How to use Chapter 13 to Save your Home

When you fall more than a few months behind on your mortgage payments, you may receive a foreclosure warning letter in the mail. This begins a process that can lead to the loss of your home - and potentially all of the home equity you’ve built up during the recent rise in home prices.

A Chapter 13 bankruptcy can be a great tool to protect your home. How can this be? Doesn’t the lender have a lien on the house? Liens are not discharged in bankruptcy, right?

Lenders do keep their mortgage liens even if you file for bankruptcy protection, BUT in a Chapter 13 case they normally cannot foreclose so long as you keep up with your promises in your approved Chapter 13 payment plan. What is a Chapter 13 payment plan? Simply put, it is a plan where you agree to make a payment each month to a “bankruptcy trustee” (and you normally can set this up as an automatic transfer from your bank account). You can think of this as a catch-up payment where the funds will be used to pay your mortgage lender for the amount of your past-due mortgage payments.

Yes, you’ll end up paying more each month to get caught up because you’ll need to also make your regular monthly mortgage payment on top of the catch-up payment. But if you can afford to do this, Chapter 13 can be a great way to avoid foreclosure and protect your home.

A Chapter 13 payment plan will be subject to review by the bankruptcy trustee’s office and by the mortgage lender. One of the trustee’s concerns will be whether your proposed payment plan is “feasible”, meaning that you can actually afford the payments on your current budget. And mortgage lenders will often present updated statements showing additional fees or charges while you fell behind on the loan. There can also be the matter of catching up on any missed property tax payments, especially if those were not paid on your behalf by the mortgage lender.

That said, we can help you sort out whether Chapter 13 might work to help you save your home before you commit to anything. If you or someone you know is falling behind on mortgage payments, you may consult with us for free by calling 612-721-0230.

About the author: Dan Cooke

Image credit: Nattanan Kanchanaprat

New Means Test Figures - effective April 1, 2022

The U.S. Department of Justice has published new median, gross annual income data for use in bankruptcy cases filed on or after April 1, 2022. For Minnesota residents, the figures have increased, making it more likely that you will qualify for Chapter 7 relief.

Here is how much the median amounts will increase in Minnesota from numbers used in cases filed after April 1, 2022:

• One person household: $65,514

• Two person household: $86,358

• Three person household: $106,445

• Four person household: $125,753

The increase for additional household members above is $9,900. NOTE: these figures can and likely will change in the future so please make sure you are relying on the most current information when attempting to calculate means test eligibility.

A reminder: the median income amounts are only part of the analysis for determining whether you qualify for Chapter 7 relief. Calculating the amount is based primarily on your gross income for the six months prior to your month of filing. But you can sometimes be over the amount and still qualify after completing the full, long-form means test. How to count household income can be tricky as well, depending on sources (social security benefits do not count, for instance) along with the amounts that are contributed by other household members.

As always, consultation with a qualified, experienced bankruptcy attorney is critical. But if you're struggling with debts, starting next month it may be a little easier for you to qualify for relief.

About the author: Dan Cooke

Credit Bureaus Plan to Remove Some Medical Debts from Credit Reports

The three major credit reporting firms - TransUnion, Equifax, and Experian - announced plans to remove some medical debts from consumer credit reports over the next year. It will start with removing items that were in collection but have been paid. Next year, the credit bureaus promise to remove any medical debts of less than $500.

This is mostly good news for people with medical debts, although medical debts often go unreported anyway. Those who have paid medical debts may still need to take steps to contact the bureaus to prove the debts were paid when collection agencies fail to do so.

A reminder: self-monitoring of credit reports is a good practice for everyone. You should check at least one of your credit reports once a year for errors.

About the author: Dan Cooke

New Means Test Amounts - Effective April 1, 2021

The U.S. Department of Justice has published new median, gross annual income data for use in bankruptcy cases filed on or after April 1, 2021. For Minnesota residents, the figures have increased, making it more likely that you will qualify for Chapter 7 relief.

Here is how much the median amounts will increase in Minnesota from numbers used in cases filed between November 1, 2020 and March 31, 2021:

• One person household: +$763 (from $61,811 to $62,574)

• Two person household: +$1,005 (from $81,478 to $82,483)

• Three person household: +$1,239 (from $100,430 to $101,669)

• Four person household: +$1,464 (from $118,646 to $120,110)

The increase for additional household members above the first four remains the same, at $9,000.

A reminder: the median income amounts are only part of the analysis for determining whether you qualify for Chapter 7 relief. Calculating the amount is based primarily on your gross income for the six months prior to your month of filing. But you can sometimes be over the amount and still qualify after completing the full, long-form means test. How to count household income can be tricky as well, depending on sources (social security benefits do not count, for instance) along with the amounts that are contributed by other household members.

As always, consultation with a qualified, experienced bankruptcy attorney is critical. But if you're struggling with debts, starting next month it may be a little easier for you to qualify for relief.

About the author: Dan Cooke

My Three-Step Approach to Resolving Debt Issues

As a bankruptcy lawyer, I spend most of my workday helping my clients file for bankruptcy protection. But bankruptcy isn’t the only solution to all debt issues, and may not even be the right one.

For anyone struggling with debt, I suggest you follow these three broad steps:

“Debt Relief”

1. Prioritize your debts by their seriousness,

2. Protect yourself by learning how the debt collection process really works, and

3. Talk to a professional who can help you understand your legal options.

Step one - prioritizing your debts - starts with making a list of all of your debts and their approximate current balances. Ideally, you’ll also be able to find your interest rates. Then, group them into two broad categories: high priority and low priority. High-priority debts include mortgages, car loans or leases, rent payments, child support payments, and any debts where there is a court order or court judgment requiring payment. Not paying high-priority debts can result in problems like eviction, foreclosure, losing your car, or being subjected to a wage garnishment or bank levy. Low-priority debts includes things like credit card balances, medical debts, debts owed to friends or relatives. Taxes and student loans can fall into either category, depending on the collection status. If you have many debts, prioritizing them further can help but may require assistance, such as from a non-profit credit counseling company.

Step two - learning more about debt collection - is also critical. There are many myths about debt collection and what exactly a creditor can do to force you to pay a bill. The more you understand about this, the better equipped you will be to decide which debts to pay first and how best to cope with demands for payment.

Step three - talking to a professional - doesn’t necessarily have to cost you anything. I offer free consultations by phone to provide information about non-profit credit counseling options as well as bankruptcy solutions. I can also help with steps one and two so you are better equipped to deal with your debts.

Why take these steps? Because they are a proven way to more quickly get yourself out of debt. If that’s your goal, take the time to work through them and they’ll help you get to the debt-free finish line faster than you might expect. If you need help, feel free to contact my office for more information.

About the author: Dan Cooke

Image credit:  CafeCredit

Protecting Real Estate in Bankruptcy

"Won't I risk losing my home if I file for bankruptcy protection?"

One thing many do not understand about bankruptcy is that you normally DO NOT lose your property when you file to eliminate debts. And this is particularly true for the place where you live.

For Minnesota residents, you generally are eligible for a $420,000 homestead exemption (and up to $1,050,000 for agricultural property). There are certain restrictions, but in general you can apply this exemption to one parcel where you actually reside. And note that the exemption is for your equity in the property. So, if you have a mortgage or mortgages encumbering the parcel, your exemption applies to the net value of your home after deducting the balances still owed on any mortgage debt. So if your Minnesota home has a value of $500,000, but you have a $100,000 mortgage, you can still exempt all of it under the statute. Meaning you can still use bankruptcy to keep the entire value of your home - free and clear - while discharging other, unsecured debts.

Bankruptcy can actually help you save your home

Suppose you missed ten months of mortgage payments - perhaps because you were out of work or experienced some other short-term income loss. You're going to lose your home, right? Wrong. A Chapter 13 reorganization can compel the mortgage lender to cancel any pending foreclosures and accept payments on the past-due mortgage amount over time: up to five years. So if you're $12,000 behind on mortgage payments, you could conceivably schedule a catch-up, repayment plan at $200/month over five years and avoid a foreclosure.

Note that your Chapter 13 would involve other fees - attorney's fees for filing and managing your case plus trustee fees - but you can often spread some of those costs out over the length of the Chapter 13 plan. You can also use the Chapter 13 process to reorganize any other debts you have, potentially saving you big time on other loans and protecting your home equity at the same time. 

"What about the [town home / house / condo] that I'm renting out right now? That's gone, right?"

What if you happen to own "investment property": real estate that you rent but do not use as your residence? Won't you lose that for sure if you file for bankruptcy protection? Not necessarily.

While a bankruptcy trustee will take a hard look at any investment property you own, the trustee is also going to be pragmatic about the costs of getting involved in your investments. First, you might be eligible for a "wild card" exemption to exempt some of the value in your investment - sometimes as much as $10,000 or even slightly more than that (call us if you have questions about how the "wild card" exemption works - it's somewhat complex). That exemption comes off the top and must be paid to you if a trustee elects to sell your investment.

Second, the bankruptcy trustee is going to take into account the costs of sale plus any tax consequences (capital gains on any appreciation). The net value of your property - fair market value minus any mortgage loans, and minus any "wild card" exemption - might be relatively small when the costs of sale are included. In that case, a trustee might not bother trying to sell it at all, meaning you would get to keep it. Or, a trustee might be willing to negotiate with you - giving you the opportunity to keep the investment property if you agree to pay part of its value. The important thing to know is that there are often options and you need to evaluate those before you file.

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Whether you own residential real estate or investment property, do not assume that you will lose it if you file for bankruptcy protection. In many cases the opposite is true.

About the author: Dan Cooke

Image credit:  Timo Newton-Syms