Home » Blog for Asset Protection News

How Chapter 11 Bankruptcy Can Modify Your Home Mortgage

Chapter 11 of the bankruptcy code used to be routinely used only by business debtors. But, more and more, the bankruptcy courts are seeing individual debtors turning to Chapter 11 for effective relief as a result of the economic downturn. Most often these type of individual debtors have real estate with negative equity, rental properties in need of debt restructuring, or too much debt for Chapter 13.

Chapter 11 is a section of the bankruptcy code that permits individuals and businesses to either liquidate or reorganize debt. Distinct from Chapter 7 and Chapter 13 bankruptcy cases, Chapter 11 typically involves greater sums of money regarding the assets and debts of the individual or business. Chapter 11 is available for both individuals and businesses. As an individual debtor, you can reorganize the debts that are in your name in an effort to restructure your finances and protect your assets. If you file as a business, you can still reorganize the debt but you are limited to debts of the business.
Chapter 11 is a powerful tool that allows real estate investors to rewrite mortgages. For example, if you own a property worth $250,000 but you owe $350,000 on the loan, Chapter 11 will allow you to reduce the principle balance of the mortgage to the value of the property. This would reduce the mortgage from $350,000 to $250,000. Not only that, but Chapter 11 will also allow you to reduce the interest rate and extend the term of repayment, often times to another 360 months (30 years). This results in a lower monthly mortgage payment and allows the property to become profitable again.
Most individuals use Chapter 13 bankruptcy to reorganize and pay back debt under a repayment plan. However, Congress has limited the amount of debt you may have to qualify for Chapter 13. The current debt limit for a Chapter 13 debtor is $394,725 for unsecured debts, and $1,184,200 for secured debts. If your total unsecured debt is more than this, or if your secured debts are higher than the limits, you could file for Chapter 11 bankruptcy instead. A Chapter 11 allows you to restructure and pay back your unsecured debt in a manner similar to Chapter 13. You will have a regular monthly payment to each of your creditors and once you have completed repayment according to your court-approved plan, the judge will give you a discharge absolving you of any future liability on most debts.

If you’re struggling financially, even if you have a significant asset base, it’s worth exploring your options, which are ample in the bankruptcy courts. Our office is equipped with the resources to evaluate your situation and recommend a path to reorganization, or even debt relief.

Attorney Jared Bellum is a contributing author to this blog.

Estate Tax and Estate Planning Updates

Estate Tax Update

Federal Estate Tax, Gift Tax and Generation-Skipping Tax Exemptions

The 2016 federal exemption against estate and gift taxes is up to $5,450,000 per person adjusted for inflation, up $20,000 from the 2015 exemption which was $5,430,000 per person. This is up from $5,120,000 in 2012. Estates in excess of this exemption amount are subject to a 40% federal estate tax. The federal generation-skipping transfer tax exemption was also increased to $5,450,000 per person.

State Estate Tax Exemption

The 2016 Washington State estate tax exemption is $2,078,000 per person up from $2,054,000 per person in 2015, adjusted for inflation. Washington estates in excess of this amount are subject to a 10% – 20% Washington State Estate Tax. Even though the Washington State estate tax exemption has been increased to $2,078,000, the filing threshold for the Washington State Estate and Transfer Tax Return remains at $2,000,000. Each estate over $2,000,000 is required to file a Washington State Estate and Transfer Tax Return. The exemption amount remained at $2,000,000 during 2012 and 2013, and was first increased to $2,012,000 in 2014.

Federal Gift Tax Annual Exclusion

The federal annual gift tax exclusion remains at $14,000 for 2016.

Estate Planning Update

Supreme Court States Inherited IRAs Are Not Exempt From Creditors’ Claims

If you have an Individual Retirement Account (IRA), funds held in your account are exempt from your creditors. In other words, if you are in a car accident and a judgment is awarded against you, your IRA cannot be seized as payment. However, it was unclear previously whether the beneficiaries who received your IRA following your death would receive the same creditor protection that you received. Recently, in Clark v. Rameker, the US Supreme Court clarified this. The Court reasoned that Inherited IRAs (e.g., IRAs left to a spouse, children, grandchildren, or friends upon a participant’s death) are not “retirement funds” and therefore do not receive creditor protection. The one exception to this rule is for IRAs left to a surviving spouse who then “rolls over” the IRA and treats it as his/her own account. In this case, the IRA will remain creditor protected.

IRA Trusts – Creditor Protection For Inherited IRAs

When one door closes, another opens. In the wake of Clark v. Rameker, IRA Trusts have become much more popular. While an Inherited IRA left to an individual is not protected from that individual’s creditors, an IRA left to an IRA Trust for the benefit of an individual can be protected from that individual’s creditors. An IRA Trust is a trust specifically designed to allow the IRA to remain tax-deferred – stretching the required minimum distributions from the IRA over the life expectancy of the beneficiary. The IRA Trust can allow these distributions to be accumulated in the trust and held for the beneficiary’s benefit, or the distributions can pass directly to the beneficiary. If the IRA Trust includes language that prohibits the IRA Trust beneficiary from voluntarily or involuntarily alienating his or her interest in the IRA Trust (commonly referred to as a “spendthrift” provision), the beneficiary’s creditors cannot reach the funds in the IRA or in the IRA Trust.

Key Asset Protection Strategy – Based on the above we are recommending that clients use an “IRA Trust” as their IRA beneficiary instead of directly to their children in what becomes an “Inherited IRA” on your death which is not protected from creditors. If you have questions or would like to discuss your personal situation, please contact us and we would be happy to discuss how you can protect your hard earned assets for the benefit of your family.

High income? You may still qualify for Chapter 7…

Many people do research about bankruptcy prior to seeking out the services of a lawyer. They get on their computer and search for bankruptcy topics such as dischargeable debts, chapter 7 vs. chapter 13, or asset exemptions. Another area that is frequently researched, but is often misunderstood is the Means Test.

The Means Test was developed as part of the bankruptcy overhaul of 2005, and was included in the bankruptcy process to limit those individuals who could technically pay back their debts over time from simply getting the immediate benefit of a chapter 7 discharge. Essentially, the Means Test determines the monthly amount of income an individual can earn each month (as calculated over a 6 month average) and still qualify for a chapter 7 discharge. That monthly average is then expanded into a yearly average. The income limits are based on tables and vary state to state. The Washington Means Test table can be found here.

But even if an individual has a yearly gross income that exceeds the tables provided by the US Department of Justice, that only creates a “presumption of abuse.” Meaning, there could be abuse in the filing, but an abuse that can be rebutted. Some individuals may technically not qualify based on the Means Test income tables, but due to their current, and forward looking, situation, could defeat the presumption of abuse and remain in chapter 7.
This is yet another reason why it helps to consult with a professional when it comes to bankruptcy. Don’t write off the possibility of a simple chapter 7 discharge just because you might make too much money.

Message for employers

Do you have employees whose wages are being garnished? If you do, then you have a Problem. What is your Problem? You have a troubled employee in a financial mess, with no credit, and experiencing a major life crisis! This translates into lower employee productivity.

We have recently seen a trend where employers are being pro-active to help these employees. How do they help them? That is where we come in.
Our firm, DRLNW, helps the employee get their life back in order, financially and otherwise. We stop the garnishment immediately. Those funds then pay the costs to get the employee out from under the financial mess.

With a “fresh start” your employee can start to rebuild his or her life and become a more productive employee. This is good business management. It is a win-win.

If you have any questions in this area, please contact our DRLNW office at (360) 876-6425.

Seward & Associates
2299 Bethel Road, Ste 201
Port Orchard, WA 98366

Top 3 Myths about bankruptcy

1) You have to be broke to file bankruptcy.

FALSE. This type of thinking about bankruptcy leads people to be broke going into bankruptcy, and broke coming out of bankruptcy. The best way to approach bankruptcy is to file before you get to a point that it is your only option and before liquidating all of your assets, like savings accounts, retirement accounts, or physical assets like your home or car. The state of Washington, and certain federal exemptions, allow you to keep assets up to a certain value. In the case of retirement accounts, there is almost no cap on the amount you can keep and still file bankruptcy.

2) You can modify your home loan in bankruptcy.

FALSE. Many homeowners have been lead to believe (mostly at the guidance of fly-by-night home loan modification companies) that they can seek a modification of their home loan in the bankruptcy court. This cannot be done. In fact, lenders must get relief from the bankruptcy court and remove the home from the bankruptcy estate in order to proceed with any type of permanent modification. If you’re going to pursue a modification, pre-bankruptcy, set your mortgage payment aside in an separate account. If the modification falls through, you’re going to need that money to bring your mortgage current in the bankruptcy setting.

3) Filing bankruptcy harms your credit score.

FALSE. Filing bankruptcy is actually the quickest, most effective way to improve your credit score. Your credit score is calculated based on your debt to income ratio. In bankruptcy, you discharge your debts. As long as your income remains the same, you now have a much better debt to income ratio, which increases your score. You can estimate a 60-100 point increase, if your score is in the high 500’s to low 600’s, within the first 6 months after filing.

2nd Mortgage Avoidance in Chapter 20

Traditionally, debtors have had the opportunity to remove or “strip” a second mortgage from their home or rental property through a chapter 13 bankruptcy petition and plan. Debtors may strip their second mortgages from their home if they can demonstrate that there is no equity beyond the first mortgage that the second mortgage to attach to. If the Debtor can prove that the second mortgage is completely unsecured, it can be removed, provided the Debtor is able to complete their chapter 13 plan obligations – i.e.: make their proposed plan payment for each of the 36 or 60 months required under their chapter 13 plan.

Debtors may also strip a second mortgage from their property by means of a “Chapter 20 Bankruptcy,” which is a chapter 7 and chapter 13 together. A chapter 20 bankruptcy is accomplished when a Debtor files a chapter 7 bankruptcy petition and receives a discharge of their debt, then files a subsequent chapter 13 petition and plan. The chapter 13 plan is often only made up of secured creditor debts (car payments, mortgages, etc.) and any arrearages on secured debts, most of the time a mortgage. The chapter 13 allows the debtor the opportunity to receive protection from the bankruptcy court while bringing their mortgage current. Protection can be needed if the debtor is facing foreclosure or garnishment of their wages or bank account.
The only hurdle to a successful outcome in a chapter 20 bankruptcy is the timing upon which the chapter 13 is filed after the chapter 7. Debtors filing a chapter 13 petition may only receive a discharge of their debt if their chapter 13 petition is filed more than four years after the filing of their chapter 7 petition was filed. Many courts in the past have found that the lien stripping action in the subsequent chapter 13 must be contingent upon the issuance of a discharge in the debtor’s chapter 13. So, by deductive reasoning, it would be safe to conclude that if a Debtor who files a chapter 13 petition within four years of their chapter 7 petition, they could not strip the second mortgage from their home due to the fact that they cannot receive a discharge.
But a case in the United States Bankruptcy Court for the Ninth Circuit could ultimately rule that the stripping of the lien from the debtors property is only contingent upon successful completion of the debtor’s chapter 13 plan, and not upon the issuance of a discharge. The case is Litton Loan Servicing v. Robert Blendheim, Ninth Circuit No. 13-35354. For additional information on this case, and other similar cases in other circuits, you can go to http://www.ncbrc.org/

This a potentially ground-breaking ruling, with beneficial consequences for those debtors that have received a chapter 7 discharge within the last four years. If you have a second mortgage that has no equity beyond the first mortgage, you may be able to strip that lien in a chapter 13 bankruptcy. If this is you, it’s time to talk with a bankruptcy attorney right away.

Attorney Jared Bellum is a contributing author to this blog.

Beyond Outrage

Robert Reich is a prominent economic analyst who was recently touted as one of the 10 most respected public servants in the last 30 years. He served at the request of three presidents including an appointment by President Clinton as his Secretary of Labor. Time Magazine called him one of the best Secretaries of the 20th century. He has written 13 books including his latest “Beyond Outrage – what is going wrong with our economy and our democracy and how to fix it”. He also produced a documentary film entitled “Inequality For All”.

The Video – In the following short video clip, from an interview with Bill Moyer Mr. Reich explains, in his own words, why he is “Beyond Outrage” with the current state of our economy and political climate.

To watch the entire interview see billmoyers.com/episode/full-show-inequality-for-all/.

Economy is Based on Rules that Determine Economic Outcomes – Mr. Reich explains that the economy is based on a set of rules that determine economic outcomes and that for the most part these rules are stacked against the average wage-earner.

Why not Take Advantage of Favorable Rules? – So, the question becomes, why would anyone not take advantage of rules that work in their favor? Bankruptcy rules are intended to favor individuals and small businesses that have taken risks and failed. The theory is that with these protective rules investments in risky small business ventures are encouraged and jobs are created.  If the business fails, the owner can generally receive protection from his creditors and in most cases, either save the business or obtain a discharge of his debts and a “fresh start”.

What the Big Banks Say – For decades the “Big Banks” have successfully convinced many individuals that you should be “ashamed” to take advantage of these favorable rules. Suffice it to say that we strongly disagree!

Special Holiday Offer

The Law Offices of Richard D. Seward and Jared Bellum wish all of you a Happy Holidays and a Prosperous New Year!

And, in the holiday spirit, every year we allocate a certain number of $50 Anthony’s gift certificates as client gifts. This year we have decided to allocate a good portion of those gift certificates for referrals, so anyone that refers a client to us during the holiday season will receive a $50 Anthony’s Restaurants gift certificate. This offer is good through the end of the year 2013.

Dysfunction in Washington? So what!

So what if there is dysfunction in Washington – Good Times Continue. You can still complete family gifting with favorable exemptions and THERE IS STILL TIME for high income earners to cash in. Yes, tax rates are slightly higher, but you can offset that by taking advantage of the generous deductions that are still allowed for purchases completed by year end. See our tax tip below for more details!

So we all now know, Congress did not disappoint us last December. It did act. We did not go over the “fiscal cliff”. On January 2, 2013 Pres. Obama signed the American Taxpayer Relief Act of 2012, (“ATRA”) which had been approved by both houses of Congress one day earlier. ATRA is notable for averting the tax side of the so-called “fiscal cliff” by extending or making permanent favorable tax legislation passed in 2001, 2003, 2009 and 2010.
Indeed ATRA is perhaps the most significant tax legislation in nearly 12 years. Its primary focus was preserving income tax breaks only for those in the lower tax brackets. So, for married couples earning more than $450,000 annually, the marginal tax rate rose from 35% to 39.6% and the capital gains rates increased from 15% to 23.8% including the 3.8% Obama surtax, but there is one last loophole left. See below:

TAX TIP – BUY TANGIBLE PERSONAL PROPERTY FOR BUSINESS USE!
You only have several weeks to take advantage of the ATRA’s one year extension of the higher expensing limits and 50% bonus depreciation by buying depreciable tangible personal property for use in your trade or business. For example, on an $800,000 purchase, you would get a $500,000 IRS Section 179 deduction and another $180,000 in depreciation deductions. This very generous deduction goes away on December 31st.

So buy that bulldozer, copier, truck, van, or whatever personal property assets your business might need and do it before year end. You can even finance it. Preserve your cash flow and get a huge tax reduction in April.

Who Said The Recession Is Over?

There are signs that the housing industry might be picking up. The stock market is at an all-time high. Yet, there are a lot of small businesses that are experiencing tough times. Sales are down or almost nonexistent.

This Newsletter is dedicated to those that are fortunate enough to take advantage of the bankruptcy laws to save their businesses and get a fresh start. There is something worse than bankruptcy – not being able to afford it. This newsletter is especially dedicated those that are in that very difficult situation.

Richard Seward is a contributing author to this blog and has been admitted to practice law in the state of Washington. He practices in the fields of bankruptcy, business start-ups, and estate planning.