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Is that True?

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Co-workers chatting by a water cooler

It is a shame that there is no “Snopes” service for bankruptcy myths and urban legends. There are many things that people say about bankruptcy that are simply just false. The problem is that it is hard to make an informed decision without the correct information. Many people believe the wrong things about what can and cannot happen in bankruptcy.

The first falsehood is that somehow you can have a free house or car if you just file bankruptcy. This would be great, were it true! However, a house or a car must be paid for if you plan to keep it. What is true, however, is that you get a choice. Bankruptcy may allow you to give up that vehicle or house you can no longer afford and restructure your other debts so that you can continue living an affordable life.

Many people are afraid they will lose their house, cars, bank accounts or retirement if they file. The good news is that in Texas, most people keep everything they own except the credit card debt! This is fairly logical. If people were going to lose everything, they would never file. Other people are concerned that they will lose their jobs. The good news is that it is illegal to fire someone for filing bankruptcy. The other truth is that most employers who are concerned about credit scores are concerned about employee theft. The employee who files bankruptcy is taking care of their debt situation. The employee who does not file bankruptcy is much more likely to steal than an employee in bankruptcy. Most bankruptcy practitioners have had the experience of having a bank employee come in to the office after their employer required a bankruptcy filing to keep their job. It is also true that many government jobs require a bankruptcy filing in order to maintain security clearance.

Many people believe they will never be able to buy a house or car again. In reality, if a person has extreme credit card debt, they are less of a risk after they file than before. Most clients have reported that they had little or no trouble buying a car or house a couple of years after the case is ended. We actually have clients who have to purchase automobiles while they are in a Chapter 13 repayment bankruptcy and have gotten very good interest rates.

There are many positive results which occur when a person files bankruptcy. However, bankruptcy does not work for every person. That is why a person thinking about filing a bankruptcy should seek the opinion of a professional to see if it would be beneficial. The real key is recognizing that there is a problem. If most of your waking hours are used to attempt to balance your creditors or if your sleeping hours become waking hours because of the stress, it is time to take action. If you are in debt, come see us. Book an appointment with a skilled bankruptcy attorney. At Bailey & Galyen, we would like to help you achieve your financial independence without all of the headache.

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Saving Your Home: “Avoiding” Judgment Liens with Either Chapter 7 or Chapter 13

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Farm House

Judgment liens on your home are traps waiting to be tripped. An extra and underappreciated benefit of filing for bankruptcy is that most of the time you can harmlessly spring these traps so that they can’t ever harm you again.

What’s a Judgment Lien?

A lien is a creditor’s interest in your property. A judgment lien is an involuntary lien that usually attaches to your home whenever a judgment is entered against you in a lawsuit. This can happen even if you settle with the creditor and regardless of whether you settle before you are sued or afterward. It’s even possible to have a judgment lien against your home without being aware that you were sued. In many circumstances the judgment creditor can execute on its judgment lien, resulting in a forced sale of your home to pay the underlying debt.

Judgment Lien “Avoidance” in Bankruptcy

Such a forced sale can be prevented by filing for bankruptcy, and in many situations the judgment lien can be gotten rid of forever through the judgment lien “avoidance” procedure. See Section 522(f) of the Bankruptcy Code.

This is quite an unusual procedure. That’s because bankruptcy wipes out debts, but generally does not wipe out liens. The most conventional kind of liens — such as your vehicle loan holder’s lien on your car or truck title, or your home lender’s trust deed on your home’s title — are certainly not wiped out with a bankruptcy filing.

So Why Can Judgment Liens Be “Avoided” in Bankruptcy?

Simply stated, Congress has decided that people’s homestead exemptions should come ahead of a creditor’s rights under a judgment lien. As will be explained in a moment, this “avoidance” power is limited to judgment liens that “impair” your homestead exemption. After all, undoing a judgment lien simply puts the creditor back in the same unsecured position it was in before it sued you and got the judgment lien attached to your homestead.

The Conditions for Judgment Liens “Avoidance” in Bankruptcy:

  • The real estate to which the judgment lien has attached must be real estate for which you qualify for and have claimed a homestead exemption.
  • That lien can’t just be any kind of lien, but must be a “judicial lien,” defined in the Bankruptcy Code as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
  • The “judicial lien” can’t be for child or spousal support, or for a mortgage foreclosure.
  • The judgment lien at issue must “impair” the homestead exemption, which generally means that it eats into the equity protected by the applicable homestead exemption. Specifically the law defines this “impairment” as follows: the value of all the liens on the house, including the judgment lien PLUS the amount of the homestead exemption that you would be able to claim if there were no liens on the house, MUST BE MORE THAN the value of the house (assuming you are its sole owner).
    Most states provide a set dollar amount for its homestead exemption, but Texas has no dollar limit (the limits are instead by acreage, regardless of value). The end result is that virtually all judgment liens (as long as they meet the other conditions above) can be “avoided.”

    • The “Avoidance” Doesn’t Happen Automatically

    One final thing: judgment lien “avoidance” doesn’t just happen in bankruptcy; it takes an additional legal procedure. That procedure — usually a motion filed by your attorney — is necessary or else the judgment lien will continue to attach to your home title. Also, that procedure must be done while your bankruptcy case is still open and active, or else your case will have to be reopened, costing hundreds more in court fees.

    So, if you own a home, an important additional benefit of filing for bankruptcy is to get rid of any judgment liens against its title. These are the kinds of services that an experienced, conscientious attorney will provide for you. Bailey & Galyen will give you this kind of expertise and thorough service. Please schedule a no-obligation, free, confidential consultation with us by calling 1-800-208-3104 or contacting us here.

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Saving Your Home: The Amazing Chapter 13 Second Mortgage Lien Strip

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House for sale

If you have a second (or third) mortgage and your home is worth no more than the balance on your first mortgage, that second (or third) mortgage may be able to be stripped off your home title. This can save you a tremendous amount of money both monthly and over time, and should make saving your home much more feasible.

#1: This procedure ONLY APPLIES to CHAPTER 13 bankruptcies, the “adjustment of debts” payment plan. It can’t be done in a “straight” Chapter 7 case.

#2: It does NOT apply to your first mortgage — even if your home is worth less than your first (and perhaps only) mortgage, you can’t reduce the balance on that mortgage to the value of your home.

#3: Lien stripping only works with mortgages, trust deeds or equity lines of credit that you signed onto voluntarily. There are many other kinds of possible liens that could attach to your title — income tax liens, judgment liens, child and spousal support liens, contractors’ liens, utility liens, homeowner association liens — none of which can be stripped off the title. (On the other hand, Chapter 13 can provide good ways to deal with some of these other liens.)

#4: Your home cannot be worth a penny more than the balance on your first mortgage. The point is that there cannot be ANY EQUITY in the home beyond the first “senior” mortgage.

#5: This lien stripping does not happen automatically in a Chapter 13 case, but is a procedure your attorney has to affirmatively take care of. The affected mortgage lender will have an opportunity to object, such as by arguing that the home’s value is greater than the balance on the first mortgage and, thus, that you’re not able to strip the second mortgage.

#6: You may have to pay a portion of the stripped second mortgage during your three-to-five-year Chapter 13 case. The mortgage is treated as an unsecured creditor and so shares pro rata in whatever funds you are required to pay to your pool of unsecured creditors. But in most situations this does not increase the amount you need to pay; the same amount just gets distributed differently among your creditors. At the end of your case, you will owe nothing on your stripped mortgage and it will be removed from your title.

#7: Because you do not get a discharge of your debts in a Chapter 13 case until completing it successfully, your lien strip will not work unless you finish your case.

If you have a second or third mortgage on a home worth no more than the balance on your first mortgage, even if you are only casually considering bankruptcy, you should get competent advice about this lien stripping option. Bailey & Galyen is here to provide you that advice. Call 1-800-518-3328 or contacting us here. Thank you.

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Saving Your Home: The Benefits of Chapter 7 and Chapter 13 Bankruptcy

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If you are facing an imminent home foreclosure, Chapter 7 bankruptcy usually buys you relatively little time, but may be enough for what you need. Chapter 13 can usually buy you much more time.

The filing of a bankruptcy stops a foreclosure. It can stop the foreclosure temporarily or permanently, depending on what you need and what resources you have to work with.

Buying a Little Time with Chapter 7

Filing for any kind of bankruptcy immediately puts into play the “automatic stay,” which stops all collection activity against you or your property, including foreclosure. This includes both nonjudicial trust deed foreclosures and ones involving a lawsuit. Under Chapter 7 that protection lasts only a very limited amount of time, generally about the three months or so that this type of bankruptcy case lasts. And the mortgage lender can even ask the bankruptcy court to cut short that protection if it chooses to file a motion to do so.

Given this relatively brief protection, a Chapter 7 bankruptcy is worth considering in two situations:

  1. You want to keep the home and, once you file for bankruptcy to write off the rest of your debts, you will have enough cash flow to make both your regular mortgage payments PLUS enough extra to catch up on the late payments within about a year. Most lenders will allow you to enter into a forbearance agreement — they agree not to foreclose as long as you continue making the agreed regular and catch-up payments. How long they allow for this depends on each lender and your individual circumstances.
  2. You’ve decided to let your home go back to your lender, but need just another couple of months to move. The bankruptcy filing would stop any immediate foreclosure, and even if the lender is extremely aggressive you will likely have at least an extra few weeks in your home. And in some situations, the lender may back off while the case is in bankruptcy, or may be willing to negotiate a time for you to leave that will work with your schedule.

Buying a Lot of Time with Chapter 13

Instead of buying a few weeks or at most a year, Chapter 13 bankruptcy can usually give you as much as five years to catch up on your back payments. If you are in foreclosure or anticipating that you will be soon, you may be tens of thousands of dollars behind on your mortgage. You will need as much time as possible to catch up in order to keep the monthly catch-up payment low enough so that keeping your home becomes feasible.

Beyond this, Chapter 13 gives you a more flexible and powerful package of benefits. Instead of being at the mercy of your mortgage lender for how much time you will have to catch up, you are much more in control of that process, allowing you to fit your mortgage obligations in with your other important creditors. This includes other creditors related to your home, such as property taxes, any homeowner association dues and income tax or support liens on your home. Chapter 13 also often allows you to get rid of a second mortgage, which alone could save you tens of thousands of dollars and make your home much more affordable.

A Chapter 13 case comes with a fair amount of flexibility. So your payment plan can usually be adjusted to reflect changes in your finances, within some limits. That gives you better odds for

keeping your home in the long run. And it also means that if your motivation for keeping the home changes — if you get a job out of state or your children finish at the local school so you don’t mind moving — you can change your mind and surrender the home later, in a financially more protected way.

We are dedicated to helping you clearly understand your options so that you can make wise, fully-informed decisions about your debts starting right now. We can make that start to happen for you with your free and confidential consultation. Don’t think that you should do without legal advice or that you can’t afford to have it. Contact your Dallas – Fort Worth bankruptcy attorneys at the Bailey & Galyen today.

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What Is a Debt Owed for “Fraud in a Fiduciary Capacity”?

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You can’t discharge debts “for fraud or defalcation while acting in a fiduciary relationship, embezzlement, or larceny.” What do these include?

This is the last of our series of blogs on types of debts that might not be discharged — legally written off — in bankruptcy, and this one may sound the most confusing.

We need to start by emphasizing that for most people, all of the debts they want to discharge do get discharged when they file for bankruptcy. So we are talking here about exceptions to what is ordinary. But people in all kinds of circumstances have to think about getting relief from bankruptcy, and that may include you.

The Reason for this Exception

Bankruptcy is intended to give a fresh start to the “honest” debtor, honest both in presenting your financial information to the bankruptcy court AND honest in how you acquired your debts. So, debts or claims against you that arose as a result of your allegedly dishonest, fraudulent and wrongful behavior may well not be discharged in bankruptcy. The exception to discharge that we are covering in this blog, referred to in Section 523(a)(4) of the Bankruptcy Code, is one category of dishonest debts.

What Does “Acting in a Fiduciary Capacity” Mean?

Generally, a fiduciary has the right and responsibility to act on behalf of another, in a relationship of trust. Besides formal trustees and similar legal agents, the following are examples of types of people who have fiduciary capacity: corporate officers and directors of an insolvent corporation toward the corporation’s creditors, an attorney with client’s funds in trust account, a partner toward the partnership and the other partners, a real estate broker toward the buyer or seller she is contracted with, and the executor of a decedent’s estate toward the beneficiaries.

How Is This Different From “Fraud” or “Willful and Malicious Injury”?

This subsection of the bankruptcy Code actually does seem largely redundant. In the last few blogs we covered the exceptions for “fraud and misrepresentation” in Section 523(a)(2) and for “willful and malicious injury” in Section 523(a)(6). “Fraud while acting in a fiduciary capacity” is simply just one version of fraud. Embezzlement — the fraudulent taking of something that is not yours but is lawfully under your control or in your possession — and larceny — the taking of something not yours and not lawfully under your control or in your possession — clearly seem to be merely versions of “willful and malicious injury” to another’s property. And that odd word, “defalcation,” means misappropriating or failing to account for assets belonging to someone else that are under your care. Since that CAN include unintentional behavior — situations involving only negligence or recklessness — this addition seems to be the only expansion beyond what is already not dischargeable under the two earlier provisions.

Civil Damages vs. Criminal Penalties

Embezzlement and larceny, as well as serious fraud in a fiduciary capacity, often turn into criminal matters, with the risk of potential prison time, restitution and other criminal penalties. Bankruptcy does NOT discharge any criminal penalties — neither Chapter 7 nor 13. What it does address are the civil damages that can arise even if you are not charged with a crime, or if you are charged but are also facing civil lawsuits for the same behavior.

If you are facing allegations of or have been defending a lawsuit involving any of these kinds of behaviors, we at the Leinart Law Firm are dedicated to helping you clearly understand your pertinent bankruptcy options. Our mission is to assist you in making wise, fully-informed decisions about any of your debt-related matters. We can start to have that happen for you with a free and confidential consultation. Contact our Dallas – Fort Worth bankruptcy attorneys at Bailey & Galyen today.

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