Author Archives: Jeena Cho

Can Bankruptcy Discharge My Student Loans?

The Student Loan Debt Crisis

It seems that no matter what angle we view student loans from these days, the picture never looks pretty. This blog from Consumer Finance Protection Bureau documents how there are 27.8 million student loan borrowers making use of the direct federal lending program totaling more than $1 trillion in debt. Only 10.8 million of these borrowers are currently repaying these loans. That is, only 38.8% of the borrowers are in repayment. That does not mean the other 61.2% are in default; actually 2.1 million people or 7.6% of borrowers are in default.

Other borrowers are in some sort of suspense mode: 5 million borrowers (18%) are in deferment or forbearance. 7.9 million borrowers (28.4%) are still in school. And 1.9 million (7.2%) are in a six month grace period given to borrowers after graduation.

I see a lot of clients that owe $50,000, $100,000 and sometimes in excess of $250,000 that are hoping to discharge these loans in bankruptcy. I hardly blame them for seeking shelter given the powers granted to the government as the lender of student loans. First, there is no statute of limitations, meaning the loan stays with you for life. Second, the Direct Loan servicing program can intercept your tax refund if you default. Third, the Direct Loan program can garnish your wages without a court order if you default on your student loans.

Bankruptcy offers limited solutions. It is possible to buy time or even discharge student loans in bankruptcy. But an actual discharge of these loans is far different from something like a credit card. In Chapter 7 bankruptcy, a typical credit card debt is listed in the bankruptcy filing and discharged by operation of law if the person filing bankruptcy complies with all requirements such as attending the meeting of creditor and taking the post filing debtor education course.

Student loans are different. The person filing bankruptcy must file an adversary proceeding against the student loan lender. This is essentially a lawsuit which can take a lot of time and expense. If student loan borrowers could afford to pay an attorney to litigate a student loan debt all the way to trial in bankruptcy court, chances are the client could pay the student loan in the first place. And the courts have set standard for discharge so high, it adds another incentive to avoid filing such an action. Discharging student loans through this route is therefore often just an illusion.

So federal student loans are standing at over $1 trillion. Add private loans, we reach $1.2 trillion. Anyone else sense a bubble? As the great economist — okay, I really mean Barry Gibb from the Bee Gees — stated: “[A]ll bubbles have a way of bursting or being deflated in the end.” Congress needs to reform the loan forgiveness for federal loans, and/or revise the bankruptcy code to make student loans dischargeable to some extent.

I’d rather manage a slowly deflating balloon than go for the ride we took in 2008 and 2009 with a full burst.

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What Happens If I Stop Paying on My Second Mortgage?

second mortgageTwo questions clients commonly ask me are:

 

If you are delinquent on your first mortgage, soon or later, your mortgage company will initiate a foreclosure process. How long you can live in your home after you stop paying your mortgage varies greatly from lender to lender, your geographical location and other factors. I’ve seen clients not receive the Notice of Sale (this is the notice letting you know the location, time and date when your home will be sold) for years in certain cases. I suspect that as housing prices recover, especially in the San Francisco Bay Area, banks won’t wait around as long to foreclose.

What happens if I stop paying on the second mortgage? Second Mortgage Can Initiate Foreclosure!

Some clients mistakenly believe that only the first mortgage can foreclose on the property. Not so! Both the first and the second mortgage can foreclose if you miss payments. However, even if the second mortgage forecloses, it will only get paid after the first mortgage.

Let’s take an example:
You have two mortgages on your home with the following balances:
1st: $700,000
2nd: $100,000

Now, let’s suppose the second initiates the foreclosure and your home sells at auction for $600,000. The second lender will get nothing because the first mortgage is first in line to get paid. Since the sale price wasn’t sufficient to cover the first mortgage, the second gets $0. For this reason, it is less likely that the second mortgage will foreclose if your home is underwater.

However, let’s suppose your home is worth $900,000. In this case, the second is a lot more likely to foreclose since it would recover all of its money.

Can Chapter 13 Get Rid of Second Mortgage?

Chapter 13 is a viable way to save a home in many foreclosure situations. In Chapter 13, you propose a Chapter 13 plan where you repay your mortgage arrearages (missed payments) over up to a five year period. For example, if you owe $30,000 in back mortgage payments, you would propose to repay $500 per month ($30,000/60 months) in order to get caught up on your mortgage.

Chapter 13 may also allow you to get rid of your second mortgage once and for all through a process known as “lien strip.” Chapter 13 lien strip is only allowed in the following situation:
Your second mortgage is unsecured. In general, this means that the fair market value of your home is worth less than the first mortgage balance. For example, your home is worth $500,000 and your first mortgage balance is $650,000. This would make your second mortgage “unsecured” no matter how much your second mortgage loan amount because the first mortgage absorbs all value and leaves nothing for the second.

In this situation, we can file a Motion to “strip” your second mortgage. In order to do the lien strip, you must a) file Chapter 13 (not a Chapter 7) and b) make all of your Chapter 13 plan payments. In general, a Chapter 13 plan will last for 3 or 5 years.

As the housing prices continue to rise in San Francisco Bay Area, it will certainly become harder to lien strip since more second mortgages will be secured. In order to strip the second mortgage, the entire second mortgage balance must be unsecured. So, if you owe $600,000 on your first mortgage and your home is worth $600,001, you’re out of luck.

Of course, valuing your home to the exact dollar is difficult, especially in this market but that’s a topic for another post.
Image Credit: 401(K)2012

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Can I Keep My House in Chapter 7?

Keep My House in Chapter 7

Keep My House in Chapter 7? | JC Law Group PC

Can I Keep My House in Chapter 7?

Frequently, I get calls from clients who has a “quick question” - Can I keep my house in Chapter 7? What I find to be curious is that for most folks, their home is their most significant asset. It’s where you live, sleep at night, your children grow up, yet, they want to resolve whether they can keep the house in Chapter 7 over a 2 minute telephone call.

Will I Lose My Home in Chapter 7? Short Question - Long Answer

In bankruptcy, you are entitled to keep certain amount of assets known as “exemptions.” Any property that is not exempted is subject to liquidation in Chapter 7. Liquidation means that the trustee can take unexempt property, sell it to pay your creditors.

You may have heard that you can keep one house in bankruptcy. Not true! Each state has its own exemptions and in California, you are entitled to keep the following amount of equity.

$75,000 for single person
$100,000 for family unit
$175,000 for senior, disabled or over 55 years old with limited income.

It’s important to remember that these amounts are equity in your home. So, if your home is worth $700,000 and you have a mortgage of $650,000, there is ostensibly $50,000 in equity. However, costs associated with the sale such realtor commissions and capital gains can deplete all or part of the equity.

The housing market is picking up in the Bay Area, and because of the high value of most Bay Area homes, the equity exemption doesn’t always go very far.

How Does the Trustee Value My House?

I always cringe whenever a client tells me that their home is worth $x based on zillow.com. Don’t get me wrong, zillow.com is fine for an estimate but incorrectly valuing your home can lead to the trustee selling your house! So, it’s important to get a recent full appraisal for your home from a reputable appraiser who is familiar with your area.

Even if your appraiser values your home at a certain dollar amount, the trustee is not bound by that number. The trustee will frequently send out his or her own real estate agent to your house to value it.

How Does the Trustee Decide if There’s Excess Equity?

The important thing to know is that the trustee can list your home for sale and let the market dictate the value.

Let’s take an example:

Suppose your appraiser says your home is worth $900,000. You have $800,000 in mortgage, leaving $100,000 in equity, which you protect using your exemption.

However, the trustee’s real estate agent thinks he can sell your home for $1,100,000. The trustee can simply list your home for sale and see what the going rate is! He can market the house, sit on it for 6 months, wait for the right buyer and sell it. If the trustee does sell your home, you would be entitled to the first $100,000 (the exemption amount), the mortgage lender gets its $800,000, and the realtor and trustee get their expenses/commission. Anything left over goes to the unsecured creditors.

Ways to Protect Your Home in Bankruptcy

There are several things you can do to protect your home through bankruptcy.

1. Only file Chapter 7 if your home is well under exemption amount. Don’t file for Chapter 7 if [mortgage + exemption] is too close to the fair market value. Home values are rising so quickly that it’s not unusual for the home to appreciate significantly over a short period of time.

2. File Chapter 13. If the numbers are close or if there’s any concern about the trustee selling the home, file Chapter 13. In Chapter 13, instead of the trustee liquidating (selling) your unexempt assets, you repay that amount over 60 months. So, for example, if there’s $30,000 of unexempt equity, you would repay $500 per month for 60 months ($500 x 60 = $30,000). *
*For the purposes of this post, I am totally oversimplifying this but that’s the general idea.

Final Thoughts

Unfortunately, in the past 6 months or so, I’ve been getting calls from panicked debtors who filed for Chapter 7 without realizing that they may lose the home in bankruptcy! Some were represented by inexperienced counsel, others were pro per. It’s always easier to plan for ways to protect the home before filing for bankruptcy. Imagine Chapter 7 like a door that you walk through. The door closes and locks behind you. There’s no un-do or reset button in Chapter 7.

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Austerity Measures in Bankruptcy | San Francisco Bankruptcy Attorney

San Francisco Bankruptcy Attorney

By: Jeena Cho, San Francisco Bankruptcy Attorney

If you’ve been watching the news, you probably saw stories about Greece and its austerity measures. Austerity describes government policies to reduce budget deficits. Oftentimes, austerity measures are necessary in personal bankruptcy as well. We are creatures of habits, so most changes are painful. Budget cuts are a particularly painful type of change.

When I meet with a potential bankruptcy client, a common question I get is “do I have to give up _________.” This can be anything from bad habits like smoking to non-essential spendings like vacations. The answer to whether you can keep any single line item on your budget depends on several factors.

Can You Afford It?

The first obvious rule is that any budget item you want to keep should be affordable. This applies to homes, cars, utilities such as phone, cable and internet, food, transportation, etc. Frequently, people subsidize their income with credit. Without credit, you may find yourself coming up short each month. If this is the case, it’s time to take a hard look at your budget and ask yourself “can I afford this?”

Another helpful analysis may be to ask yourself “is this something I need or something I want?”

Reasonable and Necessary

The basic rule in bankruptcy is that all of your expenses must be “reasonable and necessary.” This is a case-by-case analysis, taking into consideration the client’s individual circumstances.

For example, a $600 per month payment for a BMW may be “reasonable and necessary” for a real estate agent where it’s important to portray a certain image to his or her clients. However, if you’re earning $40,000 or there’s no justification for why you need a BMW, this would not be considered “reasonable and necessary.”

Similarly, if you’re a busy working professional with young children, it may be necessary to pay for full-time child care. Not so much if you’re not working and can care for the kids yourself.

Is it fair?

Bankruptcy is premised on an idea that honest but unfortunate debtors should be afforded an opportunity to get a “fresh start.” Tied to this idea is that you should be required to pay back your fair share of the debt if you can afford it. This doesn’t mean that you’ll be required to eat ramen noodle for five years to repay your creditors. It does mean you probably won’t be able to dine out at every meal.

The information contained in this post is informational only and not substitute for legal advice. Please consult a San Francisco Bankruptcy Attorney about your circumstances.

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Discharging Tax Debt in Chapter 7

Discharging Tax Debt in Chapter 7

By: Jeena Cho, San Francisco Bankruptcy Attorney

This time of year, I get a lot of calls from panicked taxpayers. Despite common myth that taxes cannot discharged in bankruptcy, oftentimes it can be discharged.

Discharging Tax Debt in Chapter 7

In general, income tax debts, both Federal and State can be discharged in Chapter 7 if you meet the following criteria.

1. It has been more than 3 years since the return was due;
2. The return was timely filed or it has been at least 2 years since filing;
3. There was no fraud or attempt to evade taxes; and
4. No taxes were assessed within 240 days.

Even though the rule may sound simple, it’s not. There are many exceptions to the rule such as “tolling events.” For example, if you’ve filed for an Offer in Compromise, or requested a due-process hearing, it may toll (or delay) the running of the above dates.

Assuming you meet all the criteria for dischargeability, you can file for Chapter 7 and discharge the back taxes in full.

Steps for Discharging Tax Debt in Chapter 7

1. Order tax transcript
2. Determine dischargeability of tax debt
3. Gather information related to your income (paystubs, P&L, etc)
4. Review assets to determine exemption
5. Gather information on any other debts (credit card, car loan, mortgage, etc)
6. Complete credit counseling
7. Prepare Chapter 7 bankruptcy petition and sign
8. File Chapter 7 petition with bankruptcy court
9. Attend your 341 hearing (approximately 30 - 45 days after filing)
10. Complete another class - debtor education
11. Receive your discharge after 60 days

Chapter 7 vs. Offer in Compromise

- Chapter 7 takes about 3 - 4 months to complete from date of filing vs. Offer in Compromise that can take years.

- Unlike an Offer in Compromise where the IRS has the discretion to reject your offer, Chapter 7 is automatic. The IRS doesn’t get to decide if it wants to accept or reject your offer.

From this perspective, Chapter 7 is often preferred over an Offer in Compromise because it’s more straightforward and in general, more core cost effective.

If you live in San Francisco Bay Area and are facing overwhelming tax debt, bankruptcy may be the solution. Please call a San Francisco Bankruptcy Lawyer at (415) 963-4004.

Image credit: 401(K) 2013

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