Can I keep my home?

Most people who file a bankruptcy will keep their home when they file a chapter 7 or chapter 13 bankruptcy as long as they continue to make on time payments. You may hear from someone who has filed bankruptcy in the past that she lost her home. Typically that is because she stopped making payments. Bankruptcy will remove the obligation to make payments on the mortgage, but the creditor retains its lien rights and can still foreclose on the home after the bankruptcy is filed if payments are not made.

If you are behind on your mortgage payments before you file your bankruptcy you will want to discuss your options to file a chapter 13 as well as a chapter 7.  A chapter 13 bankruptcy will allow you to catch up on past due payments. HOWEVER, keep in mind that if you wish to keep your home and you want the opportunity to catch up on back payments, you will need to file a bankruptcy case prior to the sheriff sale.  Please keep all the letters that you receive from your lender and from any lawyers representing your lenders.  Your attorney will want to see these. Also, please keep your closing documents and bring those to your attorney to review.

If there is any equity in your home that equity is protected by the application of an exemption. In Minnesota you are entitled to apply either the exemptions provided by Federal Bankruptcy Law or exemptions provided by Minnesota Law. Currently, you have the right to protect up to $390,000.00 of home equity if you apply the Minnesota State exemptions, so typically, debtors do not lose their homes because they were not protected under the law.

What are examples of property that may not be protected?

Remainder Interests: Sometimes you might have a legal right or title in someone else’s property.  Often parents will grant their children what is called a “remainder interest” in their homestead property.  When they grant the remainder interest, they retain what is called a “life estate.”  A remainder interest allows the holder of the remainder interest to take title automatically to the real property when the life estate holder dies and keeps the asset out of the probate estate.  This may be used as an estate planning measure to reduce the over size and tax liability on the probate estate.  The value of the remainder interest is determined by using life expectancy tables.  There are several sources of information and you will need to consult with your Minnesota Bankruptcy Lawyer to assist you in determining whether your interest in someone else’s property will be protected or not.

There are also times when people just put their children on the deed to the home as a joint tenant. This would mean that you would have an undivided one half interest in the home. Neither of these situations will necessarily preclude you from filing a bankruptcy; however, expert guidance would be necessary. You will want to use a practitioner will the appropriate level of expertise and experience who practices Minnesota Law.

Luxury items and toys: Although the federal bankruptcy exemptions are extremely generous, there are times when people are not able to protect all of their luxury items and toys. Currently the federal exemptions allow the following:

Homestead                                                                         $22,975.00

Automobile                                                                          $3,675.00

Household goods                                                             $12,250.00

Jewelry                                                                                 $1,550.00

Wildcard                                                                            $12,775.00*

Tools of the Trade                                                             $2,300.00

Insurance policy                                                              $12,250.00

Personal Injury                                                                $22,975.00

Selected Retirement Accounts                               $1,245,475.00

Although this list of exemptions under federal bankruptcy law is not complete, these are the exemptions most typically applied in bankruptcy case.  The federal wildcard exemption consists of two separate exemptions under 11 USC 522(d)(5).  The first portion allows the debtor to exempt up to $11,500 of the debtor’s unused homestead exemption.  The second portion allows all debtors an additional $1225 of wildcard exemption.  So if the debtor has used all of their homestead exemption, they only have $1225 of wildcard.  If the debtor uses $15,000 of her homestead exemption, she will have a wildcard exemption amount of only $9,200

Which debts cannot be discharged?

Alimony, maintenance or support.  Debts resulting in a property settlement from a Divorce – Up until the amendments to the Bankruptcy Code under the Bankruptcy Abuse and Prevention Act

Most Taxes The vast majority of taxes cannot be discharged.  However, this can be a complicated issue.  If you have tax debts you will need to discuss these issues with Minneapolis Bankruptcy Lawyer.

Student Loans  Debts owed to a student loan company, government or private, as well as money owed to a school are not dischargeable, unless you show an undue hardship.  In Minnesota, it is extremely hard to establish an undue hardship and it requires a trial in most cases.  This is very costly and requires the analysis of an experienced bankruptcy attorney.

Debts incurred through Fraud Loans you obtained by knowingly giving false information to a creditor, who reasonably relied on the information in providing you with the loan are not dischargeable.

Debts divided in a divorce decree In a chapter 7, some debts that have been assigned to you in a divorce decree are not dischargeable.  For example, your obligation to pay the creditor directly is discharged, but your may be required to pay on behalf of the ex-spouse and co-debtor.  If the ex-spouse and co-debtor ends up filing a bankruptcy, your non-dischargeable obligation to them dissipates.   It works like this:  If you do not pay the creditor, and your spouse is forced to pay the debt, your spouse may be able to enforce the divorce decree provision against you in a civil contempt proceeding.  However, if you file a chapter 13, these debts may be dischargeable.

Debts incurred through Willful or Malicious Conduct  This exception to discharge applies to harm to personal property or a person as a result of willful or malicious acts.  Examples might be assault, trespass, vandalism, etc.

Debts for driving  while intoxicated   This exception was expanded in 2005 to include all debts resulting from drunk driving rather than just personal injury or death resulting from drunk driving.

Debts you did not list on your petition and schedules  Although debts inadvertently omitted can be later added to your bankruptcy, if the creditor would have been able to recover assets in your bankruptcy case or establish that its debt was not dischargeable the debt cannot be discharged.

Secured Loans  Although your obligation make monthly payments on your debts to secured creditors is discharged through your bankruptcy, the liens securing the notes are not discharged.  What this means is that if you gave a lender a mortgage on your home or a security interest in your car, you must keep making payments in order to keep your house or car or other property securing the loan.

What is the Automatic Stay in Bankruptcy?

When you file for bankruptcy whether you file a chapter 7 or a chpater 13 bankruptcy, the act of filing protects you against actions of creditors.  This happens the minute you file your case and as such this protection is referred to as the automatic stay.  If the creditors are not aware that you filed a bankruptcy case, then any action the creditor took after you filed the case will be considered null and void.

The bankruptcy code’s automatic stay applies to the following types of proceedings:

  • Lawsuits
  • Foreclosures
  • Collections
  • Garnishments
  • Setoffs
  • Repossessions

Actions and happenings that are not protected by the automatic stay:

  • criminal proceedings
  • some government actions
  • withholding of wages to payback 401K loans
  • repossession of residential real estate if eviction was granted pre-petition

Termination of Bankruptcy’s Automatic Stay

Although it is not entirely clear when the stay actually terminates, the stay is terminated when the case is either closed or discharged. 

Is the Automatic Stay Different in a Chapter 7 than in a Chapter 13 Bankruptcy?

There are some differences in how the automatic stay operates in a chapter 7 versus a chapter 13 case.  In a chapter 7 bankruptcy the Automatic Stay does not protect non-filing co-debtors; whereas co-debtors can be protected in a chapter 13.  Typically the debt that is shared by the non-filing spouse must be paid either in full through the plan or directly by the non-filing spouse in order to receive protection.  In some cases, even if the debt receives no treatment in the chapter 13 plan, the co-debtor will be protected from immediate collection action that can occur in a chapter 7.  The unsecured creditor, however, can obtain relief from the automatic stay and proceed against the co-debtor.

It is important to remember that the additional protection for co-debtors in a chapter 13 is only for consumer debts.  Income tax debt is NOT considered a consumer debt, nor are debts related to your small business. There are other provisions of the automatic stay that limit the effect of the stay when someone has had multiple filings within the year of filing the current case.  If the debtor has filed either a chapter 7 or a chapter 13 bankruptcy within the year before the current case, the stay will automatically terminate within 30 days of filing the case.  The debtor may extend the stay by filing a motion with the court and asking the court for specific permission to continue the automatic stay.  The debtor must overcome the presumption that the case was filed in bad faith.  Typically if there is a significant change in circumstances that adequately explains the multiple case filings, the debtor will be able to overcome the presumption and the court will extend the automatic stay.  

What is a reaffirmation agreement and should I sign one?

Most quality bankruptcy attorneys in the Minneapolis and St. Paul metro area will discourage clients from signing reaffirmation agreements.  But because I treat each case as an individual case my advice will depend on the circumstances of your case.

In most cases signing a reaffirmation agreement is not a good idea. Why?  Because when you sign a reaffirmation agreement, you are making a new promise to pay your debt to that creditor.  In most cases, this is a debt for which you would receive a discharge.  Following are some of the reasons that clients tell me that they want to reaffirm on their debts, and some of the typically advise that I provide.

1) Line of Credit Loan at your bank.  Often my clients tell me they want to pay their bank because they feel their bank has treated them well. Usually I will say that this is not a good idea.  The truth is that you can establish a relationship with a new bank, and as much as you feel that you have a personal relationship with the people who work at the bank you do not.  Bank professionals are trained to inspire loyalty in their customers.  Don’t be fooled.  Once you have filed a bankruptcy, even if you reaffirm on this debt, the bank will be less willing to work with you.  Many credit unions will terminate your account with them, so you will need to open a different account, and its probably wise to do this before filing rather than after filing.

2) Loans to Friends and Family.  If a client tells me they would like to reaffirm on a debt to a friend or family member I usually recommend against this.  I remind my client that they are not required to reaffirm on a debt to pay it back.  I also make sure that my clients are aware that they must list these debts.  Generally it is a good idea to pay family back once you are one your feet again.  DO NOT pay this debt back before you file your bankruptcy, as this could impair your ability to file your case!

3) Credit Cards.  Do not reaffirm on this debt.  You will receive many offers for store credit cards once you receive your discharge.  You relationship with your store credit card is most likely not a healthy one.

4) Car Loans.  Whether your reaffirmon a car loan is going to depend on many factors that must be viewed on a case by case basis.  Factors considered are:

a) whether you can afford the car payment;

b) whether there is any equity in the car;

c) the condition of the car;

d) the terms of the loan; and

e) the likelihood the car creditor will repossess the car if you do not reaffirm.

5) Home Mortgages.  In most cases a good bankruptcy lawyer will tell you that it is not a good idea to reaffirm on a home mortgage.  This is particularly true if that mortgage is a second mortgage lien. One of the difficulties in reaffirming on a first mortgage (the mortgage that stands first in priority) is that you may be reaffirming on a note that is not actually secured by a mortgage.  What I mean is that often problems are found in the recording of a mortgage that destroy the validity of that mortage.  If your mortgage is not valid and you reaffirm on the mortgage note, you will emerge from the bankruptcy with a very big unsecured debt.

Mortgage companies are increasingly interested in getting you to reaffirm on mortgages.  Banks and servicers misinform borrowers all the time, telling them that reaffirmations are required for HAMP modifications.  This is not always true, while FHA loans do require reaffirmations to provide modifications, Fannie Mae loans do not.

In fact, some banks regularly tell people emerging from bankruptcy that they can not refinance a mortgage loan that was not reaffirmed in their bankruptcy.  This is not true.  There are other companies that will work with you.  The problem seems to be that when you do not reaffirm on a mortgage note, the banks and finance companies are not required to report your monthly payments so you do not receive “credit” for those payments on your credit report.  However, even when you do not reaffirm on a mortgage note, you can obtain a payment history from your mortgage company.  A skilled mortgage professional can help you apply for a loan.

How will bankruptcy affect my credit?

When you file a bankruptcy remains on your credit report for 10 years from the date you filed your case.  This is true whether you file a chapter 7 or a chapter 13 bankruptcy case.  How fast your credit score repairs depends on various factors, including how poor your credit was prior to bankruptcy, what types of delinquencies you had, whether you have judgment, repossessions and foreclosures in addition to the banrkuptcy, how many open lines of credit you had and whether your bankruptcy is properly noted on your credit report.  The formulas that are used to tabulate a credit score are proprietary and subject to change, so any information available about improving a credit score is speculative.  The impact of your bankruptcy on your ability to obtain credit depends partly on the steps you take after your chapter 7 bankruptcy is discharged and during your chapter 13 bankruptcy.  The impact of your bankruptcy on your ability to obtain credit also depends on the type of credit you are attempting to obtain.  Generally speaking it is easier to obtain an automobile loan, than it is to obtain a signature loan from your bank.

Can I obtain a student loan after filing bankruptcy?

While 11 USC 524 forbids lenders offering government backed student loans to discriminate against borrowers with former bankruptcies, it does not prohibit private lending institutions from discriminating against debtor/borrowers.  Often lenders offering private loans will require a co-signor if the applicant has a former bankruptcy.  Further, while the prohibition under 11 USC 524 protects debtors as borrowers/students, it does not protect students who have former bankruptcy debtors as a co-signor on their student loan.  For example, when a parent files a bankruptcy and that parent is a co-signor or debtor on a student loan that is granted for the child’s education, the lending institution may refuse to disburse funds on the loan.  This may happen when the loan is granted prior to the bankruptcy filing but the disbursement is set to occur after the bankruptcy is filed.

This law firm is a debt relief agency, and we help people file for bankruptcy relief under the United States Bankruptcy Law.