Bankruptcy FAQs

Experienced San Luis Obispo Bankruptcy Lawyer

faqsAt the Law Offices of R. Morgan Holland, L.C. we offer a free initial case evaluation for up to 30 minutes where you can meet with the attorney to discuss your individual case. The law's application may be different from case to case and it is not recommended that you apply the information contained in this page without first consulting with a qualified bankruptcy attorney.

Q: My CREDIT CARD REPORT SHOWS MY CREDIT CARDS AS WRITE OFF, AM I IN THE CLEAR?

A. No. Many folks are under the misconception that if a debt is written off on their credit report that they don't owe the money any more. A write off and a forgiveness of debt are two different things. A write off is done for purposes of negative credit reporting and has no legal connection as to whether the creditor is going to turn you over collections and/or sure you.

Q: I HAVE BEEN SUED, WHAT CAN I DO?

A. You have received a summons and complaint from one of your creditors because you have been sued. The question becomes: what can I do? Well that depends upon many factors, including whether you believe that you owe the money that you are being sued for and how much debt that you have. If you know that you really owe it, the chances are in most cases the court will hold you liable. At the same time, even though you may have a very good defense it may cost more to defend that than what you can afford. Either way, if you do not defend the suit then the creditor will most likely obtain a judgment against you. With the judgment the creditor will be able to attach your wages, taking a large chunk of your paycheck or take all of the funds from your bank account.

At the Law Offices of R. Morgan Holland, L.C. the earlier that we know your situation, the more that we can often do to help you. The filing of a bankruptcy will immediately stop a creditor's lawsuit (excepting a child or spousal support action) when it is filed. However, that not mean that you are safe to wait until one of these things happens to you before you take action. With the advent of the means test pre-bankruptcy planning may be necessary for you. While the bankruptcy laws do not require that you have any particular level of income, the income that you do have will used in the calculation to determine your qualification to file. Most types of income are considered but there are some that do not.

Many of the bankruptcy laws have a look back period when determining whether your filing will be successful. Frank and candid discussions with a bankruptcy attorney regarding your current and past situation is essential in nearly every case.

Q. MAY WAGES ARE BEING GRANDISHED OR MY BANK ACCOUNT HAS BEEN LEVIED UPON. CAN I STOP IT?

A. Yes. The automatic stay is a federal injunction imposed with the filing of a bankruptcy. (There are exceptions to this for 2 or more dismissed filings in the past 12 months.) Bankruptcy will immediately stop a wage garnishment. (Subject to a few limited exceptions.) With the advent of electronic filing we can often times obtain that stay immediately.

In most cases where there is a garnishment or levy your money will go to the Sheriff before it goes to the judgment creditor. As a result, even if the money has left your paycheck or bank account we can often times have the money returned to you with a properly timed bankruptcy filing.

Q. WHAT IS THE MEANS TEST AND THE BEST EFFORTS TEST AND HOW DO THEY APPLY?

A. The means test is an evaluation that must be done in any Chapter 7 or 13 bankruptcy filed after October 1, 2005. It examines your gross household income and compares it to the average income of other households of the same size as yours in your state. If you have too great of income at the first level, then it contains a second level that is much more comprehensive in its application than we can cover here.

If you are a disabled veteran than the means test does not apply to you at all. Likewise your Security Income does not count. There are many other exceptions and nuances that you may qualify to use that are not general knowledge. At the Law Offices of R. Morgan Holland, L.C. we work with these exceptions and nuances every day. We can help you understand what you qualify for.

Historically, in a Chapter 7 if your monthly income significantly exceeds your allowable monthly expenses then the court may dismiss your bankruptcy for failing to use "best efforts" available to you to pay your creditors, even if you passed the means test. In these cases you would need to convert your Chapter 7 to a Chapter 13 or 11 if you do not want it dismissed. In a Chapter 13 the difference between actual income and allowable expense will be used to determine how much your monthly payment will be. However, in 2013 the Ninth Circuit (Federal Court of Appeals in California) came down with a decision that changes the way the Court should evaluate this rule. The best efforts test should have no further application to the chapter 13 payment determinations in the 9 th Circuit. The result of such a change should be to make both the Chapter 7 and Chapter 13 more user friendly and available to more people who need them.

Q. WILL THE BANKRUPTCY STOP THE GARNISHMENT AGAINST MY WAGES FOR CHILD OR SPOUSAL SUPPORT?

A. No.

Q. SHOULD I WORK OUT A SETTLEMENT WITH MY CREDIT CARD COMPANIES INSTEAD OF FILING BANKRUPTCY?

A. Here is how it works: The forgiveness of debt is considered to be income by the Internal Revenue Service. For example, if you have a credit card to which you woe $10,000.00, that credit card company approached you and is willing to accept $3,000.00 and write off the rest if you can pay them. You, in turn, consider this to be a deal and you $3,000.00 dollar to pay off this $10,000.00 credit card. At the end of the year you will get a 1099 from that credit card company for that $7,000.00. That is the amount of forgiven debt. Unfortunately the credit card company has no choice and must issue a form 1099 to you. You will owe taxes to the IRS at whatever your normal tax rate is on the $7,000.00 just as if it were cash income that you received. An exception to this rule exists if you are able to demonstrate insolvency to the IRS under its own procedures.

Assuming that you cannot demonstrate insolvency to the IRS, you are actually in a worse position than you were before you settled the debt. The tax owed is now so recent from the transaction you will not be able to immediately file a bankruptcy to discharge your obligation to the federal government. Should you have chosen to file bankruptcy on the credit card debt instead of settling it you could ordinarily have discharged the entire among with no tax to you. This is because a discharge in bankruptcy is not a taxable event. The law does not require the creditor to issue a form 1099 to you for the discharge of that $10,000.00 credit card debt in bankruptcy. You will owe no tax on the transaction.

Q. SHOULD I SHORT SELL MY HOME?

A. The same general rule as to the taxability of forgiveness of a credit card debt applies also to mortgages that are forgiven.

When a lender/ bank elects to sell your home, a "deficiency balance" is usually created. The "deficiency balance" is that amount of the unpaid loan remaining once the foreclosure sale proceeds have been applied to your loan balance. This is the amount of the sales proceeds have been applied to your loan balance. This is the amount of the sales proceeds after the bank has already deducted the costs of sale. This deficiency balance can be substantial in today's real estate market. Deficiency balances of $100,000 - $150,000 are common. Except under limited exceptions in California the bank may sure you for this deficiency, then attach your wages or levy bank accounts.

Regarding short sales, in California recent legislation Senate (Bill 458) was passed indicating that if a bank consents in writing to a short sale of a dwelling after July 15 th, 2011 that it may not pursue you for the remaining deficient balance (i.e. it must forgive you of the excess debt over and above the sales price as long as the bank gets all of the money). However, if there is a first and a second it would appear that you need to secure the written consent of the second as well to claim this protection. If either the first or second do not agree to release their lien, then a short sale probably will not consent in writing to the transaction.

For short sales of non-dwellings and other real estate in California, dwellings of more than 4 units in Californian, and short sales of homes in many other states there still remains two types of short sales. In the first type of short sale, the bank simply states that it will release its interest in the property to the buyer of the property. However, they retain their rights to pursue you for nay defiance balance. Until recently those were the types of short sales that were generally accomplished. The second type of short sale is one where they will agree to release you of any deficiency balance after the short sale. Many people and even their real estate agents believe that they are doing a good thing

In reality, the forgiveness of a deficiency balance can create a worse problem for you than what you would have had if you would have simply let the bank foreclose on your home. Just like the credit card company, the deficiency balance owed would ordinarily be discharged in the bankruptcy. However, the tax obligation that is created by the forgiveness of debt will not be discharged in a Chapter 7 bankruptcy filed any time in the following 3-4 years. Even the tax on a forgiven deficiency balance from a mortgage can be disabling.

Q. DIDN'T THE MORTGAGE DEBT RELIEF ACT OF 2007 MAKE IT SO THAT I DON'T OWE TAX ON ANY FORGIVENESS OF MY MORTGAGE DEBT?

A. Sometime in December of 2007 the President signed the Mortgage Debt Relief Ace in an attempt to address this concern. Generally, the Act states that if a bank does choose to forgive you of a deficiency balance on your home, then the forgiveness of that deficiency will not be considered income to you.

Unfortunately, this general rule is filled with many exceptions and exclusions. Among those exclusions are:

  1. The home involved has to be your principal residence. If it is a rental property the Mortgage Debt Relief Act gives you no relief.
  2. You must have lived the house for at least two years.
  3. The debt involved cannot exceed your basis in the home. For example, you paid $250,000.00 for a home in 2001. In 2005 when the market was strong you refinanced your home and pulled our $100,000.00 of equity and put it into another house, investment or spent it. Now you owe $350,000 on a home that you only paid $250,000 for. Even if the bank chooses to forgive your debt and you lived in the home for two years you may still be subject to taxation on that other $100.000.00 of forgiven debt that represented the money you took out of the home.

Q. DID THE $700,000,000,000 BAIL OUT FOR THE FINANCIAL INDUSRTY AFFORD SPECIAL POWERS TO THE BANKRUPTCY COURT TO REDUCE OR "CRAM DOWN" MY HOME LOAD TO AN AMOUNT EQUAL TO THE CURRENT VALURE OF MY HOME?

A. No. The "Cram Down" provisions of the bankruptcy law do not apply to your home mortgage. It has been this way since 1978. Nothing was in the final version of the September 2008 legislation to change that.

The above analysis is not intended to be an extensive analysis reciting all of the exceptions to the Mortgage Relief Act. There is not enough room to provide an extensive legal analysis of the areas of law touched on herein. Your situation may differ drastically from the example that we have provided. This has been provided for informational purposes only, and is not intended to be relied upon without a consultation with a qualified Santa Maria bankruptcy attorney regarding your specific situation. However, whether you should do a short sale or proceed in some other fashion is a very complicated question that you must look into thoroughly before you make the decision. If you make the wrong decision you could be saddled with a very different situation that will follow you for a number of years.

Q. WHAT HAPPENS TO THE HOMEOWNERS' ASSOCAITION DUES ON MY PROPERTY WHEN IT STAYS IN MY NAME BECAUSE THE BANK HASN'T COMPETED ITS FORCLOSURE?

A. There is a point of law which can present a difficulty for those who own or owned real estate which is part of homeowners' association. As you are aware, unless you reaffirmed your mortgages/deeds of trust in the bankruptcy, they have been discharged. If the mortgage has been discharged, there is no potential liability. However, when there is homeowners' association, the legislature has carved out a specific exclusion when the property continue to be held in your name after bankruptcy filing. You continued to be liable for homeowners' association monthly dues assessed post filing so long as the property remains in your name. Now this may present a problem if you were waiting for the lender to complete a foreclosure when the lender is slow to move. The homeowners' association has three options:

  1. They can file a lien against the property and hope to be paid;
  2. They can accept a deed from you transferring the property to their name;
  3. They can sue you.

What does this mean for you? Let's say for example, the homeowners' associated dues for the property you plan on surrendering in your bankruptcy are $200 a month. At the time of filing your bankruptcy you have $5,000 association dues outstanding. Your bankruptcy is filed. Your mortgage lender takes a full 12 months to complete the foreclosure of the property. The association dues of $200 of a month have ben accruing for the past twelve months, meaning the HOA could pursue and obtain a judgment against you for $2,400 following the successful discharge of your bankruptcy. This would represent the homeowners' association dues accruing post filing while the property remained in your name. On the other hand, the $5,000 in homeowners' association dues owed at time of filing would be discharged and could not be pursued by the HOA. So then you may ask "what can I do?" I believe there are four options.

  1. You can pursue a deed in lieu of foreclosure with the lender. One problem is that it can be time consuming and the lender may not accept the deed. In the meantime, while you're waiting for the lender to decide, the HOA dues continue to accrue in your name. The other problem with this approach is that the lender may be unlikely to accept the deed in lieu when there is a junior lien holder such as a second mortgage or any other type of junior lien because by accepting the deed in lieu they will have to pay the junior lien holder out of the proceeds from the eventual sale of the home.
  2. You can attempt a short sale of the home and request the homeowners' association to file a lien against the property so that it gets paid during the course of the short sale. If they do not, you would insist that as party of the sale transaction, the HOA dues get paid through the close escrow.
  3. You can live in the property and pay the homeowners' association freed until there is a foreclosure.
  4. You can the rent the property out, if the HOA restrictions permit it, and use the rental income to pay past due and current HOA fees. You have the complete legal right to rent the property so long as it remains titled in your name. In addition, I would highly recommend disclosing in the rental contract that the property is in foreclosure and that the rental proceeds are being used to pay the HOA dues. Furthermore, you should not agree to any longer term than a month to month lease. This should help to avoid any claims of wrongdoing or fraud against you by any opportunistic tenants. If you pursue this option then the property needs to have been in your name for at least a year. Please keep in mind, in order to select option four it is important that the deed of trust did not have an Assignment of Rents attached. If it did and you do not use the rent to pay the lender, you could liable in the future for those amounts received. If this your situation, call us because some planning may be appropriate for you. I would like to emphasize thought that if the home was finance as principal residence it is very unusual to have an Assignment of Rents on the Deed of Trust. As you can see this areas of law if fraught with pitfalls and I would like to extend our continued availability to you in order to assist you in resolving this issue if you are dealing with it.

Lien Stripping

Q. CAN I GET RID OF THE SECOND OR THIRD MORTGAGE ON MY PERSONAL RESIDENCE THROUGH BANKRUPTCY?

A. The answer to this question in the 9 th District Court of Appeals (which includes California) is, yes, under the right circumstances. Case law has come down over the last couple of years in this district that allows for this time.

Q. HOW DOES IT WORK?

A. Any personal bankruptcy this process may not be done through Chapter 7 fresh start bankruptcy. Rather it is limited to the reorganization types of bankruptcy such as a Chapter 13 or Chapter 11 where some effort is being made to pay a portion of your unsecured debt back over the term of a plan where payments are being made through the Court. (For example payments over 36-60 months.) Normally, upon successful completion of the plan then receive your discharge of the remaining balances.

During the bankruptcy you must file a motion against the mortgages that you would like to strip off of your home. In order to win that motion against the mortgage holder, among other things, you need to prove that the current market value of the home is less than or equal to the amount that is owed against the first trust deed (or first mortgage). If you are able to prove your case then the second and/or third trust deeds/mortgage will be stripped off of your home and treated like a credit card. They end up receiving a percentage of their loan with credit cards from the payments that you are making into the plan. The amount of those payments have no relation to the amount that your original payments were to them under the load agreement. At the successful completion of the plan they are discharged with the remaining credit card balances and you keep your home free and clear of the second and/or third.

Q. IS THIS AS GOOD AS IT SOUNDS?

A. If can be. However, it involved a commitment. First, it involves a reorganization type of bankruptcy which is generally more expensive than a fresh start. Secondly, it involves a lawsuit. This also adds more expense. As part of that reorganization you are agreeing with the Court to make monthly payments to the Court as part of the plan. That is something else that you do not do in a fresh start Chapter 7 bankruptcy. Finally, you also agree that you are going to keep the payment on your first mortgage/trust deed current during the term of the plan.

These two requirements prove to be the most daunting for most individuals. Failure to do these things can and usually will mean dismissal of your plan. So, even if you have successfully sued and completed your lawsuit against the second and/or third trust deed/mortgage holders and you are well into your plan, you can still lose all of that effort and investment by dismissal of the case if you fail to continue to meet the obligations of the plan at any time during that 3-5 year period. When that happens the second and/o third trust deeds/ mortgages stay attached to your home and survive the bankruptcy that was dismissed.

It is very important that you carefully consider the cost and commitment of attempting to strip the second and/or third from your home before you attempt it. However, if it is something that you can complete, in most cases you can save a lot of money.

For answers to other questions, please call the firm at (805) 762-4465!