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Second Mortgage & Bankruptcy

What Happens to My Second Mortgage If I File for Bankruptcy?

What happens to my second mortgage if I file bankruptcy?

A second mortgage can be a huge burden to a homeowner. Second mortgages and home equity loans are usually sought to pay for unexpected bills that life may bring. What happens to a second mortgage when you file for bankruptcy? A second mortgage usually remains on your property unchanged. But, there are a few exceptions.

Second Mortgages Stay Attached to Your House After Bankruptcy

When you file for bankruptcy, the second mortgage remains attached to your house. This means that the second mortgage holder can still come after your house if you begin to default on payments. Therefore, in most situations, you will need to continue making payments on your second mortgage if you want to keep your house.

Chapter 7 Bankruptcy does, however, usually remove your personal liability for your second mortgage. If you do not sign a reaffirmation agreement during your bankruptcy case, you will no longer likely be personally liable for the repayment of the second mortgage. This means that your mortgage company can only come after your house through a foreclosure. They will not likely be able to come after you personally for collection.

Bankruptcy Can Sometimes Help You Reach a Settlement on Your Second Mortgage

This can sometimes give the bankruptcy filers an advantage in negotiating a settlement for the second mortgage. If your second mortgage is excessive and not secured by actual equity in the house, you may be able to settle for much less of the total amount. You may need to seek an additional attorney for this purpose. Such an endeavor would not be covered during a standard bankruptcy case.

Chapter 13 Can Sometimes Avoid a Second Mortgage Lien

In certain rare circumstances, a second or third mortgage can be avoided during a chapter 13 bankruptcy case. Any such mortgage would need to be not secured by actual equity. Essentially, the total value of your home would have to equal less than just your first mortgage. If your second mortgage is not secured by any actual equity in the house, you may be able to file a lien avoidance lawsuit during the chapter 13 case.
It is important to note that it is also required in most circumstances for the chapter 13 plan to be successfully completed. If you do not complete the chapter 13 plan, your second mortgage holder may challenge the validity of the avoidance order.

Right Time to File Bankruptcy?

When Is the Right Time to File Bankruptcy?

When is the right time to file bankruptcy?

Timing can mean everything in life. Bankruptcy is no exception. When is the right time to file bankruptcy?  A few basic tips about the right time to file bankruptcy can be very helpful.

1. File Before Collection Becomes Too Aggressive

If you were considering Chapter 7 or Chapter 13 bankruptcy, it is better to file your case early. If you wait too long, aggressive collection may follow. If you’re considering chapter 7, a garnishment can make it much more difficult.  The garnishment will take a substantial portion of your paycheck, taking away finds you could otherwise use to pay for your bankruptcy fees.

2.  File After You Have Received and Spent Your Tax Refund

In Indiana, it may be wise to file bankruptcy after you have received and spend your tax refund. In Indiana, only a very low exemption is allotted to protect your tax refund. Therefore, if you were owed a tax refund in the upcoming weeks or months, you may lose a portion or all of that tax refund during the bankruptcy.

3.  File As Soon As You Discover Bankruptcy Is Right For You

Many people put off bankruptcy for years.   If you have determined with an attorney that you need to file for bankruptcy, file your case as soon as possible. If you are carrying a heavy debt load, talk to an attorney right away. People wait for years to file bankruptcy much to their disadvantage.  After you file for bankruptcy, you can get a fresh start to move on with your life.

4.  Always Follow the Advice of Your Attorney

Ultimately, the greatest guidance as to the right time to file for bankruptcy will come from your attorney. A consultation with a bankruptcy attorney is many times free. If you follow the advice of a bankruptcy attorney as to the right time for bankruptcy, you can avoid costly mistakes and unnecessary stress.

Tax Refund and Paying Family Members Back

Should I Use My Tax Refund to Pay My Family Member Back?

Should I pay back a family member with my tax refund?

If you are considering bankruptcy, you may not want to use your tax refund to pay your friend or family member back. Bankruptcy has certain rules and regulations to prevent fraud and other unfair situations. Paying family members back with your tax refund before you file for bankruptcy can create problems with your bankruptcy case. It is considered to be an unfair “insider” payment.

Family Members or other “Insiders” Should Not be Repaid Before Bankruptcy

The bankruptcy code allows for the reversing of payments to relatives, friends, or other “insiders” that occurred within one year before your bankruptcy filing date. By “reversing” the payment, the trustee (the government overseer of your case) will usually just make you pay that amount towards your bankruptcy creditors. Although you may have just borrowed money from a family member recently to “get by,” repaying your family member with your tax refund can be a huge mistake.

An example of reversing a relative payment would be as follows. If you paid back $4000 to your father within one year of filing bankruptcy, the bankruptcy trustee can just make you pay $4000 into your bankruptcy filing. Your bankruptcy case would get much more expensive to complete if you had to pay $4000 to your creditors through the trustee!

If you do not pay the trustee, then the trustee can go after your family member to get the payment back. If the trustee cannot collect the payment from any source, you could have your bankruptcy discharge revoked sometime in the future. If your discharge is revoked, it would be as if you never filed for bankruptcy.

This Law Seems Harsh, Why Does the Bankruptcy Law Penalize Family Dealings?

In certain situations, the application of this law may seem harsh. It is very common for families to operate as a singular economic unit. Therefore, the one year barring of repaying family members can seem a little extreme or excessive.

In reality, however, it is simply too difficult to regulate and protect the bankruptcy system without these restrictions. It is fraud or at least unfair to favor one creditor being repaid over another creditor. Bankruptcy seeks to treat all creditors evenhandedly according to the bankruptcy code. Payments to relatives are a classic method of depleting resources before filing for bankruptcy. Although some people may be treated too harshly for a relative repayment, the concept of the one year restriction is still sound. It prevents a great deal of fraud, unfair dealing, and the hiding of assets during bankruptcy.

Debts of the Deceased

What Happens to Someone’s Debts When They Pass Away?

What happens to the debts of someone who has passed away?

When a loved one passes away, it can be difficult for the entire family. The situation can be also become confusing when the notices for the deceased family member’s debts keep coming in the mail. The creditors are demanding payment, but your loved one is now deceased. Do you need to now pay these bills? It is important to understand what happens to someone’s debts when they pass away.

Many Creditors Will Simply Write Off the Debt if Presented a Death Certificate

When a person passes away, many times their debts pass away with them. This is because many creditors will simply write off the decedent’s debts if they are presented with a death certificate. Although many creditors are not required by law to write off the debt, credit card companies and even many medical providers offer to either write off the debt entirely or drastically reduce the size of the debt.

If you were a cosigned with your recently deceased family member, you will still be responsible to repay the entire debt yourself. The creditor will not very likely write off the debt if only one signer on the debt passes. In addition, do not continue to use the credit cards of deceased person. If the credit provider finds out you used the card personally after the death, they may take legal steps to make you responsible to pay back that portion.

Some Creditors will Seek to Be Paid Out of the Estate if One is Opened

When someone passes away, the property that they own will be placed into an “estate” if the property exceeds a certain set value. This estate is usually opened in the county court where the deceased person resided. It is assigned a court case number. An administrator of the estate is named and certain required legal documents must be filed before estate can be full administered.

If someone passes away and an estate is required to be opened, the creditors may seek to be paid from the proceeds of the deceased person’s estate. This can drastically reduce the proceeds available to other family members from the estate. Although some creditors may elect to write off the debts beforehand, certain creditors may file a claim to be paid through the deceased person’s estate.

Seek the Advice of an Attorney

Because various complex situations can arise when someone passes away, seek the advice of an attorney. Not all situations will play out the same way. Also, law differ from state to state. If you have a loved one who passed away and now you are receiving their debt notices, seek the advice of an estate or debt relief attorney.


Debt To Income Ratio

Does My Debt to Income Ratio Qualify Me for Bankruptcy?

Debt to income ratio and bankruptcy

To file bankruptcy, you must be “insolvent,” a term that basically means that you can no longer pay your bills. Your debt to income ratio can help determine if you are a good candidate for bankruptcy. Testing your debt to income ratio can help you determine if you are truly “insolvent” and unable to pay off your debts.

What is Debt to Income Ratio?

Debt to income ratio is a term used by lenders. The focus of the debt to income ratio is on required monthly debt repayment. It calculates how much your minimum (or reasonable sized) payment per each month totals for all of your debts.

For instance, use an example where you had $700 in credit card payments, $1100 in mortgage payments, and a $300 auto loan payment. This would total $2100 per month. If you made a total of $4200 per month, then you would have a 50% debt to income ratio. This is because your debt-to-income ratio is your total monthly payments on debts divided by your gross income.

How Does Debt to Income Ratio Determine if You Qualify as a Good Candidate for Bankruptcy?

You may be a good candidate for bankruptcy relief if you have a calculated debt to income ratio that exceeds 50% . Mortgage lenders usually do not want to lend to anybody with a debt to income ratio of about 42%. Mortgage lenders have determined that defaults on debts occur much more frequently if the debt-to-income ratio exceeds this 42% range.

Using this concept, if you find yourself exceeding the 42% range, you may be running into trouble. If you have incurred large amounts of credit card, medical, or personal debts, you are even more likely a good candidate to file for bankruptcy if you exceed this 42-50% or greater range.

Another Simple Test for Bankruptcy

Beyond debt to income ratio, you can use a more simple qualifying test to see if you should file for bankruptcy. This is called the “two to three year test.” If you believe that you will be in the same bad financial shape as now after working on your debts to 2-3 years, you should get a consultation with a bankruptcy attorney. If you are only able to pay minimum payments or “just get by,” you need to make a more powerful plan for getting out of debt. You could service your debts for a decade and never get out of debt.

Remember, the best way to determine if you are good candidate for bankruptcy is to get a free consultation with a bankruptcy attorney. Bankruptcy attorneys constantly analyze debt situations. Such attorneys are uniquely equipped to answer all of your questions. They can give you frank and honest answers about the debt situation you are facing.