Bankruptcy Options When You Are Behind On Your Mortgage

Many individuals end up in my office when they fall behind on their mortgage. It is a common problem. The most frequent cause is a temporary lose or reduction in employment. Several months of unemployment can quickly lead to a family facing a foreclosure, which are sometimes filed within 3 months of the first missed payment. Fortunately, the Bankruptcy Code can help, whether you want to save the home you have fallen behind on, or if you simply want to walk away from it.

What if you are behind on your mortgage, and you don't want to stay in the home? Chapter 7 bankruptcy can help. When a debtor falls several or more months behind on a mortgage, a foreclosure proceeding will often commence. A foreclosure allows the lender (usually a bank or mortgage company) after a series of court filings, to seize the home, sell it at auction, and then go after you personally if the sale price does not cover all of the mortgage and expenses. Certain lenders and law firms specialize in doing just this.

Homes often sell for very low prices in these sales, and if the mortgage was large, this could lead to a huge "deficiency judgment" against you. The lender will be able to put liens on your property (or future property) or even freeze your bank account. And these deficiency judgments do not go away. However, Chapter 7 bankruptcy can wipe out these deficiency judgments, no matter how large they become. When there is a large deficiency, bankruptcy may be the only option allowing you to go on with your financial life. The process is very straightforward, and you can even continue to live in the home until it is sold at auction. This is often months down the line. As long as you are willing to ultimately surrender the home, Chapter 7 bankruptcy is the perfect option.

On the other hand, what if you are behind on your mortgage and you want to save your home? You will need to file a Chapter 13 bankruptcy. Chapter 13 bankruptcy is more complicated, but it has many benefits. You can catch up on mortgage arrears by paying them back over 3 to 5 years, without interest or further penalties. Spreading out the amount owed over a period of 60 months can make repaying even large arrears feasible. For instance, if you are one year behind on a $1,000/month mortgage, you can catch up the arrears for $200 over 5 years. While this may not be possible if you have not started working, it is often very workable when full employment returns.

Another important feature of using Chapter 13 bankruptcy when you are behind on your mortgage is that it can stop a sheriff sale up until the very moment the gavel goes down, and it does not require negotiation with the lender. Loan modifications are often endless (and useless) endeavors. However, under Chapter 13 bankruptcy, there is no such negotiations. As long as the lender is paid under the terms of the mortgage, and all arrears are accounted for, they must accept the filing. Chapter 13 bankruptcy can help in all but the most hopeless situations.

Contact us if you have fallen behind on your mortgage and you wish to discuss your options. Whether you want to save your home, or surrender it, bankruptcy has an option for you.

Chapter 13 Wage Attachments

Chapter 13 bankruptcies require payments to be made to the Chapter 13 trustee. The trustee then disperses money to your various creditors, in amounts that are determined by bankruptcy law and your bankruptcy plan. How do you pay the trustee? If you are employed, my office is required to file a wage attachment.

A wage attachment motion is filed with the bankruptcy court after the initial case filing. Court permission is required to attach your wages, but this is pretty much a formality. Once the court approves the motion, an order signed by the bankruptcy judge is sent to my office. I then serve the order on the payroll department of your employer, along with other information to make sure they properly identify you.

The wage attachment, once in effect, will deduct money from your pay every pay period. Even though your bankruptcy payment is calculated on a monthly basis, the payments will be deducted each pay period, whether you are paid monthly, bi-weekly, or weekly. The money is directed to the trustee, who actually administers your case payments. This will continue through the completion of the bankruptcy case.

You will be responsible for making any payments not directly deducted from your paycheck. So, if it takes several weeks for your payroll department to process the order, you are still required to make the payment. Contact us for instructions how to do so.

As long as your employment is steady and uninterrupted, there should be no problems with your wage attachment. However, if you change jobs, or lose your job, you will need to inform your attorney immediately. Your wage attachment will need to be terminated (which requires another motion and service) and a new wage attachment must be filed. This should be done as quickly as possible to avoid any gaps in your payment. Once again, payments not made through the wage attachment must be made directly.

Clients are often concerned that the wage attachment will affect their employment in some way. It will not. An employer cannot sanction you, and in practice, they rarely if ever care. Most payroll departments process the orders with no confusion or problems. Wage attachments are not allowed on pensions, or disability payments. In these cases, payments must be made directly to the trustee.

The prospect of a wage attachment sometimes causes trepidation on the part of my clients. However, there is no reason to be concerned. The process is efficient, and secure. Case with wage attachments have much higher rates of success, as they greatly simplify the process. I will be happy to answer any questions related to the wage attachment requirement.

Means Test Update, May 2017

The means test is a six-month income look back that is calculated when filing a bankruptcy. It determines if an individual must repay unsecured creditors in a Chapter 13 bankruptcy. This threshold is determined initially by looking at gross household income and household size. The gross income thresholds are periodically updated by the bankruptcy court for each region, to take into account inflation and other factors. They were most recently updated on May 1st, 2017.

The gross income limits for the six months before filing, above which you no longer qualify for Chapter 7 bankruptcy in most cases, are now the following in Allegheny County (as of May 1st, 2017):

• Household of 1: $25,569.00
• Household of 2: $30,635.50
• Household of 3: $37,509.00
• Household of 4: $45,410.50
• Household of 5: $49,610.50
• Household of 6: $53,810.50
• Household of 7: $58,010.50
• Household of 8: $62,210.50

Each additional household member beyond 8 will add $4,200.00 to the threshold.

A few things to point out about this chart. Once again, this is for all household income for the six months previous to filing, including non-filing spouses. Even if a spouse has no debts, or no desire to file, their income will be a part of the calculation if they are married and living in the same household. Pretty much all sources of income outside of Social Security payments is considered income. This includes unemployment, bonuses, retirement distributions, lottery winnings, and rental income. If in doubt, assume it will be income for means test purposes.

Second, dependents are generally determined by their federal income tax status in the family. In short, if you claim a child on your federal income taxes, you can claim them as household members for purposes of the means test. Adult dependents can sometimes be claimed, but you will need to consult an experienced bankruptcy attorney to determine this with certainty.

Finally, remember these numbers are for gross (before tax) income, not net (after deductions) income. If you are above the threshold, but just barely, your attorney can review your deductions to determine your "Disposable Monthly Income", or DMI. This calculation will determine how much, if anything, you must pay your unsecured creditors.

The means test is a moving six month window. Contact us to take a look at your recent income and determine if the means test will be an issue in your case. It may be necessary to wait, or hurry up and file, depending on your recent (and future) income. I will be happy to look at your situation at a free consultation.

You Can Keep Your Car In Bankruptcy... But Should You?

Bankruptcy affords numerous opportunities to keep your vehicle. This is important, because you need your car to get to work, pick up your kids, and in general get around a town that doesn't have great public transportation. However, just because you can keep your car in bankruptcy doesn't mean that you necessarily should.

Bankruptcy allows you to keep your vehicle as long as you can show that you can afford the payment. In Chapter 13 bankruptcy, you can even catch up on arrears owed and/or stop a repossession. The arrears can be made current over the three-to-five year repayment. So, in most cases, a car can be retained. However, there are situations when you should consider surrendering it through the bankruptcy.

The most common situation for surrender is when the arrears are too great to pay. If you qualify for a Chapter 7, and there are arrears on your vehicle, you would need to file a Chapter 13 bankruptcy to keep it. Chapter 13 bankruptcy is more expensive and time consuming that Chapter 7 bankruptcy, and it just might not be worth it. You can walk away from your obligation in Chapter 7, which may be an attractive option. When you walk away from a car in Chapter 7 bankruptcy, surrendering it to the creditor, your financial obligation is wiped away. You will not owe any deficiency.

An important point will be how much you owe versus what your car is worth. If you owe $20,000 and an additional $5,000 in arrears, but your car only has a Blue Book value of $15,000, it might not make sense to keep such a high payment for such a low-value car. If it is your only vehicle, and you absolutely need it to get to work, and there will be no other way to finance a vehicle in the future, you may need to bite the bullet and keep it. But, if you can use a spouse's or parent's vehicle, or take public transportation, bankruptcy might be a good opportunity to get away from the payment. It will depend on your particular circumstances.

I meet with many clients struggling with large car payments who, upon learning they can get away from the vehicle obligation, are happy to do so. Large car payment weigh my clients down. And cars only depreciate in value. It will not be very difficult to get financing on a more modest vehicle after filing your bankruptcy.

One situation where it probably makes sense to keep the car is when you must file a Chapter 13 bankruptcy that repays your unsecured creditors in full. In these cases, if you surrender a car, you will have to repay the deficiency on the car loan (unlike in a Chapter 7 bankruptcy). It doesn't make much sense to pay for a car you no longer possess, so keeping it is more likely your best option.

So what should you do? Contact us to set up a free consultation to discuss your automobile situation. I will be happy to sit down and review your case in detail. The monthly payment, your future prospects, and the condition of the vehicle should be considered. Your circumstances will probably dictate what you should do, but the decision will always be yours.

Why Are There No Creditors At The "Meeting of Creditors"?

The prospect of the Meeting of Creditors causes a lot of anxiety for many of my clients. While this is understandable (the process is new to them), it is unfounded. There is very little to worry about during the Meeting of Creditors as long as you are honest and prepared.

A major cause of anxiety is the belief that your creditors will be present, and will cross-examine and grill you. People picture a courtroom setting with a judge and prosecuting attorney. Given the aggressiveness of collection agencies that have hounded them for months and sometimes years, debtors understandably believe a similar attorney will appear in an attempt to intimidate and belittle them. In reality, nothing could be further from the truth.

First of all, there is no judge and no courtroom. The Meeting of Creditors is conducted in a normal office room, in front of a "trustee", who is an attorney appointed to review the case. While there are bankruptcy judges and courtrooms, these only become necessary in complicated and disputed cases. The Meeting of Creditors is a much less formal affair. The trustee sits in the place of the creditors who are owed money, reviews the filing, and asks the debtor some simple questions. Your attorney will be at your side to assist you.

And this brings me to the point of there being no creditors at the Meeting of Creditors. As crazy as it sounds, there is normally no reason for them to show up. First of all, they would need to either hire and attorney or in-house council to appear, which is costly and time consuming. Given the fact that they have little hope of recovering any money in a Chapter 7 bankruptcy, this would be a waste of money for most creditors.

Second, the trustee acts in their place. If the debtor appears to have assets or income sufficient to pay their creditors, the trustee will take action. The trustee will object to the bankruptcy filing if there is anything improper about it. The trustee receives a cut of the recovery, and would thus be motivated to act on their behalf if something is available. With little in the way of rights, and very little chance of recovery, and the trustee sitting in their place, it is extremely rare when a creditor shows up. 

There is also little reason for the creditors to show up in Chapter 13 cases. Once again, there is a trustee sitting in their place. Also, the amount of money there are to be repaid is determined by the claim they file, not by a personal appearance.

The only situation when creditors may (rarely) appear is when they are "unsophisticated creditors". This means they are not a credit card or finance company. An example would be someone included on a personal loan, or an ex-landlord. These individuals know very little about the process, and when they receive a notice saying their rights may be affected, they will sometimes show up. Even then, not knowing anything about the process, they normally have very little to add.

The prospect of the Meeting of Creditors is daunting to many bankruptcy filers, but it should not be! The process is very straightforward, you will be very well prepared by my office, and most importantly, you creditors will likely not be at the meeting of their very name!

Contact us if you have any questions about the Meeting of Creditors in particular, or the bankruptcy process in general.