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Rhode Island Bankruptcy Debtors Catch a Break

Twice a year, the US Census Bureau and the IRS provide data used by bankruptcy lawyers to determine who qualifies for debt relief. On May, 1, 2012, the new income numbers became effective for all new bankruptcy case filings. The good news is that median income figures rose for all household sizes in Rhode Island.

Below are the new median income figures that I will use for my Rhode Island clients who need to file for bankruptcy:

1 person household $ 47,798 (up from $ 46,335)
2 person household $ 61,506 (up from $ 59,624)
3 person household $ 68,909 (up from $ 66,800)
4 person household $ 88,990 (up from $ 86,267)
Add $ 7,500 for each additional household member above a 4 person household

As a reminder, these are gross income figures. To determine whether you qualify for Chapter 7 bankruptcy relief, I will examine your trailing 6 months of gross income from all sources, except Social Security and unemployment. I will then double the gross figure and compare it to the chart above.

Bottom line: Many more who need to file for bankruptcy protection in Rhode Island now qualify. This window of opportunity may only be available for a short period, so if you are considering bankruptcy, call a qualified RI bankruptcy attorney today.

Top 7 Reasons To File Chapter 7 vs Chapter 13

The US Bankruptcy Code provides a number of choices to people struggling with debt. The most popular choice is to file a Chapter 7 Bankruptcy petition. Here are seven reasons why.

Time—A normal Chapter 7 bankruptcy case takes about 100 days from beginning to end. After a brief creditor’s meeting one month into the process, the case ends two months later.
Property—Because federal and/or State exemption laws allow a debtor to protect their assets, most Chapter 7 filers do not lose any property. The bankruptcy trustee handles most cases as “no asset” cases, meaning that the debtor is not required to forfeit any property.
Cost—Filing under Chapter 7 is considerable cheaper than filing under Chapter 13. Even though lawyer fees may differ from state to state, most bankruptcy attorneys will quote a fee that is fair and affordable. Bankruptcy lawyers who practice exclusively in bankruptcy (not general practitioners) understand you don’t have extra money to overpay for their services.
Repayment—You are not required to repay unsecured non-priority creditors like credit cards, utility bills, personal loans, or medical bills. If you created your debt in good faith and no creditor objects to your bankruptcy, most unsecured credit obligations will be destroyed in your bankruptcy.
Privacy—Record of your bankruptcy is only accessible in the court system. In most cases, the only people who will know you filed for bankruptcy protection are you, the court, and your creditors.
Credit—Most people who file under Chapter 7 can reestablish credit shortly after their bankruptcy concludes. (Your debt to income ratio improves once your debt has been eliminated: the first step towards rebuilding your credit.)
Stress—Most chapter 7 filers never set foot in a courtroom. Instead, they merely attend a brief, informal hearing with the trustee assigned to their case.

A Unique Opportunity: Second Mortgages in Chapter 13

Guest post by South Carolina Bankruptcy Lawyer Lex Rogerson.

If you’re trying to decide which approach to bankruptcy is best for you, the prospect of writing off a second mortgage can be a powerful reason to consider filing Chapter 13.

Chapter 13 carries certain disadvantages for consumer debtors as compared with Chapter 7. The fees are higher, the bankruptcy case continues for years instead of months, and the debtor usually has to pay some creditors who might get nothing if he filed Chapter 7. So there has to be a good reason to choose Chapter 13.

Traditionally the most common reason is that Chapter 13 lets debtors catch up with delinquent mortgage payments in an orderly way. But with real estate values down an average of 30% over the last few years, an increasingly common reason to file Chapter 13 is to strip off an “underwater” second (or third) mortgage.

Let’s start by looking at how secured debts are treated in bankruptcy. In Chapter 7, for the most part, secured debts pass through unaffected. If you have two mortgages when you file Chapter 7, you will almost always have two mortgages when you finish your case. You cannot strip off a mortgage in Chapter 7.

By comparison, in Chapter 13, secured debts generally are paid in full. But unsecured creditors are often paid a nominal amount, possibly as low as one to two percent of their claims. If a debt can be classified as unsecured, the debtor can likely eliminate it with a minimal payment.

Now, we typically think of a mortgage as a classic secured debt, because the creditor has a lien on the home or other real estate to secure payment. But the Bankruptcy Code has a special definition of secured debts. Under Section 506, a debt is secured only to the extent of the value of the collateral. So if I own a TV worth $200 but owe $300 on the TV, the creditor has a secured claim of $200 and an unsecured claim for the remaining $100. We refer to this as bifurcating the claim or “cramdown.”

With home mortgages, it works a little differently. In order to encourage mortgage lending, Congress has decreed that first mortgages on residential real estate cannot be crammed down. So while Chapter 13 can help you catch up with a first mortgage if you are behind, it cannot reduce the total amount required to pay off the mortgage debt.

The situation can be different for second mortgages. If the value of the property is less than the payoff on the first mortgage, the second mortgage has no remaining value to “attach to.” In effect, the first mortgage eats up all the value of the property, leaving none for the second. In this situation, the second mortgage can be classified as fully unsecured. This means the debt to the second mortgage holder, like any other unsecured debt, can be discharged, usually with only a nominal payment. We refer to this as stripping off the second mortgage.

To illustrate how this works, let’s say you have a first mortgage with a balance of $100,000 and a second of $40,000. If your home is worth less than $100,000, your Chapter 13 plan can classify the second mortgage as an unsecured debt and usually pay it off at pennies on the dollar, because the first mortgage eats up all the value in the home. But if your home is worth $100,001, the entire second mortgage survives and must be paid in full.

Because determining real estate values is not a precise matter, it is not always possible to tell for sure whether a stripoff will succeed. But the potential upside is tremendous: the debtor can emerge from Chapter 13 after three to five years with only one mortgage instead of two, and without paying a substantial amount on the second. It’s an opportunity you will want to discuss with your RI bankruptcy attorney if your second (or third) mortgage may be underwater.

One last wrinkle. If the value of the property is more than the first mortgage payoff – even if only a few dollars – this leaves some value in the property that the second mortgage can attach to. The second mortgage then gets the same protection as the first. It must be paid in full. It’s an all-or-nothing proposition. Any value beyond the first mortgage means the second mortgage survives.

How To File a Chapter 7 Bankruptcy Petition

by Mark Buckley

For the last 28 years, I’ve been drawing pictures and timelines to explain to my Chapter 7 bankruptcy clients how the process works. I finally decided to make a video and hope you find it helpful.

The Truth About the Mortgage Modification Process

Obama’s mortgage modification program: on its way out?

Could the Obama Administration’s program to help American homeowners stay afloat be nearing the end of its usefulness? A committee of Washington Republicans assigned to oversee White House programs says this could be the case.

Soon after it became obvious that a major national financial crisis was looming on the horizon, the Obama Administration launched its Home Affordable Modification Program (HAMP), offering mortgage lenders financial incentive to restructure their customers’ payment plans. Although optimists predicted this program would stem the tide of sub-prime mortgage failures, it only ended up being temporarily effective: confusing paperwork, uninformed staffs, and poorly organized processes hopelessly confounded a large number of participants, many of whom ultimately failed to acquire long-term mortgage modification.

Newly elected Republican officials are expected to study and scrutinize many of the President’s recession-protection strategies, and thanks to its less-than-stellar performance, HAMP will probably make an easy target. “This program seems to have outlived its usefulness,” stated Darell Issa of the House Oversight and Government Reform Committee. In Issa’s opinion, the incentive program is yet another example of superfluous government intervention.

This allegation is not entirely without basis in reality. Although hopes ran high for HAMP, in truth the entire program was rushed and poorly planned from the beginning. Of the 500,000 homeowners granted temporary mortgage modifications under HAMP, only a miniscule fraction was approved for permanent modifications. In the long run, this left many further behind on their mortgage than they began.

Additionally, recent unemployment rates have been less than conducive for HAMP’s success. In recent years it has become impossible for much of the country to attain income levels capable of handling modified mortgages, let alone unadjusted ones.

The fact that HAMP has been associated with the robo-signing controversy only compounds problems. Republicans now blame Democratic regulators for not paying close enough attention to the foreclosure industry. Representative Robert Goodlatte is quoted in a recent hearing on Capitol Hill as demanding Democrats to “explain how the OCC [the agency in charge of overseeing the activity of America’s largest banks] …failed to detect that there were foreclosure documentation issues well before this turned into a crisis.”

Julie Williams, Chief counsel for the OCC, had little to say in response: “In hindsight, if we think about the volume of transactions that were going through the process, we could have been more suspicious.”

Rhode Island Bankruptcy Debtors Catch a Break

Top 7 Reasons To File Chapter 7 vs Chapter 13

A Unique Opportunity: Second Mortgages in Chapter 13

How To File a Chapter 7 Bankruptcy Petition

The Truth About the Mortgage Modification Process

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