Category Archives: Bankruptcy

Can the IRS and Student Loan Creditors Collect From Me When I’m on SSI?

Erasing DebtASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon,

I am writing for a friend who doesn’t speak English.  He is worried about creditors levying his bank account to collect two old debts (a student loan and a tax debt). Should he file for bankruptcy? 

Juan is 61 years old and recently started receiving Supplemental Security Income (SSI). He will qualify for Social Security benefits soon. The student loan debt is very old (30 years) and is now $18,000 but was originally around $8,000. He hasn’t paid the loan for a long time and the creditor told him they “can take his Social Security or his SSI.” 

The second debt is old federal income taxes, around $10,000. He has failed to file tax returns for many years (perhaps as many as ten), but he has had little or no income during the same period. He wants to know if the IRS can take some or all of his SSI or later his Social Security for unpaid taxes. 

Thanks in advance for your expertise,  

Manny

Dear Manny,

Based on what you’ve told me, Juan can most likely get rid of his student loan debt because he is totally and permanently disabled. And it is almost certain that he doesn’t have enough income for the IRS to take anything from him for the old tax debt. Bankruptcy won’t be necessary.

Discharging Student Loans Based on Total and Permanent Disability

There are basically two types of student loans – subsidized (often called federal student loans) and unsubsidized (called private student loans). Subsidized loans are made or guaranteed by governmental entities. They subsidize the interest rate so that the loan interest will be less than what private lenders normally charge. Unsubsidized student loans are made by private banks. They usually charge an interest rate that is higher than subsidized loans, but still less than ordinary consumer loans.

I am sure that Juan has a subsidized loan. When he got his student loan 30 years ago, private unsubsidized loans were basically unheard of.

The distinction is important for Juan. Lenders of subsidized loans are subject to federal regulations that allow for the loan balance to be forgiven if the borrower is totally and permanently disabled, and without financial means to pay the loan. Because Juan is 61 years old and receiving SSI, he must have already convinced the Social Security Administration that he has a total, permanent disability, and lack of any other income.

How to Cancel a Student Loan Due to Disability

If Juan’s loan is indeed subsidized, he can apply online here:  www.disabilitydischarge.com.  You can submit your SSI award letter to prove you are disabled if the award says your review is not sooner than five years. Otherwise, you will need to get a letter from your doctor. (To learn more about canceling student loans because of disability, see Nolo’s article Canceling Student Loans: Permanent Disability or Death.)

Getting Rid of Unsubsidized Student Loans

If Juan has an unsubsidized loan, he is out of luck. Private lenders normally will not forgive a loan. However, in this situation he might be able to discharge the loan in bankruptcy. While wiping out a student loan in bankruptcy is difficult, lately more and more courts are discharging loans like Juan’s – very old loans where the debtor is elderly and disabled and has no hope of earning income in the future. Unfortunately, Juan would likely need an attorney to help him do this, and it sounds like he doesn’t have the money to pay what could become very high legal fees to fight with the student loan collectors.

IRS Collection Standards: When the IRS Cannot Take Your Income 

Now let’s deal with Uncle Sam, the good old IRS. According to the website of the IRS Taxpayer Advocate, the IRS can take a person’s Social Security benefits in order to repay tax debts. However, as the advocate’s website also states, the IRS must allow the tax payer to retain enough money to cover modest basic necessities. These living expense allowances are called Collection Financial Standards.

I am certain that Juan’s SSI benefit does not leave him enough to pay for basic necessities pursuant to the Collection Financial Standards. His income won’t even come close to exceeding the amount of money he is legally allowed to keep.

Juan should immediately contact the IRS and ask them to mark his account as “current uncollectable status.” They will verify his income, match it up to the living expense allowances in their collection standards, and see that his income is below the level they are allowed to collect from. It is a process that can be done on the telephone, and they will do the form for him.

Let’s recap. Juan should request forgiveness of his student loan on the grounds of total, permanent disability. He should also contact the IRS and request “current uncollectable status.”

Juan won’t need to file for 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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If I Had a Hammer: Keeping Tools of the Trade After Bankruptcy

ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon,

I filed bankruptcy last year. I work as a mechanic and use my own tools. One of my creditors is a company that sells tools to mechanics on credit. I bought tools from this company and made payments to them for several years, occasionally buying something new from them. 

Because of financial difficulties, I stopped making payments and the company sued me in small claims court. I never went to court because I filed bankruptcy and got a discharge.

Now the tool company is demanding that I pay off my entire balance on the account all at once, or else it will repossess all the tools I bought from them. Can the company do that? I thought my bankruptcy put me in the clear because they never showed up to object. Isn’t there a law saying that a workman’s tools are protected?

Help!

Jose in California

Dear Jose,

I have seen this problem many times. In fact, I’m sure I can correctly guess which tool company you are talking about.

Your bankruptcy did not wipe out the tool company’s right to repossess your tools. However, the company’s decision to sue you in small claims court probably did – so that it cannot now repossess your tools. Read on to learn how this all works.

Bankruptcy Gets Rid of Personal Liability for Debt, But Not the Tool Company’s Security Interest in Your Tools

If you examine your agreement with the tool company, the paperwork will probably say that you gave the tool company a security interest in the tools until they had been paid for. This is just like when you buy a car and get a car loan – you don’t get full title to the car until it is paid for.

A valid security agreement (like a car loan), survives a bankruptcy discharge. While you are no longer personally liable for the tool debt (which means the tool company cannot sue you for reimbursement), the company can repossess the tools if you don’t pay.

There is an exemption that helps to protect your tools of the trade when you file bankruptcy. But that exemption only applies to tools that you already own or that you have equity in.

You Can Keep the Tools That You Have Already Paid Off

Under California law, each payment you make on a retail installment contract should be applied to the oldest thing that you purchased. After the oldest purchase gets paid off, the payments are applied to the next oldest thing in the time line, and so on.

If you made payments for any length of time, it is possible that some of the oldest purchases have been paid for. The tool company has no right to repossess anything that has already been paid for. If say, your earliest purchase was an expensive tool set, maybe it is not fully paid for. But also, it may be partially paid for because all your payments were applied against the price for just that set (after paying interest). If so, you can pay just the remaining balance for that specific purchase and keep that tool set, instead of having to pay off the entire accrued debt that includes subsequent purchases.

The Tool Company May Be Barred From Repossessing Your Tools

However, because the tool company sued you  before your bankruptcy, it cannot now try to repossess your tools. Here’s why.

The California Retail Installment Sales Act says that if you don’t pay, a creditor may repossess the merchandise or sue you for the balance due. The law says a creditor must choose one or the other remedy — we lawyers call this an election of remedies.

When the tool company sued you, it chose to seek a money judgment against you in court. In doing so, it forfeited its right to repossess the tools.

Guess what? It sounds like you can keep the tools without paying them a dime.

I suggest you get a lawyer to write a reply to the tool company or to help you get the company off your back.

-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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The National Mortgage Settlement and Lien Strip Poker

poker chipsASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I am in Chapter 13 bankruptcy with a confirmed plan, and I did a lien strip to remove my second mortgage (it is a second deed of trust with Bank of America). I just got a letter from BofA saying they are forgiving my second mortgage, they will send documents showing the loan is forgiven, and there is more nothing I need to do. My bankruptcy lawyer says that I’m not supposed to get the lien strip until I complete my five year Chapter 13 plan and get a discharge, and that therefore I must finish my Chapter 13 case in order to gain the benefit of the lien strip.  Is the bank writing this off now rather than waiting the five years? 

I just want to get a second opinion because it’s confusing.  

Thanks, 

Molly

Why BofA Forgave Your Loan

Good Golly Miss Molly!

You’ve lucked out. And I get to answer a fun question.

Of course, I have not seen the actual letter you received. However, it sounds exactly like letters many of my own clients have received. If it is, your second mortgage lender has indeed decided to give up now, instead of waiting the five years. Assuming I’m right, I’ll explain why this happened. I’ll also explain where it puts you. (But you should still take all the paperwork to a lawyer who is familiar with this.)

The National Mortgage Settlement: Banks Must Pay Owe $10 Billion for Mortgage Reduction

The Bank of America, along with Ally, Wells Fargo and several other banks are parties to the National Mortgage Settlement (NMS), a legal settlement requiring them to forgive a certain amount of home mortgage debt, including second mortgages. The settlement allows the banks to decide which loans to forgive, but the loans must total $10 billion. (You can learn more about the NMS at http://nationalmortgagesettlement.com/.)

Think about this settlement as if it were a debt that the banks owe to the public. They pay the debt by forgiving loans totaling $10 billion. After they do that, the debt is paid. Sounds like a good deal for consumers, doesn’t it?

Did Government Lawyers Get a Good Deal for Homeowners?

In agreeing to this settlement, the banks (but maybe not the government) realized that they could get full credit towards paying the $10 billion they owed by forgiving loans that were uncollectable anyway. Think about your loan. You’re not making payments on your loan. Throughyour bankruptcy, you are on track to discharge your personal liability for the loan. And your loan is already subject to a lien strip order. From the bank’s point of view, their chances of collecting money on your loan are slim to none.

Forgiving an uncollectable loan, just like yours is, makes good sense for the banks. It is similar to you giving a bag of old clothes to charity and getting a tax deduction for worthless stuff you were about to put in the trash.

If You Were a Bank, Which Loans Would You Forgive?

You would certainly keep loans that customers pay on time. That improves your balance sheet and keeps the bank healthy.

Because you must forgive some loans, you would probably choose loans that are in default. Even better, you would look for defaulted loans that are already involved in bankruptcy with a lien strip.

Small wonder why the bank picked your loan to forgive. For them, using your loan to pay off a bet was like drawing four aces in poker. Forgiving your loan (and the loans of others) makes the public think they are swell guys, but in your case (and many others), it doesn’t really cost them anything. They weren’t going to get paid on that bag of old loans anyway. But forgiving uncollectable loans pays off the settlement.

All in all, your bank is likely very happy with this deal. It gets to pay the settlement with a big bag of trash, instead of paying with real money. It also gets a tax deduction, just like you do for donating a bag of old clothes.

Here’s Where This Leaves You

Do you still need your Chapter 13 bankruptcy?  If the only reason you filed for Chapter 13 bankruptcy was to strip off your second mortgage, then perhaps you can dismiss the case and get out of bankruptcy right now. (But don’t do that until the lender records a full reconveyance of the deed of trust and a bankruptcy lawyer gives you the OK to dismiss.)

If you still have other debts to discharge, you may be able to convert your Chapter 13 to a Chapter 7 case.

A good reason to stay in your Chapter 13 is to cure arrearages that you might owe on your first mortgage. The forgiveness of your second mortgage does not alter what you owe on your first mortgage. Your Chapter 13 bankruptcy might also be managing debts that are nondischargeable, like taxes.

A knowledgeable bankruptcy expert can guide you on making the best choices.

– 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+

Payday Loan Terror Tactics

Devil with piggybankASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I plan on filing for bankruptcy soon. I have a few payday loans that I have been rolling over and paying interest on. The payday loan people said if I try to stop payment on my check to them, it is the same as writing a bad check and they will have the district attorney press charges against me. If I don’t pay them am I going to be in serious trouble? They also said I can’t discharge a payday loan in bankruptcy. I am so worried that I can’t sleep.  

Thanks, 

Steve 

Dear Steve,

Your failure to pay the payday loan “people” (I use that term loosely), will not get you in trouble. I am assuming that your bankruptcy case will be filed very soon.

How a Payday Loan Works

Here’s how a payday loan works. You give the payday loan company a post-dated check (the payday loan company actually creates an electronic check for you with a specific check number, just as if it were a paper check.) In return it gives you cash in an amount less than the face value of the check. The payday loan company holds the check for a few weeks (often until your payday). At this time, you must pay the company the face value of the check, usually by allowing it to cash the check. If you can’t make good on the check, the lender requires you to pay another fee.

(Here are some reasons why it’s best to avoid payday loans.)

Stopping Payment on a Payday Loan Check Is Not Bad Check Fraud

Putting a stop payment order on a post-dated check you gave to a payday loan company is not the same as writing a bad check. A “bad check” is a check that you knew was not good at the time you wrote it, but the payee did not. In contrast, when you give a post-dated check to a payday loan company as security for a payday loan, both you and the company know the check was not good on the day you gave it.

Here’s an example. I give a bad check at the grocery store and walk out with a bag of groceries. I might face prosecution for writing a bad check if it can be shown that I knew I had no money in the account when I wrote the check. A payday loan is different. The company knew you had no money to back up your check on the date you borrowed the money. So long as you had the honest belief at the time you borrowed the money that you would repay it when due, there has been no wrongdoing. In fact, the payday loan people consented to your delay in payment by letting you pay extra interest to roll over the loans.

The Payday Folks Lied to Scare You. Now Get Some Sleep

Doctors have recently proven that sleep is good for you. Get some. The payday folks have lied to scare you. They are the ones who should be losing sleep. In your case I don’t think they will ever get paid.

In my 34 years of bankruptcy law experience, I have never seen a payday lender so much as try to challenge anyone’s bankruptcy.

Go ahead and stop payment on the checks that you gave to the payday loan “people.” Tell them I said “Merry Christmas.”

– 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+


Filing Bankruptcy When Ex Won’t Pay Joint Debts Per Divorce Agreement

man tearing up agreementASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I am wondering if I should file for bankruptcy. I just got served with a lawsuit for an old credit card debt that my ex and I incurred when we were married. According to our divorce agreement, my ex is supposed to pay these debts.  But he hasn’t paid up. Why don’t the banks leave me alone and go after him? If I file bankruptcy, does that get my ex off the hook? 

Sincerely, 

Carol

Dear Carol,

I think you are on the right track – it’s time for you to visit a bankruptcy lawyer who can fully explore your debt issues. A good lawyer can answer your questions, determine if you are eligible to file, and let you know how you can bring this all to an end. Most bankruptcy lawyers don’t charge for a consultation. (Learn about how to find a bankruptcy lawyer.)

You Still Have Legal Rights Against Your Ex Spouse

When a divorce agreement assigns debts to your ex spouse for payment, and he fails to pay them (which means he has failed to perform under the divorce agreement), you have legal rights to assert against him. For example, you might ask the family court to hold him in contempt of court because he has failed to comply with the divorce agreement. You may have already considered this and decided not to follow this path – perhaps because it is costly and time consuming. Or maybe it would be futile if your ex’s financial situation is no better than yours.

What Can You Do If Your Ex Spouse Files Bankruptcy and You Don’t?

Incidentally, suppose he files bankruptcy and you don’t? You may be glad to know that if he files Chapter 7 bankruptcy, it won’t erase your legal rights to enforce the divorce agreement. You can still seek to recover reimbursement from him for debts covered by the agreement that you were forced to pay because of his failure to abide by the agreement. (These debts could be discharged in Chapter 13, however.)

Why Won’t the Banks Go After Your Ex and Leave You Alone?

The divorce agreement was made solely between you and your ex. The creditors were not part of the deal. They previously had the legal right to go after each person who was legally obligated on the debt. Your divorce agreement has not changed that. If both of you were obligated under the contract, the creditors still have the legal right to collect from each of you.

If you file bankruptcy, you can most likely discharge your obligation to pay the debt, but it does not eliminate your ex spouse’s liability. Once your liability for the debt is gone, perhaps the creditors will go after your ex more aggressively.

You Must List Your Rights Against Your Ex Spouse in Your Bankruptcy Case

If you file bankruptcy, your right to seek reimbursement from your ex spouse should be listed as a possible asset, even if you know that enforcement of the agreement would be futile. It is possible that the bankruptcy trustee in your case would sue your ex on behalf of your bankruptcy estate to make him pay what he owed you under the divorce agreement. (As a practical matter it rarely happens because usually the ex spouse is just as broke as the debtor. But if your ex has money, it could happen.) The right to make that decision belongs to the trustee in your case. The trustee can’t exercise the right to make a decision if the trustee doesn’t know about it. And there can be severe penalties against you for failure to correctly list all assets, even when assets have no apparent value. So be sure you list it.

Sincerely,

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+

 

Discharging Tax Debts in Bankruptcy When the IRS Has Filed Your Returns

Tax Return 1040ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I just got a Chapter 7 bankruptcy discharge. I owed Federal income taxes for 2004, 2005, and 2006. Because I did not file the returns on time, the IRS filed them for me. I called the IRS, and they suggested I file my own returns because the returns they filed showed me owing more taxes than I really owed. I filed the late returns and the IRS accepted my figures and reduced the amount that I owed. But now the IRS is billing me, despite the Chapter 7 discharge, saying my taxes were not discharged in bankruptcy because they filed the original returns. I owe the IRS about $15,000. What can I do? 

Norman

Dear Norman,

This is very interesting. The law allows the IRS to file a tax return for you, if you do not voluntarily file your own return. Normally, this occurs in cases where your return is a few years delinquent. The IRS will prepare a return for you based on the information it has on hand, usually income advices like W-2s or 1099s. The problem is that you may have been entitled to deductions which the IRS didn’t know about.

The court decisions all say that if you file a return after the IRS has filed one for you your filing is a null, “futile act” which does not allow you to discharge the tax in bankruptcy.

Your case is interesting because you may be able to get around this rule. You might be able to discharge the taxes if you can prove that:

  • the IRS agreed to let you file the subsequent returns, and
  • it accepted the changes made on those returns in lieu of their own.

If you can prove these two things, I think you will have a fair shot at discharging your debt.

To make this argument, you’ll need to reopen your bankruptcy case and file a lawsuit against the IRS seeking a court determination on the issue. It will be hard to handle this on your own. Find a lawyer to help you.

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+

Bankruptcy Filings Fall for Second Year in a Row

BankruptcyPetitioniStockPhotoAccording to the recently released 2012 Report of Statistics Required by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, consumers filed a total of 1.1 million bankruptcies in 2012. This is a whopping 14% decrease from the number of consumer cases filed in 2011.  And 2011 filings were down from 2010 as well — by 11%.

Another trend that continued from 2011 to 2012 — of the total number of consumer bankruptcies filed, a slightly smaller percentage were Chapter 7 cases as compared to the previous year. Specifically, in 2010 71% of the consumer bankruptcies filed were Chapter 7 cases, in 2011 that percentage decreased to 70%, and in 2012 it further decreased to 69%.  The percentage of cases filed that were Chapter 13s correspondingly increased — from 30% in 2011 to 31% in 2012.

Other interesting statistics:

  • In 2012, the average time it took to complete a Chapter 7 case, from start to finish, was 205 days (or about 7 to 8 months). This is much longer than the “about three months” figure often bandied about. Of course, how long a case lasts depends on the jurisdiction and the particulars of the case.  For example, a case where a creditor files a complaint to determine dischargeability or where the trustee must sell property will take longer than a no-asset case in which no motions are filed.
  • In 2012, 30% of Chapter 13 filers had filed for bankruptcy within the previous eight years.

You can read the 2012 BACPA Report here.

Do I Have to Report the Amount of Debt Discharged in Bankruptcy on My Tax Return?

Tax Return 1040ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions. 

Hi Leon,

I filed Chapter 7 bankruptcy earlier this year and got a discharge. Our bookkeeper says he needs to know the total amounts discharged for our 2013 tax return. My lawyer says he doesn’t know and I’ll have to pay more fees if I want him to try and find out. I didn’t see it on the discharge notice from the courts. I am going crazy trying to find the number.

Roger

Dear Roger,

You’re an early bird. This is a question I normally don’t see until tax season. I am sorry this is driving you crazy.

First, I’ll explain for you (and your lawyer) why you won’t find anything that lists the amount of money you discharged. Next, I’ll explain for you (and your lawyer and bookkeeper) why you don’t need to know the discharge amount for tax purposes.

Bankruptcy Doesn’t Discharge Specific Dollar Amounts

The bankruptcy court didn’t make a determination on the amount of any particular debt that you discharged. That’s why you can’t find the number anywhere. There are a number of reasons why bankruptcy law works this way.

There’s no point in figuring out exact amounts. Suppose you had an ongoing dispute over an amount that you owe to a bank – you say it’s $100 and the bank says it’s $150. If the debt is dischargeable, it doesn’t matter who is right. You don’t have to pay it, so why should the court figure out the exact amount?

Determining exact dollar figures would be costly and time-consuming. If the discharge did apply only to a specific dollar amount, then the court would have to determine that amount. This would require a court trial or some other time-consuming procedure to determine how much you owe for every debt that you have.

The amount you owe changes constantly due to interest. Most of the debts you discharged probably accrued interest during your bankruptcy case. Because of interest piling up every day, the amount you owe constantly changes. This means that even if there was no dispute over the amount you owed, you could almost never list the correct amount on your bankruptcy papers.

It’s much easier if the bankruptcy discharge simply eliminates an entire debt. So that is what the law does.

You Don’t Need Discharge Amounts for Your Tax Return

Luckily, you don’t need to know the amount of your discharged debt for tax reporting purposes. The amount of debt you have discharged in bankruptcy does not get taxed nor is it reportable as income. The figure does not go on your 1040 tax form. In fact, even if you wanted to put it on your form, there’s no place for it.

You can stop going crazy.

— 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+

Can I Keep “Cash for Keys” Money I Receive After My Bankruptcy Is Over?

Cash for KeysASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions. 

Dear Leon, 

My husband and I just got a Chapter 7 discharge. We were previously in foreclosure and walked away from our home.  

Before we left, our mortgage lender offered us a series of payments payable in two week increments if we moved out voluntarily. The longer we stayed, the less we would get. We did a final walk through with the bank representative (we were supposed to leave the house in “broom clean” condition) and then he handed us the final check. The total amount the lender paid us was $8,310. 

Here’s my question: Can we keep this money or do we have to give it to the bankruptcy court? 

Sincerely, 

Crystal

Dear Crystal,

I have great news for you. You can keep the money you received from the lender’s “cash for keys” deal and don’t have to report it to the bankruptcy trustee, if the following are both true:

  • your house was correctly listed in your bankruptcy case, and
  • the court made an order “closing” your bankruptcy case.

Cash for Keys

The deal the lender offered to you is referred to as “cash for keys.” In a cash for keys deal, the lender offers money to induce you to voluntarily leave the property. Cash for keys deals are common in foreclosures, evictions, and deeds in lieu of foreclosure.

In a typical cash for keys deal, the lender sets a deadline for you to be out. You don’t get the money until you vacate. “Broom clean” means you have tidied up the place, didn’t damage anything, and didn’t leave a pile of junk behind. There is typically a final inspection where you hand in the keys and the lender hands you a check.

Assets in Your Possession When Your Bankruptcy Case Closes Are Yours to Keep

The filing of a bankruptcy case creates an estate composed of everything you own. You can exempt certain assets from the bankruptcy estate – if assets are exempt you can keep them. After you get a bankruptcy discharge the court normally issues an order closing your case. The law says that upon closing the case, all assets still in your possession that you listed in the bankruptcy (whether exempt or not), will revert back to you.

If you correctly listed your home in the bankruptcy and the court issued and order closing your case, then you had every right to enter into the cash for keys agreement. The resulting money is yours to keep and you don’t have to report it to the bankruptcy trustee.

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.

Selling Your Home While in Chapter 13 Bankruptcy: What Do You Need for Escrow?

escrowASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I am a real estate agent in Los Angeles. I have a client listing his home for sale with me and he is in Chapter 13 bankruptcy. We have a buyer and are in escrow.  What do I need from the bankruptcy judge in order to complete the sale? My client’s bankruptcy lawyer won’t return my calls. 

Sincerely, 

Ricardo 

Dear Ricardo,

In order for escrow to close, you need a court order from the bankruptcy judge authorizing the sale of your client’s home.

How to Get the Court Order?

Your client’s attorney must file a written motion with the court. After that, you can expect to wait at least 17 days before the court issues the order.

If the bankruptcy lawyer is MIA, then your client should hire another lawyer to handle the motion for permission to sell real property. That lawyer will need you to provide a copy of the escrow instructions and an estimated closing statement.

Does Your Client Need Another Chapter 13 Bankruptcy Lawyer?

The sale of your client’s home might affect certain aspects of his bankruptcy case, and he might need additional help from a bankruptcy lawyer. For example, perhaps the sale proceeds can be used to pay the client’s creditors in full and end the bankruptcy case early. Or he might need to modify his Chapter 13 plan payments. An experienced Chapter 13 lawyer will know what to do.

-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+