A Fresh Start - Chapter 7 Bankruptcy

If you are drowning in debt, can’t sleep because you are so worried about your bills or can’t answer your phone because it is always bill collectors, a Chapter 7 bankruptcy may be the fresh start you need.

Most bankruptcy cases filed in the United States are Chapter 7 cases.  The purpose of a Chapter 7 is to provide the Debtor with a “fresh start” through a discharge of his or her debts and equitable distributing any available assets among credits.  In most cases there are no non exempt assets to be sold and thus most Debtors retain all of their assets and discharge their debts without any payments to creditors.  If you are having problems paying your debts as they become due and owing, here is what you need to know about Chapter 7.

1. Who is Eligible - A Chapter 7 bankruptcy may be filed by any person or entity who resides in or has a place of business or property in the United States, other than a railroad and certain financial institutions and insurance companies. 
2. No Debt Limit - Unlike a Chapter 13 case, there is no debt limits in a Chapter 7.
3. Exemptions - The Bankruptcy Code and California law allows Debtors to retain many assets in a bankruptcy including retirement accounts, personal injury and workers compensation awards and additional assets in the form of “wild card” exemptions.  For most individuals, all of their assets will be protected and none will be able to creditors.
4. Means Test - If the person filing a Chapter 7 is an individual consumer with a majority of his debts being consumer debt i.e. debts incurred by an individual primarily for personal, family or household purposes, the individual must disclose financial information using a “means test.”   The purpose of the test is to determine potential ability to pay creditors.  If the result of the means test demonstrates the debtor has the potential ability to pay a minimal amount, a presumption arises that the debtor’s bankruptcy filing is an “abuse” and the case is subject to dismissal or conversion to Chapter 11 or 13. 
5. Secured Debt - Secured debt payments such as a home loan or car loan can be used on the means test if the Debtors are making the payments.  However, there are recent bankruptcy cases in which the court has held that when a debtor is no longer paying on secured debts, they may not include said payments for purposes of calculating the means test. 

If you do not have sufficient income to pay your bills as they come due and owing, you should seek legal counsel before withdrawing any monies from a retirement account, savings account or defaulting on a home or car loan.  These are difficult times, but do not miss the help and protection provided by the Bankruptcy Code and California law by waiting too long.    

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE BANKRUPTCY.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.    © 2012 Joan Grimes

Debt Collectors Calling You?

Know Your Rights

When people come into my office, one of the first things they talk about is the endless calls from debt collectors both at work and home.   If you are receiving calls and letters from debt collectors on consumer debt i.e. debts incurred for personal, family and household purposes, here is the law you need know. 

1.     First Contact-  The first communication to you by a debt collector whether on the phone or in writing, must (a) describe the purpose of that communication and (b) inform you that any information that it obtains from you will be used for collection of the debt.

2.     Disclosure of Identity-  Whenever a person representing a creditor or debt collection agency contacts you, the person must correctly identify himself and must not misrepresent himself  or the entity he represents.

3.     Right to Dispute Debt-  When a debt collection agency initially contacts you or within five days of the initial contact, it must notify you in writing of your right to dispute the debt and to obtain verification of the debt, and it must provide you with verification if you request it.  If you do  not believe the debt is enforceable i.e. the lender doesn’t have the original note, it was not properly perfected or the amount of the debt is incorrect, this is a right time to request verification and dispute the debt.

4.     Right to Stop Communications- You have  the right to require a debt collection agency to stop contacting you!!!  In addition, your spouse,parent (if the debtor is a minor) or guardian can also require that such communication stop. To do this, it is necessary that you ask the debt collection agency IN WRITING, to do so.  While such a notice halts communications, it does not stop the debt collection agency from filing a lawsuit to collect on the debt.

5.     Obligation to Respect Your Privacy – You absolutely have the right to specify what times are ok and what times are not ok for debt collectors to call you.  Collectors are permitted to act on the assumption that anytime between 8 a.m. and 9 p.m. debtor’s local time are convenient to the debtor, but a collector cannot assume that those times are ok once the debtor notifies the collector that any portion of that period is, in fact, inconvenient and unsuitable for the debtor.  In addition, the debtor can also specifically request that the collector not contact the debtor at work.

6.     Communications to Your Employer  A collector may only communicate with your employer to verify your employment, to locate you, or to garnish your wages. 

7.     Communications with Family Members-  A collector is prohibited, with certain exceptions, from attempting to collect a debt by communicating information regarding the debt to any of your family members.  However, a collector can communicate with your spouse, can contact any family member to locate you and contact your parents if you reside with them.  The California statute prohibiting contacting family members no longer applies once the debt becomes a judgment.

The above highlights your rights in California with respect to collection of consumer debts.  If you are receiving calls and letters from debt collectors, I urge you to seek legal counsel before entering into any debt consolidation programs either with the lender or a third party. I see people every day for a FREE 30 minute consultation at my offices located in Walnut Creek, Antioch and Brentwood.

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.             

© 2011 Joan Grimes



Thinking About a Short Sale or Foreclosure?

The Law you Should Know

Before you consider a short sale or foreclosure, here is the law you should know.

First, there are two types of debts. They are unsecured and secured. Unsecured debt is the bare promise to pay. The most common form is credit card debt. Secured debt, on the other hand, has two parts. The first part is the bare promise to pay which on a car loan or real estate loan is the Promissory Note. What makes secured debt different than unsecured debt is the security given by the borrower to ensure the promise is kept. This security on real property is called a Deed of Trust.

Second, on real estate loans, there are two different types of promises to pay. Non-Recourse or Recourse. A Non-recourse loans is (1) the loan or loans obtained to purchase a 1-4 unit property in which the borrower occupies at least one unit or (2) seller carry back. Everything else is recourse debt i.e. the refinance of the real property, lines of credit, the loan or loans used to purchase a rental property.

Third, personal liability depends on whether you do a short sale or foreclosure and whether you have a non-recourse or recourse debt.  If you do a short sale, you can have personal liability unless it is waived by the lender.   Effective January 1, 2011, on a first deed of trust on a 1-4 unit property, the lender should be agreeing to waive any deficiency in a short sale in accordance with SB 931, but you will need to make sure the correct language is in the settlement letter.   If a property is foreclosed in a non-judicial trustee sale, you will not have any personal liability as to the loan that is foreclosed on because California is an anti-deficiency state i.e. the lender waives its right to come after you on the loan that they foreclosed on.  However, if there are junior liens to the foreclosing lien, they will have the right to sue you after the foreclosure if the junior lien(s) are recourse loans.  These loans are called “sold out” junior i.e. they lost their lien, but they still have the promise to pay and thus have the right to sue you on the promissory note.

Fourth, in every short sale or foreclosure, there are tax implications. The IRS wants to know two things. (1) Did you make any money on the deal and (2) Did you borrow any money which was not repaid.  If you made money on the deal including taking out cash to buy another house, buy a car, pay off credit card, you may have gain. If you borrowed money which is not repaid either through a short sale or foreclosure, you may Cancellation of Debt Income (“CODI”). There are exceptions to the CODI, but you should “know” not “think” the tax implications before a short sale or foreclosure.

In conclusion, a short sale or foreclosure without legal advice is like jumping into the middle of the ocean with no life vest. Don’t do it.  A short sale or foreclosure can stay on a credit up to 7 years. Do not take on liability which could have been eliminated or reduced with first obtaining legal advice. 

Help is available to you.  I see people every day for consultations on short sales and foreclosures for a flat fee of $300.  If you end up needing to filing bankruptcy, the fee is a credit against the bankruptcy fees.

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A  SHORT SALE OR FORECLOSURE. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION. 

Thinking About a Short Sale or Foreclosure?

The Law you Should Know

Before you consider a short sale or foreclosure, here is the law you should know.

First, there are two types of debts.  They are unsecured and secured.  Unsecured debt is the bare promise to pay.  The most common form is credit card debt.  Secured debt, on the other hand, has two parts.  The first part is the bare promise to pay which on a car loan or real estate loan is the Promissory Note.  What makes secured debt different than unsecured debt is the security given by the borrower to ensure the promise is kept.  This security on real property is called a Deed of Trust and on a car loan it is the lienholder on the Certificate of Title.

Second, on real estate loan, there are two different types of promises to pay.   Non-Recourse or Recourse.  A Non-recourse loan is (1) the loan or loans obtained to purchase a 1-4 unit property in which the borrower occupies at least one unit or (2) seller carry back.  Everything else is recourse debt i.e. the refinance of the real property, lines of credit, the loan or loans used to purchase a rental property.

Third, under California law, a short sale or foreclosure can stay on a credit report for up to 7 years.

Fourth, personal liability depends on whether you do a short sale or foreclosure.  If you do a short sale, you can have personal liability unless it is waived by the lender.  Remember, a short sale is just like any other sale and if you don’t pay the full amount, the lender can request payment.   If you allow your property to be foreclosed in a non-judicial foreclosure sale, you will not have any personal liability as to the loan that is foreclosed on because California is an anti-deficiency state i.e. the lender waives its right to come after you on the loan that they foreclosed on.    However, if there are junior liens to the foreclosing lien, they will have the right to sue you after the foreclose.  They are called “sold out” junior i.e. they lost their lien, but they still have the promise to pay and thus have the right to sue you on the promissory note.

Fifth, in every short sale or foreclosure, there are tax implications.  The IRS wants to know two things.  They are (1) did you make any money on the deal and (2) did you borrow any money which was not repaid.  If you made money on the deal including taking out cash to buy another house, buy another car, pay off credit card, you may have gain.  If you borrowed money which is not repaid either through a short sale or foreclosure, you may Cancellation of Debt Income (“CODI”).  There are exceptions to the CODI, but be very cautious of tax implications because it is a very complicated area of the law.
In conclusion, a short sale or foreclosure without tax and legal advice is like jumping into the middle of the ocean with no life vest.  Don’t do it.  The California Association of Realtor is so concerned about this issue that the Short Sale Addendum specifically tells sellers to obtain tax and legal advice prior to proceeding with a short sale.  Help is available to you.  Do not take on personal liability or tax liability which could have been eliminated through a bankruptcy or reduced with first obtaining tax and legal advice. 

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN  MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.