Chapter 7 Bankruptcy

Published on: August 17, 2011

Why Lien Stripping of a Second Mortgage is Not Available under Chapter 7 Bankruptcy

Our Florida clients sometimes ask me why they cannot strip off a second mortgage in a Chapter 7 like often done in a Chapter 13 bankruptcy nowadays. The limitation can be found in the United States Supreme Court’s decision in Dewsnup v. Timm, 502 U.S. 410, 417 (1992). The Court noted a distinction between the in rem and in personam claims created by a lien on a debtor’s property. The Court held that a Chapter 7 discharge of personal obligation leaves the in rem obligation intact against the property.

Even though a client might qualify to file a Chapter 7, sometimes the extra remedies available in a Chapter 13 make the more lengthy plan worthwhile. Under 11 U.S.C. 1322 a wholly unsecured second mortgage or HELOC can be stripped off a homestead. However, one other key difference exists between a Chapter 7 and 13. If a debtor retains a home in a Chapter 13, they are still personally liable for the first mortgage even if the second mortgage is stripped. Therefore, a Chapter 7 may still be best if the home is worth much less than the amount owed on a first mortgage and the debtor is uncertain about keeping the home long term.

Published on: June 17, 2011

HAMP releases second mortgage HELOCs

By Christie D. Arkovich, P.A.

I have discussed the many second mortgages that can be removed or stripped off clients’ property in a Chapter 13 bankruptcy due to the low home values in Florida. Today, I’d like to discuss other possibilities to remove a second mortgage that we are seeing. Today for instance, I received a call from a client who filed a Chapter 7 with us awhile back. She now has received approval for a HAMP waiver of her second mortgage or home equity line of credit. A complete waiver, paid in full. She also has completed a modification under HAMP for her first mortgage. Now the home is affordable and it makes sense for her to keep it. Chase was the servicer this client was working with so it may be worth the time to continue to deal with large servicers to obtain these results.

We also are seeing clients being approached with offers to satisfy their second mortgages in full for about 10 cents on the dollar (i.e. $6,000 lump sum payment to satisfy a $60,000 2nd mortgage). Usually this happens after we file a Chapter 13 threatening to strip the second mortgage, but sometimes it may come out of the blue. For a client who qualifies for a Chapter 7, they then have the option of converting to a Chapter 7 to discharge other unsecured debt and not remaining in a lengthy 3-5 year Chapter 13 Plan. Another option is that the client could simply dismiss the Chapter 13 voluntarily if they have no other debt and are current in their first mortgage or able to obtain a modification.

Published on: June 15, 2011

Exemptions Calculus

By Christie D. Arkovich, P.A.

Bankruptcy clients who are new to Florida come to our office complaining about what I call the Exemptions Calculus Problem. Learning calculus seems simpler. Below are some useful sites and a brief explanation as to how exemptions work.

First, exemptions in bankruptcy are important because they decide what you get to keep in a bankruptcy. In Florida, we have very strong homestead exemptions and retirement asset exemptions for an IRA, 401k, 403(b) or annuities. Not so much for personal property unless you are surrendering your home and can claim a $4,000 wildcard exemption in addition to a $1,000 exemption. Vehicles are allotted a $1,000 equity exemption. Anything more, you have to pay to keep or give up.

However, the rules vary dramatically when you have lived in Florida for less than two years. Then we either use the state’s exemption where you moved from or the federal exemptions. Ironically, you cannot use the federal exemptions when you have lived here for two years or more, because Florida has opted out of the federal exemptions. Federal exemptions provide a very generous personal property exemption.

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Published on: June 13, 2011

Strategic Defaults – When it’s Time to Walk Away From Your Home

By Christie D. Arkovich, P.A.

underwater mortgage.jpg Have you been considering walking away from your house payments and mortgage? According to a recent CNN article, many homeowners are getting ruthless and voluntarily choosing to walk away. We are seeing this more and more among our foreclosure defense and short sale clients. Sometimes it is better to take the credit hit and save money on huge mortgage payments on an underwater asset. Home values have continued to slide another 11% in Florida in February when compared to the same month in 2010. CBS MoneyWatch reports that 47% of Florida homeowners are underwater.

Fannie Mae reports in a recent survey that the number of homeowners who would even consider walking away has increased from 15% to 27% this year. This is despite Fannie Mae’s threat to withhold Fannie Mae backed financing for strategic defaulters that it made over a year ago.

So what should you consider before you make such a decision? Well, first of all, if you have a good job, assets and a strong credit report, you can be a target for a deficiency lawsuit later down the road as Florida is a “recourse” state. Banks and other owners of mortgage debt have up to five years to pursue you to collect the unpaid balance. The question is will they? If you look good to them on paper, it is more likely you will be sued for a deficiency. If this is the case, or you think your finances will pick up over the next few years, you may want to consider a short sale to at least try to open negotiations for a full or partial deficiency waiver. Alternatively, many clients elect to file bankruptcy now while they qualify to order to obtain closure and gain the certain knowledge that they cannot be sued later.
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Published on: June 1, 2011

You cannot be fired for filing bankruptcy, but it may be used as a reason to deny new applicant

By Christie D. Arkovich, P.A.

The Eleventh Circuit Court of Appeals which governs the State of Florida, recently ruled on May 17, 2011 in the case of Myers v. TooJay’s Management Corp. that private employers can legally deny employment to applicants if they filed for bankruptcy. In doing so, our Circuit is now consistent with similar rulings in the 3rd and 5th Circuits.

However, anyone who is trying to decide whether to file bankruptcy when they are job hunting should keep in mind that prospective employers will pull credit reports. Many employers will rescind offers of employment or refuse to hire a person merely because of a bad payment history. Any delinquent payments could equally affect an employment decision. Refusal to hire someone due to his or her credit history is not by itself unlawful (there may be a limitation as to whether or not a credit report may be pulled if the prospect has not signed an authorization to do so).

In fact, some employers would prefer that a prospective employee has discharged their debts. Many employers would rather not deal with creditors calling its employees during work hours on the job and don’t want the administrative headaches associated with processing wage garnishments. These employers would rather hire someone who is debt-free, instead of someone who has debt problems.

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Published on: May 14, 2011

Dissecting your Credit Score

By Christie D. Arkovich, P.A.

Fico 2.bmp Fico 1.bmp A lot of our clients in the Tampa Bay area have questions regarding how exactly their credit score will be impacted by a short sale, foreclosure, or a bankruptcy.

A recent article by FICO, Banking Analytics Blog, researched these very questions.

The FICO study focused on three sample consumers with credit scores of 680, 720 and 780. As shown by the charts above, the answer depends a lot on what the existing credit score is. The higher your score is, the longer it appears to fully recover. However, after 18 months of otherwise good credit, this impact may be minimized.

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Published on: May 8, 2011

Door #1 or #2: Taking the Wildcard Exemption when Retaining your Home May Come with Surprises

By Christie D. Arkovich, P.A.

house on tide.jpg In Florida, our Tampa Bay area homeowners are faced with a dilemma whether to claim the homestead exemption for their underwater homes. Historically, Florida homeowners have been allowed to keep or exempt $1,000 of personal property in a Chapter 7 bankruptcy. This isn’t much, and many homeowners had to pay the bankruptcy trustee to keep anything in excess of $1,000 per debtor. However, in the past few years, the Florida legislature passed Florida Statute 222.25(4) what is referred to as the “wildcard” exemption which allows an additional $4,000 exemption for personal property when the homeowner is not claiming the homestead exemption. Florida judges have determined that the exemptions can be stacked and now homeowners who do not claim the homestead exemption can keep up to $5,000 in personal property.

This year, the Florida Supreme Court in Osbourne v. Dumoulin, No. SC09-751 ruled that a homeowner can claim the wildcard exemption even though they are keeping their home when it has no equity. Some judges were already ruling in this manner. As a result, many attorneys began to claim the $4,000 wildcard exemption and avoided claiming the home as exempt. Trustees were not interested in the home because it had no equity so there was no need to claim the homestead exemption.

Seeing the profit potential, some companies have begun to contact the Chapter 7 trustees in the Tampa Bay area and offering to buy the bankruptcy estate’s interest in the homes where no homestead exemption is claimed. Their goal is for the approximate $2,000 that they pay the trustee, the real estate firm will then put the house up for a short sale where they make a few bucks, and charge the homeowner rent in the meantime. The homeowner gets blindsided when they intended to keep the home all along.

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Published on: March 17, 2011

Florida bankruptcy debtors allowed greater exemption to keep personal property

By Christie D. Arkovich, P.A.

Finally, a win in the Florida Supreme Court for bankruptcy debtors. In February, the Osbourne v. Dumoulin decision puts to rest an issue in Florida where judges disagreed on how much personal property a debtor could keep when filing bankruptcy. Generally a debtor using Florida state exemptions can keep $1,000 in personal property. They can retain additional personal property, but they have to pay to keep anything above the exempt amount. However, if a Florida debtor is not claiming a homestead exemption, they can claim a larger $4,000 wildcard exemption to protect additional personal property such as bank accounts, equity in vehicles etc.

Even our four bankruptcy judges in Tampa, Florida disagreed on how to apply the wildcard exemptions in cases where the home was underwater. After Dumoulin, in cases where the debtors own a home that has negative equity, they can now claim an additional $4,000 wildcard exemption to keep additional personal property. This can be very valuable since Florida’s personal property exemptions are one of the lowest in the country. Most people haven’t minded too much because Florida’s homestead and IRA/401k exemptions are very favorable to debtors. But nowadays, many people have negative home equity and have cashed out or borrowed against their 401ks and don’t receive the benefit of those broad exemptions.

Application of exemptions can be complicated especially in cases where the debtor has recently moved from another state, please consult with an attorney regarding the proper use of exemptions. Arkovich Law

Published on: March 15, 2011

Freezes of Wells Fargo Bank Accounts for Bankruptcy Debtors

By Christie D. Arkovich, P.A.

wells fargo.jpg The Middle District of Florida, Tampa Division, upheld Wells Fargo’s practice of freezing bank accounts of Chapter 7 bankruptcy debtors. In re Young, 439 B.R. 211 (Bankr. M.D. Fla. 2010). In ruling that the administrative freeze was not a violation of the stay, the Court denied sanctions against Wells Fargo.

We are advising our bankruptcy clients to move their bank accounts (checking, savings, CDs etc.) to other banks when filing a Chapter 7 bankruptcy. To our knowledge, Wells Fargo (and Wachovia which was merged into Wells Fargo) is the only bank that has taken this position. This avoids panicked calls from our clients when their bank account is frozen and they learn that it may take 30 days for the trustee to abandon any non-exempt interest in the account.

For the time being, this ruling is only applicable to Chapter 7 cases. The Court in Young unequivocally stated that its holding should only apply to Chapter 7 cases and that it would view an administrative freeze on accounts in a Chapter 11 or 13 as a violation of the automatic stay. The Wells Fargo administrative policy may be limited to accounts of $5,000 or greater, but I wouldn’t trust that they won’t freeze an account with less. The reasoning behind them holding the money for the bankruptcy trustee to decide what to do with it applies when a bank account has less than $1,000 in it due to the low personal property exemptions in the State of Florida.

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Published on: February 28, 2011

Middle District of Florida Scores Second in the Nation for Bankruptcies

By Christie D. Arkovich, P.A.

Florida’s Middle District which covers Tampa, Orlando, Fort Myers and Jacksonville was second only to the Los Angeles district in bankruptcy filings from October 2009 to September 2010. The Florida Middle District recorded 66,861 bankruptcy filings including all chapters.

That translates to approximately one person out of 100 in these two districts declared bankruptcy last year, based upon a 2009 U.S. Census.

The downturn that began in 2007 has led to an increased number of bankruptcies. The decrease in home equity made people feel less wealthy and they are more apt to file bankruptcy when the credit card debt seems overwhelming. No longer is equity available in homes to tap in an effort to pay down unsecured debt such as credit cards. Realizing this, many people have come to the conclusion that bankruptcy is their way out. Also Americans are coming to realize that the social stigma of filing bankruptcy has nearly disappeared.

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