About: Kathleen Michon

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Jointly Owned Homes in Bankruptcy: What Happens?

housedividedA house divided against itself cannot stand.  

— Abraham Lincoln (assassinated 150 years ago yesterday)

ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

My sister and I are joint owners of a home left to us by our parents. I live in the home and pay for the taxes and upkeep. There is no mortgage. My sister recently filed for Chapter 7 bankruptcy.  She and I are barely on speaking terms. 

Here’s the problem. I got a letter from the bankruptcy trustee telling me that if I want to keep the home, I have to buy my sister’s share of the home. If I don’t, the trustee will sell the house. The home is worth $200,000, and I don’t have $100,000 to fork over to the trustee. 

Can the trustee do this?  

Yours truly, 

Jim

Dear Jim,

Most likely the bankruptcy trustee will be able to sell your home if you can’t come up with the money. But once the home is sold, the trustee will turn over half of the proceeds to you.

(I am assuming that your parents did not create a legally binding directive permitting you to remain on the property. If they did, you should immediately get a lawyer to respond to the trustee.)

What Happens to Property in Bankruptcy

Your sister’s Chapter 7 bankruptcy filing automatically created a bankruptcy estate composed of all her assets. A bankruptcy trustee was appointed to administer the assets in her case. Like everyone filing for bankruptcy, she can keep certain property if it is “exempt.” However, homes in which you don’t live are usually not exempt. (Learn more about how Chapter 7 bankruptcy works and why the trustee sells property.)

If an item of property is not exempt, the trustee can sell it and use the proceeds to repay creditors. Even though your sister owns only half of the property, the equity in her half is a nice chunk of money that could go to her creditors.

When Can a Trustee Sell Co-Owned Property?

A trustee can sell a piece of property even if the debtor (your sister) doesn’t own the whole thing. But in order to do so, the trustee must meet the following criteria:

  • It’s not practical to divide up the property. A large tract of land might be subdivided to sell just the debtor’s share, but a single house and lot can’t be sawed in half to do that.
  • Selling the debtor’s undivided interest would bring in less money than selling the entire parcel. In your situation, it is unlikely that anyone else would buy your sister’s half of the property for what it is really worth, because the buyer would still have to deal with you.
  • The benefit to the bankruptcy estate from a sale of the entire property outweighs the detriment that will be faced by the other owners.
  • The property is not used for the production of energy.

In your situation, it’s extremely likely that the trustee will be able to sell the home. But keep in mind, once the trustee does so, he or she will have to give you half of the proceeds from the sale. So, if the sale nets $200,000, you will get $100,000 and the bankruptcy estate will get the other $100,000 (which will then be used to pay your sister’s creditors).

Coming Up With Money for the Home

If you have decent credit and you can afford to make payments on a $100,000 mortgage, consider getting a home loan and using the money to buy your sister’s share from the bankruptcy estate. In that way, you’ll become a 100% owner of the home.

–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. 

Find Leon on Google+

 

Fed Agency Slaps Debt Collector Hired by Prosecutors

comic book noise cartoon symbolThe federal Consumer Financial Protection Bureau (CFPB) recently settled a lawsuit it filed against National Corrective Group (NCG), a debt collection agency that was working under contract for various district attorneys’ offices in California, Maryland, Colorado, Nevada, Illinois, Indiana, Iowa, and Pennsylvania.  The settlement put a stop to the abusive practices NCG was using against people in bad check writing diversion programs.

What??? Why Are District Attorney Offices Hiring Debt Collectors?

In many states, if you are charged with writing a bad check (bouncing a check) the prosecutor can refer you to a diversion program instead of pursuing prosecution.  If you comply with the terms of the program within a certain time period, you won’t be prosecuted. Most diversion programs require the defendant to repay the creditor, pay limited fees, and participate in an education class.

For example, under California law, the diversion program requires that the defendant:

  • repay the creditor
  • pay certain fees (which are limited in amount by law),
  • and participate in a check writing financial management class. Cal. Penal Code §§ 1001.60 to 1001.67.

The law allows prosecutorial offices to contract with private companies to run these diversion programs.

Enter NCG, a company that some state district attorney offices contracted with to run their diversion programs.

Lies, Threats, and Exorbitant Fees

You would think that law enforcement offices would want to do business with companies that follow the law. Unfortunately, that doesn’t seem to be the case.

According to the lawsuit that the CFPB filed, NCG:

  • pretended it was a law enforcement agency
  • threatened people with arrest and possible imprisonment if they didn’t participate in the diversion program, and
  • charged hundreds of dollars of excess fees.

Allegedly, NCG kicked back a small portion of the fees it collected to the district attorneys’ offices.

Letters Sent Using District Attorney Letterhead and Seal

The CFPB also alleged that the various district attorney offices allowed NCG to use their letterhead and sometimes their seal. The CFPB’s suit, however, did say that NCG sent out the letters without getting approval from the district attorney offices.

That’s both good and bad news: It’s good to know that the district attorneys didn’t authorize the threatening and deceptive letters. But why didn’t the offices have a better handle on what their contractors were doing?

The CFPB Slap

In the CFPB settlement, NCG agreed to not use district attorney letterhead or signatures, pretend to be a law enforcement agency, or use deception or threats in their letters. The CFPB will be watching (there’s a compliance piece to the settlement order) – so this is good news for people wanting to take advantage of the bad check writing diversion programs. (You can read the settlement order here.)

NCG will also pay a penalty of $50,000.  Needless to say, that’s not much of a financial disincentive.

 Civil Class Action in the Works

But NCG is not completely off the hook. According to the San Francisco Chronicle, in December 2014, a civil lawsuit was filed in San Francisco against the California arm of the company – CorrectiveSolutions.  The lawsuit seeks to recover millions of dollars that CorrectiveSolutions allegedly mischarged for fees. The plaintiffs’ attorneys are seeking class action status.

Credit Reporting Agencies Agree to Better Consumer Protections

This month, the three nationwide credit reporting agencies (Equifax, Experian, and TransUnion) agreed to significant changes in their credit reporting practices and the way they handle consumer disputes. These voluntary changes, which resulted from a settlement with New York Attorney General Eric Schneiderman, are set forth in what the credit reporting industry is calling The National Consumer Assistance Plan. (Learn what a credit report is and what is contains in Credit Report Basics.)

Here are the highlights of these new policies:

180-Day Waiting Period Before Reporting Medical Debts

In what many consider to be the most significant change in the plan, the credit reporting agencies (CRAs) have agreed to a 180-day waiting period before recording delinquent medical debt on a credit report. As we all know, insurance companies are notoriously slow in determining what will, and will not, be covered and then issuing payment. This waiting period will mean that consumers won’t have negative marks on their credit reports for medical bills that are tied up with the insurance company.

As a corollary to this new policy, the CRAs will also remove notations of delinquent medical debt for those accounts that have subsequently been paid by insurance.

Traffic Tickets or Government Fines Won’t Appear in Credit Reports

Credit reports will no longer contain negative information about traffic tickets or government fines. The CRAs will only record information about debts that arose from a contract or agreement.

More Information When Disputing Inaccurate Information

If you dispute an item on your report and are not happy with the result, the CRAs will now provide you with information about your options and further steps you can take. And if you successfully dispute an error after getting your free annual credit report, you can get another free report within the year. (Learn how to dispute errors on your credit report.)

Enhanced Dispute Resolution System for Identify Theft, Fraud, and Mixed Credit Files

The three nationwide CRAs are devising enhanced dispute resolution procedures for victims of identity theft and fraud, and for those whose credit file was mixed with another’s file.

When Will These Changes Take Effect?

The CRAs will start implementing the new policies over the next several months. Experts anticipate that they will take from three to thirty-nine months to complete (depending on the particular policy).

Can You Keep Horses and Other Pets in Bankruptcy?

2horsesASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I am considering Chapter 7 bankruptcy and am wondering what will happen to my two pet horses if I file? They are not worth much; I probably couldn’t even give them away. But I don’t want to file bankruptcy if I have to give them up.

Alysia 

Dear Alysia,

There are a few issues that arise when you file for Chapter 7 bankruptcy and have horses or other household pets. The first is whether the bankruptcy trustee will sell the horses and use the proceeds to repay your creditors (since your horses aren’t worth much, this is unlikely). The second is whether the bankruptcy trustee will dismiss your Chapter 7 bankruptcy because your pet care expenses are unreasonable.

Your Horses Are Property of the Bankruptcy Estate

When you file for Chapter 7 bankruptcy, all of your assets become property of the bankruptcy estate. This includes all of your personal property, and animals are personal property. However, state and federal law allow you keep certain types of property – called exempt property. The idea is that you shouldn’t be left without basic items for living and working. (Learn how bankruptcy exemptions help you keep property.)

Are Your Pets Exempt Property?

A few states have laws that exempt pets. If you live in one of those states, you may be able to use the exemption to keep your horses.

Most states don’t have a specific exemption for pets, but many have a wildcard exemption. A wildcard exemption allows you to exempt a certain dollar value of any type of personal property.  Because your horses aren’t worth much, you may be able to use a wildcard exemption to keep them. (To find out if your state has a pet exemption or wildcard exemption, see Bankruptcy Information for Your State.)

Will the Trustee Abandon Your Horses?

Even if you cannot exempt your horses, the trustee may decide to abandon (not take and sell) them. A trustee will do this if your horses have little value, or because it would be too hard for the trustee to sell them.  (Learn more about when a trustee will abandon property in bankruptcy.) In your situation, since your horses aren’t worth much, this is likely to happen.

Keep in mind though, if your horses are valuable (when I say value, I mean market value), the bankruptcy trustee will explore the possibility of selling them.

Are Your Pet Care Expenses Unreasonable? 

When you file for bankruptcy, you fill out a number of forms that contain information about your income, expenses, debts, assets, and recent financial transactions. If the bankruptcy trustee feels that your living expenses (listed on a form called Schedule J) are unreasonable high, he or she may ask the court to dismiss your bankruptcy case. Spending money to care for horses could be an issue if the court thinks that money should go to your creditors.

Here’s what the court is likely to look at:

The cost of maintaining your horses.  The higher the cost, the more likely the court will balk. For example, if you spend $100 per month on pet care, that is unlikely to be questioned. On the other hand, if you regularly spend $1,000 per month caring for your horses, the court is more likely to toss your case.

The amount of your other expenses.  The court is likely to look at your other living expenses as well. If you spend far below average on other things so that you can pay for your horses, that fact will cut in your favor. For example, things like driving a very old, inexpensive car, scrimping on food and utilities, and foregoing any kind of middle class luxury could persuade a trustee to let your case to proceed.

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+

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.

Find Leon on Google+

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