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A recent blog post described a voluntary program initiated by the Florida Bar to help homeowners negotiate with mortgage lenders. An article about this program appears in the current issue of the Florida Bar News. Link: Fighting against foreclosure. The Bar News is a trade publication distributed every other week to attorney members of the Florida Bar.
The current draft of the governments’ financial recovery act, formally the "Emergency Economic Stabilization Act of 2008", being referred to in the media as "the bailout bill," contains several provisions designed to help homeowner prevent foreclosure. The terms of the Act are drafted in general, unspecific terms, and certainly there will be many government regulations needed to implement the new law before any agency can actually provide foreclosure relief. The foreclosure relief provisions are found in Sections 109 and 110 of the recovery package.
I probably get one or more calls and emails each day from someone who wants to file Chapter 7 bankruptcy because they are facing a mortgage foreclosure. People believe they should file bankruptcy to avoid a deficiency judgment that they believe will come with foreclosure. My advice is always the samd: Don’t Do It. There are several reasons. First, as previously stated on this Blog, most mortgage lenders have not been pursuing deficiency judgments. How this policy will change with the Economic Rescue Bill is uncertain. A Chapter 7 bankruptcy will not stop the foreclosure. (Chapter 13 can prevent foreclosure). If the mortgage lender does pursue a deficiency judgment the borrower usually can file a Chapter 7 bankruptcy at that time
I attended a meeting of local bankruptcy attorneys where the Chapter 13 Trustee spoke about current developments. She stated that the real estate recession in Florida, and job losses in many related industries is causing more and more Chapter 13 debtors to fall behind in their plan payments. The Trustee encouraged attorneys to educate Chapter 13 debtors experiencing financial difficulty about the opportunity to modify Chapter 13 plans to defer payments. When good cause is shown, the Chapter 13 Trustee will support plan modification request. The Chapter 13 Trustee also raised the possibility that bankruptcy judges may permit more lenient modifications as the Florida economy deteriorates further.
There have been several cases in recent years, after 2001, dealing with exemption in bankruptcy of joint tax refunds where only one spouse has filed bankruptcy. The general rule is that property owned jointly by husband and wife is exempt in the bankruptcy of either spouse individually so long as the filing spouse and then non-filing spouse do not have any joint unsecured debts (joint mortgages don’t count because they are secured debts). The tax issue is whether a joint tax refund is exempt as tenants by entireties property.
Here’s a question I received last week about using Chapter 13 bankruptcy to save an investment property and a primary residence from foreclosure.
"I'm in the midst of having two homes foreclosed on. One in an investment propert with a loan of 1.65 million and the other is my primary residence that was used as colalteral to get the loan (I do have a second mortgage for 250k on my primary home)....Would I be a candidate for Chapter 13?"
Chapter 13 bankruptcy is used mainly (but not exclusively) to stop foreclosures and to give the homeowner an opportunity to cure arrearage through a Chapter 13 plan. In this case, Chapter 13 may not work. Chapter 13 bankruptcy had debt ceilings. Debtors with secured debts greater than approximately $1 million are not eligible to file Chapter 13. There is also a debt ceiling for unsecured debts of approximately $300,000. People, like this debtor, who have secured debts exceeding the Chapter 13 ceiling may have to file an individual Chapter 11 bankruptcy to impose a repayment plan on the mortgage lenders. Chapter 11 bankruptcies are much more expensive and complicated than Chapter 13.
Treatment of income tax debt in Chapter 7 bankruptcy is a complicated subject. There are many rules and exceptions to the rules applicable to determine if past due taxes can be discharged. I received the following question by email:
"I was planning on filing bankruptcy next month and just went through an IRS audit for the tax year 2005. I owe $10,000 now to the IRS for mistakes made on my 2005 tax return. This includes interest and penalties. I was told that I could include this amount owed to the IRS in bankruptcy as long as I waited 240 days from the time I was assessed the tax since the return is 3 years old. But, there seems to be conflicting opinions on this as I was also told by my tax attorney that it can't be discharged at all, or maybe it can if I wait 3 more years. "
The general rule is that income taxes are not dischargeable if they relate to a tax return due to be filed less than three years prior to the bankruptcy petition or if the taxes were assessed within 240 days of the petition. There are additional exceptions when returns were filed late or when there is tax fraud.
I received the following email from a landlord (creditor) concerning a tenant who filed bankruptcy on the eve of eviction.
"I got my final judgment for possession count 1 only Sept. 4 my tenant went to file bankruptcy September 5 to avoid the eviction. I got a call from the West Palm sheriff telling me there was a stay on them serving him the 24 hour they were to do that day Sept. 5. I was in disbelief that this guy could not pay rent just because he was now protected because of this bankrupt. "
Under the facts presented the bankruptcy probably will not stop the eviction.
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