We recently wrote a post describing a MERS defeat in Oregon Bankruptcy Court, and MERS (an acronym for Mortgage Electronic Services, Inc., an electronic registry) is in the news once again. This has not only been a hot topic in Oregon, but people around the nation have been attacking MERS as foreclosures mount and banks turn defaulting homeowners out into the streets.
Many states have their own personal income tax. Generally these states also have laws that require a taxpayer to submit a copy of the IRS audit report if the federal liability is adjusted due to a reallocation of income or deductions on a previously filed return. The failure to do so may cause bankruptcy discharge problems . Changes to federal law contained in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 may render any undisclosed increase in liability a non-dischargeable debt for bankruptcy purposes.
Debtors often ask us what will happen to their home if they file for bankruptcy protection. Fortunately, federal bankruptcy law and most states provide for what is often called a “homestead exemption”. A homestead exemption acts as a shield against the claims of certain creditors. It does this by protecting up to a specific dollar amount in real property. Homestead exemptions are particularly important for debtors with equity in their home. On the other hand, where a consensual lien on real property, such as a mortgage, exceeds the home’s value, the homestead exemption does not apply since there is usually no equity in the home to protect.
There are certain requirements for the homestead exemption to apply. For instance, the real property typically must be kept as the debtor’s residence. And depending on the state where the debtor resides, the debtor may elect to apply the federal homestead exemption over their state’s homestead exemption. As of April 2010, the federal homestead exemption was $21,625. Federal exemptions are not generally available to Oregon residents. However, Oregon has protected much more home equity for its residents.
Debtors often have property subject to a lien when they file for bankruptcy. In order to keep the property debtors can often sign a reaffirmation agreement. A reaffirmation agreement is a new contract between the debtor and secured lender. The contract is the debtor’s promise to continue making future payments in exchange for the lender’s promise to not repossess. Reaffirmation agreements must be approved by the bankruptcy court. Bankruptcy Rules reqire reaffirmation agreements be filed within 60 days after the first meeting of creditors.
A debt discharge is the goal of consumer debtors when they file bankruptcy. In Chapter 7, a discharge may not be available to everyone. To ensure that potential filers were not abusing the system, Congress created a Mean’s Test that debtors must “pass” in order to invoke Chapter 7 bankruptcy relief. When computing the Mean’s Test formula, there are several steps to determine whether a presumption of abuse arises. The first step is to compare the debtor’s annual income to the median income of the state in which they reside. The US Trustee website keeps track of government figures in this area. The applicable state median income will go up or down depending on the size of the debtor’s family.
In my view, there is no question that they are – and that lay counselors in these programs who advise otherwise do not understand the bankruptcy process. Steps 8 and 9 of the program of Alcoholics Anonymous (copied verbatim by most other 12-step programs) are, respectively (8) Made a list of all persons we had harmed, and became willing to make amends to them, and (9) Made amends to such people wherever possible, except when to do so would injure them or others. The book Alcoholics Anonymous talks about moral and spiritual bankruptcy, but what about plain old financial bankruptcy? Many people recovering from alcoholism and other addictions are in serious financial difficulty. Should they consider filing for bankruptcy through the court system, or would this somehow be “weaseling” out of debts, jeopardizing 9th step amends?
In fact, declaring bankruptcy provides a sensible, logical framework within which to work the financial portions of the eighth and ninth steps. The person filing for bankruptcy is required to list all his creditors, his sources of income, and his material assets. The courts, and the debtor’s attorney if he is represented, prioritize the debts based on federal law and determine how the limited financial resources of the debtor are to be applied. Chapter 13 bankruptcy actually works very much the way a ninth step ought to. Often referred to as “wage-earner bankruptcy”, Chapter 13 requires the debtor to adhere to a bare-bones budget for 3-5 years, paying any surplus income to a trustee who parcels it out among creditors. Real effort and personal sacrifice are involved in repaying the debts, but there is a definite endpoint when the debt is considered satisfied. Bankruptcy addresses the issue of the injury complete repayment might do to others, such as family members who are hostage to a debt, or people dependent on a business which is temporarily insolvent.
The recovering substance abuser probably has a sense that some of his financial obligations have more moral urgency than others. This list will not correspond exactly to the priority schedule of the bankruptcy court. In the eyes of the court, a private loan made by a family member who is not well off financially will have the same priority as a credit card debt, and both will take a back seat to the Internal Revenue Service. Some debts, such as arrears in child support, cannot be discharged (forgiven) in bankruptcy. On the other hand, a conscientious debtor’s own priorities will probably be closer to the bankruptcy court’s determination than the priorities of debt collection agencies, whose squeakiest wheels are usually the least deserving, both from a moral and legal perspective. Should a person feel a moral obligation to pay a debt which has been discharged in bankruptcy, there is no law preventing him or her from making payments on it at some later date, once the case is closed. However, there may be good practical reasons for not doing so when it would jeopardize the fresh start a bankruptcy is designed to create.
A person who finds that the payments on his debts are leaving him without sufficient income to live on, and has no immediate prospect of either paying off those debts or increasing his income, or has exhausted conventional lending sources and is resorting to payday lenders and other loan sharks to meet basic living expenses, or is threatened with foreclosure on his home mortgage, is well-advised to explore bankruptcy. Contrary to popular perception, reinforced by credit card companies and other lenders, recent changes in Federal laws have not closed this option. There are numerous websites, including Kent Anderson’s, and books providing an overview of the bankruptcy process. The anonymity tradition of 12-step groups would preclude a law firm’s advertising that any of its partners or staff members had personal experience with 12-step based financial counseling; however, a few well-considered questions during an initial interview should reveal whether a bankruptcy attorney has the knowledge to implement the desires of a client in this context.