When is it too late to file bankruptcy to save your home from foreclosure?

Once in a while, I’ll get a phone call from someone who wants to know if I can help them file bankruptcy to save their home from foreclosure.  They tell me that the Sheriff’s Sale is scheduled soon…  Tomorrow morning, in fact.
Can I help them?  Yes.  But that phone call should have occurred much MUCH sooner.
It might not be too late to save your home now, but there are deadlines.  Time is ticking.
First, let’s talk about the legal limitations.
  • Under state law, the redemption period ends once the house is sold at the sheriff’s auction.  Under this deadline, the client has only given me a couple of hours to do what ought to be done over the span of – at minimum – a couple of weeks.
  • Judge Kelley, a bankruptcy judge here in the Eastern District of Wisconsin, has ruled that debtors can still stop a foreclosure up until the date that the sale is confirmed by the state court.  Confirmation of sale typically takes place about two weeks after the Sheriff’s Auction.  In re Wescott, 309 B.R. 308 (Bankr. E.D. Wis. 2004).  Under this deadline, we’ve got a little more time to get the case ready to file – but still not very much time.

Last week, we talked about people who procrastinate in hiring an attorney until things get really really bad, and that there are benefits to hiring an attorney early on – when you are beginning to struggle financially.
Procrastinating in a foreclosure situation is especially troubling because in the State of Wisconsin, the foreclosure process is really quite long – particularly compared to the process in other states.
In a typical residential foreclosure where the homeowner has not abandoned the property, a foreclosure lawsuit is typically not filed until there are two or more missed mortgage payments.  Add another 6-8 weeks before a hearing is held and a judgment of foreclosure is entered (assuming that the homeowner doesn’t contest the foreclosure and that the court docket isn’t swamped).  Then add your standard redemption period of 6 months.  Then the Sheriff’s Sale, and another 2 weeks to get the sale confirmed.  All in all – the typical foreclosure case gives you about 10 months minimum to save your home – from the time you miss your first mortgage payment.
In other words – it’s sort of ridiculous to get a call the night before the Sheriff’s auction.  You had 10 months, if not more.  And frankly, a lot of foreclosure lawsuits are taking a lot longer than 10 months to pay themselves out.
Okay, so all I’ve done so far is explain what your deadlines are and why you shouldn’t wait until the last minute to call a bankruptcy attorney.  But what are the advantages to hiring a bankruptcy attorney early on?
  1. Bankruptcy is complicated.  Chapter 13 is even more complicated than Chapter 7.  If you are going to use Chapter 13 as a vehicle to save your home, you want to give yourself plenty of time to appreciate what you’re getting into.  If you call an attorney the night before the Sheriff’s sale, then you’ll be forced to make a lot of quick, snap decisions that you may regret later.  You’ll also want to allow yourself plenty of time to ask questions.
  2. On that same note, it does take an attorney some time to prepare your case properly.  Filing a “bare bones” petition is dangerous.  If the attorney has not had sufficient time to interview you properly, review your case properly, do his due diligence and research, and to advise you of important information before your case is actually filed.  Asking an attorney to slap together a petition and schedules in a short period of time virtually guarantees slop work, and that could cause big problems later on.  You should allow at least 6 weeks for good, thoughtful preparation.
  3. You’ll have less to pay!  In most Chapter 13 cases, you’re proposing to cure the default.  Each month that passes between your initial missed payment through the Sheriff’s sale just adds to your bill to the mortgage company – to say nothing of late fees, penalties, and interest.  The sooner you can file a bankruptcy case, the less you’ll have to pay back to the mortgage company.

Why it’s wise to retain a bankruptcy attorney BEFORE a creditor files a lawsuit against you.

Most of the time, people are not in a particularly good mood when they meet with an attorney.  Usually, something bad has happened to the person that prompted them to speak to an attorney.  Bankruptcy clients are no exception.  Debt collectors are hounding them 20 times a day…  A lawsuit has been filed against them…  Their wages are being garnished…  Their tax refunds have been intercepted…  Or they’re facing a foreclosure…
The things is – none of these events occur out of the blue.  They’re all predictable.  Debt collectors don’t hound you and lawsuits aren’t filed until after you have begun to miss payments.  Wages don’t get garnished and homes don’t get foreclosed until after a lawsuit has been filed.
What I want to talk about today is what some of the benefits can be of hiring a bankruptcy attorney before a lawsuit is filed against you.  Notice – I didn’t say file a bankruptcy case.  There can be benefits to merely having an attorney retained for bankruptcy.
Let’s start with the good news.  Most civil claims can be discharged in bankruptcy, even if a court has entered judgment against you.  The bankruptcy court discharge order trumps a civil court judgment order.  So, there’s no such thing as being “too late” in that respect.
Also, if your wages are being garnished – filing bankruptcy can stop the garnishment, and it may be possible to recover a portion of the garnished wages once the bankruptcy case has been filed.  I discussed that last month.
But most people would prefer to not have their wages garnished at all.  Most people don’t want their employers to be aware of their financial struggles.  How can this be avoided?  Oftentimes, simply retaining an attorney for bankruptcy will do the trick.
Technically, any creditor or debt collector can file a lawsuit against you before a bankruptcy case is filed.  The question is – would they?  Well, if they have already been able to confirm that you have retained an attorney, then it is unlikely that they would waste their time or money.  Remember, to file a lawsuit, they have to pay court filing fees, and they usually have to pay an attorney to file the complaint.  They don’t necessarily know exactly when you’re going to file bankruptcy.  For all they know – they could file a lawsuit today and you will file bankruptcy tomorrow.  In which case, their lawsuit is moot and they’ve just wasted all of that money.
So – most creditors back off simply by confirming that you have indeed retained a bankruptcy attorney.
If you wait until after a lawsuit has been filed (meaning that the creditor has already invested their time and money in bringing a lawsuit) before you hire an attorney, then they have very little incentive to suspend litigation or not pursue a garnishment of your wages.
In other words – don’t wait until things get to this level.  If you are struggling to pay your bills, talk to an attorney now.  Take advantage of some of the less formal protections of pre-filing procedures in bankruptcy.

Can I file bankruptcy against my tax debts?

Many people who are suffering from burdensome debt also count, among their creditors, the Internal Revenue Service and the Wisconsin Department of Revenue.  They wonder what – if anything – can be done about their tax debt.
To answer this question, we look to 11 U.S.C. § 523 – the statute that describes the types of debts that cannot be discharged.  § 523(a)(1) describes certain types of taxes that cannot be discharged in bankruptcy – the most common of which are being income taxes that are further described at 11 U.S.C. § 507(a)(8).  When you boil away the excess verbiage, § 507(a)(8) is basically describing income taxes owed for tax returns that were due within 3 years of filing.
For example – today is July 7, 2014.  Taxes owed for 2011, 2012, and 2013 would generally be considered priority taxes, and therefore non-dischargeable.  Notwithstanding any tax liens that may exist, any remaining tax debt would be considered non-priority, and dischargeable.
Now, there are a handful of ways for older tax debts to still retain priority status (the excess verbiage we boiled away) – such as any new assessments in the past 8 months, if the tax returns were filed late, or if there was a prior stay of collections.
So what does all of this mean?  Well, in Chapter 7 – the result is fairly simple.  Priority tax debts are non-dischargeable and will survive.  Non-priority tax debts are dischargeable (though tax liens will survive) and will go away after bankruptcy.
BUT – just because your tax debts are non-dischargeable doesn’t mean you can’t do anything about them in bankruptcy.  In Chapter 13, priority tax debts can be rolled into the plan.  Generally, they are paid in full with no additional interest (the taxing authority may – in rare cases – stipulate to be paid less than in full of their priority claim, though that stipulation will usually include a provision asserting that the unpaid portion will remain non-dischargeable and survive the bankruptcy).
By the way – what’s true of priority taxes is also true of other priority debts, such as domestic support obligation (child support, alimony, or maintenance) arrears.  Other non-dischargeable debts can also be folded into Chapter 13 bankruptcy, such as student loans.  But since student loans are not a priority debt, they do not have to be paid in full (though the unpaid balance would survive the bankruptcy).
If tax liens have been filed against you, those would also have to be paid in full in a Chapter 13 Bankruptcy (and with nominal interest), but they are secured only to the extent that there is equity in property.  For example, say that a person has a $100k house with an $80k mortgage, a $20k car with a $15k lien, and $10k in personal property – the available security would be ($20k + $5k + $10k) = $35k.  If the amount of tax lien is less than $35k, then the whole amount is treated as secured.  If the amount of the tax lien is more than $35k, then only $35k of it is treated as secured.
It’s a lot to digest, and worthy of a detailed discussion with your bankruptcy attorney.  But the main points to take away are that (1) some tax debts can be discharged in bankruptcy, and (2) tax debts that cannot be discharged can be addressed in Chapter 13.