Kentucky Bankruptcy Lawyers Blog

It's certainly a buyer's market in the real estate world, but what does that mean for those who already have a home and are being hampered by a possible foreclosure?

Proof of the problem can be seen on foreclosure tracking website RealtyTrac, which shows that much of Louisville is in a high foreclosure rate right now. Ten of the 24 ZIP codes are in an area where as few as 1 in every 228 housing units is in foreclosure in Louisville.

Yet, our Louisville bankruptcy lawyers have also noted that at the same time that many residents are dealing with a foreclosure, The Courier-Journal is reporting that the Kentucky Housing Corp. is offering its lowest mortgage rates in 40 years.

The state-chartered housing finance agency is offering borrowers with certain income limits, credit scores and other criteria 30-year, fixed-rate mortgages at 3.375 percent on the low end. The agency provides rates for first-time buyers and those with moderate incomes, but consumers must work with agency-approved lenders.

This all sounds great if you're looking to cash in on the depressed real estate market and get a great deal. But what if you already bought your dream home and ended up with a bad interest rate because it was a seller's market?

Flash forward a few years and now you may have hit a tough stretch financially with someone in your family losing a job, getting hit hard with a major medical bill or having to worry about the rising costs of day-to-day bills? For those with a variable mortgage rate that suddenly has spiked, leading to higher payments, this could be an especially troubling time.

Losing your home to foreclosure is never a good option. In fact, it can be devastating to children who could have their world turned upside down by having to move. If your credit score has taken a hit because of missed payments and other financial troubles, a foreclosure can make matters worse.

So, why not try to keep your house? One clear way is through a Louisville bankruptcy. Filing for bankruptcy immediately stops foreclosure in its tracks. Whether the family is receiving its first missed payment notice or the house is scheduled to be auctioned off at the courthouse, filing for bankruptcy can stop foreclosure.

What filing does is halt any attempts creditors have made to get money or possessions from you, including wage garnishments and foreclosure. This then allows your Louisville bankruptcy lawyer to use the laws on the books to help you get out of your debt.

Bankruptcy laws are supposed to help the consumer get out of debt after other methods haven't worked. These judges are trained and expected to provide help for everyday people who have gotten stung by high interest rates and a house with an underwater mortgage, meaning it is worth less than what the homeowners is paying on it. It's a bad situation that can be made better with bankruptcy laws that were created to help.

Continue reading "Louisville Bankruptcy Can Help Stop the Rise of Foreclosures" »

SURRENDERING YOUR HOME IN BANKRUPTCY: PART 2

One of the hardest decisions a family has to make is deciding to surrender their home in a bankruptcy proceeding. Often times, this means allowing a home to go through the foreclosure process and discharging their mortgage obligations in a Chapter 7 bankruptcy. Many homeowners are concerned about the foreclosure process and their obligations to their mortgage company once their bankruptcy process is complete.

Often times, when a person chooses to surrender their home in bankruptcy, he is in the middle of the foreclosure process. Filing a bankruptcy petition creates an automatic stay, which puts an immediate halt to the foreclosure process. The mortgage company may then choose to either file a motion with the court to re-start the foreclosure process (called a motion to terminate the automatic stay) during the 90 days of the Chapter 7 process or wait until the Chapter 7 is discharged to initiate the process again. Either way, foreclosure is a long, legal process and it often takes anywhere from four to eight months for the house to be sold at the foreclosure sale. Regardless of when the bankruptcy is complete, the home still belongs to the homeowner until the home is sold at the commissioner's sale.

It is generally to the homeowner's advantage to remain in their home until the home is sold for two reasons:
1- the debtor has the ability to live "rent free" for a significant period of time and save money for moving expenses, etc.
2- generally a homeowner is still responsible for upkeep and maintenance on the property (cutting the grass, etc) until it is re-sold, so it is easier to remain in the property to ensure that regular lawn maintenance is done, and avoid citations from the city.

Once the debtors receive their discharge at the conclusion of the bankruptcy case, their personal liability on the mortgage debt is eliminated. However, the property still legally belongs to them until the foreclosure sale is complete and a new purchaser has taken title as a result of a commissioner's sale.

If you do choose to remain in the property after the foreclosure has begun, which you have a legal right to do right up until the commissioner's sale has concluded, it is important that you pay your homeowners insurance to ensure that your belongings are properly insured. If your insurance is in escrow, you will want to contact your insurance company directly to find out how far in advance the mortgage company has paid the premiums. In addition, if you live in a condominium or a neighborhood that has homeowners dues, many of these associations will expect for you to pay any association dues that were due after the filing of your bankruptcy case if you were living in the home and taking advantage of the benefits of the association, such as trash disposal, utilities, or use of a pool or workout facility.

If you have questions about your rights and responsibilities during and after a foreclosure proceedings has begun, consult with a competent legal adviser.

With many people struggling to make ends meet in today's uncertain economy, mortgage payments are becoming increasingly difficult to manage. As a result, many individuals face the prospect of having to give up their home. Oftentimes, the immediate reaction of someone who can no longer afford their home is, "I need to file bankruptcy."Although bankruptcy may ultimately turn out to be necessary, if giving up your Kentucky home is the only reason for the bankruptcy filing, you may be jumping the gun.

In order to understand why bankruptcy may not be immediately necessary in order to get out from under a mortgage, one needs to understand how the foreclosure process works. In most states, including Kentucky and Indiana, creditors are required to utilize a process called judicial foreclosure. The way it works is this. Once there has been a default, the creditor initiates the foreclosure process by filing a Complaint in the Circuit Court of the county where the property is located. The creditor must then obtain service of the Complaint on the debtor in a manner permitted by law. Once service has been obtained, the debtor then has 20 days to answer the Complaint. The purpose of this is to allow the debtor to assert any defenses that he may have. If the debtor fails to file an Answer to the Complaint, then the creditor gets a default judgment.

After obtaining a default judgment against the debtor, the creditor may then proceed to obtain a sale date. Normally it takes at least 4 months or longer from the time of service of the Complaint until the sale date. On the sale date, the property is auctioned off at the courthouse to the highest bidder. The proceeds of the sale are then credited to the loan, and what is left over, referred to as the deficiency balance, is what the debtor owes the creditor.

If the property sells for enough to cover the balance of the loan, then there is no debt that is owed by the debtor. So until such time that the property actually sells at foreclosure, it is impossible to know for sure how much the debtor will actually get stuck with. So if you owe $150,000 on your mortgage, this does not mean that you personally are on the hook for that amount. If the house sells for $140,000, then you only owe the $10,000 difference.

So before you decide that you need to file bankruptcy solely because your home is going into foreclosure, you may want to wait and see what the outcome is from the foreclosure sale. You may owe less than you think. Now if you have other reasons for filing bankruptcy, such as credit card or medical debt that you can't pay, then it makes sense to go ahead with the filing. But if it is all about your mortgage, you may want to wait and see what the damages are before pulling the trigger on a bankruptcy filing.

Is a Short Sale Right for Me?

In order to answer this question, we must first explain what is meant by a short sale. A short sale is a sale of one's real estate for less than is owed on the mortgage. In order to accomplish this, the mortgage company must agree to accept less than its full balance. A short sale cannot be accomplished without the consent of the creditor.

A short sale is probably a good idea to consider if you owe more on your house than it is worth and cannot afford the mortgage payments. However, In order for a short sale to be beneficial, the short sale should be accompanied by a full release of personal liability, or at least by a significantly reduced balance on the amount of debt left over after the sale. Many times a mortgage company will agree to a short sale but will not release the borrower from personal liability or offer any type of restructuring or forgiveness of the remaining balance. This means that the creditor will still be able to collect the "deficiency balance" from the borrower. (Although some states prohibit collection of these balances, both Kentucky and Indiana permit creditors to collect deficiency balances).This type of short sale benefits only the buyer (who probably got a good deal on the property) and the real estate agent who got a commission for arranging the deal. Real estate agents love short sales because it is a way for them to earn extra money, so be wary of real estate agents trying to talk you into a short sale which may not be in your best interest.

What are the tax consequences of a short sale? Prior to 2007, a short sale accompanied by a release of personal liability created taxable income to the borrower. For example, if you owed $150,000 on your house and sold it for $100,000.00, with the mortgage holder agreeing to release you from the balance, the $50,000 forgiven would be treated as taxable income for that year. However, The Mortgage Debt Relief Act of 2007 provides that debt reduced through mortgage restructuring, as well as mortgage debt forgiveness, is excluded from income. Up to $2 million of forgiven debt is eligible for this exclusion or $1 million if married but filing separately. The exclusion only applies to property that is the individual's primary residence, not rental properties. Furthermore, the exclusion does not apply if the release of the debt is due to services performed for the lender or any other reason not directly related to a decline in the house's value or the taxpayer's financial condition.

Before agreeing to a short sale, one should consult with a competent tax professional in order to assure that the transaction meets all of the requirements of The Mortgage Debt Relief Act of 2007 in order for the forgiven debt to be excluded from income. Keep in mind that this law does not apply to forgiveness of other types of debt such as credit cards.

CAN I GET RID OF MY SECOND MORTGAGE IF I FILE BANKRUPTCY?

Because of the decline in property values over the past few years, there has been a lot of discussion about "lien stripping" of second mortgages. Lien stripping means taking a debt that is secured by a mortgage and converting it to an unsecured debt or quite literally, stripping the mortgage off. This post will discuss the circumstance in which this relief is available through bankruptcy.

It is generally understood that consensual mortgages or deeds of trust on real estate that is one's principal residence cannot be eliminated through bankruptcy. This is true regardless of whether one files a Chapter 7 or Chapter 13 bankruptcy. In fact, these types of mortgages cannot be modified in any way. By filing Chapter 13, one can take up to five years to make up missed payments, but the amount of the monthly payment, the principal balance and the interest rate cannot be altered.

There is, however, an exception to this axiom for what are referred to as completely "underwater" or "unsecured" mortgages. These are mortgages in which there is no equity whatsoever available to secure this second mortgage. This will be the case when the amount owed on the first mortgage exceeds the fair market value of the property. For example, the property in question has a fair market value of $100,00.00 and the balance owed on the first mortgage is $110,000.00. Since the first mortgage would get paid in full at foreclosure before any money gets paid on the second mortgage, this scenario leaves the second mortgage as essentially unsecured, opening the door for that second mortgage to be stripped off.

Motions to strip off second mortgages can only be brought in Chapter 13 cases. Chapter 13 is available for wage earners and other individuals who have regular monthly income. If the second mortgage meets the criteria set forth above, then it is eligible to be stripped off in Chapter 13. This means that the debt, instead of being treated as a secured debt, will be treated as unsecured. This is extremely important because in Chapter 13 secured debts must be paid in full with interest over no longer than five years, whereas unsecured debts can oftentimes be paid only a percentage and with no interest. The percentage of unsecured debt that must be paid will depend on the individual's disposable income and various other factors, but being able to treat that second mortgage debt as an unsecured debt will be a huge advantage for the debtor in bankruptcy.

In order for this to work, it is important that the debtor have a recent appraisal of the property in question. The creditor whose mortgage is being eliminated will certainly not be happy and will not take the debtor's word for it when it comes to value. Furthermore, the creditor has a right to object to the motion to strip off the mortgage if it disagrees with the debtor's valuation of the property. In that case, the matter will go in front of a judge, who will decide what the property is worth after hearing evidence from both sides.

This type of relief is available only in Chapter 13, not in Chapter 7. If one files Chapter 7, the second mortgage cannot be eliminated, so if the debtor cannot afford to pay both the first and second mortgages in the full amount, then the property will have to be surrendered. Whereas, in a Chapter 13, under the right circumstances, that second mortgage may be able to be converted to an unsecured debt and satisfied for pennies on the dollar. So if you have a second mortgage, don't always assume that Chapter 7 is your better option. Consult with an experienced attorney in order to learn what your best options are.