Dubiln Packard

Bankruptcy as an Option

Find out if bankruptcy is an option for you.

Thousands of people have been through it.
It's just another form of financial transaction designed to give people a second chance for a fresh start. Don't let financial problems haunt you forever.

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When Is A Chapter 7 Bankruptcy Useful?

Chapter 7 bankruptcy new jersey foreclosure lawyerThere are 3 scenarios when a chapter 7 bankruptcy can be a great tool:

1. You mean I can still save my home, EVEN if I don’t qualify for a loan modification or a chapter 13 bankruptcy??

It is still possible to save your home from foreclosure even if you don’t qualify for a loan modification or a chapter 13 bankruptcy. It is possible that consumer debts were holding you back from qualifying for these strategies, but a chapter 7 bankruptcy can solve that problem.

A chapter 7 bankruptcy can eliminate burdensome debts, like credit card debts, medical debts, motor vehicle surcharges, loans, certain tax debts and personal loan debts.

Once your debts are wiped out, you can then apply for a loan modification or file for a chapter 13 bankruptcy, with much better odds of being approved. Using a chapter 7 to make yourself qualify for a chapter 13 bankruptcy is referred to as a “chapter 20 bankruptcy” and can be a useful tool if you want to save your home from foreclosure.

To find out more about whether or not a chapter 7 bankruptcy could be right for you, and whether or not you will qualify, read our post: About Chapter 7 Bankruptcy.

 

2. I don’t want to save my home, but I want to buy time, eliminate debts, live for free, avoid tax liabilities and rebuild my credit (Yes, it’s really possible!!!)

If it’s still early on in the foreclosure process and there is no impending sheriff sale, you may have already decided that you don’t want to save your home for a number of reasons; maybe it’s just not feasible to get a loan modification or enter into a chapter 13 bankruptcy, maybe you don’t want to be locked into your home for a number of years and it makes more sense to move out, whatever the reason, there are still benefits to a chapter 7 bankruptcy.

If you have racked up a large amount of debt over the years, a chapter 7 bankruptcy can eliminate these debts, while also buying you time in your home. Filing for a chapter 7 bankruptcy can buy you months in your home that you otherwise wouldn’t have had.

During the time that you are living in your home for free, you can also be saving money that would otherwise be spent on your mortgage or rent.

Also, during your prolonged stay in your home while living for free, you can rebuild your credit before you must move out. This can help you qualify again to buy another home in the future or secure an apartment to rent.

It can also help you avoid huge tax liabilities; if you allow your home to be sold at a sheriff sale, the difference in the amount of what the house is sold for and what you owe on the home is treated by the IRS as taxable income. If you don’t file for a chapter 7 bankruptcy prior to the sheriff sale, you could face owing the IRS thousands of dollars in taxes on that “income” that you never saw a dime of.

Moreover, if your financial situation changes for the better, and you change your mind and decide that you want to save your home, you can still apply for a loan modification, or chapter 13 bankruptcy, even after filing for a chapter 7 bankruptcy.

 

3. My sheriff sale is tomorrow but I’m not prepared and still need more time…

If your sheriff sale is scheduled, a chapter 7 bankruptcy can still help you eliminate debts and buy you time you otherwise wouldn’t have had in your home. Once you get your adjournment (postponement) of your sheriff sale, giving you 30 more days,  filing for a chapter 7 bankruptcy next can buy you an additional 90 days in your home. This can be highly valuable if you are still ironing out details of your move. Also, like in the previous scenario, it can assist you in avoiding tax liabilities.

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I’m Beginning to Fall Behind On My Mortgage Payments, What Should I Do?

Fall behind on my mortgage payments new jersey lawyer foreclosureMany people struggle to make their mortgage payments, you are not alone. If you’re saying to yourself “I’m beginning to fall behind on my mortgage payments, what should I do now?” Here are some quick and powerful tips that will help you:

 

  •  To answer the question “I’m beginning to fall behind on my mortgage payments, what should I do now?,” you should begin by calling your loan servicer to see what advice they have if you are just beginning to struggle with making your mortgage payments. Your loan servicer is the company responsible for mortgage payment collection. The number to reach them is located directly on your mortgage bill.

    • Your lender will allow you to miss 3 mortgage payments before declaring your loan in default, and then they won’t accept any more mortgage payments.

  • Practice good bookkeeping, this will be important in any solution you may employ down the road if you are faced with needing to apply for a loan modification or file for bankruptcy.

    • It is especially important to have good record-keeping skills if you are self-employed, because it is harder to be approved for a loan modification if you are self-employed, particularly if your finances are not in order or easy for the bank to understand.

  • Keep all of your documents related to your home in the same place, this will make it much easier if you need to call a foreclosure lawyer in the future.

    • The lawyer will need information from you, including home value, mortgage payment, the number of missed mortgage payments, interest rate, expenses, et cetera, so it is helpful if it is all in one place and easy to find.

  • Try your best to keep up with mortgage payments, but don’t be unreasonable. Do not, I repeat, do NOT, begin using your retirement savings or 401K to make your mortgage payments or to pay household bills. This money is nearly impossible to ever replace, and the temporary relief that it provides in paying your bills is not worth the strife that depleting it causes down the road. Further, if you end up filing a bankruptcy to save your home, your retirement money is protected.

  • Research all of your options for saving your home and decide on a solution that works best for your specific situation. Don’t get yourself into a solution that is unrealistic. Usually the best solution for those who have started falling behind on mortgage payments is obtaining a loan modification.

  • Be sure that you will be able to afford the option you settle on. No matter how hard it may be, sometimes moving is the best option if you cannot afford a home-saving strategy, because entering into one that you cannot pay for will only cause more trouble.

 

One of the most important things you can do when you start to struggle making mortgage payments is to learn as much as you can about all of the options that are available. This website is designed to be a great resource for you to do just that.

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Can I Apply For A Loan Modification After A Bankruptcy?

Apply for loan modification after bankruptcy Have You Filed Bankruptcy, And Are You Wondering, “Can I Apply For A Loan Modification After A Bankruptcy?”

The answer is yes. You can still apply for a loan modification after a bankruptcy. Sometimes using a bankruptcy and loan modification in combination with one another can achieve the most desirable outcome in helping you save your home from foreclosure. This is especially true if you could not get approved for a loan modification before filing for bankruptcy. It is likely that trying to get a loan modification was your first course of action, but for whatever reason, your application was denied. Then you filed for bankruptcy. The wonderful thing about bankruptcy is that once you file, you can then (re)apply for a loan modification with better chances of being approved for one.

Why Should I Apply For A Loan Modification If I Already Filed For Bankruptcy?

A bankruptcy opens up the possibility of getting a loan modification if you couldn’t obtain one the first time around. More importantly, a loan modification can adjust the terms and payments of your bankruptcy and make it more reasonable.

If you want to learn about how to get a loan modification, read our post: How To Get A Loan Modification.

Or, if you are interested in finding out how a bankruptcy works to save your home, read our post: How Does Bankruptcy Help Save My Home In Foreclosure In New Jersey?

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Don’t Use Your 401(k) or IRA to pay bills!!

don't use 401(k) to pay billsYou may think your loss or reduction of income is only temporary – and hopefully you are right.  But there are better ways to handle bills than to use your 401(k) or IRA.  Don’t do it.

 

This is really a lesson in waiting too long for help.

So many people over the last several years, mostly people in their late 40’s or early 50’s, come to me for help with a foreclosure or wanting more information about seeking the help of bankruptcy after struggling for a couple of years to make ends meet during times of unemployment or underemployment.  In many of those situations, particularly with families where one or both wage earners had decent jobs and had accumulated a nice amount of retirement savings, using a 401(k) or IRA to pay bills can be extremely painful.

I Had A Great Job and Have Years Of Experience.  I’ll Find Something Just Like I Had Before. In today’s world of employment, the skills necessary to compete have changed drastically and seemingly overnight.  Many people in their late 40’s and 50’s, although they have tons of experience in their careers and have been paid well for it, find they just are not what employers today are looking for.  But, it takes sending hundreds of resumes and going on some interviews to find this out.  In the meantime, because you have been trained to do the right thing, you may make some bad choices in trying to pay bills during this period of time.

I Want To Do The Right Thing.  The right thing means taking care of yourself and your family now and in the future.  You worked hard to save for retirement and if you are in your 40’s or 50’s, it is going to be next to impossible to replace the savings you had if you use it to pay bills that can be handled a better way.  Bills are coming due and you want to make payments.  In fact, many people will put everyday expenses on high interest credit cards, even open one or two new accounts to tap into even more credit.  Others will use savings to pay the mortgage and then to pay the credit card bills.  And, some, after savings are depleted will raid their retirement savings to make ends meet.

Why Not To Use Your 401(k) or IRA to pay bills!!

Retirement savings is protected in bankruptcy.  Yes, I know, you are not thinking about bankruptcy right now and never want to, but bankruptcy is one of the most-used tools for people to recover from a loss of income and save a home from foreclosure.

Focus on the Secured Debts Not Unsecured Debts.  You should distinguish between secured and unsecured debts.  Secured debts debts whose payments are secured by your assets such as your home.  Unsecured debts mean the creditor has no recourse other than money to be paid.  You should make careful use of this distinction and focus on your secured debts.

Paying Credit Cards is The Wrong Choice.  Credit card debt is unsecured debt and in a bankruptcy, unsecured creditors get paid very little or perhaps nothig.  This means you can better use your now limited resources to save your home from foreclosure rather than keep your credit cards current and the phone ringing from debt collectors.

Don’t Pay Your Second Mortgage.  I hear it all the time from a family in foreclosure on their first mortgage, “I have been paying my second mortgage.”  It very well may be the case that your second mortgage can be reduced or eliminated while still saving your home from foreclosure.  In a Chapter 13 bankruptcy, it may be possible to “strip” a second mortgage turning it into an unsecured debt and then paying little or nothing toward it.  Sometimes, this is the difference between getting a loan modification and not getting one.

There are severe penalties to taking early withdrawals from your 401(k) and IRA.

To make matters worse, if you do choose to use your 401(k) or IRA to pay bills, there are severe penalties to pay when you do your taxes that year.  So, not only are you paying bills you may not need to, and you are losing the savings you worked so hard for in the first place, now you have to pay a big penalty when you take an early distribution from your 401(k) or IRA. And, don’t forget you now have to pay income tax in the funds you are withdrawing since it was put into the account ta-free at that time.

Know Your Rights Before You Use Your 401(k) and IRA to pay bills.

Do the best you can do with the resources you have but do not use your retirement savings.  The government protects your retirement savings because it recognizes the difficulty you are going to have in the future if you deplete it now.  As you can see here, there are a number of things you may not have known about your retirement savings. Given the protections available to you, the heavy IRS penalties and tax consequences, and perhaps most importantly, your ability to replace the retirement savings later, using your 401(k) or IRA to pay bills is a very wrong thing to do.

 

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Do I Have To Pay Tax After A Short Sale?

do i have to pay tax after a short saleGreat! You did a short sale and now your mortgage lender sent you a 1099C to pay income tax on the amount of the loan that was not paid at the sale.  What? Do you have to pay tax after a short sale?

Answer: maybe.

The IRS treats forgiven or cancelled debts as income.  Under IRS rules, the lender is required to notify the IRS and to send you a form 1099C which may obligate you the pay income tax on the forgiven amount when you prepare your taxes for the year of the short sale.  Let’s say you had a home mortgage loan where  you owed $350,000 and the lender approved a short sale for $250,000.  In approving the sale, the lender is also agreeing to take $250,000 (less expenses) as full payment on the loan.  That means $100,000 of the loan is forgiven.  The IRS looks at this forgiveness as income and wants you to pay tax on it.

There Are Exceptions That May Apply To You.

Waiver By Congress. Up until December 2014, Congress provided a waiver of the tax given the high number of home owners that were losing their homes after the financial crisis of 2008 but that law hasn’t been renewed at this point.  You may want to check to see if Congress has renewed the waiver but at this point, it does not appear likely.

IRS Rules.  You may need the help of your tax preparer or accountant but here’s what the IRS has to say about forgiven or cancelled debts.  In IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, the IRS explains the federal tax treatment of canceled debts in certain situations. In short, if you are Insolvent in the eyes of the IRS, you do not have to pay the tax.

Insolvency. If you are insolvent according to the IRS just before the debt was cancelled, this exception may apply to you.

In Publication 4681, the IRS provides: Do not include a canceled debt in income to the extent that you were insolvent immediately before the cancellation. You were insolvent immediately before the cancellation to the extent that the total of all of your liabilities was more than the fair market value (FMV) of all of your assets immediately before the cancellation. For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account). Liabilities include: The entire amount of recourse debts, the amount of nonrecourse debt that is not in excess of the FMV of the property that is security for the debt, and, the amount of nonrecourse debt in excess of the FMV of the property subject to the nonrecourse debt to the extent nonrecourse debt in excess of the FMV of the property subject to the debt is forgiven.

A special note if you have retirement savings: 401(k)s and IRAs count toward your assets.  Please note that in the above guideline, the IRS does not exclude retirement savings from your assets.  This may prevent some people from qualifying for this exception. If you do have retirement savings, it is important to know that that retirement savings is exempt from assets in bankruptcy so in this case, bankruptcy may be a better option for you in that it saves you the tax and preserves your retirement savings.

Bankruptcy.  If you file for bankruptcy, whether chapter 7 or chapter 13, the bankruptcy exception may apply to you.

In Publication 4681, the IRS provides: Debt canceled in a title 11 bankruptcy case is not included in your income. A title 11 bank- ruptcy case is a case under title 11 of the United States Code (including all chapters in title 11 such as chapters 7, 11, and 13), but only if the debtor is under the jurisdiction of the court and the cancellation of the debt is granted by the court or occurs as a result of a plan approved by the court.

There may be other exceptions that apply to you but these are the two that apply to most people.

This IRS rule also applies in the rare event the amount you owe is reduced as part of a loan modification or if the lender simply cancels your loan as sometimes happens with second mortgage loans when the lender realizes the value of the homes has dropped significantly.  You can read more about that here.