One of the most frequent questions asked of me by those contemplating a bankruptcy filing is, "Will I lose my house if I file for bankruptcy?" Although the answer is generally "No", the question cannot be answered properly until the potential client provides some details about their financial situation. The two biggest considerations are whether the debtor is current with their mortgage payments and how much equity they have built up in their home.
Not surprisingly, a debtor can lose a home if they fail to make regular mortgage payments. In a Chapter 7 proceeding, a debtor who falls behind in mortgage payments before or after the bankruptcy case is filed is at risk of losing the home. For this reason, I will not file a Chapter 7 bankruptcy petition on behalf of any client who has expressed a desire to keep their house if they are not current with their mortgage payments. The client must become current with their mortgage (or have entered into an enforceable loan modification agreement with their lender that addresses the missed payments) before filing, or if that is not possible, the client must file for debt relief under Chapter 13.
In a Chapter 13 proceeding, a debtor who misses mortgage payments before the case is filed can avoid losing the home if they pay back the arrearage through the Chapter 13 plan, but the debtor will risk losing the home if any regular mortgage payment or Chapter 13 plan payment that comes due after the case is filed is not paid. For this reason, it is very important for a debtor to make all regular mortgage payments and plan payments after a Chapter 13 bankruptcy proceeding is commenced.
In a Chapter 7 proceeding, there is the additional consideration of the amount of equity a debtor has built up in their house in determining whether or not the debtor will keep their house. Equity is the difference between the value of the house and the amount of debt secured by the house (usually in the form of a mortgage). If the debtor has too much equity built up in their house, they are at risk of losing their home. A Chapter 7 trustee will sell, or liquidate, all property having value over and above the total amount of all secured creditors' liens and valid exemptions, and distribute to unsecured creditors the net proceeds of the sale remaining after payment of the secured creditor liens, exemptions and transactional expenses. Fortunately, in Massachusetts the exemption available for a primary residence is significant, up to $500,000.00 per household. In Connecticut, the exemption is more modest at $75,000.00 per individual, or $150,000.00 per couple. Exemption analysis can be complicated and you should not proceed with a bankruptcy proceeding unless your bankruptcy attorney can confidently demonstrate to you that your home equity will be protected by a valid exemption.
In conclusion, most people will not lose their house if they file for bankruptcy, provided they are current with their mortgage payments, and remain so after filing, and have not accumulated too much home equity.
Matthew S. Rousseau, Esq.
Morrison Rousseau, LLP
www.WorcesterBankruptcyAttorney.com
Showing posts with label Chapter 13 Plan. Show all posts
Showing posts with label Chapter 13 Plan. Show all posts
Saturday, August 21, 2010
Monday, June 14, 2010
When a Chapter 13 Bankruptcy Filing is Appropriate
In general, a chapter 7 bankruptcy is preferable to a chapter 13. This is because a chapter 7 bankruptcy proceeding will produce a discharge of debt sooner than a chapter 13, and it will usually be less expensive. There are several situations, however, when a chapter 13 is the best option.
First, a debtor may simply be ineligible to file a chapter 7 bankruptcy because he or she has too much monthly income remaining after monthly expenses are paid.
Second, a debtor may be ineligible to file a chapter 7 bankruptcy because fewer than eight years have elapsed since the debtor filed a prior chapter 7 case that resulted in a discharge of debt.
Third, a debtor may have fallen behind in house or vehicle payments and cannot pay the arrearage, but now has the ability to resume making regular payments and wants to retain the house or vehicle. The chapter 13 plan will allow the debtor to pay the arrearage over time.
Fourth, a debtor may own too much "non-exempt" property, and wants to retain such property.
Finally, the debtor may want to take advantage of the lien-avoiding rules only available in chapter 13 proceedings, such as "lien stripping" and "cram downs." "Lien stripping" is when a secured debt is converted into an unsecured debt, and gets treated the same as all of the debtor's other unsecured debt. The most common example of this is a wholly-unsecured junior mortgage. Such a mortgage will get paid partially through a chapter 13 plan, and the unpaid balance will be eliminated along with the unpaid balance of the debtor's other unsecured debt, such as credit cards and medical bills. A "cram down" occurs when a secured loan, having a balance in excess of the value of the collateral securing such loan, is reduced to the value of the collateral. Although the secured portion of the loan will get paid in full, the unsecured portion of the loan (the portion of the loan in excess of the value of the collateral) will be treated the same under the chapter 13 plan as the debtor's other unsecured debt, and will be paid back partially. The most frequent "cram down" target is a car loan.
I like to think of a chapter 7 proceeding as "Plan A", and a chapter 13 proceeding as "Plan B". I will only recommend "Plan B" to a client if one of the above situations is present.
Matthew S. Rousseau, Esq.
Morrison Rousseau, LLP
www.WorcesterBankruptcyAttorney.com
First, a debtor may simply be ineligible to file a chapter 7 bankruptcy because he or she has too much monthly income remaining after monthly expenses are paid.
Second, a debtor may be ineligible to file a chapter 7 bankruptcy because fewer than eight years have elapsed since the debtor filed a prior chapter 7 case that resulted in a discharge of debt.
Third, a debtor may have fallen behind in house or vehicle payments and cannot pay the arrearage, but now has the ability to resume making regular payments and wants to retain the house or vehicle. The chapter 13 plan will allow the debtor to pay the arrearage over time.
Fourth, a debtor may own too much "non-exempt" property, and wants to retain such property.
Finally, the debtor may want to take advantage of the lien-avoiding rules only available in chapter 13 proceedings, such as "lien stripping" and "cram downs." "Lien stripping" is when a secured debt is converted into an unsecured debt, and gets treated the same as all of the debtor's other unsecured debt. The most common example of this is a wholly-unsecured junior mortgage. Such a mortgage will get paid partially through a chapter 13 plan, and the unpaid balance will be eliminated along with the unpaid balance of the debtor's other unsecured debt, such as credit cards and medical bills. A "cram down" occurs when a secured loan, having a balance in excess of the value of the collateral securing such loan, is reduced to the value of the collateral. Although the secured portion of the loan will get paid in full, the unsecured portion of the loan (the portion of the loan in excess of the value of the collateral) will be treated the same under the chapter 13 plan as the debtor's other unsecured debt, and will be paid back partially. The most frequent "cram down" target is a car loan.
I like to think of a chapter 7 proceeding as "Plan A", and a chapter 13 proceeding as "Plan B". I will only recommend "Plan B" to a client if one of the above situations is present.
Matthew S. Rousseau, Esq.
Morrison Rousseau, LLP
www.WorcesterBankruptcyAttorney.com
Monday, May 31, 2010
The Parent Trap
No, I'm not talking about the Disney movie starring the young, innocent actress Hayley Mills,...later remade with the young innocent actress, Lindsay Lohan. I am talking about the problems your parents can create for you when they transfer assets to you (completely or partially) for their own estate planning purposes.
Parents often transfer assets (usually a home) to their children so the parents' estates may avoid paying back the value of Medicaid benefits (e.g., a nursing home stay) to the State after the parents pass away. This may sound good to some, but serious problems can arise if a child receiving assets becomes insolvent while the parents are still alive, and needs to file for bankruptcy relief.
The transfer increases the child's assets, which can compromise the child's bankruptcy case,...and the parents' estates. This is due to there being only a limited amount of exemptions available to shield assets in bankruptcy.
In a Chapter 7 bankruptcy case, too many assets can result in the sale of the non-exempt assets by the trustee assigned to the case. The fact that the child is only helping their parents will not matter to the United States Trustee's Office. What a tragedy it would be for Mom and Dad to lose their house (which they likely own debt-free) because of their child's bankruptcy, and subsequent inability to protect the house from trustee liquidation.
All too often, a child who is holding assets for a parent is forced into filing a Chapter 13 bankruptcy in order to protect the assets. As a result, the child must endure the more expensive and longer duration bankruptcy proceeding. In a Chapter 13 case, too many assets can result in higher Chapter 13 plan payments. Sometimes, the child cannot afford the higher Chapter 13 plan payment, and is prevented from filing altogether.
Parents who are contemplating a transfer of assets to their children would be wise to make sure their children are not highly leveraged or otherwise in financial distress. Children who are highly leveraged, in difficult relationships, uncertain about job security, etc. would be equally wise not to accept a transfer of assets from their parents.
An open and frank discussion of a child's financial situation with a qualified attorney prior to a transfer of assets from parent to child can avoid substantial harm to the parent's estate, and the child's chance for meaningful debt relief through bankruptcy.
Matthew S. Rousseau, Esq.
Morrison Rousseau, LLP
www.WorcesterBankruptcyAttorney.com
Parents often transfer assets (usually a home) to their children so the parents' estates may avoid paying back the value of Medicaid benefits (e.g., a nursing home stay) to the State after the parents pass away. This may sound good to some, but serious problems can arise if a child receiving assets becomes insolvent while the parents are still alive, and needs to file for bankruptcy relief.
The transfer increases the child's assets, which can compromise the child's bankruptcy case,...and the parents' estates. This is due to there being only a limited amount of exemptions available to shield assets in bankruptcy.
In a Chapter 7 bankruptcy case, too many assets can result in the sale of the non-exempt assets by the trustee assigned to the case. The fact that the child is only helping their parents will not matter to the United States Trustee's Office. What a tragedy it would be for Mom and Dad to lose their house (which they likely own debt-free) because of their child's bankruptcy, and subsequent inability to protect the house from trustee liquidation.
All too often, a child who is holding assets for a parent is forced into filing a Chapter 13 bankruptcy in order to protect the assets. As a result, the child must endure the more expensive and longer duration bankruptcy proceeding. In a Chapter 13 case, too many assets can result in higher Chapter 13 plan payments. Sometimes, the child cannot afford the higher Chapter 13 plan payment, and is prevented from filing altogether.
Parents who are contemplating a transfer of assets to their children would be wise to make sure their children are not highly leveraged or otherwise in financial distress. Children who are highly leveraged, in difficult relationships, uncertain about job security, etc. would be equally wise not to accept a transfer of assets from their parents.
An open and frank discussion of a child's financial situation with a qualified attorney prior to a transfer of assets from parent to child can avoid substantial harm to the parent's estate, and the child's chance for meaningful debt relief through bankruptcy.
Matthew S. Rousseau, Esq.
Morrison Rousseau, LLP
www.WorcesterBankruptcyAttorney.com
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