Posts Tagged ‘Bankruptcy’

In bankruptcy it is not uncommon for a debtor to own real property (a house or land) jointly with another person who is not filing. An example of this would be if you own your home with your spouse and your spouse is not filing bankruptcy. While this does not present a major problem for most debtors, there are situations where joint ownership could present a problem. In this article, I will discuss the situations where a debtor jointly owns property with someone else and the ramifications bankruptcy will have on that property.

The Homestead Exemption

When a person files bankruptcy, you are entitled to keep certain types of property up to a certain value. The property you get to keep is known as “exempt.” An example of exempt property is your residence, known as a “homestead.” In Massachusetts, if you own a home, you are entitled to an exemption in your homestead. As of March 2011, Massachusetts residents are entitled to an automatic homestead for $125,000. This means that if you have less than $125,000 in equity in your home, it is automatically exempt and you can keep your home in a bankruptcy. If you have more than $125,000 in equity, then you need to actually file a document at the registry of deeds in the county that your home is located known as a “declaration of homestead.” Filing this document will increase your homestead and protect the equity in your home up to $500,000.00.

However, if you have more equity in your home than $500,000, then your home could be soled in the bankruptcy to repay your debt. For example, if you have $600,000 in equity in your home, then $100,000 is not exempt and your home can be sold to satisfy your creditors. After the sale you will get $500,000, but the other $100,000 would be used to repay your creditors. In bankruptcy there are certain debts that a homestead will not protect you from, and your homestead is limited if you have not owned you home for at least 40 months. For more information on the limitations of a homestead in bankruptcy, you should consult with a qualified Massachusetts bankruptcy attorney.

The Trustee’s Power to Sell

What happens if you jointly own property with someone else and the property is not exempt? In Bankruptcy, the Trustee who is overseeing your case has the authority to force a sale of the entire asset, including the co-owner’s interest; even when the co-owner is not filing bankruptcy. See 11 U.S.C. 363(h).

However, the Trustee does not have the power to act independently and cannot simply sell the property. The Trustee must seek the Bankruptcy Court’s approval by filing a lawsuit in the Bankruptcy Court, known as an “adversary proceeding.” In this adversary proceeding, the co-owner will have the ability to present evidence to the court that the detriment that they will suffer is greater than the benefit to the creditors. Many times, the co-owner will be given the opportunity to purchase the debtor’s interest in the property at a discounted rate. If the property is sold, then the co-owner will be paid back their fraction of the ownership interest in the property after the Trustee’s expenses are paid.

Real Estate Ownership Scenarios

In bankruptcy, we typically see three situations where a debtor owns real estate jointly with someone else: home ownership with a spouse, co-ownership of a parents home, and co-ownership of investment property.

Home Ownership With a Souse

If you own your home with your spouse, chances are, you either own it as Joint Tenants with Rights of Survivorship (“JTROS”) or as Tenants by the Entirety. This means that both you and your spouse each own the whole home, as compared to you having ½ ownership and your spouse having ½ ownership. Then if you or your spouse dies, the other spouse automatically owns the whole.

There are clear advantages to owning your home with your spouse as Tenants by the Entirety, because it prevents once spouse’s creditors from interfering with the other spouse’s right of possession. This is also beneficial in bankruptcy in Massachusetts, because any interest that the debtor has as a tenant by the entirety is exempt “to the extent that such interest … is exempt from process under applicable non-bankruptcy law.” 11 U.S.C. § 522(b)(2). This means that in Massachusetts the debtor’s interest in their home that is owned with a spouse as tenancy-by-the-entirety is subject to attachment but not subject to levy or execution at this time and, so, the debtor’s right to possession cannot be interfered with unless and until the property is sold, or debtor and their spouse are divorced, or the debtor survives her spouse, in which event the trustee will be free to enforce his interest in the debtor’s real estate.

However, as I stated earlier, filing a declaration of homestead on your residence will protect up to $500,000 of the equity in your home, regardless of how you hold title with your spouse; therefore, it is always a good idea to go to your local registry of deeds and have one recorded. The declaration of homestead may be in either spouses name and will protect all the family members. It is also important to remember that a homestead is not available for investment property and can only protect property that you either live in, or you intend to make your home and permanent residence. You should contact a qualified bankruptcy attorney for more information on how a homestead can protect your home.

Joint Ownership of a Parent’s Home: The “Poor-Man’s” Will

It is not uncommon for elderly parents to decide to add their children to the deed of their homes for estate planning purposes. Typically, in order to save on the expense of paying an attorney to properly prepare a will, parents transfer title of their property to themselves and their children, as joint tenants. While this is an effective method of transferring property and avoiding probate upon the parents’ death, it can have undesired consequences because the parents’ property can be attached and seized by their children’s creditors. Moreover, as I discussed earlier in this article, if one of the children files bankruptcy, the bankruptcy trustee can sell the parents’ home to repay creditors.

If your parents have added you to the deed of their home, it is important to inform your bankruptcy attorney before your case is filed. A qualified attorney should be able to ensure that your parents’ property is properly protected.

Co-Ownership of Investment Property

There are very few exemptions that are available for investment/vacation property. Therefore, co-ownership of both investment and vacation property is nearly impossible to protect in bankruptcy unless there is no equity in the property. (the value of the property is equal or less than the amount owed on the mortgage.) If you file bankruptcy and you co-own investment or vacation property that has equity; you can be assured that the bankruptcy trustee will take the steps to sell the property.

Conclusion

Co-ownership of real estate presents numerous complex issues if one of the co-owners decides to file bankruptcy. If you co-own property with a spouse, parent or partner and you are facing financial difficulties, you should seek a qualified bankruptcy attorney for advice. A good attorney will be able to advise you of any potential issues that may arise, and take steps to ensure that you and your loved ones can keep your homes. Under no circumstances should you decide to try to transfer property out of your name, without advice from an attorney, because such a transfer could be seen as a fraudulent and would make it easier for a Bankruptcy Trustee to seize the property.

When a person files for bankruptcy they usually ask what happens to their secured debt and the property it secures. Secured debt is any debt what is “secured” by collateral, like a mortgage on a home or a car loan.

First, it is important to understand that bankruptcy will discharge your obligation to repay your unsecured debt (credit cards, personal loans, medical bills, etc.). However, you have options when it comes to your secured debt. Through bankruptcy you have the option to keep the collateral that secures loans such as mortgages or car loans, or return the property to the lender and walk away from the debt. The rules are complicated and what ever you chose when you file bankruptcy can affect your future long after you have received your discharge.

This article is a summary of options that a debtor has when choosing how to deal with secured debt; it is the first in a series of articles where I will discuss in detail a debtor’s options for handing their secured debts.

The Notice of Intention

When filing bankruptcy, a debtor is required to file a document known as a “Notice of Intention.” In this notice, the debtor tells the court how they intend to treat their property that is encumbered by a secured loan.

In Massachusetts, a debtor typically has four options in handling their secured property. They can surrender the property, redeem the property or reaffirm the loan; or in the case of their mortgage, they can retain the property and continue to make monthly payments, something known as “ride through”.

Surrender

“Surrender” is exactly what it sounds like. When a person filed bankruptcy, if they cannot afford, or they do not want the collateral that secures a loan, they may surrender the property and allow the lender to repossess, or foreclose. In this case the debtor can walk away from the loan and the debt is discharged through the bankruptcy.

Redemption

You redeem property by paying the lender either the replacement value of the property, or the amount owed on the debt, whichever it is less. In order to redeem property, the debt must: have been incurred primarily for personal, family, or household use; be tangible property, (property that can be touched, such as furniture, appliances, and cars) and the property must either be exempt, or abandoned by the trustee.

Reaffirming the Debt

A reaffirmation agreement is a new contract signed between a debtor and a lender that reaffirms the debt and personal liability for the obligation. Reaffirmation agreements are permanent, meaning that the debtor is agreeing to be forever bound by the terms of the original secured debt, even if the debtor can no longer afford the debt.

In order to reaffirm a debt, the court must review and approve the agreement. If the agreement would result in an undue hardship to the debtor, then the agreement will not be approved.

If the secured debt is a mortgage, or a car loan, we typically do not recommend that a debtor signs a reaffirmation agreement unless the lender is willing to modify the terms of the original loan that are more beneficial to the debtor. Every situation is different, and an experienced bankruptcy attorney will inform you if it is in your interest to reaffirm these types of loans.

Retain and Pay/Ride Trough

If a debtor owns real estate that has a mortgage, they can choose to retain the property and continue to make payments on the mortgage. This option is known as a “ride through.” Ride through is not available for all secured debts, especially those involving debts that secure personal property. This option allows a debtor to walk away from the property in the future, should the debtor no longer be able to afford the property.

Conclusion

Debtors have options when it comes to keeping property that is secures a loan. The laws involve redemption and reaffirmation are extremely complicated and vary from state to state, so it is important that you consult with a reputable bankruptcy attorney.

When clients consult with us about filing bankruptcy in Massachusetts we are forced to make a decision concerning what exemptions they wanted to claim. In the past, the choice was easy, if our client had more than $20,000 in equity in their home, then we would choose the Massachusetts exemptions in order to take advantage of the $500,000 homestead exemption. However, that meant losing protections on other items, such as a car or cash and our clients possibly having to either surrender property or hand over cash to the trustee.

In fact, Massachusetts’ exemptions were so outdated that other than the homestead, you were only afforded $700 for a car, $125 in the bank, 2 cows, 12 sheep and 2 pigs.

Now, on April 7, 2011, Massachusetts moves into the 21st Century. On that date, Massachusetts residents who file bankruptcy will have the benefit of choosing to keep their house, car, and some money to pay bills. While the federal exemptions will still be available and will be the best choice for many debtors considering bankruptcy, the increase in the new state exemptions will help a lot of people. Here is a review of the new exemptions available to debtors and chose the state exemptions:

Homestead: if you own your home, you are entitled to protect up to $500,000 in equity so long as you have lived there for 3.3 years; otherwise you are only entitled to $250,000. (investment, or vacation property is not eligible) The Massachusetts Homestead statute has recently been updated…but that is a topic of another post.

Automobile: In one of the most significant changes…you can now exempt $7,500 in an automobile. If you are handicapped or over 60, then you are entitled to $15,000. This exemption represents the “equity” in the vehicle. (if the Auto is worth $20,000 and you owe $15,000, then your exemption would be $5,000 which I allowable since it is less than the $7,500 exemption). Under the old statute, you were only entitled to $700.

Jewelry: You may now exempt up to $1,225 in personal jewelry.

Clothing, beds, appliances: The New Rule – All necessary wearing apparel, beds, bedding, 1 heating unit, 1 stove, 1 refrigerator, 1 freezer, and 1 hot water heater.

Furniture: Residents can now exempt $15,000 in home furniture. Under the old statute, you could only exempt $3,000.

Computer, TV, Sewing Machine: One sewing machine, one computer and one television, in actual use, not exceeding $300 each in resale value. The old statute did not exempt a computer or TV.

Cash for Rent: if you are a renter, then you are entitled up to $2,500 of cash in the bank (not to exceed your actual rent) to pay the rent for the dwelling unit you actually occupy.

Cash for utilities: you are now entitled to have up to $500 on hand to pay utilities. This is up from $75.

Checking & Savings: Cash or savings not exceeding $2,500. (up from $125).

Wages due and payable: the greater of 85% of the your gross wages or 50 times the greater of the federal or the Massachusetts hourly minimum wage for each week or portion thereof.

Tools for Trade or Business: if you have tools that you use in your trade or business you can now protect up to $5000, up from $500.

Materials and Stock Used in Trade or Business: a debtor can now exempt up to $5,000 in materials that you use in your trade or business. (up from $500).

Fishing equipment: Boats, fishing tackle and nets of fishermen actually used in their business, up to $1,500. This is an increase from $500 under the old statute.

Wild Card: You can now use up to $5,000 of your unused tool, auto, or furniture exemption to protect any other property; so long as the value of any single item does not exceed $1,000.

This list provides a brief summary of the new changes in Massachusetts’ exemption laws as they apply to bankruptcy. However it is not an exclusive list, nor should you rely on this list to try to file your own bankruptcy. Bankruptcy is an extremely complicated area of practice and a mistake could lead to the loss of your home or car or could result in your case being dismissed.

Debtor collectors have now turned to social media outlets such as Facebook, Twitter, MySpace, Friendster, LinkedIn, and other various social media web-sites to collect information on debtors.  There have also been reports in the media of debt collectors sending messages to Debtors, as well as their friends, family, and colleagues, through these social media sites.

These debt collectors are searching these social media sites for information on debtors, such as employment information, current residence, friends and family information, aliases, and nicknames.  This information can be used to help track down Debtors for collection purposes. They are also attempting to relay messages to Debtors through friends, family, and colleagues asking the Debtors to contact to collector at a specified phone number.

One way to avoid the use of social media against you is to closely monitor and manage your privacy settings.  Make sure that the details of your profile are not viewable by search engine or on the social media site itself. Also, closely monitor and screen who is attempting to connect to your social network.  Finally, reconsider the information that your publishing on the Internet.  It is nearly impossible to control that information once you send it into the Web.

The FICO credit-scoring system groups together people with similar histories and rates them.  These groups are called Score Cards.

If you have filed for bankruptcy, your case filing will appear on your credit report. However, you will be grouped on a Score Card with other individuals who have filed for bankruptcy.  As such, your credit history will be compared with others in your Score Card, and could be viewed favorably by lenders.  However, if and when you are placed into a different Score Card with individuals who have not filed bankruptcy, and who have strong credit histories, your credit rating could be viewed unfavorably by lenders.  In other words, your credit score will be lower, and your credit score can drop when you “jump” from one Score Card to the next.

The best way to avoid a significant drop off in a credit score and recover your credit rating when switching score cards is to repay all debts on-time; pay down all outstanding debts; refrain from opening new credit accounts; and keeping low balances when you do incur debt.  Adhering to this formula will invariably raise your credit score, which will allow you to borrow money to purchase a car or a home at a more favorable interest rate.  Rebuilding your credit score after filing for Chapter 7 or Chapter 13 bankruptcy is possible, however, it takes discipline and time to achieve a higher credit score rating.