Los Angeles Bankruptcy Blog

I am always curious when people come to me and say they want to file bankruptcy and do a short sale for the upsidedown mortgage. In my analysis, these are different alternatives to solve the same problem. That is, either a shortsale or a bankruptcy would do the trick (get rid of the real estate property). So, why then, do both?

Let’s do a quick review.

There may be very good reasons to file a Chapter 7 bankruptcy or file Chapter 13 bankruptcy. These would include things like avoiding financial liability for those credit cards you got in over your head with. Or maybe to avoid having to repay the balance on a underwater mortgage or car loan for a house or car you gave back to the bank (or plan on giving back).

There also might be good reasons for doing a short sale (or a quick sale). For example, saving your credit from the hit of a bankruptcy for the home loan that’s under water.

But both? If you have already made the decision of filing bankruptcy, who benefits from your doing a short sale? Your credit? No. The bank? A real estate broker, who may or may not be able to arrange the transaction. But make no mistake: there’s a commission at stake, and in this market, real estate people gotta eat.

Also make no mistake: when you file bankruptcy, there is no transferring or selling of your property. Without taking additional measures, you cannot sell your property while in bankruptcy.

But why would you want to? Let the BK take care of the upside down mortgage when deciding between foreclosure or short sale.

Here is a riveting analysis about why the recent downturn in the housing market will get worse before it gets better.

In today’s housing market, many people are upside down with their mortgages. Not to mention, many homeowners have an adjustable rate mortgage (ARM) that has the payment skyrocketing. As a result, there are people who approach me with this basic of questions:

Should I do a short sale or let the house go in foreclosure?

The question is not easy to answer. In a short sale (also sometimes called a quick sale), you are agreeing to sell your house back to the bank at a reduced price. Now, banks are not crazy about owning homes; they’re in the making-money-from-interest-and-loans business. They don’t want to own homes. Especially if your entire neighborhood is faltering. Will they own your entire block? What about half your block? Is this really what Bank of America, Countrywide, HomEq and Chase Mortgage are in business for?

In addition, with a shortsale, you may have to pay taxes on the amount you were forgiven, the write-off. Talk to your CPA about the tax consequences of this. A 1099c for the cancelation of
debt might be sent to you, and then you have to pay taxes. (not to mention property taxes) Check with your tax advisor.

A foreclosure, on the other hand, is where the bank takes possession of the house again. In some ways, it’s like a car repossession. However, unlike a car repo, there are many statutory requirements about notice and such that the mortgage servicer has to abide by which are beyond the scope of this article.

The thing to get out of a foreclosure is that, unlike a quicksale, you won’t owe additional income taxes if a foreclosure happens on your residence, thanks to the Mortgage Forgiveness Act that President Bush signed into law last year.

Also unlike a short sale, there is no aggressive and extremely hungry real estate agent seeking a commission off your transaction. Are they looking out for you?

Summary

Short sale: Realtor gets commission, possible tax bill to IRS, no leftover debt, roller-coaster ride.
Foreclosure: No realtor, no tax assessment or 1099, credit hit, possible collection for unpaid mortgage

And it’s this last point where a bankruptcy could swoop in, remove any lingering debt owed to a mortgage company that didn’t have thier lien paid, eliminate the other debt you have, and get you a fresh start, tieing this all up in a neat little bow. (call to set up a consultation for more info)

No easy answers, both are imperfect solutions. As of today, no bankruptcy attorney or judge can change your mortgage payment or balance or payout. It is what it is. However, if you want a fresh start, no property tax debt, no Internal Revenue Service bill, and just to move on, a bankruptcy after a foreclosure might be the way to go.

Inspired by a WSJ article, here are my own pointers on how you can teach your kids to be savvy when it comes to money matters:

Save. It used to be that if you wanted to buy a treat or a car, you dutifully put some money away for months until that happy day came. Now things are financed. This is bad, for obvious reasons. Learn to do without. Learn to sacrifice.

Allowances. I think allowances are good things. That way, if your child wants something, they can put some money aside for it, rather than rely on their good looks with you, or their whining.

Work ethic. If “performance” or attitude for a given week on chores is done poorly, give them half their allowance. It’s important to teach them that there are no free lunches in life, and that the harder they work, the better things are. Teach them to be independent, self-reliant and that half-efforts only hurt themselves.

Extra credit. Allow for opportunities to make extra money, for chores that are once-a-year things, like cleaning out the attic, garage, or raking the five-acre back yard with a hair brush. This way, if they really have their eye on something, there’s a way to show that work ethic, save, and learn self-reliance, all in one.

Attitude. I agree that it’s good to make fun of people who are showy with their wealth, as well as highlighting the tragedy of people who are rich but clearly unhappy (see: B. Spears). The lesson? Money doesn’t buy happiness. It just makes you rich … and unhappy.

Reward saving. This goes in here twice. Make realistic goals about saving that allowance, and then if they reach it, contribute to their savings a minor but not trivial amount.

With effort and consistency, you can teach and shape your children’s behavior towards money that will help them through life, long after you’re gone.

Is this really a good idea?

Your mortgage was a bad proposition from Day One. You didn’t read the fine print, and Mr. Sleazeball Lender told you this was a good loan. Nine easy payments of only $800 a month, and then things adjust. What exactly does that mean? Well, you found out, didn’t you? Three months at $2000 a month, and then now it’s at $3600 monthly. When will the mortgage payment go up again, and what will it be then?

Well, of course, you don’t want to move. You can’t refi… it’s too soon, and you have no more equity anyway. And you have some available credit on the credit cards. Just take cash out of the credit card stash and apply that to the mortgages that you can no longer afford. The writing is on the wall, but you don’t want to face reality.

You cannot afford that house.

Only the grace of Countrywide’s HOPE department will let you do a loan modification so that you can afford your dream house turned mansion of nightmares. Sure, they don’t want to own your home and have to sell it some poor shlub for less than it’s worth, but really, do you want to gamble your future on your mortgage servicer being nice to you? Reality is, you’re stuck with a horrible loan, and borrowing from friends, family and even Capital One is just putting off the inevitable.

Robbing Peter to pay Paul is not really fair to Peter. You’re not really going to repay that credit card that’s making the next month’s mortgage while you buy some time. Desperate times calls for desperate measures.

And finally, the credit cards are maxed out. Then what?

You do what you should have done six months ago. It’s time to get ready to move.

But what of the debt?

Just file bankruptcy.

But there may be problems. Can we all agree that if you put a lot of debt on the credit cards and then file bankruptcy that the credit card companies might have a problem with that? Sure they will. They’re not giving out free money. Taking out $3000 and then telling them to pound sand probably will set off some alarms. It’s not Chase or Bank of America’s fault that some shyster lender lied to you about your house’s monthly payment. You borrowed money and they kind of expect it back. Filing bankruptcy will only create new problems, potentially.

In our world, these are called 707(b) and 707(c) motions from the United States Trustee. Words like fraud, bad faith and totality of the circumstances puts your case in the hands of a judge who may or may not see things your way.

We’re very sympathetic to your situation; many people come to our office and we need to help them face difficult truths. But using credit cards to pay mortgages when you know you can afford neither is just not a good idea. And despite the rumors you hear, no bankruptcy attorney, not even this Los Angeles bankruptcy lawyer, can change your mortgage loan. (we can help you catch up on arrearages, however).

It’s a sad situation, and one that breaks my heart. Constant re-finanacing, the downturn in housing prices, being lied to about your loan, losing a job after getting the loans, it all leads to a payment that’s unaffordable. But the good news is: at least I can help you turn the page and start your life over.

Simplify.

Today is the day after Christmas. How do you feel?

Did you indulge in the power-shopping at the malls and stores prior to Christmas? Did you whip out the credit cards at Best Buy and say “charge it!” Did you hang out at home, sipping brewed coffee, comfortably shopping online at Amazon, having all your gifts shipped as you “spent” hundreds of dollars of money you never had? (”borrowed” is a more accurate word).

How do you feel today?

Excited? Is it a good day to go shopping for after-Christmas sales? Borrow and spend even more?
Depressed? Feeling like you overdid it and wondering how you’re going to repay those loans?
Avoiding? Not thinking about it? After all.. you won’t get billed for another few weeks.

What are those balances up to now? How long will it take for you to pay off those loans at the rate you pay them?

“But it’s Christmas! My family deserves nice gifts!”

Your family deserves to have money saved for college.
Your family deserves to have money saved for an eventual downturn in income.
Your family deserves to have money saved for retirement.

All of those happen from saving, not borrowing. All of your extra money is going to go to pay down debt. How much will be left for you to save?

How will you live when you retire?
What is going to be different in your budgeting and spending and borrowing patterns between now and then?

When do you change to avoid the collision course?

Just a cookie stick to stir into your $4 latte.

A new term has crept into today’s vocabulary: “MySpace bankruptcy” (also “Facebook bankruptcy”). The first time I read these, I figured the companies had somehow filed some sort of business bankruptcy or Chapter 11 bankruptcy. But no, they’re quite robust and healthy with their annoying flash ads and heavily sponsored web pages.

What Myspace bankruptcy means, apparently, is that the user has a page on My Space (or Face book), which are both popular social networking web sites. And realizing that these are addictive and major time sucks, finally deciding to delete and end their account.

O! How dramatic! That something so simple (”I’m deleting my account”) is somehow tied to something so major (”I am filing bankruptcy”). But scale aside, is this an apt analogy, or does this new slang somehow perpetuate a myth about bankruptcy?

True, people become attached to a myspace customized page, complete with modified templates, songs, videos, flash animation and a sordid collection of “friends” and messages and blogs and movie reviews. Usually this takes some time. And then the user checks on their messages daily, giving updates about their mood, their status, and so yawn. So, making the decision to end the timesuck and just delete the account and do Myspace Bankruptcy is the destruction of something (presumably good) that was accumulated.

But is that right? Filing Bankruptcy (the normal kind) is not the destruction of something good. It’s the elimination or reduction of something bad (debt). And before you say that it destroys your credit, most people have messed up credit already before they file bankruptcy. Is the negative impact really that great for most people who have been in collection creditor harassment for 2 years with 9 accounts and being sued by yet another credit card collection agency? Filing bankruptcy gives most people a new start, a chance to wipe out something negative. And removing a negative is a good thing.

Myspace bankruptcy is removing a positive, which is a bad thing. So, this terminology is really the opposite. Bankruptcy can be a good outcome, giving people a new opportunity for a new beginning.

So, what to do about this new misleading jargon? There needs to be a better phrase. The more appropriate analogy, then, seems to be something else for the concept of destroys your identity (in the online sense). The first thing that pops into my mind would be Myspace suicide or Facebook suicide.

But that would be too dramatic.

I know! How about just telling your not-really-your-friends that “I’m deleting my account” and getting on with your life and doing something meaningful with your time?

Like, oh, I don’t know: creating a budget?

But that’s a column for another day.

That’s the big question these days. People call up and ask “Can I file bankruptcy?” The questions really should be, “Do I qualify to file Chapter 7 bankruptcy?” And over the phone, without knowing all the facts surrounding your situation, it’s not always easy to answer that.

Since the BAPCPA and new bankruptcy laws, more and more people have to pay back some of their debt, and Chapter 7 bankruptcy is harder to get into for some people. Are you one of those people?

Because of the Means Test based on US Trustee median income family numbers, we attorneys need to understand many factors and variables about you. Your income. Your income lately. Your household size. Dependents. What are your expenses? What are your secured loans? How much do you pay on each of these? And so on.

Sure, an unethical lawyer could tell everyone over the phone a resounding “YES!” However, wouldn’t you rather have someone spend time to learn about you and give you specific advice rather than bait-and-switch you? Spend time with a lawyer you are comfortable with, give the attorney all the info they want, and then sit back and let them analyze your situation. It’s not a fast or easy process (for some people, at least) but at least you’ll know where things stand.

So, contact a friendly and helpful bankruptcy lawyer, and spend the time giving them information about. The more you give, the more you get. And hopefully you’ll be filing Chapter 7 and getting a fresh start soon.

We have a tendency to think not of the cost of something, but the monthly payment amount.  How many of us consider the total cost of a car when we go to buy it?  We just think of what sized check we’d need to write each month, right?  “I can afford that,” we ponder to ourselves.   But seriously, how many people really sit down and figure out how much money they can afford to spend?  When was the last time you sat down and added up your monthly expenses and did a budget?

When you watch a television commercial for an automobile, have you noticed that the total price of the vehicle is in the small print?  What we see instead in the large print is the monthly payment that seems oh-so-affordable.

The danger of a thinking only in monthly payment mentality is obvious:  you are sweeping under the rug the interest fees and other finance hits you’re taking.  Take the typical Cashcall loan.  For $10,000 cash, you will pay “only” $300 a month.  However, when you figure how many months you’ll be paying, it turns out you’re paying $30,000 back to Cash call, something like 29% APR.  Is that a wise decision?

Another hazard of monthly payment mentality is that we all think we can afford
another couple of hundred bucks a month in our budget, again without ever doing hte actual math.  Adding a new monthly payment most likely means you need to be cutting back and making a sacrifice elsewhere (that daily $5 latte, for example).

But are you really going to make that sacrifice and cut out something you currently spend on to get something else?  Rather, we continue to add new things to the expense list, playing Checkbook Jenga until the budget topples on the floor.

So, next time you are thinking about buying something or financing it, really ask yourself whether you have the money.  If you add a new payment, what will you cut out?  And what is the total cost?

Beware when you are asked to cosign for someone. Yes, it can be difficult to say “no” to them. They’re family. They’re a trusted friend. They’re someone who’s close to you that’s trying to get back on their feet. And they come to you for help.

When you become a cosigner for someone, you’re taking on the responsibility that they’ll be good on the debt. In California, this can be a risk even if you’re on the title or pink slip with them, because any accident or damage the driver incurs — even if uninsured — can be your responsibility. Suddenly, you are on the hook not just for the car loan amount if your coborrower defaults on the car loan or car note, but you can be liable for any property damage or medical bills as a result of anyone driving and then crashing your coborrower’s car.

I had someone visit my office last week. A 18 year old girl with her mom. The daughter, in a moment of inattention, rear-ended the car in front of her. Somehow, she wasn’t insured. But mom cosigned for the loan, and mom was also on the registration. Suddenly, both are responsible for the vehicle that got crunched and mysteriously totalled. Suddenly, both are on the hook for any medical bills from the daughter smashing into someone.

Who should file bankruptcy? The daughter? They’ll just come after mom. Should mom file bankruptcy? Why not get a judgment against daughter? She’s 18 and has her best earning years ahead of her. The judgment can grow with penalties and interest and follower her forever until she becomes an adult, owns a home and gets a real job.

There can be serious headaches when you take the chance to cosign for someone’s debts.

In my years of practicing only bankruptcy law, I have helped hundreds of people get a fresh start. The following not scientific or a study, but just my observations based on my own personal experiences why people file bankruptcy.

So, in no particular order:

1. Divorce: going from two incomes to one can cause people to have a tougher time getting by. Also, bankruptcy is effective at tying up the loose ends — and shared debts — in a divorce for a fresh start.

2. Job Loss: whether unemployed now or a couple of years ago, people use credit cards as temporary loans to get by and pay back once reestablished and back on their feet. Unfortunately, once the income stream starts again, the disappointing surprise is that the minimum payments are not affordable. And even if they are, it’s enough only to maintain the debt, not reduce it or eliminate it.

3. Identity Theft: not just by a stranger, but I’ve seen relatives who “borrow” someone’s identity by using their credit without permission.

4. Medical Debt: Sometimes medical and health-related debt can come up suddenly. Maybe insurance will cover some of it, most of it, or none of the medical expenses or hospital stay. A bankruptcy can eliminate the tens of thousands of dollars of medical debt.

5. Budgeting Problems: You have $3,000 coming into your bank account each month after taxes, but you spend $3,500 for all of your living expenses. That extra $500 each month is coming from somewhere, and you are simply delaying the inevitable by continuing to use the credit cards.

6. Reorganizing Debt: Making minimum payments is only paying just the interest on the loans. Chapter 13 bankruptcy is more effective than debt management companies, and gives people a chance to get out of debt by making a manageable payment they can afford.

7. Lawsuits (”I got a summons”): Old credit card debt can lead to a lawsuit. This can prompt action to finally file bankruptcy and lead you to deal with the issue, once and for all.

8. Foreclosure: Filing bankruptcy can stop the foreclosure and let you either save your home or walk away with dignity (and possibly a better credit report than a foreclosure if you ever want to get another home).

9. Wage garnishment: The law suit turned into a judgment and now you want to stop the wage garnishment as they threaten to garnish your paycheck.

10. Saving for Rainy Day: Very few people seem to save for the proverbial rainy day. The credit cards are there, and relied upon to get you through. Instead, take 10% (or even 5%) of every pay check and put it aside in a separate account and don’t touch it. Make it automated.

I punched this list out in 15 minutes. I could probably come up with another five or ten if I wanted.

Which category are you in? What’s missing?

From today’s newspaper:

WASHINGTON — Congress appears increasingly likely to pursue new protections for consumers seeking risky home loans, as defaults surge among borrowers and concerns rise over alleged abuses in the sector.

Top lawmakers in the House and Senate signaled their intention to tackle the issue, underscoring the more-activist sentiment prevailing on Capitol Hill since the Democrats swept to power in November.

Really, what this means is that when they changed the bankruptcy laws in 10/2005, they thought it was consumer abuse. That people were filing bankruptcy just to avoid responsibility. That was a false premise, and they solved a problem that wasn’t there.

What we’re finding out now is, gee whiz, the creditors were lending to people that really had no business having credit, or that loan, or that house. Risky loans.. why? To make big bucks on interest rates. The lure was just too great. But if people file bankruptcy as a result of stupid lending practices, don’t penalize the lenders. No, make it harder for people to file. That’s just wrong.

And now what we’re seeing is that subprime lenders like New Century are stopping all lending, and realizing that foreclosures are sky high based on the dumb loans they gave to people — hello! people should not be spending 90% of their takehome pay on 80-20 mortgage financing with nothing down! — are coming back to haunt them.

So now it’s all about “stop us before we lend again!” As if they’re some out of control psychopath that can’t stop lending to people who have bad credit or no income.

Bottom line: The creditors are just as guilty of bad mistakes as the consumers. No, worse than that. Most consumers don’t maximize their spending and borrowing and plan a bankruptcy. However, most lenders maximize their interest rates, number of accounts and risky clients in the hopes of getting the most profit. Nothing wrong with profit, but taking huge and stupid risks with the expectation that they’ll be bailed out is exactly what the credit card companies (wrongly) accused debtors of doing before the bankruptcy law changes in 2005.

As an attorney that specializes in consumer debt, I see a lot of people’s personal finances during the helpful consultation. A common problem is that they have no idea what they spend each month and don’t realize they’re often spending more than they earn.

When you are sick, you pay careful attention to the medicine that the doctor prescribes. When you’re on a diet, you pay attention to the food you eat and weigh yourself every day. Yet most of us don’t track how much we spend each month. You may know how much you spend on fixed bills like rent, but chances are that you don’t know to the nearest $100 how much you spend in total.

A budget is essential to taking control of your finances. Maybe there is a place you can tighten your belt. Maybe there isn’t. How do you know where to cut back if you don’t even know what you’re spending?

Try this for one week (or better yet, for a month): you don’t need to track every penny, but why not track every dollar you spend during the day? Save your receipts and jot down your daily expenditures. Keep a running tab so you know your month-to-date spending every day. When given a choice, use your debit card, not cash. Keep your debit receipts to make tracking easier and to make your spending more visible.

You’ll be surprised how many “little things” gobble up those $40 withdrawals: cash for Starbucks here, cash for a bagel there. You then pay with cash as you go out for lunch, and there goes another $10 and it’s not even 2pm yet!

Once you make the commitment to track your spending, you can see where you can cut back if you need to. Give yourself an allowance of spending money: one ATM withdrawal of cash per week. Make that $20 or $40 last the whole 7 days. Make the commitment to spend no more cash than absolutely necessary. And continue to track each dollar.

You can’t fix the problem until you know what the problem is. Knowing your spending can help you cut back where there is waste. Most importantly, adjusting your spending can help you meet your ultimate goal of saving money to pay off your credit card bills, a down payment for your own home, or for your retirement.

[originally posted in Feb 2005]