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Will Filing Bankruptcy Stop Foreclosure
Your lender has started foreclosure. What should you do? What are your options? Will bankruptcy stop foreclosure? How can I bring my mortgage current? These are common questions facing those who find themselves in foreclosure. This article answers these questions and outlines some options.
Bankruptcy Stops Foreclosure
When a bankruptcy petition is filed with the court, 11. U.S.C. § 362 imposes an automatic stay that prevents creditors from beginning or continuing collection activities—including repossessions, garnishments and foreclosure. This automatic stay may be limited or not apply at all if the debtor has filed one or more bankruptcy cases within the past year that has been dismissed, however. Consulting with an experience bankruptcy attorney will help you determine whether the automatic stay will apply in your situation.
Filing bankruptcy may only temporarily stop the foreclosure process, however. While a chapter 7 bankruptcy case is pending the lender can file a motion for relief of the automatic stay. If granted, the lender will then be free to foreclose. After a chapter 7 the lender can foreclose as well.
How Can I Bring My Mortgage Current
If you have fallen behind on your mortgage, your mortgage company likely will not accept payments, unless you pay all the past due amounts or arrearage amounts. This poses a practical challenge for most borrowers. They obviously would not be behind if they have thousands of dollars to bring the account current.
There are two primary options other than foreclosure when this occurs: (1) file for and hope for a loan modification; or (2) file chapter 13 bankruptcy.
Loan Modification to Stop Foreclosure
Federal law may require your lender to engage in foreclosure alternatives prior to foreclosing, including loan modification. Loan modification will alter the terms of your mortgage most often by reducing the interest rate either temporarily or permanently, extending the term of the loan, and in some circumstances reducing the principal amount owed. The challenge with loan modification is that there are no guarantees of success. In our experience, the process will usually last months and sometimes more than a year before a definitive answer is received. During that period you are further and further behind increasing the challenge to keep the property if the modification is unsuccessful.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is specifically designed to deal with mortgage arrears. In a chapter 13 the borrower proposes a repayment plan that complies with the bankruptcy provisions. The first benefit is that the borrower is allowed to begin making regular mortgage payments. This prevents further arrears. The second benefit is the chapter 13 plan can repay the arrears interest free over the plan period. Thus by the end of the chapter 13 plan the borrower is current on the mortgage as well as discharged other debts. Because the code specifically permits this, it is far more reliable than a loan modification.
Chapter 13 bankruptcy and loan modification is NOT mutually exclusive. You can file a chapter 13 and seek a loan modification at the same time.
The experienced lawyers for bankruptcy with Weekes Law can help you determine the best course of action in your circumstances. Contact us today for a free bankruptcy evaluation.
Located in the heart of Utah County, Weekes Law has opened an office in American Fork, Utah. The opening extends Weekes Law’s physical presence into Utah County. Weekes Law has long served Utah County residents with online legal services. Now Utah County residents can chose to either have an “online” or a physical experience in working with Weekes Law.
“We’re excited about the expanded offerings to Utah County residents the new office affords,” says Russell B. Weekes, Weekes Law’s founder and Managing Member. “Clients in Utah County have come to appreciate the high level of expertise, personal attention, efficiency and convenience that is the hallmark of Weekes Law’s legal services. Now clients in American Fork, Provo, Orem, Pleasant Grove, Lindon, Lehi, and Saratoga Springs can experience that specialized service in a local office setting,” continued Mr. Weekes. Weekes Law maintains office locations in Draper (Salt Lake County) as well as Heber City (Wasatch County) in addition to the American Fork office. The American Fork office is conveniently located just off of exit 276 at 500 East in American Fork at 802 Bamberger Drive, Suite D2, American Fork, Utah 84003.
Weekes Law provides chapter 7 and chapter 13 consumer bankruptcy, estate planning, business, criminal defense and asset protections services. Weekes Law has developed a unique online bankruptcy system that boasts of increased client communication, thoroughness, and convenience. The online bankruptcy system allows Weekes Law to provide quality chapter 7 and chapter 13 bankruptcy services to clients across the State of Utah. Mr. Weekes describes the firm’s competitive advantage, as “providing bankruptcy expertise at a reasonable rate and in a convenient way in a way no other firm can deliver is our competitive advantage”.
To schedule a free bankruptcy evaluation or legal consultation, call (801) 228-0017 or online at www.WeekesLaw.net.
A reaffirmation agreement is an agreement by which the debtor agrees to remain personally liable for a debt post-bankruptcy. A reaffirmation agreement essentially eliminates the benefit of filing for bankruptcy in Salt Lake or one specific debt. Because reaffirming a debt undermines the most basic benefit of filing for bankruptcy in Salt Lake, you should seek counsel from an experienced Salt Lake bankruptcy lawyer before entering into a reaffirmation agreement. A Salt Lake Chapter 7 bankruptcy lawyer must review your financial position following bankruptcy in Salt Lake and certify to the bankruptcy court that entering into the reaffirmation agreement will not cause an undue financial hardship. The Salt Lake bankruptcy judge must also approve the agreement.
As a Salt Lake Bankruptcy lawyer, it is difficult to predict a person’s financial future. Therefore, our experienced Salt Lake bankruptcy lawyers generally discourage our clients from entering into a reaffirmation agreement…unless absolutely necessary.
Most secured creditors with whom a reaffirmation agreement would arise arise—automobile lenders—generally allow you to keep the secure property (automobile) without entering into a formal reaffirmation agreement, so long as you keep your payments current. We call this the “pay and retain” method. While a creditor is not legally obligated, our experience is that most secured creditors will agree to the pay and retain method.
While the pay and retain method works well with most secured creditors, there are a minority of creditors who take the extreme position to repossess the secured property even if you are current. America First Credit Union is one of these creditors. In cases that deal with AFCU or other creditors who take the same position, it may be necessary to enter into the reaffirmation agreement in order to retain possession of the secured asset.
As mentioned, the best way to ensure that your rights and best interest is protected is to consult with an experienced Salt Lake bankruptcy lawyer. Schedule your free consultation today.
Separation Agreements that are incorporated into a divorce decree (and decrees of divorce themselves) pose difficult and sometimes unexpected results in bankruptcy. Many of the general rules of bankruptcy can be dramatically altered with a separation agreement or divorce decree. This article discusses a few of the problems that divorces and divorce decrees pose in a subsequent bankruptcy.
It is widely known that domestic support obligations, such as child support and alimony, are excepted from discharge under section 523(a)(5) of the bankruptcy code. (This means that the debtor will remain liable for the debt even after a discharge of other debts has been obtained.) Debts that are owed to a spouse are excepted from discharge under section 523(a)(15) as well. At first blush this seems to be straight forward and a narrow exception (unless the debt is owed to the spouse, it is discharged). This has a much greater reach than meets the eye, however.
Courts have interpreted this section 533(a)(15), however, to include pre-existing marital debts agreed to be paid by one spouse (debtor spouse) as part of a separation agreement or divorce decree. In re Wodark, 425 B.R. 834 (10th Cir. BAP 2010). This applies when the separation agreement is incorporated into an enforceable divorce decree. A divorce decree is a judgment and not just a contract. As a result, the non-debtor spouse may, inter alia, obtain a contempt order when the debtor spouse fails to pay. While the liability to creditor is discharged in a Utah chapter 7 bankruptcy, the spouse has the right to enforce the judgment (divorce decree).
The limitation of discharge of the debts owed to the spouse under § 523(a)(15) as discussed above, does not apply in a Utah chapter 13 bankruptcy, however. Section 1328(a)(2), also know as the super discharge provision that applies in chapter 13 cases discharges the debt owed to the spouse upon completion of the chapter 13 plan.
Therefore, if one of the primary debts sought to be discharged is debt owed under divorce decree, the debtor should file a chapter 13 petition rather than a chapter 7. While the difference between a chapter 7 and chapter 13 regarding former spouses may seem surprising, it is consistent with one of the primary objections of bankruptcy reform of 2005: to encourage more chapter 13 bankruptcies. Consultation with an experienced bankruptcy attorney is the best way to determine which chapter of bankruptcy is appropriate.
“I heard that I can discharge my tax debt, is that true?” The preceding question is one that is frequently posed in our Utah bankruptcy practice. Federal and State income taxes may be eligible for discharge under Chapter 7 or Chapter 13 of the bankruptcy code under certain circumstances.
Chapter 7 bankruptcy provides for a full discharge of allowable debts. Chapter 13 bankruptcy is a debt consolidation and a partial repayment of debts over a period of time; allowable debts that are unpaid after completion of the repayment plan are then discharged. As a result, under either Chapter 7 or Chapter 13 may be discharges, so long as the requirements are met for discharge.
There are five rules that determine dischargeability of tax liabilities:
- The due date for filing the tax return is at least three years prior to the filing of the bankruptcy petition.
- The tax returned was “filed” at least two years prior to the filing of the bankruptcy petition.
- The tax assessment is at least 240 days old (as of the date of filing the petition).
- The tax return was not fraudulent.
- The taxpayer is not guilty of tax evasion.
First, the tax debt must arise from a tax return that was due at least three years prior to filing the bankruptcy petition. This requirement includes any extensions. So, if you filed for an extension, the time period is calculated from the due date of the extension.
Second, the debtor must have filed a return. This requirement is met when a debtor participates in (provides information and documentation) or signs off on a return, pursuant to Internal Revenue Code section 6020(a). This requirement apparently does not include, however, a service-filed return pursuant to Internal Revenue Code section 6020(b) where the filing is not done with the debtor’s cooperation and is based on information obtained by the taxing authority on its own.
Third, the taxing authority must assess the tax at least 240 days before filing the petition. This is when the taxing authority sends you a notice of assessment or the IRS issues a certificate of assessment.
Fourth, the tax liability is only dischargeable if you did not file a fraudulent return.
Fifth, your tax liability cannot be discharged if you are guilty of intentionally trying to evade taxes.
If the five requirements listed above are met, the taxes are dischargeable. In some cases it may be advantageous to wait to file the bankruptcy petition until the tax liabilities are dischargeable. If taxes are not dischargeable, but the debtor cannot wait to file for bankruptcy, the Chapter 13 bankruptcy may provide for additional benefits for dealing with the tax debt. To assess a particular situation and determine the dischargeability of tax debt, you should consult with an experienced bankruptcy attorney.
In the wake of the U.S. foreclosure crisis, and as part of the Helping Families Save Their Homes Act of 2009, congress enacted the Protecting Tenants at Foreclosure Act (“PTFA”). This relatively unknown piece of legislation has significant importance to tenants of property that is foreclosed. Legislative history of the PTFA reveals that “for too long, tenants have been the innocent victims of the foreclosure crisis. Countless tenants across the country have been forced to leave their homes simply because their landlords were unable to pay their mortgages.”
The PTFA prevents tenants from being evicted from the property immediately following a foreclosure sale. The length of the tenant’s right to remain in the property is determined by the buyer’s intent to occupy the property as their primary dwelling.
Buyer Intends To Occupy
If the buyer intends to occupy the property as their primary dwelling, then the tenant has the right to stay in the property until they receive a 90-day notice to vacate before the effective date of the notice. So the soonest a tenant can be required to vacate is 90-days following the foreclosure sale. To be more precise, the new owner cannot serve a 90-day notice until they actually own the property–or after the trustee’s deed has been recorded with the county recorder. A notice prior to the sale or prior to the recordation is presumably void. It is possible that the new owner’s trustee’s deed is recorded on the same day of the trustee’s sale, but this is unusual. Under Utah Code Section 57-1-28(2), the trustee must provide the buyer a trustee’s deed for recordation withing 3 business days. Therefore, it will normally take about a week after the sale before the trustee’s deed is recorded.
Buyer Doesn’t Intend to Occupy
The tenant’s right to occupy the property when the new owner doesn’t intend to occupy the property as their primary dwelling is substantial. The tenant is entitled to remain in the property for the remainder of the current term of the lease. Weekes Law has successfully defended a lease with a 7-year term! While anyone is able to bid at a foreclosure sale (including the foreclosed mortgagor), the bank is the most frequent buyer at trustee’s sales. That means in the overwhelming majority of cases, the tenant is entitled to remain in the property during the current term of the lease.
Requirements of Protecting Tenants at Foreclosure Act
For the PTFA to apply, the lease must be bona fide. All leases or tenancies under PTFA are bona fide if:
(1) the tenant is not the mortgagor or the child, spouse, or parent of the mortgagor;
(2) the lease or tenancy was the result of an arms-length transaction; and
(3) the lease or tenancy requires rent that is not substantially less than fair market rent for the property.
Because of the relative ease to meet PTFA’s definition of bona fide, nearly all residential leases qualify under PTFA. While there is scant case-law interpreting PTFA, courts that have addressed the issue overwhelmingly find in favor of the tenant.
In 2009 Congress enacted the Helping Families Save Their Homes Act of 2009, which among other things requires federally insured lenders to engage in loss mitigation actions for the purpose of providing an alternative to foreclosure, including forbearance, loan modification, and deeds in lieu of foreclosure. Perhaps the most popular among these initiatives is loan modification. Loan Modification is the restructuring of the loan.
But how successful is loan modifications as a foreclosure alternative and how well does it compare to other loan restructuring alternatives including chapter 13 bankruptcy’s so-called cram down strategies?
In our debt relief practice we find that most clients would prefer a loan modification strategy to chapter 13 cram down strategy–at least initially. While motivations may vary somewhat, it appears to us anecdotally that loan modification is preferred primarily as a method to avoid the stigma of filing for bankruptcy. We appreciate the well-intentioned motive, but question whether loan modification alone is a superior financial strategy in the long-term.
Loan modification, in our experience, typically involves a rate reduction, extension of the loan term, and re-amortization of past due amounts. In contrast, a successful cram down following a chapter 13 is in effect a discharge or principal reduction of a second mortgage. While we have seen lenders occasionally include a principal reduction as part of a loan modification, our experience is that a principal reduction is rare.
Because nearly all of these properties that are pursuing a modification are already upside-down, a modification merely addresses the symptom of an overpriced property and doesn’t address the underlying negative equity problem. For those of us who do not believe that real estate will “recover” in the near future (we believe the current depreciation is a natural course correction following false appreciation), a modification will exacerbate and perpetuate the negative equity problem. The negative equity will invariably rear it’s head when the borrower wants or needs to sale the property in the future.
In contrast a successful chapter 13 cram down will bring the debt on the property more in line with the true or corrected value of the property with the under secured portion being discharged. For this reason cram down will leave the borrower in a better long-term financial position standing alone.
Chapter 13 cram down is not available in every situation. Sections 1322 and 506 of the bankruptcy code permits bankruptcy courts to reduce or “cram-down” a wholly unsecured second mortgage of a principal residence in Chapter 13 bankruptcy. The unsecured portion is lumped with all other unsecured debt of the debtor, potentially receives some repayment under the Chapter 13 plan and then discharged upon completion of the plan. This is true because no portion of the debt is “secured” as defined by Section 506 of the code. If any portion of a mortgage of a principal residence is secured (based on its replacement value), however, the mortgage may not be crammed-down. In addition cram-down is available on all second homes or investment properties to the extent that ANY portion of any debt is under-secured.
For these reasons standing alone chapter 13 is a financially preferable strategy when the debtor’s situation avails itself to a cram down. Loan modification is not without its place, however. When a debtor’s financial distress is limited or the debtor doesn’t qualify for chapter 13, then loan modification is a good alternative to foreclosure.
Moreover, chapter 13 cram-down and loan modification are not mutually exclusive. The most powerful restructure of the debt would be to cram-down the second mortgage and modify the primary debt of the property. The combination of cram-down and loan modification would address both monthly mortgage expense as well as addressing the property’s negative equity leaving the debtor in the best possible financial position for the future and avoiding foreclosure.
It may come to a surprise to most people to hear an estate planning attorney admit that most estate plans don’t work. In our experience, however, that is indeed the sad reality. They “don’t work” because they fail to meet the expectations of planner. That’s to say if the decedent could see what happened to their estate, they would be disappointed.
One simple yet potentially extreme example is the common scenario where the surviving spouse remarries. Some time ago I received a call from a distraught daughter of an estate who posed the common query “so when do we get mom & dad’s house”? Dad predeceased mom, who had in turn remarried and then passed away herself. Mom was survived by her new spouse, who was living in the house because he received her entire estate. If mom & dad had been questioned at the time of preparing their estate plan, at their death or after their death, they undoubtedly would have indicated that would like their estate to pass to their children when both of them had passed on rather than to a surviving new spouse. So what did they do wrong? How could they have prevented this unintended consequence?
The first deficiency that I regularly see in most estate plans, including the one cited above, is that they are not regularly updated. Because they are not kept current, they are deficient when they are needed most: at the time of death. Out of date plans never meet the expectations of the planning couple.
In addition, I rarely see an estate plan (drafted by another estate planning attorney of course) that adequately protects the estate from a future remarriage scenario. Because the likely scenario isn’t addressed, the surviving spouse is left alone in a precarious position after remarriage: they either give all the assets to the new spouse because after all “we’re in this together”, “we love each other” and “shouldn’t we share everything”? OR it places a significant strain on the marriage because the surviving spouse refuses to “share her stuff”. In either case, the plan fails because it doesn’t meet the expectations of the planning couple.
With careful planning, sufficient counseling, an understanding of family dynamics, and regular updates to the plan, unintended consequences can be ameliorated or eliminated completely. With careful planning, the estate can be protected from remarriage scenarios that are very common.
National lender Wells Fargo, N.A.’s (Wells Fargo) attempt to invalidate a residential lease following the foreclosure of a mortgage covering a Highland property was denied by the Fourth District Court in American Fork, Utah pursuant to the Protecting Tenants in Foreclosure Act of 2009. In 2008, the landlord of the subject property defaulted on his mortgage precipitating foreclosure by Wells Fargo. Wells Fargo immediately commenced eviction proceedings against the tenant occupying the home, who had approximately 6 years remaining on a 7-year residential lease. With modern-day David versus Goliath certitude, the tenant refused to vacate the property citing his right to occupy the property during the remaining term of the lease pursuant to The Protecting Tenants at Foreclosure Act of 2009 (“PTFA”), codified as 12 U.S.C. § 5220. Through his attorney Russell B. Weekes with Weekes Law, PLLC, the Tenant initially prevailed on a motion to dismiss because Wells Fargo ignored the requirements of the PTFA when bringing its eviction action against the Tenant. Wells Fargo immediately brought a second eviction action against the Tenant.
Wells Fargo’s second action ultimately when to trial where Wells Fargo argued that the PTFA shouldn’t handcuff lenders into long-term leases and the the Tenant’s lease couldn’t be an arms-length lease under the definition of the PTFA because the lease term was too long. Experts on both sides agreed that they had never personally seen a 7-year residential lease. Wells Fargo further argued that because the lease payment was reduced by a substantial prepayment of rent, that the lease was not a bona fide lease under the PTFA because the lease required substantially less than fair market rent to be paid for the remainder of the lease. The Tenant argued that the lease the lease term does not invalidate a lease, the lease did not require substantially less than market rent, and the lease met all the requirements to be bona fide under the PTFA.
The court ultimately found in favor of the Tenant holding that the prepayment of rent was not unreasonable and that the rental rate required under the lease was not substantially less than fair market rent for the property.
“This is a great victory for tenants who are innocent victims of the foreclosure crisis. Too many tenants have been forced to leave their homes simply because their landlords were unable to pay their mortgages,” said Mr. Weekes following the victory. “Too many real estate agents and tenants are unaware of their federally protected right to remain in the property following foreclosure. Hopefully this victory will help educate lenders, real estate agents and tenants that law was specifically enacted to protect tenants in this situation,” Mr. Weekes continued.
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