Tax refund not yet received? In Colorado, you can kiss that sucker goodbye. Didn’t plan for how you would handle your LLC assets? Your creditors can now claim their share of the business and all your tools of the trade. Paid back your family what you owed them prior to filing? Now your family can be sued within your bankruptcy.

These are just a few examples of what can go wrong without legal advice. Bankruptcy seems simple on the surface, but that is misleading. Many cases I see are actually pretty complicated and need some care and attention in order to go smoothly through the bankruptcy process.

So, if you’re struggling with debts you cannot repay and need the relief of bankruptcy protection you should be shopping for a lawyer. Who you choose really depends on how you want to be treated during the 5 months or longer your bankruptcy case will affect your life.

High-Volume vs. Hand Holding

Some bankruptcy law firms do a lot of business and claim to offer cheaper services. I say “claim to” because when you actually look at the fees actually charged it’s rarely a bargain with all the add-ons and hidden fees involved in their supposed “flat fee”. Not to mention the property their clients lose because of sloppy or inadequate pre-bankruptcy planning.

Additionally, most high-volume bankruptcy firms do not offer much access to an attorney. You meet with a paralegal to evaluate your case (how this isn’t giving legal advice without a law degree I will never know) and may not even meet the attorney until after you’ve given them money. In fact, in most of these firms your face-to-face time with an attorney may be limited to a brief meeting and the short time they spend with you in front of the bankruptcy trustee at your Meeting of Creditors.

And what about when you have questions for your attorney? Good luck if you picked a bankruptcy “mill”. You may never get a call back, much less an e-mail reply. In most cases, your questions will be handled by a non-attorney staff member. When you pick a law firm that churns out bankruptcies like cheap plastic toys, what do you expect? You are just a number.

There Are Options

You don’t have to settle for such impersonal and non-attentive treatment from your bankruptcy lawyer. There are firms out there where experienced bankruptcy attorneys take their time meeting with you, evaluating your case, protecting your assets, and returning your calls promptly. I know this because Wink & Wink is one of those law firms. (However, I think we may be the only law firm where you actually get your attorney’s personal cell phone number. Really. Let me know if you hear of any others.) You don’t have to settle for feeling ignored or having your case filing pushed back month after month. Bankruptcy is a stressful event for most people and your attorney should seek to lessen that stress by answering your questions quickly and being available throughout the process.

Questions to Ask

So, how do you find the right attorney to handle your case? Ask questions! Ask a prospective law firm how much time your attorney will give your case. Most firms use paralegals to help process bankruptcy paperwork and communicate with clients. There’s nothing wrong with that (a good paralegal is worth their weight in gold!). It becomes less than ideal when the paralegal is tapped to give legal advice and generally take on all aspects of the bankruptcy case. Why pay for a lawyer if there isn’t a lawyer heavily involved in your case?

If the free consultation is with a paralegal, that’s a red flag. No one can evaluate the legal problems that can arise in bankruptcy except a lawyer. Period.  How are you supposed to “feel out” whether you have confidence in an attorney’s legal knowledge and skill if you can’t interview them, too? You can’t.

And if there is an issue that concerns you about your case– your small business, your home, your car loan—ask specific questions. Then evaluate how well the attorney explained how bankruptcy would affect your situation.

Trust Your Gut

The bottom line with any decision that matters is to trust your gut. Do you like the attorney? Did they treat you with respect? With empathy? Did you feel like you would be in competent hands if you chose their firm? If the answer is no, then keep looking.

There are many bankruptcy attorneys out there and you owe it to yourself to feel that your case is in good hands.

Denver, CO – Citing data from their American family debt infographic, Colorado bankruptcy attorneys Wink and Wink report that the median American family never pays off their credit cards. Wink and Wink have found that the median American family has carried at least $4,300 in credit card debt for more than 20 years, effectively never paying off their credit card debt.

“We live in culture that encourages debt,” says attorney Gailyn Wink. “From politicians in Washington to individual families, too many Americans spend more than they earn. Sadly, that means the median American family is never able to get ahead of their credit card debt.”

According to Wink and Wink, the median American family carries more than $170,000 dollars in debt while earning just $50,221 per year.

“Many families don’t realize how long it will take to pay off their debts,” says attorney Michael Wink, also of Wink & Wink. “When our clients add up all the money they owe and then compare that to how much they can afford to pay back, they’re often shocked to learn it could take decades to become debt free. Fortunately, all Americans have a legal right to bankruptcy.”

According to Wink and Wink, America’s “culture of debt” doesn’t have to be debilitating. When the US Constitution was written, every citizen was granted the right to declare bankruptcy. Since that time, many famous Americans have declared bankruptcy, including former President Harry Truman and captain of industry Henry Ford.

“Because we live in a culture that encourages debt, there’s a stigma associated with bankruptcy that’s completely unfair,” says Gailyn. “American families are encouraged to take on debt while America’s corporate leaders earn millions. The current system is out of whack, and bankruptcy is how debt-burdened families can find the right balance.”

Considering Divorce

If you are considering divorce and you have debt you cannot manage the best course of action is to determine your bankruptcy options. It is important to understand if you qualify for Chapter 7 bankruptcy or whether there is a reason you would need to file Chapter 13.

Usually, when one spouse is considering bankruptcy it makes sense for both spouses to file for bankruptcy and get rid of their debts together. In fact, separated couples can file a joint bankruptcy case. This is a big decision, however, and depends on your ability to communicate and work together during the bankruptcy process. Often, it makes the most sense to file separate bankruptcies and avoid conflicts of interest.

The reason that filing bankruptcy, together or separately, prior to filing for divorce is the best idea in most cases is that discharging the credit card debt, medical bills, pay day loans and other debts means that those debts will not get divided up in the divorce. Usually, if there are marital debts, such as credit card bills, the family court will take these into consideration when dividing property. Often one spouse will be ordered to pay off debt as part of the divorce. If that spouse does not fulfill that obligation and refuses or is unable to pay that debt, the credit card companies, who are not bound by the divorce decree, can still sue and collect against the other spouse after the divorce (the spouse who gets sued can go back to family court to try and collect against the ex, but this is expensive and messy). Bankruptcy will wipe out that liability and prevent this issue from occurring after the divorce.

The bottom line is that filing bankruptcy before filing for divorce can make the divorce process less complicated, both during the divorce and after.

In the Process of a Divorce

If you are already in the process of dissolving your marriage, there are important things to understand about how filing for bankruptcy during a divorce can affect the proceeding.

First, the filing of a bankruptcy during a divorce can stop the divorce case in its tracks. This is because once you file for bankruptcy you are instantly protected by the Automatic Stay, which slams down around you like a protective bubble. The automatic stay prevents all lawsuit and court proceedings from going forward (except criminal cases and tax audits) unless the other party to the court case petitions the bankruptcy court to “lift the stay” and allow the other case to move forward.

However, the protection of the Automatic Stay is not 100% when it comes to divorce. There are two divorce-related exceptions to the Automatic Stay. First, the bankruptcy filing does not stop any actions for the establishment of paternity or for establishment or modification of an order of alimony, maintenance or support. This means that the family court can still make orders regarding alimony, maintenance or support even though one spouse has filed for bankruptcy.

The second exception allows the divorce court to collect alimony, maintenance or support from any property that is not property of the bankruptcy estate. This means that in a Chapter 7 case, the divorce court can collect from wages or assets earned or received AFTER the Chapter 7 is filed. Additionally, once the Chapter 7 discharge order enters (usually 3-5 months after filing) the automatic stay is lifted and the divorce case can proceed. In a Chapter 13 case, the automatic stay is in place for the entire Chapter 13 repayment period. However, once the Chapter 13 case is confirmed all property is again subject to collection for alimony, support and maintenance orders.

One more thing to understand about the Automatic Stay and divorce cases is that if the other side in the divorce case petitions the bankruptcy court to lift the automatic stay to allow the divorce to proceed, they will very likely win. This is because the case law supports allowing the divorce issues to be litigated in family court, not bankruptcy court. Because of this, filing bankruptcy will generally only stall, but not stop,  a divorce case from going forward, or a contempt action in family court . Usually, the other side will fight to have the divorce move forward and the filing of bankruptcy will simply add time, costs and attorney fees in the divorce case as the other side files motions and expends legal time fighting the automatic stay.

Already Divorced

Because of the complications to the divorce case that arise when a bankruptcy is filed during divorce, it is usually best to wait until final orders have entered in the family court before filing for bankruptcy. Not only does this approach minimize attorney fees in the divorce, it also has the potential for an ex-spouse to discharge some divorce-related debt that wouldn’t be possible if they filed for bankruptcy before final orders enter. This is because there is a type of divorce debt that CAN be discharged in Chapter 13 bankruptcy: property settlement orders.

Property settlements are very narrowly defined in bankruptcy. They cannot be in the nature of alimony or support in any way, shape or form. The bankruptcy court can look beyond the divorce decree at the circumstances surrounding the divorce in determining whether a debt is or property settlement or in the nature of support or alimony. The bankruptcy court will try to determine the intent of the parties in the divorce and will look at the financial situation of both parties as well as the number and frequency of payments and the actual language of the divorce decree. Some courts have found awards of attorney’s fees in divorce to be in the nature of support and not dischargeable in bankruptcy.

If you have been ordered to pay divorce debt that is a property settlement, such as an order to pay off your ex-spouse’s credit cards or other bills, you may be able to get rid of that debt in a bankruptcy. However, the only chapter of bankruptcy that allows this is Chapter 13. No divorce-related debts are dischargeable in Chapter 7. None.

Therefore, if you have a property settlement debt you want to analyze your eligibility for Chapter 13 and determine if it makes sense to file a Chapter 13 to potentially get rid of that debt. Often, filing a Chapter 13 to discharge property settlements awarded in divorce actions involves litigation within your bankruptcy. This is because the other side will often file a proceeding to have the debt declared non-dischargeable. In order to prevail you will need to fight that action and convince the court that the debt is for property settlement and not support or alimony.

Additionally, if the other side does not file an action in your bankruptcy to determine this, that does not mean you automatically get the debt discharged. Without a court order in the bankruptcy your ex-spouse can continue to enforce the property settlement order in state court. Unlike some claims in bankruptcy, the claim that divorce debts do not get discharged does not disappear once the bankruptcy is over. Without a court order declaring the debt to be property settlement the issue can come up again in further divorce proceedings. Therefore, if the other side doesn’t bring the action you may want to bring it yourself in the Chapter 13 in order to have some finality on the issue.

Conclusion

As this very lengthy blog post makes clear, bankruptcy and divorce are complicated. The legal issues involved can affect each other in many ways and not all family law or bankruptcy attorneys adequately understand this. If you have unmanageable debt and are considering divorce, involved in a pending divorce or have a divorce decree you should contact a bankruptcy attorney who understands divorce issues in bankruptcy. Make sure you find an attorney who offers a free consultation.  If you are in Colorado, contact the attorneys of Wink & Wink for a free consultation and evaluation of your options.

Loss Carry Forward/Exclusion of Gain on Sale

When you file for bankruptcy an estate is created. This means that all your assets become property of the bankruptcy estate and if they are not exempt then they can be liquidated by the bankruptcy trustee for the benefit of your creditors.

Sometimes, especially in the case of the small business owner or someone who has recently sold real estate, there are positive tax attributes that will be lost with the filing of bankruptcy. If you have suffered losses that you are allowed to take as deductions on your taxes, you should use the maximum amount possible –even if that means going back to amend a prior year to take losses you elected to save for later. There are two reasons for this.

The first reason is that the loss carry forward is an asset in a bankruptcy case and the trustee can step into your shoes and use the loss carry forward, even going back and taking in on a prior year. In most jurisdictions, including Colorado where I practice bankruptcy law, the extra refund created by taking the losses is not exempt and will be given to creditors.  The second reason is that your right to take losses in the future will be reduced by the amount of debt discharged in your bankruptcy. This usually means that even if the trustee doesn’t take the extra refund, it will disappear as a result of the bankruptcy filing.

There are other tax attributes which can be lost as a result of filing bankruptcy, including: minimum tax credit, basis (which can be reduced as a result of discharged debt) and foreign tax credits. For more information on bankruptcy and tax attributes, see IRS Publication 908.

1099C/Cancellation of Debt Income

One way bankruptcy can help you with your tax liability is in the area of cancellation of debt income. Normally, when you settle a debt for less than its full value whether it comes from a negotiation with the owner of your credit card debt, a short sale or some other situation where you pay less than the full amount owed on a debt, the difference between what you owed and what you actually paid is considered income for tax purposes. This type of income is called Cancellation of Debt Income and is usually accompanied by the issuance of a 1099C tax form, which is reported to the IRS.

Luckily, bankruptcy is a complete defense to the 1099C income issue. If you filed bankruptcy, debts included in your bankruptcy do not result in debt forgiveness income. Additionally, insolvency is a defense to the 1099C issue as well. This means that if your liabilities (debts) equals more than the fair market value of your assets you are technically insolvent and cannot be held liable for tax penalties on forgiven debt even for debts reduced outside of bankruptcy.

IRS Form 982 Is Your Friend

Sometimes, even though you file for bankruptcy, your past creditors still submit a 1099C to the IRS. This is an easy situation to handle, especially if your tax preparer is familiar with bankruptcy’s effect on forgiveness of debt income. All you need to do is submit IRS Form 982 along with your taxes and you will not have to pay taxes on the discharged debts in your bankruptcy.

What Is A Short Sale?

A short sale is an agreement between a mortgage lender and borrower to accept less than the full balance owed on the mortgage in satisfaction of the debt. For example, if you owed $300,000 on a first mortgage but could only sell the home for $250,000, in a short sale the bank would accept $250,000 for the property.

However, it is almost never this simple. This is because the lender typically wants you to remain liable for the deficiency (or settle it for some lump sum of cash). A deficiency is the difference between what you owe and what the property sells for in a short sale or foreclosure. In the example above, the deficiency would be $50,000. Furthermore, for those with more than one mortgage or line of credit on their house, the short sale typically does not cover the second loan, leaving the entire second mortgage or line of credit as a deficiency once the property is sold.

Very few lenders, whether for a first or second mortgage or home equity line, waive the deficiency in a short sale. In fact, I have personally heard of NOT ONE short sale in which the deficiency on a second mortgage has been waived by the lender. Real estate agents will tell clients that they can get the deficiency waived but they seemingly never do, it’s all blowing smoke.

Because of this, people who do short sales on their property come out of the short sale with more debt. They are out of the house and no longer paying the mortgage(s), but they are still liable for the deficiency on the first or second mortgage (or line of credit, or small business loan) and they will eventually have to pay that debt or face being subjected to harsh collections actions and lawsuits.

Forgiveness of Debt Income After Short Sale

There is another wrinkle to the short sale process that most people do not understand and that is that any debt forgiven by a credit grantor (such as a mortgage lender) is taxable income. That means that of you did a short sale in which the house sold for less than what you owed, the difference will be treated as income for tax purposes (this also applies to credit card debt settled for less than the full amount).

In 2007, this negative tax liability was put on hold by the federal government through the HAMP program. However, this break on taxable income resulting from short sales is only temporary: it ends in 2012. Additionally, it only applies to your principal residence. Therefore, if you do a short sale on an investment property, or a property that used to be your principal residence but no longer is, you are still subject to additional taxable income as a result of a short sale.

The Difference Between A Short Sale and A Foreclosure

A common myth, pushed into existence by real estate agents, is that a short sale is better for your credit than a foreclosure. This is simply NOT TRUE. As far as FICO and Fannie and Freddie are concerned, a short sale is a defaulted mortgage debt, just like a foreclosure.  The FHA will not allow you to take out another mortgage loan for three years regardless of whether you did a short sale or let the home go into foreclosure.

Foreclosure, as opposed to short sale, can offer you big benefits. This is because once you decide you can no longer afford the mortgage payments (or that you no longer want to keep paying on an underwater mortgage that will never gain back any equity) you can live in the home for free during the foreclosure process. This is huge!

In most states, including Colorado where I practice, the foreclosure process allows you 5 months or so in the house before it is sold. However, in most cases the timeline is much longer than that (and bankruptcy can stretch it even further) because lenders typically do not start the foreclosure process for 3 to 6 months or more. As a result, many people who decide to let the homes go into foreclosure end up living rent free for 9 to 12 months or more.

If you do a short sale, you must move out once the house is sold. You must also show the house to potential buyers, which causes a lot of stress and means a lot of work. And in lots and lots of cases, after all the work trying to get an offer on the house, the bank ends up dragging its feet and often declines the short sale anyway!

While foreclosures allow you to save money for the next step, they typically do not get rid of your liability from a deficiency on a first or second mortgage or line of credit. For that you need bankruptcy.

Short Sales And Bankruptcy

The bottom line is that most people considering a short sale or foreclosure have more debt than they can pay. Many people have been trying to keep up with increasing mortgage payments, dealing with wage reductions or job loss or have significant medical bills they cannot pay. A short sale or foreclosure typically does nothing to get rid of that additional debt.

Most people considering a short sale feel that it is somehow “the right thing to do”. However, the only persons benefitting from the short sale are the realtors who make a commission. It doesn’t help the seller at all. In most every case the seller is left with a deficiency, has to leave a house they could have lived in much longer for free, and still has a deficiency liability from the home as well as all the credit card debt and medical bills to contend with.

This is why bankruptcy and foreclosure often go hand-in-hand. Bankruptcy wipes out credit card debt, medical bills, deficiencies on foreclosures and short sales and deficiencies on repossessions, too. Bankruptcy gives you the greatest debt relief available under the law and when used in conjunction with a foreclosure can position you to get a fresh start in the strongest position possible for you and your family. Bankruptcy can even stop a foreclosure in its tracks and give you additional time in the house while you get yourself ready for the next step.

Additionally, in some cases bankruptcy can help you get rid of a second mortgage all together.

Why Do Realtors Push Short Sales?

The real question here is why short sales are pushed so hard by Realtors? (And don’t think they aren’t pushing those short sales. I have had numerous clients call me to tell me that once their house went into foreclosure status they began receiving calls and even doorbell visits from Realtors seeking to list their home as a short sale. It’s a very aggressive campaign.) The answer is as old as time: MONEY. Realtors are being crushed by this terrible housing market and they are searching for any way to make a commission. Short sales get them a commission. It is always important to look at the motives behind the message. Realtors pay money to go to seminars where they learn to push short sales. It’s all business, baby.

I always tell my clients that their debt is part of a business decision. The bank made a business decision when it gave you your mortgage. The bank made a business decision when it gave you credit cards. The Realtor is making a business decision when they try to sell you on a short sale. It’s time for you to make a business decision about your life and your debt. If you are struggling with an underwater home and any other type of debt that you cannot pay, get the facts from a bankruptcy attorney and find out what makes the best sense for you. Not for your Realtor.

Why Give Up One of Bankruptcy’s Biggest Benefits? Why You Should NOT Reaffirm

Reaffirmation agreements are not required, they are completely voluntary. No creditor can make you reaffirm a debt. This is because a reaffirmation goes against the most basic upside of filing bankruptcy: the fresh start.

Chapter 7 bankruptcy wipes out your personal liability on all secured debt, such as auto loans and mortgages. Normally, after you get a discharge in Chapter 7 you are no longer personally liable for secured debts. This means that if you are unable to keep up with those payments in the future: because of continued unemployment, job loss, reduction in income, illness, damage to the property itself (such as a car or home that suddenly need very expensive repairs) or any other reason, the creditor can only collect the debt by taking the property back, either through repossession or foreclosure. Without a reaffirmation, the creditor cannot sue you to recover any deficiency left over after they take back and resell the property.

This benefit cannot be overstated: you cannot be sent to collections, sued or garnished on a debt that was discharged in bankruptcy. If you reaffirm a debt, however, and something goes wrong and you cannot keep up with the payments, you no longer have that protection. You can be sued. You can be garnished. And you CANNOT file Chapter 7 bankruptcy again for eight years, so you have no legal protection against those actions.

Limited Exceptions to the No Reaff Rule

In spite of the warning above, there may be a few situations in which a reaffirmation agreement makes sense.

1) Creditor Gives You a Better Deal

One reason to sign a reaffirmation agreement would be when the creditor agrees to sweeten the pot and make it worthwhile for you to re-up on the secured debt. This could be done through a reduced interest rate or a reduction in the principal balance owed. Unfortunately, this is a very unlikely scenario. Kind of like seeing a double rainbow when it hasn’t rained in days.

2) The Debt Includes Cosigner

If you took out the debt with a cosigner who will continue to remain liable on the loan, such as a spouse or parent, you may not want to leave them hanging after your bankruptcy. To read more about cosigners and bankruptcy visit:  http://www.winkandwink.com/blog/what-happens-to-my-cosigner-in-bankruptcy/325/. In this case, you moral obligation to your cosigner may outweigh the benefits of bankruptcy and you may decide to reaffirm the debt.

3) You Want the Debt Payment Reported to the Credit Bureaus After Bankruptcy

One of the big reasons a creditor will give you to try to get you back on the hook for debt after bankruptcy is credit reporting. If you do not reaffirm secured debt after bankruptcy, the creditor does not have to report your continued, on time payments to the credit agencies, and these payments will not help improve your credit score after bankruptcy.

On its face, this may seem like a good reason to reaffirm a debt. However, there are other ways to build credit after bankruptcy, such as on time payments to student loans, responsible use of secured and unsecured credit cards and payment on future secured debt (such as new auto loans). The bottom line is that your credit will improve after bankruptcy as long as you pay any future debt on-time and do not use more than 30% of any one unsecured credit line at any time.

Then even bigger question to me is: Why do you need great credit so soon after bankruptcy? Isn’t that what got many bankruptcy filers into trouble in the first place? (And do you really want to be diving back into the terrible housing market right now?) Slow down and take advantage of your fresh start. Research shows that the majority of those who file bankruptcy regain their original, good credit score within 24 months of filing.

You will get offered credit again. The question really should be whether or not you can afford to use it in the future. Reaffirming a debt you would have come out from bankruptcy free and clear of is not a benefit to be given up solely over the prospect of being extended more credit in the future.

4) Your Creditor Is Going To Repossess Your Collateral

The last situation that might make you consider reaffirming a debt after bankruptcy would be the case where the creditor threatens to repossess your car or personal property if you do not sign a reaffirmation agreement. This is because the creditor will consider your bankruptcy filing a breach of contract and repossess based on that fact alone.

Caveat: This only happens with cars and sometimes with personal property (like furniture or electronic equipment you purchased with store credit—where the store takes a security interest in the merchandise you purchase). Mortgage lenders cannot foreclose on your home for failure to reaffirm the mortgage.

In reality, this almost never happens. There are only a few creditors out there who repossess cars and personal property without a reaffirmation agreement. Your bankruptcy lawyer will know who these creditors are and whether this is a risk you even need to worry about. Most likely it is not.

If you are unlucky enough to have one of those nasty creditors holding your auto loan then you still have to analyze whether it makes sense to sign a reaffirmation agreement. In my opinion you probably still do not want to reaffirm debt on a depreciating asset like a car, and then be liable for that debt even if it breaks down or if you find you can’t keep up with the payments. However, in some limited circumstances (like when for a vehicle in which you have equity) it might make sense.

Procedure

In order to be approved, a reaffirmation agreement must be reviewed by the Court and if you are represented by an attorney for the purposes of the reaffirmation your attorney must certify that the agreement does not impose an “undue hardship” on you or your dependants. A reaffirmation agreement is presumed to impose an “undue hardship” if your monthly income minus your monthly expenses does not leave room for the payment of the debt being reaffirmed.

A reaffirmation agreement must be signed within 60 days of your original meeting of creditors, unless the Court, in its discretion, allows for a longer timeframe. After signing a reaffirmation, you still have 60 days to back out of it (that always tells you something).

Conclusion

Reaffirmation agreements are loved by creditors and hated by bankruptcy attorneys who want their clients to get a true fresh start. Many creditors will misrepresent the nature of a reaffirmation agreement as a way to make you think it is necessary or somehow to your benefit. However, in the vast majority of cases signing a reaffirmation is a terrible mistake.

Mike (aka “He Said”) Wink was on the Tom Martino Show recently to discuss the ways that bankruptcy can help homeowners. During their discussion, Tom Martino, Colorado’s best-known consumer advocate, “The Troubleshooter” makes a bold statement, calling out mortgage modifications as a scam.

This isn’t news to Wink & Wink, we see clients burned by the mortgage modification scam all the time, but it is news to many people hoping for a solution to a mortgage they cannot afford, usually on a property that is “underwater” and worth less than it can be sold for in the foreseeable future.

So how does the scam work? The victims of modifications all tell a similar story: 1) bank entices homeowner to enter modification program, 2) in order to qualify for program, homeowner must fall behind on regular mortgage payments and begin making smaller “trial” payments, 3) homeowner making trial payments is now officially in “default” on their mortgage and bank begins the foreclosure process, 4) homeowner reassured by bank that foreclosure process is just a formality and nothing to be concerned about, 5) homeowner notified by bank that their modification has been denied, and 6) home sold at foreclosure sale.

Two recent articles highlight this horrendous and unfair situation, called the “dual-track” process (the dual tracks being modification negotiations going on at the same time the bank pursues a foreclosure): Amid Mortgage Mess, Homeowners Blindsided, and Homeowners Say Mortgage Mods Led Them to Foreclosure. I cannot think of a more blatant conflict of interest than allowing a bank to, on one hand, dangle the potential solution of a mortgage modification to a homeowner struggling to keep their home while at the same time allow the bank to start running the foreclosure clock on the property. It makes no sense and it isn’t right.

In actuality, there are very few loan modifications being made permanent, and even those that homeowners believe are truly permanent often have clauses in them allowing the bank to go back on their word (the practice of what some term “parallel foreclosure” was supposed to have been prohibited by new updates to the HAMP guidelines effective June 1, 2010, but in our experience and the experiences detailed my so many homeowners on the internet the banks are still regularly pursuing foreclosure against people in trial modification programs. This is because there are no penalties for violating this HAMP guideline.)

What ends up happening to many, many people who put their hope in mortgage modifications is that they end up filing bankruptcy after the foreclosure that inevitably follows their loan mod denial. Bankruptcy can help, that is certain, because it wipes out your liability on any deficiency owed after a foreclosure. But the message I want to get across here is that bankruptcy shouldn’t always be the LAST RESORT. It is an option that can help homeowners at the beginning or middle of the process—when you know you can no longer afford your current mortgage payments.

As our website’s new Homeowner’s section outlines in detail, Bankruptcy can allow you to strip off a second or even third mortgage, allowing you to continue paying only on the first mortgage. Bankruptcy can give you time to make up your arrears on your mortgage while blocking the bank from pursuing a foreclosure. In other words, it can force your lender to accept your back payments while blocking them from taking any action against you or the property. And in the event you simply cannot make your current payments work, bankruptcy can give you a way to live in the property as long as possible without paying the mortgage while wiping out the lender’s ability to ever come after you for the mortgage debt.

The key here is to know your options. If you are a Colorado homeowner in financial distress, please contact us for a free consultation today. The biggest mistake people make regarding bankruptcy is waiting too long to find out what their options are and losing valuable time (and money) without a strong game plan. Don’t be another victim of the mortgage modification scam, be informed!

Effect of Filing Bankruptcy: The Automatic Stay

Most lawsuits filed to collect debts owed are dischargeable in bankruptcy. This means that filing for bankruptcy, either before the court date or after a judgment has entered will wipe out the debt for which you are being sued and the judgment itself if it has been entered.

Once you file for bankruptcy, you are immediately protected by the Automatic Stay. The automatic stay prevents creditors from continuing to try to collect on your debts and it includes lawsuits. This means that the Automatic Stay immediately stops lawsuits pending against you and protects you from collection activity, even ongoing garnishments, for the length of your bankruptcy.

If you receive a Chapter 7 bankruptcy discharge, the debt you were being sued for is wiped out and cannot be collected on in the future. In a Chapter 13 bankruptcy, most people end up paying a small fraction of their debts over time and receive a discharge on those debts at the end of their Chapter 13 payment plan.

Bankruptcy Cannot Help In Cases of Child Support, Fraud and Criminal Proceedings

There are exceptions, however. If the lawsuit is to collect a debt that is NOT dischargeable in bankruptcy (such as a suit for child support or in some cases for claims involving fraud) or if the case is a criminal court proceeding, then the lawsuit will be allowed to continue despite your bankruptcy. This is because bankruptcy cannot wipe out debts owed for child support or spousal support, criminal charges or fines/restitution or debts obtained by fraud.

What To Do About the Summons?

If you are served with a Summons to appear in court and you are considering filing bankruptcy, you have two options: 1) Answer the Complaint or 2) Do Nothing.

File An Answer

When you are served with a summons, it will contain a time period in which you must file an Answer with the court. If you do not file the Answer in that time frame, you lose the right to do so, and a default judgment will enter against you.

You can file an answer in which you assert any defenses you may have to the lawsuit, as well as any counterclaims you have against the party suing you. Defenses may include the statute of limitations, lack of evidence (ex., an accounting of the amount owed, including calculations of interest, payments made by you, etc.), or no proof that the creditor actually owns the debt. Again, failing to file an answer means you waive the right to assert any defenses or counterclaims and can be taken by the court as an admission that you owe the debt.

Filing an answer in the lawsuit also gives you more time until a judgment will enter, because the court will have to set a new court date for a pretrial conference and allow the parties more time to prepare their cases and request discovery. Therefore, filing an answer can be a good idea if you want more time to look into options such as bankruptcy or settlement.

Filing an answer does cost money, however. In Colorado, where I practice, filing an answer in County Court costs about $85.

Do Nothing

Your other option if you have received a summons is to do nothing, knowing that a default judgment will enter against you in the case. Once a default judgment enters, it will show up on your credit report and the creditor will be able to use legal means to collect on the judgment. Bankruptcy can stop the collection of a judgment (as long as it is for a dischargeable debt, as discussed above). Bankruptcy also wipes out your liability for the judgment once a discharge enters, but it does not remove the judgment from your credit report.

If you choose to do nothing and you do not plan to file bankruptcy, there is a possibility that your creditor will seek to have you brought into court to answer questions about your assets, bank locations and employer information through a demand to answer interrogatories. If you fail to answer interrogatories, you can be found in contempt of court and even have a warrant issued for your arrest.

What if a Judgment Has Already Entered?

Once a judgment enters against you, the creditor can seek to collect the judgment from either you or your property. The most common ways they do this are: 1) Garnishment, 2) Levy or attachment of bank accounts and 3) Judgment Lien filed on your property.

Garnishment

In Colorado, creditors can collect on a judgment by garnishing up to 25% of your wages. Once a judgment enters and the creditor gets a garnishment order from the court, the creditor will serve notice upon your employer, who will then give you notice of the upcoming garnishment.  The garnishment will continue until the entire judgment is paid in full, including attorney’s fees and other fees for the collection efforts.

A bankruptcy filing can immediately stop a garnishment.

Attachment of Bank Accounts

Your judgment creditor can also collect against money you have in the bank. They do this by serving a notice to your bank. Your bank then seizes the funds (and often charges you a fee to do this) and gives you notice and a chance to claim the money exempt under Colorado or Federal law. Some possible exemptions would be social security funds or disability funds.

In some cases, bankruptcy can help you get those funds back if they would be exempt in your bankruptcy case.

Judgment Lien on your Property

In Colorado, your judgment creditor can file a transcript of the judgment in any county in which you own property and that judgment will act as a lien upon the property. This means that if you try to sell the property in the future that judgment must be paid before title can be transferred to a new owner. In bankruptcy, judgment liens that attach to property you claim as exempt may be avoided, or removed. However, this depends on the property, its value and your personal bankruptcy exemptions. Not all judgment liens can be removed through bankruptcy.

Conclusion

Being sued is stressful and can result in your property being seized out from under you, but in most cases bankruptcy can help. This is because bankruptcy can wipe out your liability for the debt and judgment, and stop any further collection against you. Bankruptcy can do this regardless of whether you have been sued already or whether there is a judgment against you or even whether you are already being garnished.

If you are planning to file for bankruptcy, a law suit should not cause any problems, though it may speed up the timeframe in which you want to file in order to avoid a garnishment or liens on your property.

In most cases, having a lawsuit filed against you by a creditor means it is a good time to have a free consultation with a bankruptcy attorney to explore all of your options. It is always better to know your options, and the sooner the better. Most people wait too long to find out about bankruptcy protection and it costs them. If you are served with a summons, it’s not too late.

Because of this potential blind spot, it is imperative to consider how asset planning moves will affect you in a potential bankruptcy case. This is because transfers of business and personal property are heavily scrutinized by the bankruptcy court, and many moves that look like a good idea to your CPA can actually cause you to lose the benefit of the bankruptcy exemptions, and worse.

Exempt property exists in every state as a means of protecting people with a base amount of property necessary for survival. It is essentially a list of assets and values prescribed under state or federal law which cannot be taken from you by a creditor, whether through a lawsuit or in bankruptcy.

Exempt property in Colorado, where I practice, includes $60,000 of home equity, $5,000 of vehicle equity, and $20,000 of stock in trade. Remember, the equity is the value of the property less the amount owed to secured debt on the property (i.e., mortgage, auto loan, etc.). While the list of Colorado exemptions includes more than these three exemptions, I bring mention these three because they are often overlooked for asset planning purposes.

Home ownership through a Trust

A common asset planning technique is to purchase your home through a trust in order to be able pass it on to your relatives outside of probate when you die. In general, probate is an expensive and time consuming process which people seek to avoid through asset planning.

Unfortunately, most don’t understand the downside of this move when it is made. That downside is that the equity in your home no longer falls under the homestead exemption because it is owned through a trust. While assets in a trust may be secure from your creditors in bankruptcy if the trust is a valid spendthrift trust, such trusts are restrictive and most do not utilize valid spendthrift trusts for purposes of holding real estate. Therefore, this move often prevents you from claiming the $60,000 homestead exemption (which is $90,000 if you are over 60) and exposes your home equity to your creditors.

Cha-ching – you’ve just help fund a banker’s bonus.

Fortunately, ownership of the home through a trust can often be undone prior to filing bankruptcy. However, if you get sued and there is a judgment against you, such a move prior to filing bankruptcy could be viewed as a fraudulent conveyance.

Placing personal assets in your small business

This is an old favorite of CPAs for tax planning purposes. It entails pledging a personal asset such as vehicle to your small business so that you can depreciate the asset against your business income. While the depreciation can often enable you to realize significant tax benefit, it has downside you need to understand.

In the case of pledging a vehicle to your business, this move prevents you from claiming the $5,000 motor vehicle exemption for your vehicle if your business is a legal entity such as an LLC, corporation or partnership. For other assets pledged to a legal entity, this move denies you the $20,000 stock in trade exemption (which may also apply to your vehicle). The trade-off for your tax deduction is often losing the ability to protect the asset against your creditors.

While it may also be possible to undo these moves prior to bankruptcy by distributing the assets back to you, this can be risky and costly. The distribution often carries fresh tax liability which cannot be discharged in bankruptcy.

Furthermore, if such a distribution is made after a creditor gets a judgment against you, it may be viewed as a fraudulent transfer. There is also risk of such a transfer being found to be fraudulent if the business is insolvent when you make the distribution, or if the asset distributed is secured by a corporate debt (ex., line of credit secured by the assets of the business).

Asset planning is an important exercise and one which should look at all of the facets of your financial situation. Unfortunately, many asset planners do not appreciate risk of defaulting on debt when giving advice about asset planning. As the economic events over the last few years have shown, this is a major oversight. When considering moving assets from personal ownership to ownership through a legal entity such as a corporation or trust, you should know that such moves may well expose an otherwise protected asset to your creditors. I suggest seeking the advice of a bankruptcy attorney before making any transfers of property while in debt. While you may not need to file bankruptcy, many firms such as Wink & Wink will perform bankruptcy-smart asset planning at a reasonable cost.

In Colorado, anyone looking to claim a secured interest in a motor vehicle (such as a car dealer or family member who sells you a car) must “perfect” their lien against the vehicle by filing a record of their security interest with the Department of Motor Vehicles in the county where the property is located. This rule is intended to put everyone else on notice that there is a lien on the vehicle.

In practice, car dealerships and family members who sell you a car do not always “perfect” their security interest in a timely manner. Many of them wait to file their security interest with the DMV. This can create big problems for both buyer and seller if the buyer files bankruptcy. These problems arise in two ways.

In the first situation, the seller of the vehicle does not record the lien at all. Because there is no recorded lien, the lien is called “unperfected.”  In this situation, the trustee can use their “strong-arm power” under bankruptcy code section 544 to avoid (or cancel/reverse) the lien and then use Section 551 to preserve the property for the bankruptcy estate. What that means is that the trustee uses their power to ignore the lien and then, because there is no security interest in the car anymore, the car itself becomes a part of the bankruptcy estate and can be sold to pay creditors.

In the second situation, the seller records the security interest more than 30 days after the car was purchased and within 90 days of the bankruptcy case being filed. Here, you have a valid security interest (as long as no other person who claims to have a security interest files their interest in the meantime, Colorado is a “first in time, first in line” state as far as security interests in property go—but that’s a whole ‘nother ball of wax). However, you also have something called a “preference payment” under bankruptcy law.

A preference payment is a payment made to a creditor of more than $600 in the 90 days before bankruptcy. These can be cash payments or providing a security interest in one of your assets. Regardless of the type of payment, preference payments can also be avoided (or canceled/reversed) by the trustee. This is because when you file bankruptcy, all your creditors are supposed to share equally in the property that may be liquidated to pay their claims. If you were able to pay off one creditor to the exclusion of others, that just wouldn’t be fair. Your unsecured creditors are supposed to all get an equal piece of the pie. So, if the security interest gets recorded during the 90 days before the buyer files bankruptcy, it can also disappear, allowing the trustee to claim the car as property of the estate.

There are some defenses to preference payments. One of the defenses is called “contemporaneous value”, meaning that you paid for something and got something at the same time. This should be the case when you buy a car, right? BUT, if the seller waits more than 30 days to record that security interest, they may lose the argument that the value exchange was contemporaneous, or “at the same time”. Generally, a 30-day period is found to be contemporaneous, meaning that perfection of a security interest within 30 days of the sale date for the vehicle avoids any problems even if the perfection occurs within 90 days of the buyer filing for bankruptcy. However, if the seller waits longer than 30 days and either perfects the security interest within the 90 days prior to the buyer filing bankruptcy or does not perfect at all before the buyer files bankruptcy, then problems arise.

The bottom line in both of these scenarios is not good for buyer or seller. Once the trustee successfully avoids the lien, the automobile in question is claimed as part of the bankruptcy estate. The trustee then wants the value of the property, or the property itself. Since trustees are under pressure to close cases in a timely manner, they are not usually open to allowing bankruptcy filers (i.e., the buyer of the car) to pay the car off over time. Rather, they want a lump-sum payment for the value of the lien (i.e., fair market value less any equity the buyer may have had in the vehicle on the bankruptcy filing date). Trustee mileage may vary, but odds are the buyer of the vehicle will need to either pay up in full within a few months, or lose the car.

Additionally, the seller of the car loses big time. They no longer have a security interest in the vehicle, and the contract you signed with them is wiped out by the bankruptcy (unless they bring a claim against the buyer for fraud, such as buying the car knowing they were going to file bankruptcy and lying to the seller about their intentions. A whole ‘nother ball of wax for sure!). So the seller is out the property AND the right to receive your payments for the property.

No one ends up happy in this situation except the trustee. (And no, the buyer can’t just claim the car exempt once it comes back into the bankruptcy estate. The exemption is determined at the time of filing, when the security interest was presumed to exist. So unless the buyer had equity in the car on the filing date, he or she gets nothing.)

WHAT TO DO ABOUT THIS?

For sellers of vehicles, there is a simple solution. Always perfect your security interest within 30 days.

For buyers of vehicles within 6 to 9 months of filing bankruptcy, contact the seller prior to filing bankruptcy to get the date of perfection (that is, the date they filed the lien with the DMV). If the lien was filed by the seller within 30 days of the sale, the buyer can proceed with filing bankruptcy without this risk. If not, the buyer should make sure at least 90 days have passed since the lien was perfected before filing for bankruptcy.

This convoluted subject really highlights the pitfalls of bankruptcy. The bankruptcy laws are deceptively complex and filing for bankruptcy without having competent legal advice can mean the loss of property you would have otherwise been able to keep. Having a bankruptcy attorney you trust is essential for spotting these pitfalls and allowing you to file your case with peace of mind.