Law Offices of David C. Winton/(415) Bankruptcy and Mortgage Deficiency Basics Chapter 7 and Chapter 13

Law Offices of David C. Winton/(415) What is bankruptcy? Federal court process by which a debtor can discharge or reorganize their debts. Intended to provide the honest but unfortunate debtor with a “fresh start.”

Law Offices of David C. Winton/(415) Why file bankruptcy? (Or, what are the upsides?) Automatic stay of all debt collection action. (Including lawsuits, foreclosures, collection calls, etc.) Automatic stay of all debt collection action. (Including lawsuits, foreclosures, collection calls, etc.) Financial “reboot” Financial “reboot” Discharge all dischargeable debts Discharge all dischargeable debts Eliminate risk of deficiency (where it exists) Eliminate risk of deficiency (where it exists) Eliminate some tax debts Eliminate some tax debts Eliminate credit card debt Eliminate credit card debt Get a “fresh start” Get a “fresh start” Look better to lenders (yes, it’s true!) Look better to lenders (yes, it’s true!)

Law Offices of David C. Winton/(415) Why not file bankruptcy? (Or, what are the downsides?) FICO hit (immediate but recoverable). FICO hit (immediate but recoverable). Stays on credit for 10 years. Stays on credit for 10 years. Some debts can't be discharged (student loans especially). Some debts can't be discharged (student loans especially). May have to part with some property (rare, but it happens). May have to part with some property (rare, but it happens). Financial affairs will be scrutinized to some degree. Financial affairs will be scrutinized to some degree. Expense and time. Expense and time.

Law Offices of David C. Winton/(415) Chapter 7 “Straight” bankruptcy. “Straight” bankruptcy. “Liquidation” of non-exempt assets, sale and distribution to unsecured creditors. “Liquidation” of non-exempt assets, sale and distribution to unsecured creditors. About 3 months (in most circumstances) About 3 months (in most circumstances) Rarely loss of property. Rarely loss of property. Keep home if loans stay current. Keep home if loans stay current. Yes you CAN discharge some taxes. (“Old and moldy” rule) Yes you CAN discharge some taxes. (“Old and moldy” rule)

Law Offices of David C. Winton/(415) Chapter 7 Eligibility Must “pass” means test. Must “pass” means test. Adjusted income after below median for state. Adjusted income after below median for state. Must take “credit counseling” class. (Sort of like traffic school for bankruptcy only much shorter.) Must take “credit counseling” class. (Sort of like traffic school for bankruptcy only much shorter.)

Law Offices of David C. Winton/(415) Chapter 13 3 to 5 year process in which “some” debts are repaid with “disposable income.” 3 to 5 year process in which “some” debts are repaid with “disposable income.” Disposable income is calculated by a strict formula. Disposable income is calculated by a strict formula. Good: “Super discharge” Can provide discharges of some debts that a Chapter 7 may not. Good: “Super discharge” Can provide discharges of some debts that a Chapter 7 may not. Good: May allow homeowner in default to keep their home. Good: May allow homeowner in default to keep their home. Good: May allow a homeowner to “lien strip” junior deeds of trust that are “wholly unsecured.” Good: May allow a homeowner to “lien strip” junior deeds of trust that are “wholly unsecured.” Bad: Keeps the debtor in the bankruptcy system for the whole time. Bad: Keeps the debtor in the bankruptcy system for the whole time.

Law Offices of David C. Winton/(415) Chapter 13 Eligibility No more than $360,475 in unsecured debt, and $1,081,400 in secured debt. No more than $360,475 in unsecured debt, and $1,081,400 in secured debt. Must have “regular source of income.” Must have “regular source of income.”

Law Offices of David C. Winton/(415) Keeping your property in bankruptcy It’s simple: Stay current on the payments!!!! It’s simple: Stay current on the payments!!!! Houses and cars treated similarly with minor differences in “reaffirmation” requirements. Houses and cars treated similarly with minor differences in “reaffirmation” requirements. As a practical matter, statutory exemptions protect most property. As a practical matter, statutory exemptions protect most property. Redemption of property back from trustee. Redemption of property back from trustee. Chapter 13 keeps everything unless Ch 13 plan doesn’t pay out as much as a liquidation. Chapter 13 keeps everything unless Ch 13 plan doesn’t pay out as much as a liquidation.

Law Offices of David C. Winton/(415) Exemptions (“Home Owner”) Depends on your situation: Depends on your situation: If you have equity in your home above the value of all combined loans: If you have equity in your home above the value of all combined loans: $75k if single $75k if single $100k if “head of household $100k if “head of household $175k IF $175k IF <65 years old <65 years old Mentally or physically disabled, or Mentally or physically disabled, or <55 years with household income <$15k <55 years with household income <$15k

Law Offices of David C. Winton/(415) Exemptions (“Non-Home Owner”) $24,250 “wild card” Can be used for anything: cash, securities, property, art. $24,250 “wild card” Can be used for anything: cash, securities, property, art. Usually covers most personal property Usually covers most personal property Timing of filing can be managed to protect certain items Timing of filing can be managed to protect certain items All “post petition” wages and income All “post petition” wages and income

Law Offices of David C. Winton/(415) Other Exemptions and Concepts All “post petition” wages and income All “post petition” wages and income All IRA,s 401k’s, 529’s (some limits may apply) All IRA,s 401k’s, 529’s (some limits may apply) Most cars, jewelry, art, clothing, furniture, etc. Most cars, jewelry, art, clothing, furniture, etc.

Law Offices of David C. Winton/(415) Can I “keep” anything out of bankruptcy? No!!!! All financial affairs (assets, debts, etc.) must be fully disclosed. No!!!! All financial affairs (assets, debts, etc.) must be fully disclosed. Intentional omissions or misrepresentations in Bankruptcy is a federal crime. Intentional omissions or misrepresentations in Bankruptcy is a federal crime. But it’s a disclosure issue: You can pay anyone you want. But it’s a disclosure issue: You can pay anyone you want. If you want to lose a piece of property, the easiest way to do that is to fail to disclose in in your schedules. If you want to lose a piece of property, the easiest way to do that is to fail to disclose in in your schedules. Recent client who “assumed” that taxes had nothing to do with bankruptcy. Recent client who “assumed” that taxes had nothing to do with bankruptcy. Another client who “forgot” she owned a house that she’d recently sold. Indicted. Another client who “forgot” she owned a house that she’d recently sold. Indicted.

Law Offices of David C. Winton/(415) Consequences of bankruptcy non-disclosures? Possible loss of discharge Possible loss of discharge May be charged with a crime. May be charged with a crime. Just don’t do it. A good bankruptcy lawyer can fix ANYTHING but a lie. A good bankruptcy lawyer can fix ANYTHING but a lie.

Law Offices of David C. Winton/(415) Bankruptcy Process and Procedures Starts with filing a “Petition and Schedules” with the Bankruptcy Court. Starts with filing a “Petition and Schedules” with the Bankruptcy Court. Which Court depends on your residence. Which Court depends on your residence. All filings online through CM/ECF system. All filings online through CM/ECF system. Usually only one appearance at “meeting of creditors.” Usually only one appearance at “meeting of creditors.” Chapter 7: Usually done three months from filing unless there is property to be administered by the trustee. Chapter 7: Usually done three months from filing unless there is property to be administered by the trustee. Chapter 13: Can take up to 5 years to payoff the plan and get the discharge. Chapter 13: Can take up to 5 years to payoff the plan and get the discharge.

Law Offices of David C. Winton/(415) Cost and Attorneys fees ( Unfortunately, it ain't free to go broke.) Fees are highly variable, depending on location, attorney’s experience, attorney’s other business. Fees are highly variable, depending on location, attorney’s experience, attorney’s other business. You WILL get what you pay for. (At least on the low end. Few things more dangerous than an underemployed attorney.) You WILL get what you pay for. (At least on the low end. Few things more dangerous than an underemployed attorney.) Do your best to get an “all in” arrangement. Do your best to get an “all in” arrangement. Under most circumstances Chapter 7 MUST be paid pre-filing. (Your attorney can't be a “creditor”). Under most circumstances Chapter 7 MUST be paid pre-filing. (Your attorney can't be a “creditor”). Chapter 7: “Simple” cases, anywhere from $1,700 to $3,500 depending on complexity of assets and debts. Chapter 7: “Simple” cases, anywhere from $1,700 to $3,500 depending on complexity of assets and debts. Chapter 13: $3,500 to $7,000, again, depending on complexity of assets and debts. Chapter 13: $3,500 to $7,000, again, depending on complexity of assets and debts. Chapter 11? $20,000 to…. Chapter 11? $20,000 to….

Law Offices of David C. Winton/(415) Can I represent myself? Sure. You can also do your own knee surgery. Sure. You can also do your own knee surgery. Generally not a good idea because the requirements are highly technical and the penalties for error can be very costly. Generally not a good idea because the requirements are highly technical and the penalties for error can be very costly. Lots of calls from people who have spent 6 to 12 months screwing up their own bankruptcy. Lots of calls from people who have spent 6 to 12 months screwing up their own bankruptcy. Costs way more in the long run. Costs way more in the long run. Do it right. Do it once. Do it right. Do it once.

Law Offices of David C. Winton/(415) What about “bankruptcy petition preparers?” Another bad idea Another bad idea They’re not lawyers. They’re form fillers. They’re not lawyers. They’re form fillers. They can’t give legal advice. They can’t give legal advice.

Law Offices of David C. Winton/(415) Loan Modification in Bankruptcy  Yes you CAN modify mortgages while in bankruptcy. The question is whether the bank will do it. _____________________________________  Remember: Banks are stupid. They are not able to hold two concepts in their brain at the same time. Like loan modification and bankruptcy. It causes their wires to cross.

Law Offices of David C. Winton/(415) Strategic Defaults The conscious and deliberate decision to “walk away” from a mortgage. The conscious and deliberate decision to “walk away” from a mortgage. Usually because the loss in market value means that the investment no longer makes any sense. Usually because the loss in market value means that the investment no longer makes any sense. Can be stressful. Can be stressful. But, it can also bail you out of a very bad financial position. But, it can also bail you out of a very bad financial position. Controversial. Controversial.

Law Offices of David C. Winton/(415) Who’s doing it? Mortgage Bankers Association of America walked away from a $79 million obligation in Mortgage Bankers Association of America walked away from a $79 million obligation in Studies show that: Studies show that: 20% of homeowners will walk away when the loan-to- value ratio drops below 75%. 20% of homeowners will walk away when the loan-to- value ratio drops below 75%. 63% of people will walk away when deficiency hits $300k. 63% of people will walk away when deficiency hits $300k. Estimates are that 15% of all foreclosures are “strategic.” Estimates are that 15% of all foreclosures are “strategic.”

Law Offices of David C. Winton/(415) Why? “Clean break” from the bank and avoids the months and months of uncertainty and negotiation with a large lending institution that probably doesn’t really want to modify the loan anyhow. “Clean break” from the bank and avoids the months and months of uncertainty and negotiation with a large lending institution that probably doesn’t really want to modify the loan anyhow. If there is any risk of a deficiency, the foreclosure will in all likelihood nuke that lien, and a bankruptcy will discharge the underlying obligation. If there is any risk of a deficiency, the foreclosure will in all likelihood nuke that lien, and a bankruptcy will discharge the underlying obligation. Starts financial rehab faster. Starts financial rehab faster. May have better tax implications than a short sale or deed in lieu. May have better tax implications than a short sale or deed in lieu. Loan mod can make the homeowner stuck in a house that may never recover its value. Loan mod can make the homeowner stuck in a house that may never recover its value. See 60 Minutes piece by Morley Safer on May 9, See 60 Minutes piece by Morley Safer on May 9, 2010.

Law Offices of David C. Winton/(415) Mortgage Deficiencies What is it? What is it? The amount of the unpaid mortgage debt that remains after foreclosure, short sale, trustee’s sale or deed in lieu. The amount of the unpaid mortgage debt that remains after foreclosure, short sale, trustee’s sale or deed in lieu. Example: House worth $400k. Mortgage of $475k. If bank takes property valued at $400k back, deficiency will be $75k. Example: House worth $400k. Mortgage of $475k. If bank takes property valued at $400k back, deficiency will be $75k.

Law Offices of David C. Winton/(415) Can the bank get a deficiency from me? Under some circumstances. Under some circumstances. Is a question of state law, even in a federal bankruptcy. Is a question of state law, even in a federal bankruptcy. California law only: California law only: Not allowed for “Purchase Money Mortgages.” Literally the mortgage (or HELOC) that was obtained for the purpose of, and actually used for, the purchase of the property. Not allowed for “Purchase Money Mortgages.” Literally the mortgage (or HELOC) that was obtained for the purpose of, and actually used for, the purchase of the property. Not allowed for loans in which the bank actually takes the property back by non-judicial foreclosure. Not allowed for loans in which the bank actually takes the property back by non-judicial foreclosure. Not allowed on first mortgages in which the lender has agreed to a short sale. Not allowed on first mortgages in which the lender has agreed to a short sale.

Law Offices of David C. Winton/(415) Most likely deficiency problems Investment property second deed of trusts (“DOT”). Investment property second deed of trusts (“DOT”). Personal residence HELOCs, (seconds or thirds) obtained AFTER purchase of property. E.g. Home improvement loans, home equity loans taken out to pull some cash out of the property. Personal residence HELOCs, (seconds or thirds) obtained AFTER purchase of property. E.g. Home improvement loans, home equity loans taken out to pull some cash out of the property. May present tax problems in the form of “cancellation of debt” (“COD”) income. May present tax problems in the form of “cancellation of debt” (“COD”) income. Cancellation of a debt is taxable as ordinary income unless Cancellation of a debt is taxable as ordinary income unless Debt is cancelled in bankruptcy. Debt is cancelled in bankruptcy. Property is primary residence. (At least until 2013) Property is primary residence. (At least until 2013) Debtor is balance sheet “insolvent” when debt is canceled. Debtor is balance sheet “insolvent” when debt is canceled.

Law Offices of David C. Winton/(415) How to deal with deficiencies Pay it. Pay it. Discharge it in bankruptcy Discharge it in bankruptcy Negotiate a discount. Negotiate a discount. Banks typically sell this debt “by the pound.” Meaning that they aggregate large portfolios and sell the lot to bottom feeders and collection agencies. Usually for 3 to 5 cents on the dollar. Anything over that is gravy. Banks typically sell this debt “by the pound.” Meaning that they aggregate large portfolios and sell the lot to bottom feeders and collection agencies. Usually for 3 to 5 cents on the dollar. Anything over that is gravy. Success with this will depend on how likely the owner of the debt thinks they will be able to get more. Success with this will depend on how likely the owner of the debt thinks they will be able to get more. High income or significant wealth? You’ll pay more. High income or significant wealth? You’ll pay more.

Law Offices of David C. Winton/(415) Conclusions Don’t do your own knee surgery. These issues are not easy to sort out. Talk to a lawyer (and a tax accountant). Don’t do your own knee surgery. These issues are not easy to sort out. Talk to a lawyer (and a tax accountant). Even so, in the hands of a qualified and experienced attorney, most of these problems have relatively simple legal and financial solutions. Even so, in the hands of a qualified and experienced attorney, most of these problems have relatively simple legal and financial solutions. Simple doesn't mean easy: Can be very stressful, and can make you feel like you’re quite alone. Simple doesn't mean easy: Can be very stressful, and can make you feel like you’re quite alone. Only regret any client has ever expressed is that it took them so long to take the plunge. Only regret any client has ever expressed is that it took them so long to take the plunge.

Law Offices of David C. Winton/(415) Bankruptcy and Deficiency Basics Chapter 7 and Chapter 13 Thank you. David C. Winton, Esq. 2 Ranch Drive, Suite 8 Novato, CA Tel: