FreshStart Solutions

Possible Scenarios

2010-09-28T13:37:00.000-07:00

The following was the result of consult with a client and lays out how certain ch 7 and ch 13 options may work in specific situations.

Current facts:
Employment: Temporary employment after a period of unemployment, current income approx: $450/week.
Real Estate: House value approximately $175,000 with a first mortgage balance of $190,000 and a second mortgage balance of $45,000. Both are in default and there is a foreclosure date pending.
Car Payments: None
CC Debt: $15,000
Personal Prop: Retirement account, nothing else of significant value.

Two options, ch 7 and ch 13
Either filing stops the foreclosure sale so long as the case is filed before Oct. 12.

ch 7
A fresh start.
In theory all property transferred to ch 7 trustee for sale (liquidation) with the proceeds distributed to unsecured creditors on pro rata basis and remaining debt discharged.

Property that is fully leveraged (debt against it exceeds value of the property, such as the mortgage in this case), will not be sold however the lien survives which means in order to retain the property, the mortgage must be brought current within about 90 days of the date the case is filed. Also the second mortgage survives as well.

In a ch 7 you can 'surrender' the property to the lien holder (the mortgage co.) and walk away from the house. The debt remaining after the bank sells the property is discharged i.e. there will be no liability for any deficiency debt.

You can remain in the property until the first mortgage again forecloses which will be a minimum of 4 months but has been as long as 18 mos. No payments need be made on the mortgage during this time (allowing you to accumulate funds to facilitate the move and new beginning).

Retirement account is excluded from the bankruptcy and is 100% safe.

ch 13
A reorganization.

Instead of giving assets to court, you retain the assets and 'reorganize' the debt in a ch. 13 plan filed with and administered by the ch 13 trustee.

In your ch 13, filed say Oct 5, you would agree to resume regular first mortgage payments beginning 11/1 and continuing. The plan payment would include the current arrears to the first mortgage (8-10k), costs, and pennies on the dollar to the remaining creditors.

In a ch. 13, it is possible, if the value of the Real Estate and the balance on the first mortgage as above are correct, to file a separate action, in the bankruptcy court to "strip off" the second mortgage and treat it as an unsecured, credit card like debt. If this is successful (very likely if numbers correct as above), then upon the conclusion of the plan (36 months) 1) the first mortgage is deemed current; 2) the second mortgage lien is deemed VOID; 3) all remaining debt including the second mortgage obligation is discharged.

Upon the successful completion, the home will be owned by Client, with one mortgage against it in the amount of approximately $185,000.

Also, in the current environment, it is possible, though I have no control, to 'modify' the mortgage obligation. In my experience this means rolling all the arrears into a new debt and reducing the interest rate for at least five years, (usually to 2 or 3 %). This process can and should take place during the ch.. 13, in fact it should probably begin promptly. I can assist though not formally represent in the matter. The timing is usually about six months to complete the modification.

If modified, you must continue in the ch 13 in order to get the benefit of the lien strip but we can modify the plan to pay only what you can afford to the remaining creditors (again i would anticipate a minimum distribution such as 2-10 cents on the dollar or at total of 2-4 thousand over the 36 months.

The ch 13 can be converted to a ch 7 at anytime, though the lien strip is voided upon the conversion (i.e. the second mortgage would 'reappear' as a lien on the property). So if the income situation changed, the lien strip did not work, or you decided you just did not want the house at any price, we can convert to a ch 7 and proceed as above.

Costs, Attorneys fees for the ch. 7 would be $2500 plus costs in this case, which run around $450. All fees must be paid before the case can be filed as I cannot file as a creditor of yours, (creates instant ethical conflict not permitted by the court).

Attorneys fees for ch. 13 are $3,000 plus approx $2,000 for the lien strip action. I prefer all fees to be paid and held in escrow in advance of the filing however if not possible, some of the fees can be paid through the plan. Costs are a little higher as occasionally an appraisal and or title work are required in the lien strip action.

Mortgage Definititons

2010-07-07T05:59:00.000-07:00

When analyzing a person's real estate as asset, liability and its place in a bankruptcy, it is important to determine the exact status of the property. There are three documents required to determine the 'who' and 'what' regarding real estate.

Deed: The deed is document by which a person "owns" property. A deed is a two or three page document that shows who has title to the real estate. The deed will list who is on the title and therefore who is responsible for taxes and who has the right to pledge the property as security for a mortgage loan, second trust, HELOC or line of credit. The deed is like the title to a vehicle.
Deed of Trust. The deed of trust is the document that gives a lender a legal interest in the property that, among its 30 or so pages, gives the lender the right to foreclose on the property if the terms of a promissory note are not made on time (default). Like the deed, the deed of trust must be 'recorded' at the courthouse where the property is located in order to be effective.
Promissory Note. A promissory note is the a promise to pay a certain amount. Deeds of trust secure the payment of the underlying promissory note to the lender.

Different parties may be on the different documents and analysis of who signed which of the documents is required to determine the status of the property in a bankruptcy. It is a good idea to go to the local courthouse and request copies of the recorded instruments (deed and deeds of trust, promissory notes are usually not recorded). The copies of the documents you may have received at your closing are not the fully signed recorded copies.

Free Annual Credit Report

2010-07-05T07:35:00.000-07:00

Once per year consumers are entitled to receive a free copy of each of the three major credit reports. Experian, Equifax and TransUnion. To receive your report go to AnnualCreditReport.com; find the U.S. Mail request, print, complete and mail. DO NOT sign up for the online version as when you click the ubiquitous "I Agree" button, contained in that small print is a waiver of your right to a jury trial and an agreement to submit to binding arbitration. If a cause of action arises from your credit reports, you do not want it decided by arbitration.

If you have already received your discharge, sign up at FreshStartServices.com and the form to receive your Free Report is loaded in the Documents section.

The report sent via U.S. Mail is more complete and should be filed away with other annual documents. We suggest designating a time of year, tax time, daylight savings time, New Years day, something like that to pull the report the same time each year.

Debt Settlement

2010-07-04T08:42:00.000-07:00

Credit Card Bailout Bill, You Have The Right To Settle Your Debt, The Program The Credit Card Companies Don't Want You To Know.

Debt Settlement Companies, use these pitches to softsell their expensive and destructive get out of debt product. The way they work is simple. The consumer pays the Debt Settlement Company (DSC) a certain amount each month until the DSC is holding a percentage of the total debt, e.g. 30,000 in debt, x 40% = 12,000 / 20 months = $600.00 per month the DSC.

By the time the consumer has accumulated 40% of the total debt, the original creditor has written off the debt and probably sold it downstream to a collection agency or attorney, and if not have charged off the debt and reported that charge off to the credit reporting agencies. At this point, whoever owns or controls the debt account, is willing to accept a compromise of the original claim. Usually, the collection agency, or debt buyer has paid 5 or 10 cents per dollar of debt to the original lender, so if they receive 25 cents on the dollar, that is a tidy profit.

There is no magic or secret to debt settlement. It is pure economics, either a lender cutting its losses by compromising non-performing accounts, or a debt buyer making 500% on its purchased debt.

The consumer is perfectly capable of making these deals with creditors. The one service the DSC does provide is to accumulate the funds because the compromises with creditors must be made in lump sums.

Resolving debt problems way destroys your credit score and future. Each of the accounts you settle will continue to report for seven years that their obligation went into default for months, then was finally compromised with the borrower. The problem is that this information, this 'status' continues to report month after month. Every month the compromised account will place this negative information into your score calculation. In a bankruptcy, the negative information is certainly on the report and in the score, but the Discharge and defaults do not continue to report month after month. The fact of the filing is set forth, the default and Discharge of particular accounts is noted, but next month, that account will be silent, no new report. This is why recovery after bankruptcy is ironically faster then recovery after even full payment after a default.

View this Article for more information and resources regarding DSC. Note, if already involved with a DSC and in Virginia, ask your company if they are in compliance with the new regulations that became effective July 1, 2010.

Mortgage Modifications in Bankruptcy

2010-05-31T16:42:00.000-07:00

Whether in a chapter 13 plan, waiting for your discharge in a chapter 7 or just starting the bankruptcy process, now is a good time to wade into the mortgage modification morass. While in bankruptcy, your lender will need consent from your attorney to speak with you. FreshStart Law Office provides a monitoring service through a third party web portal that may help streamline the process for certain lenders.

A loan modification may work better while in bankruptcy because you, the consumer, now have some power, namely to walk away from the mortgage. Also your budget has been filed with the Court and reviewed by at least three different parties so the interminable back and forth that has characterized so many of the modification attempts we have seen will end. As of June 1, 2010 bankruptcy schedules (income and expense) can be used to determine the borrowers new payment.

These are the June 1 revised guidelines. Be sure to coordinate with your attorney or get a referral from him or her.

Income tax withholding

2010-04-25T19:58:00.000-07:00

Income Tax Withholding

Your income tax refund is not a savings account. Ideally you should be writing the IRS a $150.00 check each April 15 rather then giving the government use of your money interest free.

If you receive an EIC refund AND ARE CERTAIN you will receive one in the coming year then you should decrease your withholding to zero as you will not be paying any Federal taxes.

The IRS.GOV website is extremely useful. This is a withholding calculation program on the site that you should use to be sure you are receiving as much of your income a appropriate each month. Contact your freshstart coach if you need help with the calculator.

Opting out of debt

2008-02-18T11:43:00.000-08:00

The FACTA law permits individuals to "opt out" of unsolicited offers for new debt, sales and junkmail generally, much like the "do not call" list we should all be on. The link https://www.optoutprescreen.com allows you to opt out for five years from all solicitations including credit cards.

The internet allows us to search for and apply for different lines of credit and financing we might need without sifting through stacks of unwanted mail. Being on the list will help protect against identity theft, credit scores (by keeping inquiries down) and generally make getting the mail a much more pleasurable experience.

Sign up today.

1099 received regarding discharged debt

2008-02-16T18:34:00.001-08:00

Some creditors have sent 1099 forms to to debtors purporting to have "forgiven" the debt that was actually discharged. The problem is the IRS also receives the form and expects it to be listed as "taxable income" on your 1040 tax return.

The IRS form provided here informs the IRS that the debt was discharged in a bankruptcy and should not be considered taxable income. You should only file this form if you receive one of the bogus 1099s from a creditor but if you do, this form is required or the IRS will expect you to pay taxes on the 'forgiven' debt as income.

Discharge_1099_982.pdf