The settlement announced by the Attorney Generals with the mortgage service industry has generated big headlines and created false hope of help for underwater homeowners.  $25 billion dollars sure seems like a lot of money.

It’s a Scam

When you hear that the mortgage servicers have agreed to a $25 billion dollar settlement I bet you believe it means they are going to pay $25 billion dollars.  Wrong!

Most of the settlement is not going to be paid.  It will “paid” in the form of mortgage principal reductions.  The maximum amount of the reduction is reported to be 20% of the amount owed.  So the few people who will get the maximum benefit will still owe more on the house than it is worth.

A fairly typical situation I see in my office is a Mesa homeowner who owes $250,000 on a house that is now worth $120,000.  Assuming they will qualify for the maximum benefit they will now owe $200,000 on a house worth $120,000.  I doubt the mortgage industry would every collected the dollars they are going to use to pay this settlement.

The Math Doesn’t Work

The government bragged that it will help at least 1 million homeowners.  My math tells me that works out to $2600.00 each.

That doesn’t seem like much help to Arizona homeowners who have lost virtually all of the equity in their homes and nearly 70% of homeowners owe more on their mortgage than the house is worth.  House values have dropped as much as 50% in communities such as Mesa, Chandler and Glendale.  It is even worse in towns like Maricopa and Queen Creek.

This “settlement” makes about as much sense as throwing a drowning man a glass of water.

Cheating Pays

The government paid for a massive bail-out of the financial industry — the same companies that are responsible for the failing economy.  The mortgage industry was paid to help homeowners stay in their homes.  They took the money and refused to offer any meaningful help to homeowners.  At the same time they caught filing fraudulent documents and illegally foreclosing on homeowners.

It might be time to stop waiting for the government to ride to the rescue.

A new book, Best Practices for Filing Chapter 13: Leading Lawyers on Examining Today’s Consumer Bankruptcy Trends and Preparing a Throrough Chapter 13 Filing, was just published by Aspatore Books.

I know that lots of books are published everyday.  But, there is one thing that makes this book remarkable.  One of the Chapters titled “The Continuous Ebbs and Flows of Bankruptcy” is written by yours truly, Joe Volin.

The book is available from one of the major legal publisher’s, Westlaw, internet bookstore.  I wish I could post a copy of my Chapter, but I can’t because the copyright agreement I signed with Aspatore does not allow me to.

Is the book a good investment?  For a consumer who needs to hire a bankruptcy lawyer, no.  Things change too fast in the law.  The material in the book was written last summer.  New Court decisions have been published that have put a new spin on much of what is discussed in the book.  Ideas evolved too.   For example, a good part of my chapter deals with challenging mortgage claims in Chapter 13 cases.  Since writing that material my thinking and ideas on how to attack mortgage claims has evolved.  I no longer rely on the same approach I used at the time the book was written.

For a bankruptcy lawyer the book has a great deal of solid information.  It is a great starting point for their own independent research for the cases they are handling.  Also, many of the chapters discuss the authors mental approach to dealing with bankruptcy issues.  These sections are timeless and will always be valuable.  One that I will always apply to my practice is to understand that each client is unique.  They are not, and should not be treated like stacks of papers.  To do a good job, and get the best results, it is critical that I really listen to my clients and then find the best solution for their unique situation.

One of the enduring myths about bankruptcy is that tax debts cannot be discharged in bankruptcy.  They can be, but not all of the time.  The rules governing when they will be discharged are complex and full of loop-holes.

The things that matter are: was a return filed?  When was it filed?  How old are the taxes?  When were the taxes assessed?  Did any events that extend the time periods to discharge taxes happen?  This included filing an offer-in-compromise, requesting a due process hearing, an appeal, a prior bankruptcy, among others.

Before you believe that tax debts cannot be discharged in bankruptcy consider a letter I received from the IRS addressed to one of my clients.  It starts off by saying: “You recently received a discharge under Chapter 7 of the Bankruptcy Code.  Thus, you are relieved from personal liability for the following tax Liabilities….”  The letter then lists about $100,000.00 in tax debts my client will not have to pay.  The IRS also released the tax liens that it had previously filed.

There was nothing really special about the letter.  It is a form letter that I have received many times before.  The only thing that varies is my client’s information, the tax years, and the amounts.

What is different is how we approach these cases.  They are different than the typical bankruptcy filing.  The special rules for discharging taxes require special handling.  Before a case is filed we need to investigate the type of tax, who they are owed to, the tax years, our client’s assets, search for tax liens, and obtain tax transcripts, and of course put together a game plan for getting rid of the tax.

If you are up to your eyeballs with tax debts, don’t buy into the myth that you can never deal with taxes in bankruptcy.  Just make sure you have someone on your side who knows the rules.  Then, you may be getting a letter from the IRS announcing that the tax burden you have been fighting has been taken off your back.

Arizona real estate values continue to stay stagnant.  Even with a shortage of houses in the Phoenix market home values have not gone up.  Many of us feel trapped in our home mortgages and owe far more on the house than it is worth

You might be considering walking away from the mortgage.  The Arizona Anti-Deficiency laws provide great protection for the homeowner.  This law prohibits a mortgage company from collecting any unpaid portion of the mortgage following a foreclosure.

There are some important limits to this law.  The property must be residential property.  There is no requirement that you ever lived in the property, but it must be a house and it must be on a lot that is no bigger than two and one-half acres.

Two big exceptions to this protection are Veteran Administration loans (VA loans) and many second mortgages.

The Courts have consistently ruled that the VA is not governed by state laws.  It does not matter what the state laws say when it comes to the VA.  The Veteran Administration rules allow the VA to collect any money that is not paid by the foreclosure sale.  Arizona’s anti-deficiency law does not apply

Another requirement to Arizona’s anti-deficiency law is that the loan be a “purchase money” loan.  Many second mortgages fall into this category.  Often called 80/20 loans, the second mortgage is taken out at the time the house is purchased.  Because these are purchase money loans the lender cannot collect after a foreclosure, even if they are not the lender who foreclosed.

Most second mortgages are taken out after the house was purchased.  A Home Equity Line of Credit (HELOC) is not a purchase money loan.  These loans are not covered by Arizona’s anti-deficiency law and the lender is free to collect on the debt even after a foreclosure.  An exception to this exception is where the holder of the second mortgage is the one foreclosing.  When this happens, which is rare, they cannot collect on the deficiency.

The ultimate protection from liability on a mortgage debt is a bankruptcy filing.  None of the above rules make any difference in the Bankruptcy Court.  The debt can be discharged no matter who the lender is and no matter whether it is a second mortgage.

The bankruptcy system is complex.  Filing a Chapter 7 or Chapter 13 bankruptcy in the Arizona Bankruptcy Court is not something you learn in a weekend.  A recent study published in the book Broke: How Debt Bankrupts the Middle Class shows just how tough it can be to file a do-it-yourself bankruptcy.

The study researched the success rate of cases filed by people representing themselves (in court these are referred to as pro se cases) and compared it to the success rate of cases handled by lawyers in Chapter 7 and Chapter 13 cases.

In the Chapter 7 filings 17.6% of the cases filed by unrepresented Debtors resulted in the case either being dismissed or converted to Chapter 13.  Either way, these individuals did not get what they wanted when they filed bankruptcy.  Their case was either thrown out or they were forced into a payment plan with their creditors.  Only 1.9% of the cases handled by lawyers were dismissed or converted.

The Chapter 13 results paint even a darker picture.  Of these cases filed by unrepresented filers 91.3% were dismissed before the case was approved by the Court.  The cases filed by lawyers were dismissed in 14.9% of the filings.

The researchers also looked at the educational background of the do-it-yourself filers.  They found that the college educated Debtors were no more likely to succeed than those with less education.  I was surprised by this at first, but I suspect that smart people think they can figure out how to handle their own case — but they cannot.

The bankruptcy system is complex.  The forms that are filed to start a case may look simple.  That does not mean that the process will be easy or that you will get relief you need without knowing the details of the law and the legal system.

I often describe filing Chapter 7 bankruptcy to my clients as a trade-off. Here in Arizona, that seems to work out well. You receive a “fresh start” by having debts eliminated. In exchange, a bankruptcy trustee takes any unprotected property you have, or have owed to you, on the day your case is filed.

Because the bankruptcy laws allow you to protect the most common personal and household items, most people who file for bankruptcy in Arizona don’t lose anything in Chapter 7. The bankruptcy exemptions in Arizona are very good overall, and for that we’re more fortunate than people elsewhere in the nation.

Tax refunds are a big exception in the world of bankruptcy. A tax refund is getting back the money you did not owe. It is similar to than putting money in a saving account. The right to get this money back is considered an asset when your bankruptcy case is filed.

The bankruptcy trustee can take the entire refund that is owed to you when your bankruptcy is filed for any year up to the date your case is filed. The Arizona Bankruptcy Court will also allow the trustee to prorate the refund you receive for the tax year your case is filed in. For example, a case filed on September 30, 2011 was filed on a day when 75% of the year was over.

Under the Arizona bankruptcy exemption scheme, the trustee will have a right to 75% of the 2011 tax refund.

You have a legal duty to provide a copy of your 2011 tax return to the trustee and send the refund check to the trustee. The trustee also has a right to collect the refund directly from the IRS or Arizona Department of Revenue.

There are a couple of ways to plan to avoid losing a tax refund to the Arizona bankruptcy system. One, adjust your tax withholding by filing a new W-4 Form with your employer. This form will allow you to reduce your tax withholding and either eliminate or reduce the size of the refund. It will stop the overpayment of the tax. It might be too late into the year to completely eliminate the refund.

A second option is to delay filing your bankruptcy case until after you have received the refund. This strategy should always be combined with updating your W-4 so that you do not have the same problem when your tax return is filed for the following year. You can then use that money to pay personal expenses, legal fees, or purchase things that are protected prior to filing your bankruptcy.

In some states, protecting your tax refund is a given. Not so in Arizona. When Congress wrote the bankruptcy laws they allowed each state to determine what property will be protected for the cases filed in its state.

This is another example of how important it is to make sure you receive up to date advice based on your situation.

The Meeting of Creditors is no big deal. I know it’s scary to go into a strange office building in Phoenix, sit in front of a stranger, and pour over your life’s details. But bear in mind that this isn’t going to be like an episode of Law & Order.

You will be worried about what will happen.

Will you be put on the spot to explain yourself?

Who else will be there?

Will any you know see you?

Will creditors show up and embarrass you?

Will you answer the questions right?

Will you be too nervous to do a “good” job of testifying?

Knowing exactly what to expect might make things a little easier.

First off, you need to know how to get there. The Phoenix Bankruptcy Court is located at 230 North First Avenue. I can’t really give you directions since my clients are as likely to live in Peoria, Glendale, or Avondale as they are to live near my office in Mesa, Tempe, or Chandler.

Get the map from MapQuest or Google Maps and print it out a couple of days before your hearing. It will be one less thing to worry about.

Leave lots of extra time to get there. It seems that they are always tearing up the streets around the Courthouse.

Parking is a challenge in downtown Phoenix. After the Oklahoma federal building bombing there’s no parking allowed next to the Court building. There are two parking garages that you can use. One is at the southeast corner of Van Buren and First Avenue. The other is at the northeast corner of Second Avenue and Van Buren.

I wouldn’t use either of them.

Instead, park on the street on Second Avenue north of Van Buren. It will be faster and cheaper. Until now I don’t think anyone knows about these spaces. There are a lot of them though. Bring a couple dollars in quarters for the meter. There is no free parking near the Courthouse.

The building is located on the west side of First Avenue between Monroe and Van Buren. It takes up the whole block. There is only one way into the building through the entrance facing First Avenue.

You will need to go through security. Pack light and it will be faster. Don’t bring your pocket knife, mace, or handgun. If you do, they will be taken from you and you’ll be able to pick them up on the way out.

You will be going to Room 102. After you get through security walk straight through to the end of the lobby and take the hallway to the right. It’s the only one. Room 102, the Bankruptcy Trustee’s Hearing Room will be to your left about three quarters of the way to the end of the hall. There will be a sign letting you know you are in the right place.

When you enter the room you will see a few rows of chairs. This is a waiting room. There will probably be a handful of lawyers waiting to meet there clients plus a few people waiting for their case to be called. Either Trucly or I will meet you there about 15 minutes before the hearing.

Instead of gossiping with the other bankruptcy lawyers, I will want to sit with you and make sure that you understand exactly what to expect. I will go over the questions that you will be asked and discuss with you anything I expect the bankruptcy trustee will be interested in. I will let you know about the trustee’s personality and how they conduct themselves. They can be very intimidating. They are also professional and fair.

As we wait for our case to be called we can discuss any questions you have. It might take a while. It is not unusual for the hearings to be running 30 to 60 minutes behind schedule, especially if your case is scheduled in the afternoon. As we wait you will probably hear a couple of lawyers announce a few names of people they are looking for. These are the TV lawyers looking for their clients that they have never met. You won’t have to worry about that. It will either be me or Trucly who will walk you through this and we will know every detail of your case.

Once it our turn to go into the bankruptcy hearing room we will file in with five to ten other people who are there for the same thing. The cases will be individually called in the same order they were filed with the Court. Unless we are first on the schedule, you will get to see some other cases go through the process. This can be good or bad.

It is not unusual for the Trustee to continue a case because financial documents were not provided to the Trustee ahead of time. Some lawyers leave that responsibility to their clients and either none of the documents have been provided or some are missing. We won’t let that happen to you. We will make sure that we have provided everything the Trustee needs well ahead of the hearing date.

Some of the people will be asked detailed questions about their filings. The Trustee may find that important information has been left out or is inconsistent with the financial records provided. You will not need to worry about this. Part of my job is to go through everything in the case just like the Trustee will. My goal is to make sure that all the Trustee’s questions are already answered before he has a chance to ask them. We meet that goal virtually every time.

Some people will have their case continued because they forgot to bring their photo identification and proof of the social security card. We will make sure that you get several reminders about this.

Most of the cases you will have a chance to see will be well prepared and will go smoothly. These are the ones that I want you to see. It is just a handful of questions to establish that you have been honest in listing all of your property and creditors.

When it is our turn you will need to sit at the table next to the trustee. I will sit next to you. This is the part that you have to tough out. There is only one thing you need to do. Answer the questions honestly. If you start getting off track, I will speak up and guide you. Once the trustee has completed his questions, he will ask if any creditors are there. There almost never are. Then we are free to go.

I probably won’t have any other cases after yours. I don’t run a high volume firm. I will walk out with you to discuss what just happened. You will be relieved. There may be a few items we need to follow up on. I will describe what happens next in the case.

You just completed the most nerve racking part of your case.

The United States Trustee’s Office, a branch of the United States Department of Justice, announced changes that may affect your right to file bankruptcy in Arizona.

Your right to file Chapter 7 bankruptcy depends on being able to show a financial hardship. If your income is below the median income for your household size that hardship is presumed.

You do not need to prove that you do not have sufficient income to pay a fair amount toward your debts when your income is less than the median income.

The United States Trustee’s Office published new median income numbers for bankruptcy purposes that took effect on November 1, 2011. Ironically, as the economy gets worse in Arizona it is becoming harder to qualify for Chapter 7 bankruptcy.

The new median income for a family of four in Arizona has been reduced by $5846. The new median income for a household of four, effective November 1, 2011, is $61,267.00. The current median income for households of four is $67,113. As a result, many people who qualified for Chapter 7 bankruptcy in Arizona in October 2011 now need to be prepared to prove a financial hardship in order to receive a Chapter 7 discharge.

This does not mean that if your income is over the median for your household size that you cannot receive a Chapter 7 discharge. A second step to the qualifying process is called the means test. The means test is essentially a budget form that deducts living expenses from your income.

However, the government has also published guidelines on what can be deducted for many expense items such as food, clothing and shelter. In order to deviate from these guidelines we need to be prepared to prove what is called a special circumstance.

An example of a special circumstance is medical expense. If you have significant medical expenses the bankruptcy law allows you to take the full amount of those expenses as a deduction on the means test. We will need to be prepared to prove the amount deducted. Other examples of special circumstances include education expenses child care expenses work-related expenses.

My job in helping you through the bankruptcy process is to help prove your eligibility for a bankruptcy discharge. We can do this by helping you identify and document the expenses that you have that will allow you to file a Chapter 7 case and receive a discharge despite an income that is over the median. We won’t be able to do this in every case, but when you are entitled to Chapter 7 relief, we will help you prove it.

Sitting in my office in Mesa, you’d think I was the center of the saddest movie of all time. In some respects, you’d be right. A lot of tears get shed in my office. It doesn’t take me by surprise anymore.

Bankruptcy filings in Arizona are down 7.3% from last year, but from behind my glasses it sure looks as if things aren’t getting better in Phoenix anytime soon.

You feel the same way, I know.

I listen to you and hear the pain you are in. I can’t change the way you feel. I try to let you know that filing a bankruptcy is unlikely to be the worst thing that will happen in your life. You know this. You have probably dealt with far worse.

You hate the idea of giving up. You have already given up most everything you own to try to keep your bills paid. You are at the end of your rope.

I know you don’t want to be here, sitting in my office looking out at another beautiful Mesa day and wondering where it all went wrong.

Most of the people I meet with show the effects of stress. Some are obviously depressed. Not just emotionally, but physically. The signs are obvious.

Money Trouble Depression Is Real

I didn’t know that scientists have studied this seriously until I ran across this article about Legal Abuse Syndrome.

The symptoms are the same as my bankruptcy clients often describe – depression, sleep problems, anger, and relationship breakdowns. It is what happens when we are exposed to stressful and traumatic events. We might think it is all in our heads that we should just learn to cope with.

PTSD is a medical condition and leads to physical symptoms. Lack of sleep, fatigue, and giving up are just the tip of the iceberg. Getting fired, despite putting in long hours of honest work, abusive calls from bills collectors, lack of understanding from the legal system, and downright fraud in the corporate world are traumatic events that lead to serious physical problems.

It’s Not In Your Head

What makes financial problems different from many others is that we have been taught that we are in control of our finances. We really are not. Just like a health problems, we only have partial control. Some of us get sick and there is no avoiding it.

It is not fair. We just have to deal with it.

Many of my bankruptcy clients tell me that the weight on their shoulders is lighter once we’ve spoken and mapped out a plan of resolving their bill problems.

I can’t promise that filing bankruptcy is a cure-all for your money troubles, but I can tell you that knowing your options will make you feel better.

Image credit:  Jessia Hime

Sometimes knowing a little about a topic is more dangerous than knowing nothing. The Arizona Anti-Deficiency Statute is like this. There are two of them. If you don’t know both of them, you would be better off not knowing either. That way you wouldn’t think you have the answer when you don’t.

The most common situation I come across is meeting with a prospective client who believes that are going to owe a lot of money after their property in Arizona goes into foreclosure. Someone has told them that only a short sale will prevent the lenders from coming after the homeowner for a deficiency. This is wrong.

Arizona Anti-Deficiency Law Rule 1

A short-sale has some advantages, but it is not to avoid a deficiency claim by the lender. Arizona has two anti-deficiency statutes. One of them states that if a mortgage company forecloses on residential property in Arizona they cannot collect a deficiency. It makes no difference whether or not the borrower lived in the property. It doesn’t matter whether or not the mortgage loan was used to buy the property (a purchase money mortgage). The only thing that matters is whether the property was residential, a house, and whether the lender foreclosed.

Arizona Anti-Deficiency Law Rule 2

The second anti-deficiency statute says the borrower cannot be sued to collect on a loan that was used to buy a home in Arizona. This is often called a “non-recourse” loan.  The loan must be a “purchase money” loan.  That means that the loan proceeds were used to buy the house.  The property must be residential property.  That property must be on a lot no larger than two and one-half acres.

What’s Not Covered?

A second mortgage taken out after you already own the home is a problem. A Home Equity Line of Credit (HELOC) is never a purchase money loan. The second rule does not apply; it is not a purchase money mortgage. The first rule does not apply unless the second mortgage holder is the one who forecloses. When the first mortgage forecloses, the second mortgage is still a personal liability. Neither one of the Arizona Anti-Deficiency rules cover this situation.

What About the Tax?

You may have heard about a tax for forgiveness of debt. A lender cannot forgive a debt that you do not owe. When either one of the above Arizona Anti-Deficiency statutes apply there is no debt to cancel. There will be no income tax as a result. I know you have heard different. The IRS agrees with me on this one. You can read IRS Publication 4681 for all the details.

What to Do

Before deciding whether to put time and money into a short-sale, file a bankruptcy, settle with second mortgage holder, or walk away from your mortgage, get the facts. The problem I see repeated over and over is advice that was given based on one of the statutes being applied to the wrong facts. It is wrong. The time and expense invested in learning what the real rules are and applying them to your specific situation is a drop in the bucket compared to the grieve and unnecessary expense of relying on second hand or wrong advice.

Image credit:  Caveman Chuck Coker