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Can I Refinance a Mortgage That Was Discharged in Bankruptcy?

Leon Bayer PhotoASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I filed bankruptcy in 2009. One of the debts discharged in the bankruptcy was a mortgage with Wells Fargo. Upon the advice of my lawyer, I did not reaffirm the mortgage in the bankruptcy. I kept my house, and I have stayed current on my mortgage.

I just asked Wells Fargo to refinance my mortgage at a lower rate. It told me that it cannot refinance the mortgage because I did not affirm the loan in the bankruptcy. It also told me that no bank will refinance the loan, for the same reason.

Should my lawyer have advised me to reaffirm the loan? Is there anything I can do? 

Shirley

 

Dear Shirley,

What Wells Fargo told you is partially right, and partially wrong. If the only issue is that you did not reaffirm the home loan in your bankruptcy, you will be able to refinance your loan with a different lender. Your lawyer was not remiss in advising you not to try to reaffirm the mortgage.

What Is Reaffirmation in Bankruptcy?

Most types of debts are wiped out in Chapter 7 bankruptcy. If you want to keep a particular debt, however, you can reaffirm it. Essentially you sign an agreement with the lender that waives the discharge of the debt. (Learn more about how reaffirmation works in bankruptcy.)

The effect of reaffirming a mortgage is that if you later default on the loan and the lender forecloses, you will be liable for a deficiency (the difference between what you owe and the value of your home). If you don’t reaffirm your mortgage in bankruptcy and later default, the lender cannot go after you for a deficiency. (Learn why reaffirming a mortgage is almost always a bad idea.)

Refinancing a Discharged Loan

If a debt is discharged in bankruptcy, the lender is prohibited from trying to  collect on that debt. The lender cannot sue you, call you, or send you a bill or mortgage statement.

When you refinance a discharged mortgage loan with the same lender who currently holds the mortgage, the proceeds of the refinance go back to that lender to repay the loan balance. This violates the bankruptcy discharge and that’s why Wells Fargo won’t refinance your mortgage. However, this  should not prevent other lenders from refinancing your mortgage.

It’s unfortunate that Wells Fargo was not able to explain the law correctly, or clearly.

Should You Have Reaffirmed Your Mortgage?

But should your lawyer have recommended or tried to get your mortgage reaffirmed? Most likely not.

In bankruptcy, a reaffirmation agreement must be approved by either

  • the bankruptcy judge, or
  • your bankruptcy lawyer.

Bankruptcy court approval. Most bankruptcy judges will not approve mortgage reaffirmations, reasoning that a debtor can keep the house without reaffirming as long as he or she makes timely payments. This makes the reaffirmation an unnecessary liability. Often the only reason in favor of reaffirming is to reestablish a good payment history. (Without a reaffirmation agreement, your future payments probably will not appear on your credit report.) Most bankruptcy judges feel that building future credit is not a sufficient reason to burden a debtor with mortgage liability.

Lawyer approval. If the judge won’t sign off on the reaffirmation, then it won’t be valid unless your lawyer signs a legal declaration stating that the reaffirmed debt will not impose an undue hardship on you or your dependents. Lawyers are very hesitant to sign such a document because they don’t know what their own responsibility will be if you default. Lawyers also reason that if judges won’t sign these agreements, then they shouldn’t either.

The end result: Mortgages are almost never reaffirmed in bankruptcy.

-Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

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10th Circuit Rules: No Tax Discharge in Bankruptcy If You File a Late Return

The 10th Circuit Court of Appeals recently ruled that if a bankruptcy debtor files a “late” income tax return, the underlying income tax debt cannot be discharged in Chapter 7 bankruptcy even if the debtor meets the other criteria for discharging tax debt in bankruptcy.

The Criteria for Discharging Income Taxes in Bankruptcy

Although many income tax debts are not dischargeable in bankruptcy, you can discharge a tax debt if it meets the following criteria:

  • The tax debt is for federal or state income taxes.
  • The tax return was due at least three years ago (this includes all valid extensions).
  • You filed the return at least two years ago.(This is where the “late filed” return issue arises, see below.)
  • The taxes were assessed at least 240 days ago.
  • You did not file a fraudulent frivolous return and you are not evading tax laws.

(To learn more, see Tax Debts in Chapter 7 Bankruptcy.)

The Split in Authority

According to most bankruptcy courts, a late-filed return does not constitute a “return” for purposes of the third prong in the above criteria for discharging tax debt.

What is a late return? Your return is “late” if all of your filing extensions have expired and the IRS has filed a substitute return without your assistance. Your return is not late if the IRS files a substitute return with your assistance under Internal Revenue Code Section 6020(a) — something the IRS may, but is not obligated, to do.

However, some courts have found otherwise:  That a late return is still a “return” for the purposes of the third prong. This means that if you filed a late return at least two years before your bankruptcy and meet the other criteria, you can discharge the underlying tax debt.

The 10th Circuit Decision: In re Mallo

In a recent decision, the 10th Circuit Court of Appeals embraced the first line of authority:  That is, a late filed return does not constitute a “return” for purposes of the bankruptcy dischargeability test. In re Mallo, No. 13-1464, 2014 WL 7360130 (10th Cir. Dec. 29, 2014). The 10th Circuit did say that if the IRS files a return with your assistance under IRC Section 6020(a), then the return does count as a “return” for the third prong of the test.

This case may go to the U.S. Supreme Court; we’ll keep you posted.  In the meantime, if you have income taxes you’d like to discharge in bankruptcy, be sure to speak with a local bankruptcy attorney.

New Protections for New Yorkers Against Debt Collection Abuses

The New York Department of Financial Services recently released new regulations that will better protect New Yorkers from the debt collection industry’s rampant abuses. Once the majority of the regulations go into effect on March 3, 2015 (a few of the regulations will begin in August), New York will have some of the strongest laws in the country when it comes to debt collection.

The Scope of the Problem: Debt Collectors Gone Wild

According to Governor Cuomo, in 2014 New York consumers filed more than 20,000 complaints about debt collection practices. Common complaints include harassment, aggressive collection tactics, and trying to collect the wrong amount or from the wrong person.

Many of those complaints were levelled against debt buyers – companies that buy old debts for pennies on the dollar and then try to collect them. Debt buyers often do little to verify that the debt is in fact owed. As a result, debt buyers often try to collect debts that have already been paid or settled or for which the time period to sue has passed. Debt buyers rarely give consumers any information about the debt – so consumers don’t know when it was allegedly incurred, who the original creditor was, how much the original debt was, and so on. (Learn more about how debt buyers operate.)

The complaints in New York complaints mirror those in the rest of the country; the problem abusive and unfair tactics in debt collection is widespread. The federal Consumer Financial Protection Bureau has taken notice and is attacking the problem in its own way. But it’s particularly heartening to see a state such as New York take the bull by the horns and promulgate such tough regulations. Let’s hope other states follow suit.

The New York Debt Collection Regulations

Here’s a summary of a few of the most important new rules that will soon govern debt collectors in New York.

Required Disclosures

Within five days of first contacting a consumer about a debt, a debt collector or debt buyer must provide the consumer with general information about his or her rights as well as actions the collector cannot take when collecting the debt.

The collector or debt buyer must also give the consumer information about the debt including: the name of the original creditor and an itemized accounting of the debt.

And finally (and this is a big one) if the debt collector knows or has reason to know that that statute of limitations (the time period in which the collector must bring a lawsuit to enforce the debt) may have expired, it must tell the consumer this, along with what this means if the collector sues or the consumer makes a payment anyway.

Substantiation of Debts

If the consumer disputes that he or she owes the debt, the debt collector must provide information on how to request “substantiation” of the debt. Once the consumer requests substantiation, the collector must then provide documents and statements about the debt, such as the judgment, original contract, the charge-off statement, a description of the chain of title from the original creditor to the present owner of the debt, and records of payments and settlements.

The collector must stop collection efforts until it provide substantiation.

Will the debt buyer industry have to change? Because debt buyers often don’t have information about the debts they collect (remember, they often buy them in bulk), it will be interesting to see how they deal with this new regulation. The law makes clear that the collector cannot resume collection until it provides the required documents and statements.  It follows that debt buyers will probably be barred from collecting some of the debts in their portfolios. Does this mean debt buyers start looking more closely at the debts they buy and demand better records and information from the sellers?  Let’s hope so.  Although any such change will probably occur only after a number of debt buyers get slapped by NY prosecutors for violating the regulations.

Written Confirmation of Payment or Settlement

If the collector and consumer agree upon a debt payment schedule, the collector must confirm this in writing. Written confirmation is also required once the consumer pays off the debt.

Email Communications

The debt collector may correspond through email if the consumer consents. This may be a good option for consumers that want to keep track of the debt and the status of collection but don’t want to receive annoying or harassing telephone calls.

Governor Cuomo’s press release characterized this provision as the consumer’s “right” to receive email communications. But the language of the statute says the collector “may” use email, which seems to indicate that the collector can choose not to use email.

Getting More Information

For more detailed information about the regulations, see Nolo’s article New York Laws Regulating Debt Collectors and Debt Buyers. You can also find the full text of the regulations here.

FHA Reduces Mortgage Insurance Premiums for FHA Loans

Scissors_Cutting_MoneyThe Federal Housing Administration recently announced that as of January 26, 2015, it will reduce the annual mortgage insurance premiums for FHA loans by .5%.  On average, the reduction could save an FHA loan borrower about $900 per year. (Learn more about FHA Loans.)

What Are FHA Mortgage Insurance Premiums?

If you get an FHA-insured loan you’ll have to pay mortgage insurance (mortgage insurance protects the lender in the event you default on loan payments). There are two types of mortgage insurance premiums (MIPs) that you must include in your FHA loan agreement:

  • Upfront premium. This is a one-time payment that you make when you first get the loan. It is currently 1.75% of the loan amount. The new FHA rules do not change this premium amount.
  • Annual premiums. Unless your loan-to-value rate is substantial, you’ll also be required to pay annual mortgage insurance premiums. Although called annual premiums, you pay them monthly. The amount you pay is based on the length of your loan, the amount you borrow, and your loan-to-value rate.

Reduction in FHA Annual Mortgage Insurance Premiums

The FHA’s new rules reduce the annual premium by .5% for loans that are greater than 15 years. While the total percentage that you must pay for annual premiums varies based on a number of factors, most people are currently paying 1.35% for loans greater than 15. The new rates for these loans will be .85%. (The MIP rates on loans that last less than 15 years will not change; those loans already have a rate lower than .85%.)

U.S. Department of Housing and Urban Development Secretary Julian Castro predicts the new rates will save the average FHA loan borrower about $900 per year.

When Does the Premium Reduction Go Into Effect?

The new rates will apply to loans made on or after January 26, 2015.

What If You Already Have a Loan With Higher Premiums?

The FHA announced two fixes if you already have a loan with higher premiums or if you are currently in the loan process.

Cancel loans in process. The FHA will allow lenders to cancel loan files already in process so that borrowers can start over and get the lower premium rate.

Refinance. If you have an FHA loan made after May 31, 2009, you can refinance in order to get a new loan with the lower premium. (Loans made prior to May 31, 2009 already have lower rates.)

Can I Extend My Chapter 13 Bankruptcy Plan Beyond Five Years to Pay a Claim?

Leon Bayer PhotoASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I have been in Chapter 13 bankruptcy for five years and just made my last plan payment. But the trustee now says I have to pay an additional $8,000 before I am done with my bankruptcy and can get a discharge. The trustee has filed a motion to dismiss my case. 

I have talked to several bankruptcy lawyers, and they all agree that the trustee is correct – I do in fact have to pay the additional $8,000 into my Chapter 13 plan. 

I don’t have the money right now and my five year plan is over. I’m worried that if the trustee dismisses my case, the unpaid interest on my credit cards will become due. But I don’t have the money to make the $8,000 payment. 

Can I extend my case beyond the five years in order to spread this payment out over time?  I have a hearing next month on the trustee’s motion to dismiss. 

Sincerely,

Grace 

Dear Grace,

Unfortunately you are not allowed to extend your Chapter 13 payment plan beyond five years (60 months). (Learn more about the Chapter 13 bankruptcy plan and how long it can last.) If the trustee dismisses your case, you’ll owe the $8,000 plus interest on all the debt you paid through your plan over the past five years. This could be a lot of money.

Another Way Around the Five Year Plan Limit

But you might be able to get extra time to pay a different way. Hire a lawyer and have that lawyer file an opposition to the trustee’s motion to dismiss.

In the opposition, explain what happened, tell the court that you need six more months to pay off the $8,000, and ask the court to continue the hearing on this matter, giving you time to finish the job. After filing the motion, your lawyer should ask the Chapter 13 trustee if he or she will agree to continue the hearing. I think any decent trustee will agree, probably giving you a series of continuances over the next six months so you can pay as promised.

Why This Might Work

While you can’t officially modify your plan to extend it to 66 months, there is nothing in the law preventing the trustee from accepting your voluntary payments, even after your plan is over.

If the trustee will not agree, then make your argument to the judge. I think there is a good chance the judge will agree to the proposal if you have had a good Chapter 13 payment record up to now.

Good luck.

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+

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