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A Unique Opportunity: Second Mortgages in Chapter 13

by Mark Buckley

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.

Filed Under: Blog, Chapter 13, Personal Finance, Rhode Island Bankruptcy Articles Tagged With: bankruptcy attorneys, bankruptcy lawyers, Chapter 13, filing bankruptcy in Rhode Island, Mark Buckley, Rhode Island, Rhode Island bankruptcy, Rhode Island Bankruptcy lawyer, RI bankruptcy lawyer, RI bankruptcy lawyer Mark Buckley, RI Chapter 13, SC bankruptcy lawyer Lex Rogerson, second mortgage, stripping off mortgage

“How Much Do You Charge To File Bankruptcy”

by Mark Buckley

A percentage of callers always begin with that magic question:  What do you charge for bankruptcy?

Price is always a fair question when it comes to hiring any professional.  If I were paying a plumber to fix a toilet, or a dentist to pull a tooth, I want to know two things:

  1. is he experienced to do the job
  2. is his fee reasonable for my particular job

Sometimes you strike a good deal and sometimes you don’t.  Hiring a bankruptcy lawyer is no different.  Sit in on some Rhode Island bankruptcy court hearings in Providence for a day and you will quickly discover that good bankruptcy lawyers know what they are doing, but many “general practice” lawyers do not.

You will also determine which lawyers are running bankruptcy mills.  I have seen some lawyers file 30 cases at once, miss filing deadlines and receive court sanctions for their poor representation.  Don’t be fooled by the big billboards, the radio advertisements or their claims of filing more cases than any other firm.  You should hire a lawyer who is respected by the court and the bankruptcy trustees; not someone who has a reputation of cutting corners and being unprepared.

So, back to the question of “price”.  What do I charge for a Chapter 7 bankruptcy?  It truly depends on what your case looks like.  Its not like buying a gallon of gas where you just buy it from whoever is the cheapest.  Bankruptcy is anything but a one-size-fits-all situation.  Tell me your story first, we will explore all options, and if we are a good fit, I will quote you a price you can afford.  (And yes, I do realize that if you had a lot of money, you wouldn’t be needing to call me.  I get it.)

Filing for bankruptcy is a very complex process with specialized procedures tailored to your individual situation.  Remember, your legal costs correspond to the complexity of your bankruptcy case.  Fortunately, bankruptcy attorney fees are relatively inexpensive in comparison with the relief of having your debt cleared once and for all.

Another factor that will influence the amount of your bankruptcy attorney fee is the length of time your case will take to run its course. Generally speaking, a more complicated case will take longer for a bankruptcy lawyer to see through, resulting in higher prices than would be charged for a short, simple case.  Easy cases should be done quickly and inexpensively.  That is why I charge the lowest fee to a senior citizen, living on Social Security, with no real estate and only a few credit cards.

The costliness of your legal fees also depends on the size and volume of your assets and debts. In most cases, your legal bills will be lower the fewer assets, properties, cars, investments, and debts you have accrued. The Law Offices of Mark Buckley can provide an initial consultation to determine the value of your assets, and, consequently, determine the cost of your bankruptcy case.

Lastly, the amount of money you pay to file for bankruptcy is directly related to the type of bankruptcy you file under. When a client files bankruptcy under Chapter 13 of the US Bankruptcy Code, for example, his attorney can put the majority of his attorney fee in the Chapter 13 plan, a payment scheme that demands less money up front from the person filing.

As a RI bankruptcy lawyer practicing for 21 years, I have counseled thousands of good people struggling with bad debt problems.  If you are getting collection calls, being sued for wage attachment, or just simply getting close to your breaking point, its time to call a professional.

Filed Under: Blog, Rhode Island Bankruptcy Articles, Rhode Island Chapter 7 Tagged With: Bankruptcy, bankruptcy court, bankruptcy filing, bankruptcy lawyer, bankruptcy lawyers, bankruptcy low fees, Chapter 13, Chapter 7 bankruptcy, cheapest bankruptcy, credit card, debt, filing bankruptcy in Rhode Island, how much to file Chapter 7, Mark Buckley, Rhode Island, Rhode Island Bankruptcy lawyer, Rhode Island Chapter 7, RI Bankruptcy Court, RI Chapter 7, what does bankruptcy cost

Chapter 7 Bankruptcy Filing in Rhode Island: How Long Will It Take?

by Mark Buckley

Chapter 7 Bankruptcy filings take how long to complete in Rhode Island?

Let’s pretend you filed a Rhode Island Chapter 7 bankruptcy case today. If you did, your case would come to an end in about 90 days. What happens during that time?

Let’s examine a typical Chapter 7 filing in RI:

  1. You complete your first education course on-line, or over the phone. It takes about 60 minutes and is easy.
  2. Your bankruptcy lawyer obtains a bankruptcy-specific version of your credit report.
  3. Your 50 page bankruptcy petition is filed electronically with the RI Bankruptcy Court in Providence.
  4. A Chapter 7 trustee (another lawyer) is assigned to review your petition.
  5. Your attorney sends your tax returns and pays advice information to the court/ trustee.
  6. The Bankruptcy Court Noticing Center contacts each creditor listed in your petition.
  7. You complete your second debtor education course which takes 2-3 hours.  Also very easy.
  8. Once your course is completed, your attorney files a certificate of completion with the court.
  9. A 341 meeting of creditors is scheduled 30-35 days into the process.  Hearings take place in Providence.
  10. You attend the meeting of creditors to answer common questions from the assigned trustee.
  11. If your property is exempt (protected), the trustee files paperwork with the court saying you have been examined and there is no property to distribute to creditors.
  12. If you have assets that are unprotected, the trustee will collect the property for later distribution to creditors.
  13. Around day 90, your dischargeable debts are wiped out and your case is over (if no creditor has contested your case.)

It’s easier to understand the Chapter 7 bankruptcy timeline if you divide it in thirds. If you filed your case today, you would have to attend a creditors meeting in 30 days.  Then, if no creditor contests your case and your trustee doesn’t need to distribute any assets, your case is over 60 days after the hearing.

I realize it is stressful to think about filing for bankruptcy.  If handled correctly, however, there is nothing to worry about.  I have represented more than 3,000 clients over the past 21 years.  If you can answer my questions honestly and completely before the bankruptcy petition is filed, you will be amazed how fast and straightforward bankruptcy can be.  I have never filed a bankruptcy petition that was not approved by the court.

A 341 meeting of creditors typically lasts 5 minutes or less.  It is not a court room.  There is no judge, jury, or really anything you would associate with “court”.  Honest debtors are literally out the door in a matter of minutes.

Filed Under: Blog Tagged With: Bankruptcy, bankruptcy courts, bankruptcy lawyers, bankruptcy petition, business, credit report, file bankruptcy, filing, honestly, how long, insolvency law, law, rhode, Rhode Island, Rhode Island Chapter 7, RI bankruptcy, title 11, trustee, united states bankruptcy law, united states code

14 Lies About Bankruptcy

by Mark Buckley

Search the words “bankruptcy”, or “filing for bankruptcy”, or even “Rhode Island bankruptcy lawyer” on the internet and you will discover a subject surrounded by a confusion and misinformation.

However, if you are drowning in debt, it becomes crucial to separate fiction from fact. Is bankruptcy as bad as your creditors would have you believe? Let’s analyze a few of the charges leveled at bankruptcy to find the truth.

Myth 1:  Under The NEW Bankruptcy Law….There’s No More Help (or It’s Too Late To File)

Nothing could be further from the truth. Despite what you may have heard from the press, this claim is completely unsupported. In reality, you can do almost as much (and in some cases, more) under the new law as you could under the old law. Many clients are actually making out better under the new law than they did under the old.

Myth 2:  Everyone Will Know You Have Filed For Bankruptcy

This is another falsehood. The average person can obtain a financial fresh start without the world ever finding out: chances are the only people who will know about your RI Chapter 7 filing are the people you decide to tell. Although it is true that your bankruptcy is a matter of public record, the number of bankruptcies filed yearly is so massive that the possibility of anyone knowing you filed is extremely remote.

It is crucial to note the importance of not telling others of your bankruptcy filing. Like divorces and cancer, financial problems makes good gossip, and if you tell one person, you tell the world. Unless you actually want your friends and family to know you filed for bankruptcy, keep it under your hat.

Myth 3:  You Will Lose Everything You Have

Most of my clients don’t lose anything. Every state, including Rhode Island and Massachusetts, has its own set of exemptions that protect various kinds of property under bankruptcy. For example, Rhode Isand’s exemption laws protect a person’s house, car, truck, household goods, furnishings, retirement plans, IRAs, wages, personal injury claims, and cash value in life insurance. In most cases, creditors will not require the signing of a reaffirmation agreement to keep secured property.  Even if you have more property than can be covered by available exemptions, filing for the slightly-more-expensive Chapter 13 bankruptcy allows you to keep your property.

Myth 4:  You Will Never Be Able To Own Anything Again

No matter how many people believe this myth, it too is untrue. If anything, bankruptcy actually helps you get back on your own feet financially. In the future you will be able to buy, own, control and possess whatever you can afford, and if you are able to come up with the money for it, there is no law preventing you from buying homes, cars, trucks, equipment, household goods, et cetera.

Myth 5:  You Will Never Get Credit Again

The opposite is true: filing for bankruptcy leaves you in a better position to get credit than not filing. This is because filing for bankruptcy eliminates debt. Once your debt is behind you, you look more attractive to banks and credit card companies. In fact, it probably won’t be long before you start getting credit card offers-which is a mixed blessing because you don’t want to get right back into debt all over again.

Banks, credit card companies and other lenders might charge you higher interest rates at first, and will demand more money in down payments, but if you are financially responsible and keep your job, the quality of your credit will only improve as time goes by. In most cases, if a client has not re-established good credit after 3 years, it is not because he filed bankruptcy; something else must have happened to disrupt his credit.

Myth 6:  Filing Bankruptcy Means You’re a Bad Person

On the contrary, filing bankruptcy is a sign of financial responsibility.

Filing RI bankruptcy helps remove certain debts so you can take better care of your family, freeing your loved ones from the constant threat of unpaid bills and harrassing bill collectors.

Over 750,000 families file for bankruptcy relief every year. The majority of these are industrious, honest, law-abiding people who have simply fallen on hard times-whether it be job loss, family emergencies, medical difficulties, failed businesses, or otherwise. Bankruptcy laws were created with such unforeseen circumstances in mind, in order to allow families trapped under crushing mountains of debt to make a fresh start for themselves.

Myth 7:  Filing Bankruptcy Will Hurt Your Credit For 10 Years

To believe this myth is to confuse two entirely different concepts. The fact that a bankruptcy filing is reported on your credit report for up to 10 years does not mean that you will have no credit, or bad credit, for 10 years. In reality, filing for federal debt relief might not actually have a negative effect on your credit score at all.

Generally speaking your credit is already a mess-or maxed out-by the time you make an appointment to see a bankruptcy attorney. More than likely you have very little or no credit for bankruptcy to hurt.

Myth 8:  If You’re Married…Both You and Your Spouse Have To File For Bankruptcy

Thousands of cases exist in which husbands or wives filed for bankruptcy separately from each other. While it is sensible for a husband and wife who both have a lot of debt to file for bankruptcy together, doing so is never a legal requirement.  If there is not enough debt in both spouse’s names, I will only file for the spouse who actually needs help.

Myth 9:  It’s Really Hard To File For Bankruptcy

With an experienced bankruptcy attorney, filing for bankruptcy is far from difficult. In all honesty, the most difficult part of filing for bankruptcy is making the decision to do so. After that decision is made, filing bankruptcy in Rhode Island should be a straightforward process.

Myth 10:  Only Deadbeats File For Bankruptcy

Most who file consumer bankruptcy do so in order to protect their family from financial ruin. The majority of people who file for debt-relief are hardworking individuals who resort to filing as a last-ditch attempt to deal with large bills. Life-changing experiences like divorce, job-loss, failed businesses, illness, and unforeseen emergencies can happen unexpectedly.  As a step to free your family from crushing debt created by these events, bankruptcy is a noble act.

Compare this to the real definition of a deadbeat: someone who lets himself get deeper and deeper into debt each year, allows creditors to abuse him, and pays his hard-earned money to those creditors while his family suffers.  His house falls apart, his car falls apart, his life falls apart, his family falls apart.

He doesn’t seek to fix his situation because he doesn’t care. “Deadbeats” don’t file for bankruptcy: financially responsible people who care about their families do.

Myth 11:  Even If You File For Bankruptcy, Creditors Will Still Harass You and Your Family

The moment you file bankruptcy, an order called the “automatic stay” is issued by the Rhode Island Bankruptcy Court. This order is a grave warning that tells your creditors to leave you alone. The automatic stay prohibits you from all collection actions and even prevents your creditors from being allowed to talk to you. Creditors must cease all new collection attempts and halt all collection attempts they have already started. Their failure to do so gives you the right to take your creditor to court. Bankruptcy Court Judges are not friendly to violators of the “automatic stay.” In essence, creditors can either leave you alone or suffer the consequences: many Bankruptcy Court Judges have been known to issue severe punishment on offending creditors.

Think about the peace of mind you will have once you file for bankruptcy protection. No more collection letters, phone calls, repossessions, lawsuits, or threats of foreclosure from hungry creditors. You are protected by the “automatic stay”and have the full force of the bankruptcy court system backing you.

Myth 12:  If You File For Bankruptcy, It May Cause More Family Troubles and May Even Lead To Divorce

Filing for bankruptcy does not cause family troubles-not being able to provide for your family does. Stress and anxiety in the family are the products of the symptoms, not the cure. When unpaid bills loom, creditors can knock at the door, and nothing can be done about it.  In this environment, families will experience tremendous levels of pressure. If this pressure is allowed to continue for long, it can lead to family rifts and even divorce.

Bankruptcy, by its very nature, is designed to remove this pressure by destroying debt. Once the burden of debt is removed, stress lowers and your family can breathe easy again. Filing for bankruptcy can be an important first step in re-building relationships strained by financial hardship.

Myth 13:  You Can Only File Once For Bankruptcy Protection

Under Chapter 7 bankruptcy law, you can get a “discharge” once every eight years, allowing you to file for debt relief again if necessary. The wait is even shorter under Chapter 13, where it is only six years.

Myth 14:  You Can Pick and Choose Which Debts and Property To List In Your Bankruptcy

Unfortunately, this is not only impossible, but illegal. You must list all of your property and all of your debts when filing for bankruptcy. One of the prime reasons people want to leave out a debt is because they want to continue paying it off. However, the same result can be achieved under bankruptcy. Bankruptcy does not prohibit you from paying back whoever you like. In fact, in some cases you need to continue paying certain debts under bankruptcy-if you want to keep cars, trucks, or houses you owe money on, for example, you must continue paying off your debt.  You are protected under law and are able to keep the property for as long as you stay current on these loans.

Bottom line:  Knowledge is power. And in these days of financial instability, economic turmoil, and rampant debt, knowledge about your financial options is crucial to keeping your family and possessions secure.  Wouldn’t you prefer to know the truth about bankruptcy than remain in the dark about your options?  Before you come to your own personal verdict, make sure you know enough information to make a responsible decision.

The sad truth is that myths and ignorance are a creditor’s best friends.

Filed Under: Blog Tagged With: about bankruptcy, automatic stay, Bankruptcy, bankruptcy courts, bankruptcy exemption, bankruptcy filing, bankruptcy in the united states, bankruptcy law, bankruptcy laws, bankruptcy lawyer, bankruptcy lawyers, business, chapter 11, Chapter 13, credit card, file bankruptcy, file bankrupty, filing, filing for bankruptcy in RI, law, lies, Mark Buckley, Personal Finance, Rhode Island, Rhode Island bankruptcy, Rhode Island Chapter 7, RI bankruptcy lawyer, title 11, united states bankruptcy law, united states code

Debt Settlement Plans: Part II

by Mark Buckley

You’ve tried calling each credit card company to work out a debt settlement plan, but they aren’t interested.  Interest rates have only skyrocketed in the past year.  The bills keep coming and you are drowning in debt.

What if your “minimum payments” on credit cards add up to $ 1,000 a month?  Few debtors can honestly afford repaying such a high amount without using other cards for their daily living expenses.  It becomes a game of robbing Peter to pay Paul.

It would seem like a miracle for a “credit counseling” company to get your payments down to $750 per month by decreasing your interest rates.  Who wouldn’t want to save $ 250 a month?  Although saving $250 per month may sound good at first, here is the bigger question.  Do you honestly even have the $ 750 available?

If you can only afford $300 a month, a plan that requires you to pay $750 per month will not do you much good. You are still in debt. For this reason, “credit counseling” companies and “debt management” companies focus exclusively on the amount of savings they offer, rather than whether you can actually afford your payments.  Many clients who ended up filing bankruptcy in Rhode Island wasted thousands of dollars on unrealistic repayment plans first.

Added to the misleading nature of “debt management” company claims are hidden fees and fraud. Consumer Reports claims that

” Many [“debt management” companies] advise rolling high-interest debt into a second mortgage. But by using your house as collateral for what was unsecured debt, you risk losing your home. Some firms can persuade creditors to cut your debt. But if you miss payments they can later back out of the deal and demand full payment, potentially landing you in bankruptcy court after you’ve already paid a large portion of your debt.”  Consumer Reports online report, June 2005.

Filing Chapter 7 bankruptcy offers a straightforward, honest, effective alternative to the misinformation propagated by “debt management” and “credit counseling” companies. Federal bankruptcy laws were created by Congress for the purpose of helping hardworking citizens pay off their debts.  Unlike DMPs, bankruptcy actually reduces both interest and debt. In fact, bankruptcy is the only way to completely eliminate a debt.

Bottom line: Before you look into signing up for an unrealistic debt management plan, consider consulting a qualified Rhode Island bankruptcy lawyer.

Filed Under: Blog, Rhode Island Chapter 7 Tagged With: Bankruptcy, bankruptcy lawyer, business, Chapter 7 bankruptcy, credit, credit cards, credit counseling, debt, debt management, debt management companies, debt management plan, debt relief option, debt settlement, debt settlement plan, economics, filing bankruptcy in Rhode Island, filing for bankruptcy in RI, finance, insolvency law, Mark Buckley, part ii, payment plan, Personal Finance, Rhode Island, Rhode Island Bankruptcy lawyer, rhode island bankruptcy lawyers, secured loan, settlement planning, the truth about

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