Rebound in Housing means Appraisals in Bankruptcy

In bankruptcy, property appraisals can be crucial. Under chapter 7, a proper valuation can mean the difference between keeping and losing the property. Under chapter 13 it can significantly impact the amount you will have to pay to unsecured creditors.

I wanted to mention this in the blog because I’ve noticed an uptick in bankruptcy filers with at least some equity in their homes. Of course equity is normally a good thing, but it can be a real problem when you're trying to wipe-out debts in bankruptcy.

WHAT IS EQUITY?

The term “equity” can mean different things. For the purposes of our Chicago bankruptcy discussion EQUITY is the value of an ownership interest in property – whether personal property or real property. The most common property that comes into play in bankruptcy are houses and cars.

Here’s how to figure out the equity in your property:

FIRST, take the difference between the market value of the property and the balance on the loan you made to purchase the property (this is also the lien value). If you've paid off your loan and there is no lien, you have 100% equity in the property. Or, put another way, the property is owned by you “free and clear.”

SECOND, account for co-owners. In most cases, property is either owned by only one person or by two people who are married. If you are the sole title holder, all the equity in the property belongs to you. If, on the other hand, you share title with someone else, that equity is divided like the ownership interests (usually 50/50).

Here's an example

If your house has a market value of $100,000 and you still have a $70,000 mortgage to pay back, the value of your ownership interest (your equity) is $30,000 (the difference between the market value and the balance on the loan). It’s only $30,000 and not the full $100,000 because if you were to ever sell the home, you can only keep what you don’t have to pay back to the bank.

If someone else owns the property with you, the $30,000 in equity is divided according to each person’s ownership interest. In the case of joint tenants, the equity would be divided 50/50 with each owner getting $15,000 each.

FYI: This works the same way with personal property too (cars, motorcycles, etc.)

In cases where the balance on the loan is more than the market value of the property, your ownership interest is not worth anything and you have no equity. It’s worth zilch because after a sale at market value, you wouldn’t have anything left for yourself after paying the lender. In fact, you would owe the lender money (a deficiency). This is when your interest in the property is considered “upside-down" or "underwater.”

SO: When you have equity, you have an interest in property that is worth money. When you don’t have equity, you still have an interest in property, but it’s not worth any money.

ROLE OF EQUITY IN BANKRUPTCY

Equity essentially dictates whether or not you will be able to keep the property or how much you will have to pay back to your unsecured creditors.

Here's How it Works

The law generally only allows you to keep only a certain portion of the equity. The remainder is distributed among your creditors. The size of the equity portion you can keep depends on property type and locality of the filing. Locality matters because different states have different rules for dividing equity between the owners and creditors. These rules are called “exemptions.”

Bankruptcy and Property with No Equity.

When you have no equity there is no value to share. The lender you’re making payments to has first dibs on the entire value of the property. Generally, you will not lose that property in bankruptcy as long as you continue making payments as agreed. Remember, the most common reason people lose property in bankruptcy is because they have equity in it unsecured creditors can share.

In a Chapter 7 bankruptcy, if you don't have property with equity, the dischargeable debts are wiped out without unsecured creditors getting a dime. You just get on with your financial fresh start.

Bankruptcy and Property with Equity.

When you have equity there IS, or more appropriately MAY be, something to divide between you and the creditors. As stated above, the division is made according to certain rules. These rules specify the amount of equity each owner can keep. Any equity that exceeds the owner's share must be divided among the creditors.

Keep in mind that the only way the equity can be divided is if it’s turned into cash. And the only way to turn the property into cash is to sell it (“liquidate” it). The exceptions are if you can come up with the money to payoff the chapter 7 trustee (the trustee liquidates the property and disburses the proceeds to creditors), or pay the equity to the creditors over time through a chapter 13 reorganization plan.

EQUITY WILL REBOUND WITH THE HOUSING MARKET

While the jury is still out, the consensus seems to point to a strong rebound in the housing market. “The housing market is rebounding faster than anyone thought possible...” says Blackstone Group LP (BX)’s global head of real estate Jonathan Gray. (check out this article in Bloomberg.com . As home prices increase, owners who were only marginally upside-down will start to see positive equity. If the rebound continues, equity may exceed the share you can protect. This is especially true if you are the sole title holder.

Consequently, if you're a home owner and considering bankruptcy to wipe out your debts under chapter 7, or haven’t yet decided if you want to strip that second mortgage or otherwise reorganize your debts using chapter 13, your time to do so may be slowly running out.

In chapter 7, the property may have to be sold. In chapter 13, equity causes problems in two ways: For one, you can only strip a second mortgage if it's completely unsecured. This means that you can't have any equity in the property. And two, you have to pay your unsecured creditors at least the value of the equity they would receive if the property was liquidated under chapter 7 bankruptcy. This is known as the "liquidation test." This may mean that you will have to pay more to unsecured creditors than your budget can afford, preventing you from proposing a plan a judge will approve.

AND...BACK TO APPRAISALS

I hope by now you realize the importance of appraisals in bankruptcy as the housing market continues to rebound. As prices increase, bankruptcy trustees and creditors will start scrutinizing the value of your home. Both parties will be on the lookout for equity that exceeds your allowed exemptions.

An appraisal by an expert can be invaluable because it is the most objective assessment of the property’s value. Providing an appraised value in the bankruptcy forms will lessen this scrutiny and will be greatly appreciated by the bankruptcy trustee who would otherwise have to dedicate more time and resources into obtaining an appraisal herself. The risk of losing the property justifies the extra expense of an expert appraisal. And it's best to have all the details and issues of the bankruptcy case worked out before the case is even filed so there are no surprises.

So, if you are unsure of the market value of your home, it behooves you to find out before the bankruptcy process is initiated. Where there is a chance of unprotected equity, it behooves you to fork out the $300 for a full appraisal.

IN SUMMARY

Equity is the difference between the market value of the property and the loan balance. The equity is divided among ownership interests in the property. State laws allow each owner to keep a certain share of the equity. Generally, in bankruptcy, the equity exceeding the owner’s share must be divided among creditors. I’m seeing an uptick in circumstances where the property is no longer underwater where the owner is unsure about the amount of equity in the home. If you’re considering a fresh start and own a home, spending the $300 for a proper appraisal can be priceless.

So, keep this in mind. FIRST, if your attorney does not raise the issue and simply accepts the market valuation you got from Zillow, consider consulting with a different bankruptcy attorney. SECOND, if you're a homeowner and you’ve been contemplating wiping out your debts or stripping that second mortgage through bankruptcy but weren’t sure whether to file, your time for a no-asset case may be running out as the housing market continues to rebound.

- BKguy
“Get out of debt . . . and start living your life in color.”

Notes for this Post

Illinois homestead exemption: $15,000 per person. This is the share of equity each owner can keep in the home under Illinois law (married couple gets $15k each for a total of $30,000).

Interesting New York Times article on property appraisals.

Zillow.com. Zillow’s market value estimates were acceptable before the market crash. Today, the valuations are inaccurate. Zillow’s algoritym just couldn't and still can't keep up with a housing market that’s just out of whack.

Nada.com Use this site to get the estimated market value for your car.

There are generally two bankruptcy types for consumers. Chapter 7 Bankruptcy, and Chapter 13 Bankruptcy.

Timing of the bankruptcy case filing – Part I: The pitfalls of emergency bankruptcy filings.

The Situation

I recently had an exchange with a potential chapter 7 bankruptcy client. I’ll name the client “Sam.” Sam wanted to meet Saturday afternoon and have the case filed Monday. I told Sam that unless I specifically agree to file a case by a certain date, I reserve the timing of the filing to my discretion. Sam didn’t understand this and decided to seek services from another attorney.

Because we never did meet that Saturday I can only speculate why Sam wanted the case filed so quickly. It might be because I handle routine chapter 7 bankruptcy cases at reduced fees for unemployed clients, and Sam was about to get hired. But who knows, it’s only my guess. Regardless, I found I want to discuss two topics from this exchange in a two-post series.

In this post, I’ll share some thoughts on why fast emergency bankruptcy filings – unless absolutely necessary – are usually not a good idea. In Part II I’ll talk about the discretion the bankruptcy attorney has when it comes to the timing of the filing of a bankruptcy case.

MY THOUGHTS ON EMERGENCY BANKRUPTCY FILINGS

While not recommended, a fast emergency bankruptcy may be appropriate in certain situations – like for example, if your home is about to be sold at a foreclosure sale or your car is about to get repossessed. In those cases, an emergency filing may be to only option to keep your property. But mind you, fast/emergency bankruptcy filings are expensive and involve certain added risks.

1. DEADLINES

Once the case is filed, the clock starts ticking on many tasks with deadlines. When the attorney has plenty of time to completely analyze and prepare a case the deadlines should be a non-issue. A hasty filing, however, may lead to problems because the client may not be able to provide (even due to circumstances beyond the client’s control – the bankruptcy court will generally not care) the attorney with the documents or information to complete the task before the deadline. This may jeopardize the case.

2. DOCUMENTS AND INFORMATION

Filing a bankruptcy case involves the gathering of many documents and a lot of information; things that a bankruptcy client may not have readily available. These are needed for a complete analysis of your case, as discussed below, and to complete certain tasks before deadlines as discussed above.

3. COMPLETE ANALYSIS

A dedicated and competent Des Plaines bankruptcy attorney will completely analyze the client’s situation for adverse consequences that may result from the filing (consequences that a client may not be ready to accept), and whether bankruptcy is even possible and advisable. Unless a situation is fairly simple and the client has all the documents and information at the initial consultation (this is rare), the analysis of your case will be an ongoing process and will not be complete until you provide the attorney with every document and piece of information needed to complete the analysis. This is why initial consultations are usually just the start of the evaluation process.

Here are some common reasons why potential clients usually do not have the documents and information at the initial consultation: (1) the information may not be readily available; (2) not sure if wants to proceed with the bankruptcy so lacks the effort to gather information ; (3) forgot or could not find the information or document; (4) issues come up during the consultation that the potential client has not considered and additional information and documents are needed to complete the analysis; (5) there is a continuous change in the potential client’s situation (like a divorce); (5) changes in the law; (6) the situation involves an issue that requires additional legal research.

4. COOPERATION AND COORDINATION

Even simple bankruptcy cases involve a great deal of cooperation and coordination between the attorney and the client (and even third parties) in doing what is discussed in the points above. This is time consuming and takes effort. After all, life doesn’t just stop because a person is filing bankruptcy. You still have to go to work, kids get sick, you get stuck in traffic, the bank or some agency from which you need a document closes, etc... The point here is: Filing a successful bankruptcy case takes time.

5. RISKS

Adding to the risks and uncertainties listed above, in chapter 7 bankruptcy cases the client has no right to voluntarily dismiss the case when things go wrong. A judge must give the approval. Getting approval may be difficult, if at all possible, particularly when assets that can be administered by the trustee are discovered. Voluntary dismissal of a chapter 13 case is not guaranteed either. All bankruptcy cases must be filed in good faith. This means that they must be filed for the right reasons with the proper intent. Filing a chapter 13 case without the intent of ever completing the plan is considered bad faith. Keep in mind that in the rush to file the case things may be overlooked; important things. This can lead to a dicey situation with consequences such as a dismissal of your case, denial of discharge, or, while rare, even fines and imprisonment.

6. EXPENSE

Even if an attorney agrees to represent a potential client in an emergency bankruptcy case or promises to file your case by a certain date that is fast approaching, it will be very expensive.

First, the attorney will increase fees just for taking on the risks and uncertainties discussed above.

Second, the attorney will increase fees because the attorney will have to spend more time and effort coordinating matters to get the case filed as agreed and addressing complications that may arise. The attorney may have to put the matters of other clients on hold just to do this.

Third, the attorney will probably charge higher fees for allotting time that may have to be spent writing and filing motions and going to court to extend deadlines, for example. And an additional bill may be sent to the client for actually doing these things later.

The point here is: Getting an attorney to agree to file an emergency bankruptcy case or to file a case by a certain date fast approaching will be very expensive.

CONCLUSION

In summary, emergency filings are possible but are expensive and involve certain risks. You really shouldn’t wait to the last minute to get bankruptcy advice. Talk to a bankruptcy lawyer about your federal debt relief options when you find your financial situation STARTING to get out of control. Don’t wait until your financial situation already IS out of control. And certainly don’t wait until the eve of a foreclosure sale or lawsuit judgment!!! A dedicated and competent bankruptcy attorney will meet with you, hear you out, and give you initial advice for free.

In the next post, I’ll discuss the bankruptcy attorney’s discretion when it comes to the timing of the filing of a bankruptcy case.

- BKguy
“Get out of debt . . . and start living your life in color.”

Behind on Bills? Becoming a Social Recluse Can Lead to More Trouble

You Must Keep Some Semblance of a Social Life Even With Money Problems.

Being behind on bills really sucks – the threatening dunning letters, harassing phone calls, etc. What can suck most are the social ramifications. When your finances are a mess you can find yourself slowly withdrawing from society – you may not even notice. Social withdrawal can quickly lead to mild depression (if not worse) which is definitely not conducive to helping you take control of your finances by attacking the problem head on.

Humans are social beings. We need to interact with others to maintain our mental stability. For the majority of us, the most important social interactions are with friends and family. And having no money can lead to less interaction with both groups.

How a social withdrawal may start.

You stop participating in the events with your extended family. After all, going to your cousin’s birthday party costs money; you can’t just show up empty-handed, right? Your credit cards are maxed out and you have no cash for a gift (not even a small one) because you’re trying to keep up with the minimum payments – that have now doubled since you’ve fallen a bit behind. So you come up with an excuse and you don’t attend.

You spend less quality time with your immediate family. Constantly preoccupied with your finances, you can’t enjoy any activities because your concentration is elsewhere. Doing stuff outside the house is out of the question; even taking the kid to the zoo costs money. There’s the price of tickets, and heck, you have to pay for gas to get there.

The severe debt induces the social withdrawal further as you stop going out with friends. You can no longer afford to go to a movie or to hang out over a few beers. You have to pay for the beer and there’s that dreaded tip (Remember when you took great pride in being a great tipper?).

Serious consequences to the unwary.

A missed birthday party, a pass on a hangout, etc... The next thing you know you’re screening calls from family and friends as if they themselves were the debt collectors. You figure: what’s the point? you can’t afford to participate anyway! Now you’re even in a deeper hole. Not only are you in trouble financially, you’re now in trouble mentally and emotionally. It becomes hard to take any kind of action when you’re mentally resigned. You must be proactive to take control of your finances. You have to want to get out of bed in the morning.

You don't have to be a social butterfly. A small amount of social engagement can go a long way.

So the bottom line is this: You don’t have to attend birthday parties or hangouts with friends when your finances have taken a turn for the worse. Just be mindful of the dangers of a complete social withdrawal. Lack of interaction with your social support networks can lead to depression. And depression is a bad thing. You must attack your financial situation with all your mental faculties intact.

I challenge you. You challenge you.

I challenge you and you must challenge yourself to get informed about all your debt relief options; after all, knowledge is power. Address your financial problems head on

. . . and start living your life in color.

- BKguy
“Get out of debt . . . and start living your life in color.”

Understanding America's Bankruptcy Law and Getting it Right.

Intro

This “Understanding” series of posts is aimed to help you get a grasp of the general principles and policies behind our bankruptcy law. I won’t be getting into the technical provisions of the Bankruptcy Code or what relief the Code can provide for your situation. Instead, I’ll give you a brief overview of how the law came about, its purpose, and how it works. My hope is that once you better understand the principles and policies behind the Bankruptcy Code, you will have an easier time embracing bankruptcy as a debt relief solution.

The History of Our Bankruptcy Law

To start the series, I will briefly discuss the history of America’s bankruptcy law in these next couple of posts. I know, I know . . . who cares about the history of bankruptcy law when you just want fast relief from burdensome debt. Well, believe it or not, there are a lot of people that are in need of bankruptcy protection but are afraid to seek relief due to the sheer terror of even the idea of bankruptcy.

My stance on this inhibition is that most people that are afraid to consider bankruptcy as a solution don’t have the complete picture of bankruptcy law. They just embrace the negative misconceptions about the law that gives the term “bankruptcy” its stigma while the important policies driving the Bankruptcy Code get “lost in the sauce.”

There’s a lot of misinformation out there about bankruptcy. You can easily get wrong information from the internet, from your neighbor, or even your mother. That’s why one of my main objectives through this blog is to provide you with concrete information about America’s bankruptcy law so when you decide to either embrace it or reject it as a debt relief solution, you can do so intelligently. I mean, you can lead the horse to water, but you can’t make it drink, right?

Through my experience I have found that knowing the history of something and the underlying policies behind it are important setting stones to understanding it – whatever it may be. After you understand it you can then either embrace it or reject it. This also applies to bankruptcy law.

First Historical Lesson | Founding Fathers did not make bankruptcy a constitutional right.

Contrary to popular belief and many internet search results, bankruptcy is not a constitutional or fundamental right. Take a look at the United States Supreme Court decision U.S. v. Krass, 409 US 434. The Court explains that the bankruptcy discharge is a legislative “benefit” created by our Congress. So while it’s your statutory right, it’s not your constitutional right.

You might think: “Who cares!..does it really matter whether bankruptcy law is a constitutional right or a legislatively created one?” Well, yes and no.

No, it doesn’t matter if you’re seeking to get relief from debts right now, because the Bankruptcy Code is here and you can take advantage of the law RIGHT NOW.

But on the other hand, YES, it does matter. It matters because what Congress “giveth,” Congress can “taketh.” In fact, except for three short periods during the first 110 years of America’s life the benefit of the bankruptcy discharge wasn't available. A bit more recently in 2005, due to the powerful lobby of the credit card industry, Congress decided to make bankruptcy relief more complicated and difficult to obtain (thus more expensive). Congress is also the reason why over a trillion dollars in student loans is largely not dischargeable in bankruptcy. The bottom line is that it’s well within the power of your Congressmen and Senators to control your financial destiny if you are ever in severe debt for whatever reason. And this means that it's also within the credit card industry's or medical industry's power because these imposing special interests can surely influence your legislators.

The side note to that, of course, is that YOU can influence the decisions of your legislators. And your participation is more important than ever largely due to the Supreme Court’s Citizens United decision where the Court held that corporations (this includes credit card companies, for-profit schools, etc.) can spend unlimited money influencing our elections.

So, while Article I, Section 8, Clause 4 of the U.S. Constitution does provide for bankruptcy laws throughout the United States, it merely gives Congress the power to create them. It certainly does not create or guarantee them.

Instead of getting into the reasons for the prevalence of this “bankruptcy is your fundamental right” misinformation, I’d like to ask you to chime in with yours. However, this definitely may be a topic for a future post.

A Quick Summary

There is a lot of misinformation out there, and you should reserve judgment about considering bankruptcy as a solution to your debt problems until you at least understand the underlying purpose of our bankruptcy law. The best way to do this is to start with getting to know the law’s history. One of the biggest misconceptions out there about bankruptcy is that it’s your constitutional right – it isn’t. The Founding Fathers merely gave Congress the power to create bankruptcy laws but never guaranteed them. Congress used the power to give you the right to file bankruptcy because letting people file bankruptcy is grounded in sound principles and policy reasons. The most important thing to remember out of this historical lesson is that Congress is well within its power to take away your right to file bankruptcy.

Next Post

In the next post, I’ll discuss the reasons the Founding Fathers wanted Congress to have the power to create bankruptcy laws.

- BKguy
“Get out of debt . . . and start living your life in color.”