What you need to know before you decide to sell, refinance or file bankruptcy

The Old Homestead Copyright (c) 2018 by David L Nelson, All Rights Reserved

What you need to know before you decide to sell, refinance or file bankruptcy.

Have you ever found out your home had a lot of equity? If you’re like me and everyone else in the world, you thought that if you could just refinance and pay off the credit cards, that would fix everything. 

Maybe it would. It might help a ton in fact. But it would depend on how much equity was in your home. How much equity we’re talking about. Let’s say for example that Tarzan and Jane owe $30,000 in credit cards and own a home worth $450,000. They each make $40,000 per year. They have two children, bad credit and their monthly credit card payments add up to $1050 per month.

Upside Down or No Equity

If their house is upside or has no equity, they might just file a Chapter 7 Bankruptcy and be done with the credit card debt. As a married couple with a family of four and eighty thousand per year in income, they would qualify for a chapter 7 bankruptcy in California and wouldn’t lose the house to the Bankruptcy Trustee assigned to administer their bankruptcy case. Bankruptcy Trustees are only interested in equity that they can actually impound, in their case, there is little or no equity at all.

The only risk is that Tarzan and Jane are paying for a house with a loan of over, or equal to $450,000. That’s a big loan with a big payment. They should probably fix up their place as much as possible, do it fast, and sell it to buy a house they can afford. Their payment on $450,000 is probably $2700/mo depending on the Homeowner’s Association Dues and Escrow Impounds and whether they have had the loan modified or not. So, they could file bankruptcy, get out of the credit card debt and if they can budget really well, they might stay in the house or sell it or even short sell it and find a rent that they can better afford.

Small Amount of Equity in the Home

See above but now the short sale is off the table so that at least when they sold, if they did, then they wouldn’t have a bankruptcy plus a short sale on their credit and that’s good for everyone. It also means they have a lower balance on their mortgage and that means maybe they should stay, at least they’re on the positive side and their payment is likely lower than in the first example supra.

Significant Equity in the Home

Of course this is where I wanted to get to in the first place. Now there are some real decisions to be made and not all of them are rosy. Let’s assume there’s $140,000 in equity, so that on the $450,000 house they only owe a mortgage with a balance of $310,000.

At least, at $310,000 in mortgage debt, Tarzan and Jane probably have a mortgage they can afford of something in the neighborhood of $2000 per month depending on impounds and etc. For a family of four, that’s comparable to what rents would probably be if they moved. So they wouldn’t want to move because the equity and the affordable house payment.

So what are the options?

a) Just Keep Paying Your Credit Card Payments

The average monthly credit card payments are probably about $1050 per month or even more if they just continue paying them. It will take a long time to pay them all off if Tarzan and Jane are only paying the minimum monthly payments. In the end they will have paid off nearly $100,000 because of all the interest. So this is not a good plan. 

b) Sell Their Home and Buy Another

This is a terrible option for obvious reasons outlined above, there’s plenty of equity and an affordable payment. Selling in order to pay off credit cards is a terrible idea. Besides where would they go? They would have cash but bad credit and a decent income. That and a couple dollars will get you a cup of coffee but not another house.

c) Chapter 7 Bankruptcy

I like chapter 7 bankruptcy more than chapter 13 in most cases, but not this one. Tarzan and Jane are too young and healthy. Chapter 7 is the Straight Bankruptcy or also called a Liquidation Bankruptcy where you’re in and out again in about four (4) months, however, the Trustee’s job in a Chapter 7 is to collect assets from you, liquidate them and pay them to your creditors. Tarzan and Jane have $140,000 in equity, but in California they can protect only $100,000 in equity in their home at best. Have a look at Calif. Code Civ. Pro. 704.730.

Certainly, if one of them were permanently disabled, on social security, or had a letter from the VA so stating then they would be good to go. In that case they could protect up to $175,000 of home equity in a chapter 7 bankruptcy, in California. (See Link above). Even if no one has stated that they are totally  and permanently disabled or close to it, and if one of them cannot participate in gainful employment, then they should go to the doctor and get one or two of them to sign off on it. Or if either were over sixty-five (65) years old, then that works too, and they could protect up to $175,000 in home equity. 

There’s another option for people over fifty-five (55) and low income, (but that one hardly ever works). If Tarzan and Jane could protect more equity than they actually have, then they could file a chapter 7 bankruptcy and keep the house no problem and since $175,000 is greater than $140,000 in equity, they could file a Chapter 7. Unfortunately . . . 

Turns out that we’ve already decided that Tarzan and Jane have two munchkins still at home. Tarzan and Jane are probably young-ish and they are not disabled since both are working and making $40,000 each. So the disabled protection for home equity is not going to work for them and the low income over fifty-five (55) is not going to work either. So they can protect only $100,000 of the equity or $40,000 less than the equity that they have.

In a Chapter 7 Bankruptcy the Trustee would sell their home and give them a check for $100,000. But where can they move with only $100,000 and bad credit? I think we may have seen this movie before. But with a bankruptcy too?  That’s even worse.

Perhaps one might think that the Trustee couldn’t obtain enough money from the sale of the home to cover the costs of sale, and while it may be close to true, Chapter 7 Trustees have other things up their sleeves. Realtors will sometimes reduce their fees. Even more importantly, sometimes the mortgage lender will take a reduction in pay off as well. Because a bankruptcy trustee does not need to be able to collect very much in order to go through with taking a home and selling it, in this case he or she probably would. It gets even worse. During the time that Tarzan and Jane’s bankruptcy were to be pending, and before the home sale were complete, if the value of the house went up and the bankruptcy trustee could take advantage of it, then the bankruptcy trustee gets the additional appreciation, not Tarzan and Jane.

So if you don’t mind the Chapter 7 Trustee selling your house for you then maybe a Chapter 7 is for you. But I don’t recommend it, not in Tarzan and Jane’s case.

d) Chapter 13 Bankruptcy

A Chapter 13 Bankruptcy gives a type of protection that a chapter 7 does not. Remember that in a Chapter 7 Bankruptcy the Trustee’s job is to take things away, sell them and pay creditors. In a Chapter 13 Bankruptcy, the Trustee takes monthly payments from Tarzan and Jane only. They would get to keep their home.

In this case, it would work like this, the home equity that Tarzan and Jane can protect is $100,000 but the total equity is $140,000 leaving $40,000 not protected. The $40,000 which is not protected is greater than the $30,000 that Tarzan and Jane owe in credit cards, therefore, Tarzan and Jane must pay 100% of that $30,000 in credit cards into the payment plan for up to five (5) years.

At least the payment plan would require little or no interest. It would require a Chapter 13 bankruptcy payment plan payment of about $625 per month in Southern California. This is almost certainly a much better cash flow than just paying the credit cards directly by about half or so. Remember that they were paying $1050 per month on credit card bills before?

It’s not a bad monthly payment really. If you need a Chapter 7 or a Chapter 13 Bankruptcy in Southern California including San Diego, LA, Orange and Riverside Counties, call me 951-200-3613. 

e) Debt Consolidation Plans

There are three main types of debt consolidations: The First is the Chapter 13 Bankruptcy discussed above. The second collects payments  from Tarzan and Jane and negotiates with the credit card companies. They form agreements with creditors to reduce payments by obtaining lower interest rates and on rare occasions also reductions in principal as well. The payment would be about what a Chapter 13 payment would be. 

The third type collects regular payments from Tarzan and Jane but lets their credit cards go unpaid for a while until those debts are sent to collection agencies and then the consolidator settles the debts with the collection agents for a one time payment for less than the full balance. This is also called Settling the Debts or Debt Settlement.

Often they work out great. Other times, not so much. Sometimes what happens is you place your five (5) or ten (10) accounts, including credit cards, small loans, medical bills etc that you owe on the table in front of him, and if he’s been doing debt consolidation work long enough, he must immediately know which ones will play ball with him and which won’t. However, what he won’t do, is tell you which ones won’t work with him. Think about it, if there were one or two that wouldn’t work with him and he told  you, you would call me instead. 

Next thing Tarzan and Jane know, one of their credit cards has sued them. If the attorney who sued them was unscrupulous, as collectors sometimes can be, then Tarzan and Jane might not even know that it has happened until they find out that their wages are being garnished. Wage Garnishments can take up to 25% of a normal paycheck. Or they might find out because their bank account has been emptied by the sheriff via bank levy.

f) Refinance or Second Mortgage or Home Equity Line of Credit

But how do Tarzan and Jane take a loan against their home when they have bad credit? Even if they have enough equity in the house to borrow enough to pay off the $30,000 in credit cards, who will lend to them? 

It’s not a question of WHO but WHEN will they lend to you? Credit Repair is what you need.

Did you know that you can repair your credit yourself? It’s easy too. You just need to know how. If you could raise your credit score enough, then you could refinance your mortgage, obtain a second mortgage or qualify for a home equity line of credit.

A second mortgage would give a much better cash flow than a chapter 13 bankruptcy would by at least half. The second mortgage payment might be only about $325 per month. So, from a payment of about $1050 per month, down to about $325 per month. That’s a huge improvement and all you have to do is follow the Guide and it’s real simple. 

So how do you repair your credit? Click Here for the Attorney’s Guide to Credit Repair.. It’s fast, easy and guaranteed by Attorney Robert Shapiro who wrote the Guide. If your credit is bad, you can make it good. If your credit is good, you can make it better. 

Chapter 7 and Your Second Mortgage

My Father’s House Copyright (c) 2018 by David L Nelson, All Rights Reserved

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 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 Mortgage or Home Equity Line of Credit – 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. 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, most credit repair services use the same techniques outlined in this Guide. In fact many use the very same Guide. Follow this guide to repair your credit including how to write letters to settle debts such as mentioned below. Download the Following Link Now and Get Started Right Away with The Attorney’s Guide to Credit Repair. It’s Fast, Easy and Guaranteed.

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.

Or 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, most credit repair services use the same techniques outlined in this Guide. In fact many use the very same Guide. Follow this guide to repair your credit including how to write letters to settle debts such as mentioned above. Download the Following Link Now and Get Started Right Away with The Attorney’s Guide to Credit Repair. It’s Fast, Easy and Guaranteed.

So You Might Need to Buy a New Car?

Copyright (c) 2018 by David L Nelson, all rights reserved

What you need to know before buying a car on credit after a bankruptcy, or after bad credit?

They love to say, they will sell you a car with bad credit, of course they will, at 25%, I might sell you my own car.

After a bankruptcy one of the easiest things to do is to buy a new car, or at least a newer car. A new to you car. It sounds too good to be true but oddly enough, it’s not.

If you filed a chapter 7 bankruptcy, the more common type, then your new car creditor knows that you can’t file again for eight (8) more years from one file date to the next. So, they know that you can’t file again, and if you can’t file again, I’d sell you a car too. If you default on the new car loan (for the new car to you which is probably an older car) then we can sue you for another however many of those eight (8) years are left. Then I can garnish your wages, levy your bank account, and record a judgment lien on your house. Creditors love doing all of those things. Especially car creditors, car creditors love to be the first one to sue you. One attorney who represents car lenders told me that if “we’re the first one to sue, maybe the debtor puts up with one wage garnishment, ignores one judgment lien on the ol’ homestead. However, when the second judgment comes along, they call you. ” In fact I might as well mention, if you need a bankruptcy attorney in Southern California, give me a call, 951-200-3613

If you do have to buy a car, and sometimes you must, then your interest rates will be absolute murder. Don’t do it. If you can avoid it, avoid it. However, with a little effort and just a little time, maybe only a couple of months, you can repair your credit enough to buy a car with a decent-ish interest rate. 

If you do nothing, and you wait long enough, your credit will be rehabilitated on its own rather like a cut on  your finger will get better even if you just do nothing. Keep working in your garden or garage where it’s filthy without washing it, without a bandage, in the filth and dust and dirt and your finger will get infected and in spite of that in the long run, it eventually gets better anyway.

But if you clean it, put some Neosporin or a salve on it and bandage it, and keep it clean, then it gets better a lot faster. And what’s wrong with faster? Nothing of course.

But you just had a bankruptcy, what can you possibly do to repair your credit after a bankruptcy? Bankruptcy is the Credit-Reaper.

There are a few things.

Be sure of course, that whatever credit you still have, whatever debts you still have to pay after your bankruptcy, be sure that credit stays in good condition during the months and years after the bankruptcy is over. Don’t get into any new debt that you cannot handle, if you have reaffirmed any debts from the bankruptcy, make sure that you stay current on those and everything else including your utilities. Utilities won’t report your good payment history but they’ll definitely report your bad payment history if things go wrong.

Good credit is a combination of not too many bad things on your credit reports compared to the good things on your credit reports. Great credit is few or no bad things compared to lots of good things.

You can increase or improve your credit rating by removing bad things and adding good things to your credit reports. One of the easiest things to do to add good credit to your credit score is to buy a car, but you don’t want to do it until you’ve already improved your scores.

Check your credit after your bankruptcy is over. It’s almost a certainty that not all of the accounts included in your bankruptcy discharge are listed in your credit reports as “an account included in bankruptcy” or “bankruptcy” or “bankruptcy discharge”.

Go to AnnualCreditReport.com and check. If even one, just one of the dischargeable accounts that existed prior to your bankruptcy is not listed as included in your bankruptcy, then that account is dragging your score down. You can correct that with the appropriate letters to the creditor or to the credit reporting agencies directly. Prove that they have you listed wrong in your credit reports and they will have to fix it.

Where you do sometimes run into some fun, and by fun I mean it like Michael Jackson did in the 80s when he referred to good things as Bad: What if the account which is bringing down your score is also an account which for some reason was not listed in your bankruptcy in the first place, also called an unlisted or omitted account. Now what do you do?

Unlisted or Omitted Accounts are considered not discharged by the bankruptcy code unless two (2) things didn’t happen. See 11 USC 523 (a) (3). However, you can see from that code section that an omitted debt is nevertheless discharged if those two things didn’t happen. Here’s a hint, there is a case called In Re Beezley in which the Ninth (9th) Circuit Court held that the code section really does mean what it says that it means.

The first thing that had to NOT happen was, 1st) Did the Trustee on your case figure out that you may have assets which means that he would set a deadline called a claims bar date for creditors to turn in a proof of claim? When a trustee finds that you have assets, it’s called an asset case, and if no assets, then it is a no-asset case. In a no-asset case, the Trustee files a report with the court called a No-Asset Report. In the bankruptcy court’s court docket it will probably be listed as a Chapter 7 Trustee’s Report of No Distribution. If the Trustee did impound assets and distribute to creditors and the one you now have found was never listed, then you still owe that creditor his money because under 11 USC 523 (a) (3) it was not included in your discharge.

The second thing that has to NOT happen is 2nd) Even in a no-asset case, did you commit Fraud, Embezzlement or Malicious Injury to Person or Property against that creditor. Then if you committed any of those but you left this debt out of the bankruptcy, then the creditor was never barred from filing a non-dischargeability action against you in the bankruptcy court like would normally happen at discharge time because they never knew that a bankruptcy had been filed. Phew long sentence. Basically, at the beginning of the bankruptcy a temporary restraining order prohibits any collection efforts or lawsuits against you, except for suits in the bankruptcy itself for fraud, embezzlement or malicious injury to person or property. At the end of the case, the discharge order is a permanent injunction prohibiting collections and lawsuits against you even in the bankruptcy court for those same types of actions. A discharge does allow secured creditors to collect cars and houses if you stop paying for them.

If the omitted creditor had been listed in the bankruptcy petition and received a notice of your bankruptcy, and nevertheless, didn’t file that lawsuit in the bankruptcy, then at the end of the case, they would have been included in the discharge. How’s that for irony. Most of them won’t bother once they see how low your income is, how few assets you actually have and they might think that suing you in the bankruptcy court to prove you are a fraudster is throwing good money after bad.  But if you left them out of the bankruptcy then, therefore, they can now sue you if they want to. But they would still have to sue you to prove that you did the fraud, embezzlement or malicious injury, that’s not going to be an automatic.

If you’ve just had a bankruptcy and afterwards, if you have no debts, start by going to your bank with a little money, say $300 to $500 or $1000 and ask for a secured credit card. It may take a while to save up, but go ahead and do it. Using it sparingly and then paying it down or off quickly will help your credit scores immensely.

If you can afford to, get two of them, from different banks. Two accounts is much better on your credit reports than only one. However, unless it’s an emergency, don’t buy something unless you have already saved up the money for it first. Here’s a hint: Most things you think are emergencies are not.

In other words: Don’t Buy Stuff You Cannot Afford.

Once you’ve purchased something with your new card, you can pay it off over two or three months that way, because you already have the money saved. Do this and it will improve your credit scores.

Meanwhile, a couple or a few months after the bankruptcy discharge, go to Annual Credit Report and download your credit reports to see what is on them. If there is anything that was included in the bankruptcy that is not showing as “an account included in bankruptcy,” or “bankruptcy” or something like that, then you can ask the credit reports and even the creditor to correct the situation.

If a creditor was left out of your bankruptcy but it pre-dates your bankruptcy, then you can ask them to fix it too by sending a letter explaining the in Re Beezley ruling and that it applies to that creditor.

For specific forms and language to put into those letters, to go The Attorney’s Guide to Credit Repair for easy, fast, guaranteed Credit Repair advice.

Once you’ve taken the opportunity to clean your credit first, then you can buy a newer car than you would have been able to, and with a more favorable interest rate than you would have been offered. That means that you can buy a better car, a safer car and more a more reliable car.