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Wednesday, February 27, 2013

Financing mortgages after a bankruptcy filing

Many of my clients are curious/anxious about acquiring a mortgage after they file a bankruptcy case.  Can I get one?  Will I get one?  WHEN can I get one?  

The answer to that I guess is....all in good time my friends.  

First off....."Can" or "Will" I get a new mortgage after I file bankruptcy?  The answer to that is "sure" that's an affirmative.  There is nothing in the bankruptcy code stating that mortgage lenders can't give you a loan if they want to.  Of course, each lender has it's own protocols in terms of how they assess creditworthiness and whether or not they make any particular person a loan is going to depend on quite a number of factors.  A non-exclusive list of those factors would be some major items like nature and length (so stability) of your employment, your current debt load and your ability to service that debt along with any new debt you contemplating taking on, the fair market value of the property and the amount of the loan you are looking for, etc., etc.

Look....it's not the wild west out there anymore like we had before the housing/mortgage meltdown when pretty much anyone could get a loan on just "stated" income without having to provide a shred of documentation.  Lenders are more cautious now......and with good reason.  However...they have money to lend and interest rates are simply "great"---historical lows and all.

However, there are certain underwriting requirements for some very popular loan programs when someone has filed a bankruptcy, had a foreclosure or did a short sale.  Here's the skinny on the WHEN question for those who have filed bankruptcy and are looking to refinance or take out a new mortgage loan;

FHA............2 years with reestablished credit.
VA......2 years with reestablished credit.
Conventional financing....4 years for a chapter 7 filer unless documented extenuating circumstances and reestablished credit.  If a chapter 13 case...2 years from the date of discharge or 4 years from any dismissal.   

For those with a prior foreclosure or short sale....

FHA......generally speaking 3 years with an exception for short sales if the borrower was current on all debt at the time of the sale..then there is no waiting period.
VA......2 years with reestablished credit.  
Conventional financing.......on a short sale it would be 2 to 7 years with a reduced loan to value (LTV) and with reestablished credit. In the event of a foreclosure then it would be 7 years.  However, it could be 3 years if documented extenuating circumstances with reduced loan to value (LTV--as above) and with reestablished credit. 

So...as you can see....a prior bankruptcy is not the "kiss of death" in terms of getting a new mortgage.  When I first started practicing bankruptcy back in 1990 it pretty much was.  My how things have changed.  It went from the "wild west" days I mentioned previously when your pet could almost get a loan to the really rough period we went through recently when even folks with stellar credit had trouble finding a loan.  Everything....given time...finds it's own level.  Things are on a more even keel now and it's getting better.  Housing values have started to rise, banks are more willing to give loans to qualified buyers and there is a pent up demand of people who want and need housing.  As housing goes so goes our economy.  I'm not in the mortgage business.  However, if you are looking for a good mortgage lender I can refer you to a couple.  Don't be dismayed if you have or need to file bankruptcy or had short sale or foreclosure events.  There's hope.  The idea is that if you are experiencing or have had experienced a financial calamity we can help you make as soft a landing as possible.  The goal is to preserve your assets, reduce or eliminate the debt and move forward in a positive fashion.

If you need help please give us a call.

David D. Kingsbury
Bankruptcy Lawyer
(952) 432-4388

Offices in Apple Valley and Rochester, MN    

*Be advised that the advice given regarding qualifying for mortgages after certain events is deemed reliable and not guaranteed as they are subject to change at any time. 

Wednesday, February 20, 2013

Saturday bankruptcy chatter

I am scheduled to be a guest expert on bankruptcy matters on your AM 1500 ESPN dial this coming Saturday morning at 8 am.  Todd Rooker, a financial planner and noted problem solver, hosts the "Cover Your Assets" radio program.  The topics will be lien stripping in Chapter 13 bankruptcy for wholly unsecured 2nd mortgages, the extension of the Mortgage Forgiveness Debt Relief Act which appears to have been extended once again (good thing)....with maybe a little other tax/bankruptcy advice thrown into the mix.

Both lien stripping and the Mortgage Forgiveness Debt Relief Act warrant attention in these times of low home valuations as either may benefit a distressed homeowner.  Join us in discussing these topics.

David D. Kingsbury
Attorney at Law
 (952) 432-4388

Offices in Apple Valley and Rochester, MN

Monday, February 18, 2013

Tax time...what can bankruptcy do for me if I owe?

This time of year many people get an unpleasant surprise when they do their returns....what to do if they've been underwithholding and now have a tax liability?  Often it is due to the fact that they've experienced some financial distress and took distributions from IRA's, 401Ks or other pension.  Maybe there was some unemployment and they neglected to do withholding from that income source.  Perhaps there are multiple years worth of tax liabilities and now the IRS or the state tax authority is threatening wage garnishment, bank levy or liens against business or personal property.

What to do?

If one can work out a manageable payment plan with the tax authorities...of course that is one way to handle it.  Offers in compromise are often brought up in conversations like these but my experience has been that while many people would like them...they are as hard to find as hen's teeth.

Bankruptcy can offer a solution.  Some tax debts are discharged in chapter 7 depending on their nature, age and the status of the filed returns.

The general rule is that to be discharged in bankruptcy the taxes have to be at least 3 years old and the returns have to have been on file (and filed by the debtor) for at least 2 years. 

There are exceptions to that rule.  They have to be income taxes (so sales tax, employee withholding or anything else which would fall under the "trust tax definition will never be eligible for discharge).  They can't have been assessed within the past 240 days.  Plus....there are events which can "toll" the 3 year aging...such as prior bankruptcy filings or other such situations that prevents the taxing authorities from acting in a collection mode if they chose....like the aforementioned "offers in compromise" or an appeal from an assessment, etc.  It is important to note as well that where there has been fraudulent returns filed those taxes will not be eligible for a discharge either.

If there are liens filed...then they are not dischargeable even if they were old enough and the tax returns had been filed on time as they are now considered a SECURED debt and secured debts are not discharged in bankruptcy.  However, often as there is no equity in any of th debtor's property the liens are essentially unenforceable and so the taxing authority may choose to release them on that basis. 

In Chapter 13 even if they are not dischargeable they can be paid as a priority debt in the chapter 13 plan of reorganization.  One of the requisites for confirmation of a chapter 13 plan is that it provides for full repayment of any priority tax debt (which would be the non dischargeable tax debts...see the standard recited above for what can be discharged and what can't be).  A significant benefit of paying the priority debt through a chapter 13 case is that as of the date of the case filing no more interest or penalty will accrue on the balance.  In chapter 13 you have up to 5 years to pay the debt as that is the maximum length allowed for a chapter 13 under the bankruptcy code.

In summary....there may be something you can do in terms of filing a bankruptcy for relief from your debt problems.  Many tax professionals, interestingly, are not aware of the advantages that the bankruptcy can provided overburdened tax payers. 

If you are a Minnesota resident and get a jaw-dropping surprise from your CPA or tax preparer give us a call and we can find some workable solutions for you.

David D. Kingsbury
Attorney at Law
(952) 432- 4388

Offices in Apple Valley and Rochester, MN.

Friday, February 15, 2013

Homeowners association dues still owed after filing a bankruptcy

Much to some bankruptcy filer's chagrin there is some residual liability for association dues that accrue after the bankruptcy case has been filed and/or discharged even for properties that the debtor is surrendering to the mortgage company in their bankruptcy case.  

Under 11 USC 523(a)(16) of the United States Bankruptcy Code there is an exception to discharge for any fee or assessment that comes due and payable after the case is filed.  Any that were due prior to the case being filed are discharged but any that rack up later the debtor is responsible for as long as he or she remains on titleIn Minnesota that means as long as it takes for the mortgage holders to foreclose and for the redemption period to expire which generally speaking can take up to 8 months from the date they start it.  Some mortgage companies though are notorious in neglecting to foreclose for long periods of time....years even.  I have one client who quit making payments on his townhome and moved out in 2009.  He filed bankruptcy in May of 2011.  Now his townhome association is asking the bankruptcy court to let them out of the bankruptcy so they can sue him for the accrued fees and assessments.  I underscored assessments above for a reason.  I had another client in an unrelated case but with similar circumstances.   They had been out of it for at least a year and a half and their bankruptcy petition and Chapter 13 plan stated that they were surrendering the real estate.  Time went on...no foreclosure.  At some point a  water pipe burst.  $10K in repairs as it leaked through is unit into common areas, etc.   
 
Interestingly enough, a strict reading of the bankruptcy code indicates that the exception to discharge does not apply in Chapter 13.  So you'd assume then there would be no liability.  I was at a National Association of Chapter 13 Trustee's convention a couple of years ago in Anaheim, CA.  One of the judges on the panel mentioned this and I took note of it as I thought it was interesting and perhaps useful.  To date I have now had two cases in chapter 13 where the townhome associations have pursued my clients for these fees/assessments in Chapter 13.  My answer to the creditor's attorneys the first time this came up was "tough luck"...the exception to discharge you refer to has no application in Chapter 13.  He bought it and went away because I either convinced him I was right or they simply didn't want to litigate it.  Either way...they haven't bothered my client since as far as I know.  The second which was just recent pressed it.  So I planned to defend my client in court to stop the creditor action which would ultimately lead to collection against my client for a debt I assumed was dischargeable.  Like a lot of things....all is not as simple as it seems.   
Doing my due diligence in terms of legal research I read the cases my opposing counsel relied on plus I did my own research and found other cases which supported my position.  Unfortunately there was nothing quite on point in my jurisdiction.  However, after a careful reading of the cases I did find that had at least some relevance it became clear what the judges decision would be if he/she relied on precedent from other related cases dealing with these issues.  My research and analysis boiled down to this; 

While the statute has no application in chapter 13 the case law determining the nature of the obligation to pay these fees and assessments turned on whether the debt was an obligation that had arisen prior to the bankruptcy case being filed and not whether the exception to discharge I cited in this post applied.  It actually turned on interpretation of what seemed to be at the time an unrelated issue...which would be the nature of the claim.  If, according to the cases I read..the obligation to pay these post petition fees/assessments were determined to be a contractual obligation  there was a good argument that the debt would be included in the bankruptcy as obligations to pay under the terms of the contract  was incurred pre-filing.  Then actually the exception to discharge issue was relevant.  But.....alternatively, if it was an obligation that occurred due to covenants running with the land...then it was a post-petition debt.  If a post filing obligation under the covenant theory then whether or not it is dischargeable is not an issue as one cannot discharge debts which arise post-petition.  The state court  decision I consulted which appears to me to control here turned on the court looking to and interpreting the Declarations published by the association as the basis for the judge's decision.  I consulted the Declaration for the townhome association relative in my client's case and indeed the obligation to pay the fees and assessment was  state as a convenant.  Therefore, I reluctantly informed my client that it appeared to me that he would be liable and would continue to be so until his name comes off title.  Unfortunately for my client when that will  happen is only a guess the mortgage company still shows no interest in foreclosing on this property.  Obviously the mortgage industry/housing meltdown has led to this poor result.  Because this property had no equity or was not anywhere close in terms of value to loan balance they have not foreclosed and how long they will wait to do so no one knows.  Until then my client is responsible for those fees and assessments.

*Note that this is my personal analysis interpreting how the law would apply to this issue in Minnesota.  If you live in another state the result with the same facts/circumstances could be completely the opposite depending on how these issues have been resolved by the courts in your jurisdiction.