, the probability of them foreclosing is lower and lower when the value of the house is lower than the balance on the 1st mortgage.  It’s simple math, they won’t pay off a $200K loan to get a $150K asset that they can then resell and only recoup $150K and they’d have to pay closing costs to sell it so they’d only net $120K. That would be a loss of $80K plus they would also lose all of the 2nd mortgage too which is probably another $50K or more on top of the $80K.

HOWEVER, when the 1st and 2nd are held by the same company and particularly if that company is a credit union, it may be possible that they’d foreclose anyway but if the payment on the 1st is getting paid, then it’s still not very likely.

Overall, when dealing with a 2nd mortgage, it’s risky, no matter what happens. A chapter 13 which would allow stripping off the 2nd mortgage, is risky too.  Even more so because your Chapter 13 Bankruptcy requires that you immediately go back to paying your regularly scheduled monthly mortgage payments on your 1st mortgage, and if the 1st was not yet modified on the date of filing the bankruptcy, then you’d be stuck with the unmodified mortgage payments. Also, most Chapter 13 Bankruptcies never get completed.  More than 70% don’t get a chapter 13 discharge because something happens that derails the payment plan such as a work stoppage or an illness, or even something unexpected such as a busted transmission. Stripping the 2nd mortgage off in a chapter 13 requires that you complete the three to five year payment plan, so it’s majorly risky because if you have a hypothetical plan payment of $350/mo and you pay it for 2 1/2 years and then if you cannot pay anymore and you don’t get your plan completed, guess what, you just tossed $350 x 30 months out the window.  That’s $10,500 that you’ll never get back, and that’s only if you get a payment that low to begin with.  Most are higher.

In Summary:

Offer to Settle Your 2nd Mortgage

So, in summary, making an offer to settle the balance on the 2nd after a Chapter 7 Bankruptcy, should aim to pay (I originally wrote 10% of the balance or less, but nowadays the percentage at this writing in 2018, must be much higher). However if the house is seriously upside down on the 1st mortgage already, you may be able to offer lower. But it does have to be paid in one payment once they accept and you must get them to accept it in advance in writing. You must not pay them unless you have it from them in writing that they will accept your settlement offer and that they will RELEASE the lien once they get the payment.

I’ll say it again just in case you didn’t hear me, they must agree to RELEASE the lien in writing once they get your payment. If they don’t agree to release the lien, don’t send the check.

Refinancing Your Second Mortgage

1.  Refinance Your Second Mortgage: Yes, it may be an actual option. And as unlikely as it may seem or feel, if you have home equity now (at this writing in 2018) then a refinance may work but only if you have good enough credit. But how do you manage that after having filed a Chapter 7 Bankruptcy? Believe it or not, credit repair services use the same techniques outlined in the following Guide. The Attorney’s Guide to Credit Repair. It’s Fast, Easy and Guaranteed.

In fact many use the very same Guide. Follow this guide to repair your credit fast, including how to write letters to settle debts such as your 2nd Mortgage. Download it Now and Get Started Right Away with The Attorney’s Guide to Credit Repair. It’s Fast, Easy and Guaranteed.

YOUR HOA MAY SUE YOU EVEN AFTER YOUR BANKRUPTCY

YOUR HOA MAY SUE YOU EVEN AFTER YOUR BANKRUPTCY:

THE BANKRUPTCY CODE SPECIFICALLY ALLOWS IT!  The Rule is that you can eliminate your personal liability to pay your Home Owner’s Association up to the date that you file your case.  But what happens AFTER?

YOUR HOME OWNER’S ASSOCIATION CAN SUE YOU IF:

FILING BANKRUPTCY STOPS FORECLOSURE, BUT YOU MUST STILL EITHER WORK OUT A LOAN MODIFICATION OR SETUP A CHAPTER 13 PAYMENT PLAN IN ORDER TO STRIP OFF THE 2ND AND CATCH UP YOUR FIRST. IF ALL GOES WELL YOU WON’T THINK ABOUT YOUR HOA, YOU JUST CONTINUE TO PAY IT.

IF THE ABOVE DOESN’T WORK OUT, YOUR AIM MUST BE FOR A SHORT SALE to avoid a Foreclosure after Bankruptcy.  Doing a Short Sale will take the Home Owner’s Association into account as part of the final deal and that will be that.

But if you end up with a Foreclosure after Bankruptcy . . .

FORECLOSURE AFTER BANKRUPTCY:

If you know that you can’t pay a Chapter 13 payment (YOU MUST CONSULT A BANKRUPTCY ATTORNEY TO BE SURE, NEVER ASSUME ONE WAY OR THE OTHER WITHOUT A CONSULTATION FIRST), & if you cannot pay your 1st, you are going to lose your property.  So, File a Chapter 7 Bankruptcy: Your 2nd or HELOC will no longer be able to sue once your Chapter 7 has discharged.  You can stay in the property a bit longer while saving up to move. You could get a couple or even several extra months Rent-Free! But if you don’t do a short sale, you will eventually have a foreclosure.

Your HOA will be able to sue you from the date that you filed your Bankruptcy until the day your property is foreclosed.  I have seen this more than once, a couple assumes that a short sale is on track, and then it doesn’t go through.  Meanwhile they have not been paying the Home Owner’s Association fees.  Probably they haven’t paid for a year prior to filing the bankruptcy so they are out of the habit of paying it.  Once the bankruptcy took place, they still didn’t pay because they couldn’t afford to, or they assumed that the short sale would take care of it.

But if you don’t pay, and there’s a foreclosure, you’re going to owe all HOA fees and assessments from the day that you filed until the day that you no longer owned the property. Because they banks don’t want to pay the HOA fees either, I have seen them take a couple years to actually repossess a house, especially if the family has already moved out.  $150/mo in HOA fees plus special assessments, attorney’s fees and costs adds up pretty quickly.

SO CONTINUE TO PAY THE HOME OWNERS ASSOCIATION FEES UNTIL THE PROPERTY IS SOLD OR FORECLOSED.  If you don’t want to pay the HOA Fees to the HOA because you expect a short sale to take care of it, put the HOA Fees into a savings account just in case the short sale doesn’t go through.  If it doesn’t go through you just pay them.  If it does go through, you have a small savings account to use as moving money, or maybe replacing your appliances.

Bankruptcy Attorney David Nelson

Temecula bankruptcy attorney, Murrieta bankruptcy attorney, Lake Elsinore bankruptcy attorney, Canyon Lake bankruptcy attorney, Menifee bankruptcy attorney, Perris bankruptcy attorney, Riverside bankruptcy attorney, Corona bankruptcy attorney, San Diego bankruptcy attorney, Los Angeles bankruptcy attorney, LA, and Orange County bankruptcy attorney

Why File Bankruptcy?

Ever considered it?

You may either make too much money or have too much equity in your assets, in which case, why bother?  You may have no job and nothing to take away from you, in which case, why not bother?

However, if you are like most families and people, you have an average income, average sized family and not enough income.  An average income would have been fine some years ago, but now, you’re making less and spending more, even if you have the same job.

As the price of gas, or milk, or health insurance, or baby-formula, or crunchy tacos goes up, while that might be good for the country if it forces us off of gas, milk, or crunchy tacos, it also means that your discretionary spending is shrinking faster than we can re-budget the little that’s left over.  

What are you going to do?

If you’re thinking that it’s immoral, stop it.  Two things, first look up the Jubile (Jubilee in Modern English) in your bible dictionary.  Second, think of the parable that ends with the statement that you cannot serve two masters, you cannot serve God and Mammon. You will want to Google the meaning of Mammon but it translates as ill-gotten gains, (some translations say filthy-lucre, and one just says wealth).  In other words, you cannot serve God and sin.  Kind of a no duh moment. 

But watch what the servant did. In that parable the servant was told by the Lord of the House that he was going to be fired because he hadn’t collected on the accounts.  As the accounts manager of the House, (think of House the way the English use it to mean business) he was a bad servant because he hadn’t collected.

So, upon learning that he was about to be fired, he settled many of the accounts.  Inquired of several of the Lord’s debtors, he would ask how much do you owe? Whatever answer he received, he would settle the account for less. Accounts of 100 measures of oil, or 50 bushels of wheat, or 100 buckets of barley, he settled for between 50% to 80% of the balance.

But what happened to him?  From the Lord who had threatened to fire him, and had called him a bad servant, that servant received a commendation. Think about that. Almost a promotion and he gets an Attaboy from his boss.  The business owner actually thanks him for getting .

Serving Mammon

Serving mammon is to try to get the last penny out of your debtors when in a tough economy no one can afford to pay. Wise action is when the accounts manager has enough sense to settle the accounts and at least get some money back into the business in order to continue operations. In doing so, he made his boss happy to get at least something instead of nothing which is what he was getting when the accounts manager was holding out for full price. In doing so, he also made friends outside the business just in case he did in fact get fired and had to leave.

What are your Creditors doing to you?  They’re trying to get the last penny out of you when in a tough economy no one can afford to pay. If they won’t be the wise servant and settle the accounts with you, then you be the wise servant and settle the accounts with them. If you can afford to pay a little, you do a chapter 13 and pay a payment plan. If you cannot afford to pay, then this is your JUBILEE year, and you do a chapter 7.

If you need help to settle your debts, your best bet for the best advice ever on how to do that is Right Here

If you decide you would like to file bankruptcy, Call 800-345-3292, 800 FILE AWAY 

Temecula, San Diego, Los Angeles or LA, Orange, Temecula, Murrieta, Riverside, Corona, Menifee, Perris, Wildomar, Lake Elsinore in Riverside County, San Diego County, Los Angeles County