Michigan Bankruptcy Attorneys Blog

At the end of the year, many people start thinking about their tax refunds. As a result, they are often concerned about whether filing a bankruptcy petition may affect those refunds. Will they get the refunds or will the court or bankruptcy trustee take them?

Generally, in a Chapter 7 bankruptcy, most people get to keep their income tax refunds. However, the anticipated refunds must be listed as an asset and exempted in the bankruptcy schedules. This is important even if haven't prepared your tax return and don't know exactly how much your tax refund will be. I'll often look at my clients' most recent tax return to determine how much they may recent on the next one if they will earn about the same amount of money.

What happens if tax refunds are not disclosed in a Chapter bankruptcy petition? Failing to disclose the refunds may result in the trustee taking them for the creditors. The trustee will simply send a letter to the IRS requesting that the refunds be turned over.

In a Chapter 13 bankruptcy, most debtors are required to contribute tax refunds toward their Chapter 13 payment plan. In Detroit, the Chapter 13 trustees have the debtors sign a form so that the federal tax refunds can be sent directly to the trustees. However, Chapter 13 debtors may be allowed to keep their refunds if they need them for an emergency or important expense that isn't already included in their budget. Chapter 13 debtors who want to keep their tax refund should contact their attorney for guidance before filing their tax returns.

After most foreclosure sales in Michigan, the homeowners have the right of redemption for six months.  This means that they have an extra six months after the sale date before they have to move.  The homeowners can also use the six month redemption period to sell the home or to redeem the home by paying the mortgage company the redemption cost which includes foreclosure attorney fees and costs.  This right of redemption can be affected if a homeowner files a Chapter 7 bankruptcy petition.

In a Chapter 7 bankruptcy case, all of the debtor's assets become property of the bankruptcy estate.  However, debtors can keep exempt property.  If a debtor does not completely exempt his or her right the redeem a home, the trustee can redeem the home by paying the mortgage company the amount of the bid at the foreclosure sale.  Then, the trustee can sell the home for a profit.  This usually only becomes a problem if the debtor hopes to remain in the home for the entire six month redemption period.  Also, the debtor may be inconvenienced when the trustee wants potential buyers to view the home.

Detroit Chapter 7 bankruptcy trustees have been redeeming foreclosed homes in order to obtain significant money for creditors.  In many cases, they redeem the homes even after the debtor receives the bankruptcy discharge by keeping the case open or by reopening the case at a later date.  Therefore, a Chapter 7 debtor who receives a bankruptcy discharge might still lose the right of redemption if his or her home is sold at a foreclosure sale.

Anyone who files a Chapter 13 bankruptcy petition gains some familiarity with a Chapter 13 trustee. In Detroit, there are three Chapter 13 trustees. Each trustee administers cases assigned under a particular judge. During the bankruptcy case, trustees collect money from the debtors and send it to creditors. The Chapter 13 trustees are supposed be a neutral party to the case, but many debtors will find that the trustees' actions usually seem to benefit creditors.

In many cases, a Chapter 13 trustee reviews the debtor's income and expenses with the goal of making sure that the creditors receive as much money as possible. Debtors are supposed to contribute all of their disposable income toward their Chapter 13 plan. As a result, the trustee will often file an objection in the case if it seems as if certain expenses are unreasonable for someone in bankruptcy. The trustee also makes sure that the debtor's payment plan complies with the US Bankruptcy Code. Despite trustee objections, an experienced Detroit bankruptcy attorney can get the debtor's payment plan approved by the court.

Many people tried to avoid bankruptcy at all costs.  Afterall, some of them have spent years building a high credit score and bankruptcy is the last thing they want to even consider.  I remember watching a show on television when a financial expert, Suzy Orman, told a guest that she should file bankruptcy.  I was surprised because that same financial expert often tells people to avoid bankruptcy.

The bad news is that bankruptcy can't always be avoided and it's sometimes the best option.  People who can't afford their bills and often miss payments or pay late are continuously ruining their credit.  They will never be able to rebuild their credit unless they're able to consistently make the monthly debt payments.  A bankruptcy can be a good alternative because it gives people a fresh start.  The debt is cleared and the process of rebuilding credit can begin.

Bankruptcy may be the only option for people who are unemployed, especially if there's a limited chance that their circumstances will change due to a disability or lack of job skills.  Most people sincerely want to repay their debt.  However, sometimes that's not possible and bankruptcy is the best option.

When a creditor gets a judgment against a debtor, the creditor can attempt to collect the money owed by doing things like garnishing wages, bank accounts or state tax refunds. However, there are some people who are uncollectible. They are unemployed and have no bank accounts or other assets. With uncollectible debtors, creditors only have the option of making written or verbal demands for money.

If an uncollectible person doesn't pay the debt, there is nothing the creditor can do. However, some uncollectible people still prefer to file bankruptcy in order to have some peace of mind. Bankruptcy stops all collection action. That means no more ringing phones and harassing letters from aggressive creditors and collection agencies. For that reason alone, bankruptcy is an ideal option for some uncollectible debtors. However, uncollectible debtors don't need to file bankruptcy right away. Sometimes, it might be a better financial strategy to wait. Getting a free consultation with an experienced bankruptcy attorney will help uncollectible debtors decide whether bankruptcy is right for them.

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Last year, the Supreme Court issued a decision holding that bankruptcy attorneys are included in the definition of debt relief agency as defined in the US Bankruptcy Code.  Many attorneys opposed the inclusion of attorneys in the definition because the term also includes non-attorneys and can potentially cause confusion for prospective clients.  Additionally, debt relief agencies must comply with certain requirements that potentially limit the advice that they may give to clients.

To me, being required to include a statement that I help people to file bankruptcy isn't a problem because I do help people to file bankruptcy.  However, requiring the statement "we are a debt relief agency" can cause confusion because there are non-attorneys who are also "debt relief agencies." I recently had a client who was confused about the debt relief agency language. I had to explain that we were bankruptcy attorneys and that we were simply required to also call ourselves debt relief agencies.

I understand how including a statement about helping people file bankruptcy is important because I have seen advertisements by bankruptcy attorneys that didn't mention the word bankruptcy and made it seem as if they just helped with debt outside of bankruptcy.  However, a better statement would be "We are attorneys who help people file bankruptcy under the U.S. bankruptcy code."  This helps to eliminate the problem with bankruptcy attorneys not using the word "bankruptcy" in their advertising while distinguishing attorneys from non-attorneys who prepare petitions. 

Another issue with the debt relief agency requirement is the provision requiring that an agreement be executed within 5 days after providing bankruptcy assistance.  To me, executing an agreement means that the client is retaining you as an attorney.  However, it appears that an agreement is required to be executed even if the prospective client doesn't want to file bankruptcy.  Also, there are some people who decide not to file bankruptcy until one year after the initial meeting and the fees, costs, etc. may have changed.  Clearly, this provision can lead to some absurd results and should definitely be rewritten.  Perhaps it would be better to state that a fee agreement should be executed within 5 days after the debtor informs the attorney that he/she wants to proceed with filing bankruptcy.

Corporations, limited liability companies, and partnerships are allowed to file a chapter 7 bankruptcy petition. Like individuals, business entities receive protection from creditors in bankruptcy. However, a chapter 7 bankruptcy provides a limited benefit to business debtors.

Individual chapter 7 filers can keep a certain amount of property that they own. However, businesses that file bankruptcy cannot keep anything. A chapter 7 trustee will sell all of the business property and distribute any proceeds to the creditors. The chapter 7 trustee also has the right to operate the business until all of its assets are liquidated. Therefore, a chapter 7 bankruptcy would not be the best option for a business owner who wants to maintain control of the business.

Generally, a business chapter 7 bankruptcy should only be considered if the business is going to close. That's because businesses don't receive a discharge or cancellation of debt in a chapter 7. Even after the trustee takes all of the businesses property, the business still technically owes money to its creditors. Nonetheless, if the business closes and there are no more assets, the creditors won't be able to be paid additional money anyway.

One of the benefits of filing Chapter 13 bankruptcy is removing a second mortgage on your personal residence. This process is called "lien stripping." You can qualify to "strip" the second mortgage if the balance owed on your first mortgage is greater than the current market value of your residence.

An example is if you purchased your home for $200,000 and the value of your residence has gone down to $150,000. You have two mortgages on your home. The balance owed on your first mortgage is $170,000. The balance owed on your second mortgage is $50,000. Since the balance owed on your first mortgage ($170,000) is higher than the current market value of your residence ("$150,000), you can eliminate ("strip") your second mortgage.

If you are behind on your mortgage payments and are worried about foreclosure, lien stripping is a powerful remedy provided under bankruptcy law.

Recently, there have been reports of Chapter 13 debtors being called by someone claiming to be the trustee. The person directs them to mail their payments to a different address. All Chapter 13 debtors should keep in mind that the trustee will never contact them by phone. All trustee contact will be by mail or through their attorney. Although payment mailing addresses have changed in the past, it is very rare and debtors should verify any notices of a new payment mailing address with their attorney.

Many people who file bankruptcy have property with a lien on it, such as a mortgage or car finance loan.  If they don't pay the secured loan, the property can be repossessed or foreclosed.  Bankruptcy provides the opportunity for people to give up property with a lien so that they won't have to make the payments any longer.  In the bankruptcy schedules, they tell they court and creditors whether or not they want to keep the secured property.

Many people initially believe that they no longer own property if they decide to surrender the property in a bankruptcy.  However, even moving out of a home after expressing a desire to surrender it in a bankruptcy doesn't mean that the home is actually surrendered.  That's because the property isn't automatically transferred to the mortgage company without further action being taken. 

What must be done?  Many mortgage companies will still go through the foreclosure process in order to reclaim the home after a bankruptcy is over or during a bankruptcy if they get permission from the court.  However, debtors do have the option to sign a deed transferring the property to the mortgage company.  This is called a deed in lieu of foreclosure.  This is the better option for debtors who have already moved out of the own so that they will no longer be responsible for maintaining the property.

Many of my clients have become overwhelmed with high mortgage payments.  Some of their payments increased due to an adjustable interest rate while a reduction in income made maintaining mortgage payments difficult for other clients.  The good news is that some of my clients have been able to successfully reduce their mortgage payment through a loan modification.  The bad news is that the process is often painstakenly slow and filled with pitfalls.

Getting approved for a loan modification isn't always easy, but there are some things that can be done to increase the odds.  Mortgage companies typically request a hardship letter and financial information in order to evaluate someone for a mortgage modification.  It's often helpful to have an experienced attorney or non-profit housing counselor review the application before it's submitted.  I often find that most of my clients do not draft a compelling hardship letter or properly complete the financial statements.  These are things that can make or break a modification application.

It's also important to make sure that all of the requested financial documents are promptly submitted.  An incomplete application will delay the process even further and may result in a denial.  Unfortunately, some mortgage companies seem to have a habit of losing applications or supporting documents so it's important to always keep a copy of everything and to be prepared to quickly resubmit information, if necessary.  It's also crucial to keep track of when information was submitted and to whom it was sent.  Keep fax confirmations and get delivery confirmation when mailing documents.

Regularly following up with the mortgage company after submitting the application and being persistant is important.  One of my clients was quickly approved for a loan modification after sending a hardship letter directly to the CEO of the mortgage company.  Sometimes, it's possible to encourage a modification if there are problems with the loan such as Truth in Lending Act violations.  A creditor might modify the loan in order to avoid litigation.

It's important to remember that banks offer more than one type of loan modification.  A denial for one type of loan modification doesn't mean that it's not possible to be approved for another type.  Also, it's important to remember that being in a bankruptcy does not mean that it's impossible to get a loan modification.  Many Chapter 7 and Chapter 13 bankruptcy clients are approved for loan modifications.

Are Loan Modifications Causing Foreclosures? The Huffington Post, August 20, 2010

Banks wouldn't do things that were sleazy and illegal, would they? Chicago's Real Law Blog, August 2, 2010

Will you do anything for money? The "broke, unemployed and bankrupt" can now apply for an upcoming reality tv show where they can compete for cash to pay their bills. The show is called Competition for Cash. It's somewhat ironic that they're looking for people who have filed bankruptcy because most filers get a discharge from most or all of their debt. Anyway, it will be interesting to see what type of things competitors will need to do in order win money.

When many of my clients file a Chapter 13 bankruptcy, their biggest concern is whether they will still have enough money to live on after making payments to the trustee.  In the ideal world, there will never be a problem with the Chapter 13 plan payment amount.  After all, the payment is based on how much money a debtor has available after paying living expenses.  As long as the debtor can stick with a budget, there should be no problem.

Problems do arise for several reasons.  Sometimes debtors do not accurately list their living expenses.  For example, they forget about certain expenses such as pet food or underestimate the utilities.  Without an accurate budget, debtors struggle to make their plan payments.  When the budget fails, the Chapter 13 case is more likely to fail.

People who file a Chapter 13 bankruptcy are required to have reasonable living expenses.  This may be a problem for people who are used to living beyond their means.  It's also a problem for some people who have suffered a loss of income because they are used to a higher standard of living.  Also, the court doesn't consider expenses for non-dependants to be reasonable so tuition payments for an adult child is not considered to be reasonable.

As a bankruptcy attorney, my goal is to help debtors reduce their living expenses and create a reasonable budget that they can maintain.  In most cases, the monthly payments in a Chapter 13 plan are lower than the minimum monthly payments outside of the Chapter 13.  The good thing about a Chapter 13 is that debtors who do struggle with the plan payments may be able to have their payment amount changed.

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Some people prefer to negotiate settlements with their creditors either through a debt management company or on their own. Their goal is to avoid what they consider to be the absolute worst option: bankruptcy. However, a bankruptcy provides some benefits that are not available in debt settlement.

When a debtor files bankruptcy, there is an automatic stay that becomes effective. Creditors must immediately stop all collection activity against the debtor. Creditors must stop sending collection letters and statements, garnishing wages, and contacting debtors on the phone. If a lawsuit is in process, the lawsuit must be closed with the court. As a result of the automatic stay, debtors get relief from creditors.

With debt management, interest rates are typically negotiated with creditors to reduce the monthly payments. However, there's nothing that absolutely prevents creditors from contacting debtors. To make matters worse, there are some fraudulent debt management companies that take money, but don't do anything to settle the debt.

Both bankruptcy and debt settlement are reported on credit reports. Bankruptcy can be reported for up to ten years, but that doesn't mean that it will take ten years to improve a credit score. Also, debt eliminated in a bankruptcy doesn't count as income for tax purposes while settled debt may count as income.

As shown above, bankruptcy is not always the worst option in the world. There are benefits that are not available with other options.