Mitchell & Culp » Asset Planning & Protection

Student Loans and Bankruptcy

Heather Culp — Fri, 14 May 2010 11:53:57 +0000

On April 15 of this year The Private Student Loan Bankruptcy Fairness Act of 2010 was introduced to the House of Representatives calling for certain student loans to be eligible for discharge under bankruptcy.

Time will tell whether the Act becomes law; if it does, it is likely to undergo substantial revisions prior to passage.

Student loans are not dischargeable

Under the current law, student loans are not dischargeable in a bankruptcy. There are certain provisions allowing for dischargeability in the event that the bankrupt debtor can show “undue hardship,” but experience has taught us that if the debtor is blind, deaf, mute, and is missing all four limbs, there is a small chance that the debtor can show undue hardship and thus have his or her student loans discharged in a bankruptcy.

In other words, undue hardship just doesn’t happen.

Q: What about all the exemptions that exist at the federal and state levels– can’t I use exemptions to keep the feds from liquidating my assets to try and collect on student loan debt?

A: GOOD QUESTION and the answer is NO! The feds don’t have to abide by the exemptions, as to student loan default and certain other debts. Check out this helpful set of FAQs from the Federal Student Aid Collections site, which includes these on financial hardship caused by:

If you have student debt in addition to other debts you struggle to pay, a debt counseling session with a qualified bankruptcy practitioner will give you clarity for how to proceed with satisfying your obligations.

Dealing With The IRS

Heather Culp — Fri, 23 Apr 2010 11:59:43 +0000

Did you file for an extension on your income taxes? If you did so because you owe the government more than you can afford to pay, USAToday ran a good article on how to proceed.

The best advice may be in this paragraph about installment agreements:

You’ll have to pay interest on the unpaid amount at a rate that’s adjusted quarterly. The rate for the first quarter of 2010 is 4%, which is lower than you’d pay on most credit cards. The IRS charges a $105 processing fee but will reduce it to $52 if you agree to electronic withdrawal of your payments. Low-income taxpayers qualify for a $43 fee.

We find that people who can’t pay their taxes in a timely manner often have other financial concerns. A qualified advisor who works for YOU, not your creditor, may be in the best position to guide your next steps.

Strategic Default: Part 3 of 3

Heather Culp — Mon, 05 Apr 2010 11:37:34 +0000

Here are three common questions asked of my partner, Rick Mitchell, and me by homeowners considering defaulting on their mortgages.

I can’t afford to pay my mortgage and my other bills. The house is under water. I’ve asked for a modification. How long do I have to decide whether strategic default is an option? I don’t want to come home and find the locks have been changed on my house.

The lender alone decides whether and when to modify, and the lender alone decides whether and when to initiate foreclosure. Neither modification nor foreclosure can be pinned down to an average time line or any particular deadline.

Foreclosure is an orderly process; you will NOT be locked out of your home without having several legal notices of your rights and the mortgage company’s intentions. This post explains the foreclosure process, step by step. The foreclosure process itself has a timeline. The statutory process (in North Carolina) takes about 75 days to complete, and that runs from receipt of the notice of foreclosure hearing.

However, many many months often go by, with no mortgage payment or less than the full amount, before the foreclosure proceeding is filed — so who knows when the lender will start the 75-day process. The lender controls that.

Do you have clients who move out of their homes prematurely?

Yes, under a misunderstanding of how the foreclosure process works. The bank doesn’t show up in the middle of the night and kick you out of your house. Foreclosure is an orderly process and an attorney with experience in real estate or bankruptcy can help a property owner understand when it would be most advantageous for the client to move out.

What about renting? Is it true that you need to secure a rental before “foreclosure” hits your credit report?

In this economy, with bankruptcy filings dramatically rising, we are not aware of clients with either bankruptcy or foreclosure on their credit reports having trouble renting, as long as they are able to show that they have the income to afford the rental and put down the requested security deposit (usually one to two months’ rent).

Be sure to visit parts 1 and 2 of this series for a fuller picture of strategic default. However,the only way to determine the best course of action for your circumstances is to consult with a qualified advisor.

Debunking Strategic Default Myths

Heather Culp — Fri, 02 Apr 2010 11:34:16 +0000

Myth: strategic default is limited higher-income debtors.

In our experience, clients across the income spectrum have considered and engaged in strategic default.

Myth: strategic default is limited to investment properties.

In our experience, clients have strategically defaulted on primary residences as well as investment/rental properties and commercial properties.

Myth: lenders are eager to avoid foreclosure — which is one consequence of strategic default — and will do almost anything to work with a borrower in order to avoid it.

In our experience, lenders are either unwilling or unable to modify mortgages to give borrowers the relief that they need in order to avoid strategic default. The government, and lenders themselves, are talking a big game about modification, but it is just not happening.

Myth: strategic default is immoral and unethical.

We firmly believe that the lender made a business decision to offer a mortgage, factoring in how to protect itself in the event of default (including down payment, interest, repossessing the property, etc.). Mark Gimein has debunked this myth more thoroughly and articulately than most.

Myth: a short sale is the best or only way out.

Not surprisingly, realtors are among the harshest critics of strategic default, perhaps because a short sale generates a realtor commission but strategic default does not. Short sales are fraught with problems for borrowers: they are time consuming, frustrating, and create a variety of legal and tax traps for the borrower/seller.

As the recession drags on and mis-information piles up on the web and in advertisements, it’s tough to get a clear view of how to legally handle financial difficulties. A qualified bankruptcy attorney may be the best source of unbiased information and may actually help you avoid bankruptcy or mortgage default. Get the facts for your circumstances.

Strategic Default: Part 2 of 3

Heather Culp — Mon, 29 Mar 2010 11:45:10 +0000

The term “strategic default” has been in the news. With 25% of American homes valued at less than the balance of the mortgage, and some of those “underwater” mortgage holders out of work it’s no wonder.

For those who can’t stay up late enough to watch Stephen Colbert, here’s a video clip on this subject. After he talks about the bankers testifying on Capitol Hill, he gets to The Word: “Honor Bound,” which refers to the social pressure mortgage owners feel to pay their mortgage because they gave their word to do so.

Lines like this are classic Colbert: “A mortgage is a sacred obligation, right fully-employed TV commentators?”

The Colbert ReportMon – Thurs 11:30pm / 10:30cThe Word – Honor Bound www.colbertnation.com

Strategic Default: Part 1 of 3

Heather Culp — Tue, 23 Mar 2010 11:34:05 +0000

“Strategic default” is a conscious decision by a borrower to stop paying the mortgage(s) on a real property even though the borrower can afford the payment(s). It can happen for a number of reasons and is not a decision to be made lightly or without education about the legal, tax and credit consequences.

We have counseled clients about strategic default in these common scenarios:

The client owns more than one real property, living in one as the primary residence and owning the other(s) as investment property; the investment property is either not cash flowing (the collected rent does not cover the mortgage, taxes, maintenance and other expenses), or so underwater (worth less than what’s owed) that the client does not wish to retain ownership of the investment property. Efforts to sell the investment property for what’s owed, or close to what’s owed, may have been unsuccessful. The client decides to either allow foreclosure of the investment property, or move into the rental property that best suits her needs, and either sell, lease, or allow foreclosure of the former primary residence. Any deficiency owed on the mortgage on the former primary residence is discharged in the bankruptcy.

The client owns his primary residence and decides to file for bankruptcy. As part of the “fresh start” afforded by a bankruptcy, the client decides to move back home, to another state, and surrender the primary residence — typically, upside down or with very little equity — in the bankruptcy, allowing foreclosure on the residence and discharge of any deficiency on the mortgage.

The client is current on the mortgage on her primary residence, but only because of supplementing income through debt — credit card, 401(K) loans, life insurance loans, and the like. When the client is no longer able or willing to continue borrowing in order to meet the mortgage, strategic default is an option, as is a bankruptcy.

The decision to default on a mortgage is fraught with emotion. We help clients look at the emotion-neutral facts and figures so that they can make a decision that’s right for them.

Creditor Protection Without Bankruptcy

Heather Culp — Tue, 16 Mar 2010 11:52:17 +0000

With so many people unwinding unprofitable businesses and adjusting their lifestyles after financial hardship, many are confused about assets a creditor can seize and if bankruptcy is the only way to protect themselves from the proverbial wolves at the door.

While we offer general information here, it is not comprehensive and not intended as legal advice.

Exempt property: hands off, creditors

We typically refer to property that creditors cannot reach as exempt property. Exempt property for North Carolina residents is set out in North Carolina General Statutes §1C-1601(a).

The most commonly applicable exemptions in North Carolina:

$3,500 in an automobile
$35,000 homestead exemption (note: debtor’s name must be on the deed)
$5,000 for household goods and furnishings (including clothing, computers, art, guns, pets, jewelry, etc.), and an additional $1,000 for each dependent
$2,000 for tools of the trade (such as a laptop if used for business purposes)
$5,000 “wild card” exemption that can be applied to anything that would otherwise be nonexempt: stocks, bonds, equity above the maximum allowed for an automobile, homestead exemption, etc.

In practical terms

If the only assets you own are exempt from creditors’ reach, they cannot force you to liquidate these assets to satisfy your debts. They can sue you, than can call you every day and they will often attempt to frighten you with consequences that the law prohibits. Our website and blog provide additional information, which, again, should not be construed as legal advice, but may point you in a helpful direction.

If you have any questions about your vulnerabilities or your rights as a debtor, consult with a qualified bankruptcy attorney. Even if you do not wish to file for bankruptcy protection, a qualified attorney can help you plan a strategy for dealing with your debts.

Can a Creditor Take My 401k?

Heather Culp — Fri, 12 Mar 2010 12:00:50 +0000

Although creditors have been known to claim that they can liquidate everything including the clothes on your back to settle your debts, each state provides guidance on what assets are safe from creditors. These are termed “exempt property.” So what about life insurance and retirement plans? Are they at risk if a creditor takes you to court?

IRAs and life insurance

North Carolina includes two exemption provisions that are not limited in terms of dollar amounts.

The first is Individual Retirement Accounts (IRAs) or any plan that is accorded the same treatment as IRAs under the Internal Revenue Code. Thus, as a general rule, funds in any amount that are in an IRA or similarly treated retirement plan is beyond the reach of creditors.

The second exemption provision, unlimited in dollar amount, is for life insurance benefits when the beneficiary is solely the spouse and/or children. It is especially important to note that the life insurance provision is limited to spouse or children. Do not have a policy payable “to my wife and, in the event of her death, to my estate” unless you want to risk a fight with a creditor or bankruptcy trustee that you might lose.

The best way to understand what property might be seized by creditors is to meet with qualified legal counsel. The laws are complex and a trained attorney is in the best position to guide you in protecting your assets.

Primer for Distressed Homeowners: Part 1 of 3

Heather Culp — Mon, 30 Nov 2009 21:31:56 +0000

With the jobless recovery hitting the Charlotte region particularly hard, we’re getting a steady stream of calls asking for help preventing home foreclosures, forced sales and sheriff’s sales, and facilitating short sales.

The general news press has gotten sloppy in the language it uses for distressed real estate, so let’s start there:

Forced sale is not used often, but when it is it would include a sheriff’s sale or a foreclosure sale.
Foreclosure is the process by which the lender repossesses real property upon the borrower’s default.
Short sale, though, is a consensual deal between the lender and the borrower in which the lender agrees to take less than what’s owed; a short sale is not a forced sale in the strictly legal sense of the word.

The foreclosure process, step by step

The foreclosure process is straightforward. It begins when the lender files a lawsuit in the state court in the county in which the property is located, giving notice to anyone legally responsible for the debt — borrowers, co-signers, guarantors — and upon at least ten days’ notice to the responsible parties, a hearing is held at the courthouse.

A deputy clerk, an assistant clerk, or the clerk of court presides over the hearing; the lender must show only four elements: (1) that there is a valid debt secured by the property, (2) that the borrower is in default on that debt, (3) that there is a power of sale in the agreements between the borrower and the lender, and (4) that the responsible parties had ten days’ notice or more prior to the hearing. This can all be shown by affidavit and usually is — in other words, there is no live testimony. As part of the power of sale clause, the lender hires a “trustee” or “substitute trustee” — a neutral party — to foreclose on the property. The trustee/substitute trustee attends this hearing and provides the proof of these four elements. The clerk has no authority to consider anything other than these four elements; if they are met, then the clerk shall enter an order of sale, allowing the property to be auctioned on the courthouse steps. It is generally pointless for borrowers to attend these hearings and try to delay the process.

If a borrower believes he has equitable grounds to stay the foreclosure, then he has the right to file a lawsuit in the county’s superior court, asking that a temporary restraining order, preliminary injunction, and/or permanent injunction be issued to stop the foreclosure. These lawsuits are expensive and generally a long shot. In the absence of either a successful superior court suit or a workout between the borrower and the bank, the property will be auctioned on the courthouse steps about 25-30 days after the hearing. The bank usually places a credit bid at the sale — buying the property back for something short of the full amount of the debt. Anyone can bid, but live bidders are relatively rare.

There is a ten-day “upset bid” period following the sale, in which anyone can file a bid on the property that exceeds the sale price by the greater of 5% or $750.00. The filing of any upset bid triggers a new ten-day upset bid period, until the period passes with no new filed bids. Once the ten-day upset bid period expires, the sale is final; the trustee/substitute trustee signs a “trustee’s deed” giving the property to the winner of the sale, and files documents related to the sale.

The relationship between foreclosure and bankruptcy protection

A bankruptcy filing by a borrower stops a foreclosure proceeding until such time as the lender obtains from the bankruptcy court an order giving it relief from the automatic stay of all creditor activity.

Generally speaking, a Chapter 13 debtor can propose a plan that provides for payment in full of pre-bankruptcy mortgage arrearage, and at the same time keep current on post-bankruptcy payments, and keep the house. Falling behind on either aspect will likely lead to the lender getting relief from stay and then having the right to re-start the foreclosure process.

Also speaking generally, a Chapter 7 debtor can’t do anything to stop the mortgage company from getting relief from stay and thus restarting the foreclosure process, unless the debtor is able to do what he couldn’t do prior to the institution of the foreclosure — do a mortgage modification with the lender; refinance; or otherwise come up with a large lump sum to get current on the mortgage and then keep current with the monthly payments.

I just can’t have my credit ruined by a bankruptcy!

People often tell me that “I just can’t have my credit ruined by a bankruptcy!” and these people have a pending foreclosure, are in default on several credit card obligations, and are past due on other debts. While a foreclosure is probably less prejudicial to your creditworthiness than a bankruptcy, the reality is neither is good and a bankruptcy may be the only way to get a fresh start.

Another consideration in favor of bankruptcy: foreclosures are governed by state law and the practice and procedure varies wildly from state to state while bankruptcy is federally regulated. If you own real property in more than one state, consult with a bankruptcy attorney to see if the bankruptcy process may produce a less expensive outcome. Remember this summer’s talk about GM and Chrysler entering an “orderly bankruptcy?” Bankruptcy is indeed an orderly process.

In Part 2 of 3: Questions and Answers on preventing foreclosure, negotiating with a mortgage company, and what to do about an adjustable rate mortgage that will soon reset.

In Part 3 of 3: Questions and Answers on short sales and sifting through the confusing offers from those who want to help distressed homeowners.

Emerging Trend in Commercial Foreclosures

Richard Mitchell — Tue, 11 Aug 2009 14:45:57 +0000

I was quoted in The Charlotte Observer regarding a $515 million luxury condo, office and retail project in Cornelius, NC that’s being foreclosed on.

Many people are surprised to learn that the developers hadn’t missed payments. Then why the foreclosure? Because the project wasn’t hitting agreed-upon milestones — the developers hadn’t leased enough of the space.

I expect to see more of this type foreclosure. As a result,I encourage developers of every size and every stripe (residential, commercial, multi-use) to consult with a qualified bankruptcy attorney well BEFORE they miss a milestone or loan covenant.

Watching the news and dealing with my clients’ cases, we’re in a climate where many creditors would rather take their beating now than wait for the market to come back. Even if you don’t foresee an issue with your project, a recession like this one is a time every developer should sit down for a proactive asset planning and protection session with a qualified attorney.

People tend to stick their heads in the sand and hope for the best. Hoping for the best isn’t a strategy. You can hope for the best while planning for the worst.

Call our offices today.