Should I Refinance My House to Pay Off Debt?
Desperate times require desperate measures or so the saying goes. If you are struggling to pay your debts, primarily the result of the minimum payments on credit cards, medical bills, personal loans, taxes, student loans, etc., should you consider refinancing your home to pay off the debt?
There are several factors to consider. First, you must determine if you have any equity in your home that would allow you to refinance and take the excess proceeds to pay off your debt. Unfortunately, with the downturn in the economy fewer and fewer people find they have equity in their home. However, if you are one of the lucky ones that have equity in the home, you need to decide if consolidating the debts into the mortgage loan is your best option. Is it always a bad idea to refinance your home to pay off debt, no, but you need to consider the pros and cons before you make the decision.
Pros:
The payment on the debt can be spread over the terms of a mortgage, often 30 years, therefore reducing the payment each month.
The interest rate on the mortgage is usually considerably less than what would be paid on credit cards, so there is an automatic savings.
The interest from the mortgage loan can be deducted on your taxes; interest on credit cards and most other personal debts cannot be deducted. (Interest on student loans is the exception. It can be deducted, but the deduction is limited and phased out as income reaches a threshold.)
You will be making one consolidated payment each month so there is a convenience factor.
This all sounds great, so why wouldn’t everyone just refinance their home to pay off their other debt.
Cons:
The monthly payment on the home mortgage is larger after refinancing and can be a stretch for the family budget.
If you are unable to make payments on the mortgage due to illness, loss of job, etc., the mortgage company can foreclose on the home.
Again, refinancing the home is not always a bad idea, but you must realize you have placed your largest asset, your “home”, at risk.
Do I Have To List My Business Assets on My Personal Bankruptcy?
This is an excellent question. For the most part, our bankruptcy clients who have businesses fall into two categories. The first category consists of those who feel as though they and their business are “one” entity. The second category consists of those who feel as though their business is a completely separate entity. Often, when clients drop their paperwork off at our office and we question what business assets exist, clients will reply, “Well, that doesn’t belong to me, that belongs to my business.” So the real question is: what needs to be listed as assets in your bankruptcy and what does not?
Technically, ALL of your assets need to be listed. Therefore, going back to our previous blog post on whether or not tools are protected we can examine debtor-owned businesses based upon the same scenarios. Let’s use the example of Joe Blow’s Lawn Care. Joe owns Joe Blow’s Lawn Care. The lawn mower, rakes, blower, hedgers, etc. all belong to Joe. If he decided to no longer run the company next week, the only difference would be that the tools would move from his truck to his garage at home. These tools would need to be listed in Joe’s personal property and protected by the exemption known as “Tools of the Trade” as long as Joe is using them in his business. If Joe were to be sued, he would need to protect those tools as he would any other asset (such as a bank account or vehicle) he has from seizure.
Referring back to the same situation as discussed in the previous blog post, let’s use the scenario that Joe went to the Secretary of State and registered his company as a corporation. Now Joe Blow’s Lawn Care, Inc. is the owner of the tools. Even though the company at this point in time owns the tools, let us not forget that in the end scheme of things the debtor owns the company. That company is an asset in itself; therefore the tools would be listed on the business balance sheet, included as an asset and the Joe’s portion of equity from the corporation must be listed in the bankruptcy and protected.
Regardless of how large or small, the court looks as personal assets all in the same; they need to be listed and at least attempted to be protected in the bankruptcy. Again, it goes back to the confusing question of how the business should be treated for bankruptcy purposes. Since businesses can get quite complicated at times, we strongly suggest that you thoroughly discuss your business and any other assets you or your business may have with your attorney so they may advise you properly to ensure your assets are protected.
Do My Taxes Have To Be Filed Before Filing for Bankruptcy?
You will notice when you are filling out your paperwork that the court asks you for what seems to be a billion pieces of documentation ranging from copies of bills, papers from purchases, income advices and federal and state taxes. These documents are asked for to verify information you are providing is true and accurate.
However, what happens if you haven’t filed your taxes? Can you still go through the bankruptcy process or must your taxes be done beforehand? The answer is you must have all prior tax years filed and received by the IRS and state in order to file the bankruptcy. There are several reasons why taxes are required to be filed and received before filing your bankruptcy.
The Bankruptcy Trustee, Bankruptcy Court and Bankruptcy Administrator Require It
As your attorney, are required to send a copy of your most recent tax year to the bankruptcy Trustee. If they do not get the taxes before the 341 creditor’s meeting then they technically has the right to dismiss your case. When April 15th (or the appropriate deadline depending on the year) hits, the bankruptcy Trustee will expect taxes to be filed as completed. What if you’ve received an extension? Even if you have received an extension, if you are filing bankruptcy you need to file the taxes before filing for bankruptcy. This does not mean you have to pay on taxes owed but they at least need to be filed.
The Bankruptcy Administrator’s office randomly elects cases to audit. They do this to ensure bankruptcy lawyers are performing their duties but also to ensure clients are providing accurate information. It is similar to being audited by a taxing agency. If your case is randomly selected to be audited then we are required to provide those documents.
Taxing Agencies Want to Ensure Taxes Are Completed
In addition to the bankruptcy Trustee and bankruptcy court needing to see evidence of your tax filings – the taxing agencies, the Internal Revenue Service and the North Carolina Department of Revenue, also will receive notice of your bankruptcy filing and want to make sure information you are reporting is accurate. Once they have word that you have filed a bankruptcy they will reassess your prior year’s taxes to make sure they are completed. If they are not, they can object to your discharge until they have been completed. If a creditor, such as a taxing agency, objects to your discharge it means your case will be held open longer. The longer your case is open, the longer it takes to get your financial freedom.
Filing Taxes Allows You to Accurately Budget Repayments
Just like any other debt you have in your bankruptcy – the amount owed for taxes has an impact on your bankruptcy filing. If you have not filed your taxes, and you are filing a Chapter 7 bankruptcy, then you have no way of knowing what you owe, and cannot go ahead and budget a repayment plan going forward. If you file a Chapter 13 bankruptcy, and you have not filed taxes yet, then the IRS or NCDOR is going to estimate what you will owe them and file a Proof of Claim for un-assessed returns. Oftentimes, the taxing agencies file the proof of claim as a worst-case scenario on your taxes, which typically, means the amount is overstated which can cause an increase in your Chapter 13 plan payment. If you file your taxes then the IRS can use the amount of taxes owed to file a more accurate proof of claim, which may increase your chances of success in a Chapter 13 bankruptcy.
The bottom line is, yes you have to file your taxes before filing your bankruptcy. We understand that it’s a pain to have to dig through your paperwork, retrieve the documents, make copies and bring them to us, but the government requires it as part of your bankruptcy documentation.
What Is Abandonment In Bankruptcy?
Property that is surrendered or was not protected under the bankruptcy code exemptions is fair game for the bankruptcy Trustee. Once a debtor has filed bankruptcy, his estate becomes that of the bankruptcy court and the bankruptcy Trustee.
At that time, the Trustee determines if there is any value or potential value in any of the assets of a bankruptcy case. If the property proves to be worthless, with no beneficial value, or the value is not worth the hassle of selling the property, the Trustee will submit a motion to abandon the property. Once an asset is abandoned in bankruptcy, it is released from the protection of the bankruptcy automatic stay. At this point, the property may be sold, transferred, or used by the debtor or other parties of interest, such as the mortgage company. Abandonment can be automatic if a Final Decree is issued on a case which officially closes a bankruptcy (this is after the discharge is issued.) A final decree labels the property for abandonment because the case has been closed and the Trustee has issued a non-distribution of assets.
To better illustrate, lets take a look at a common example. A debtor surrenders a home in bankruptcy and must forfeit a piece of land that he was not able to protect with his exemptions. The Trustee reviews the estate and decides to hire a real estate agent. The real estate agent explains that due to the market’s condition, the land would take over a year to sell, but the house may sell in 6 months. The Trustee decides to put both on the market for 6 months. Debtor receives a discharge but not a Final Decree. The time passes and the Trustee has not even received an offer on the land or house. To cut his losses, he decides to file a Motion to Abandon on the land and notifies the creditors there are no assets to be disbursed. The debtor receives a Final Decree a month later. The house is considered abandoned by the receipt of the Final Decree and the land becomes the debtor’s once again. The mortgage company sets up foreclosing proceedings on the home and months later, the home forecloses and the debtor’s name is removed from the deed.
The bottom line is, when a Trustee abandons property they are notifying the bankruptcy court, creditors and the bankruptcy debtors that they no longer have an interest in the property.
What Does “Bad Faith” Mean in Bankruptcy?
As it sounds, this is not a term you care to associate yourself with if you can help it. Bad faith refers to certain actions and circumstances that cover fraudulent bankruptcy filings. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act was legislated to define and outline situations associated with bad faith bankruptcy filing.
One of the roles of the bankruptcy court and bankruptcy Trustee is to protect creditors from debtors who are maliciously trying to defraud the system. Most debtors are really struggling under the weight of their debt without much hope of ever breaking even, but unfortunately, there are people who are just trying to stall or manipulate creditors. There are 5 situations in which a debtor is considered to act in bad faith.
First, if there is evidence that a debtor is trying to unfairly thwart a creditor’s efforts to collect on a debt, this is considered a bad faith filing. For example, a client files bankruptcy in order to stall a foreclosure with no intention of ever completing the bankruptcy. Bad faith is relevant when a client files bankruptcy to save a home, then does not make any of the required plan payments and is dismissed. This of course can be a very fine line and cannot always be proved; especially if a client has a very tight budget and unforeseen circumstances arise. Most Chapter 13 bankruptcy clients are in this position and have every intention of completing their bankruptcy. This is why bankruptcy is a very involved process and should be taken seriously by all potential debtors.
Another bad faith filing revolves around a debtor filing a bankruptcy while already in an active one. How does this happen? Most commonly, a debtor is dismissed from a bankruptcy and files before they have received a Final Decree that officially releases them from the first bankruptcy. Or, a Chapter 13 client cares to convert to a Chapter 7 bankruptcy and files a Chapter 7 while still in the Chapter 13 without permission from the court. Or a debtor tries to file bankruptcy within the time limitations, such as with 8 years of previously filing a Chapter 7 bankruptcy or 4 years for a Chapter 13 bankruptcy.
The third example would be prevalent among the debtors who care to file pro se or without an attorney. There are certain documents and motions that must be filed with the court. Two very important documents are the financial management certification and the motion for discharge. Don’t know what these are? That is why an attorney comes in handy! A bankruptcy case may be dismissed under bad faith if required documents are not filed or presented to the bankruptcy court or bankruptcy Trustee.
Fourth, if a debtor is continually filing and being dismissed from a Chapter 13 due to non-payment, the bankruptcy Trustee may reject the case due to bad faith. If you are dismissed from a Chapter 13 you may turn around after the final decree and file again as long as the court has not placed some limitation on your ability to file again like dismissing your case with prejudice. The big question to determine bad faith is “why do you keep being dismissed? And what is different about your situation from your previous filings?” Usually, this is just a due diligence question, but it is very important.
Lastly, if you fail to make adequate protection payments, your bankruptcy is automatically noted as being filed in bad faith. Adequate protection is rather loosely defined as the initial payments in a Chapter 13 bankruptcy. On the other hand, in a Chapter 7 bankruptcy, unprotected equity must be compensated to the Trustee in order for the debtor to keep the non-exempted asset. If this adequate protection payment is not made to the Trustee in the mandated time frame, your case can be dismissed.
Be sure to avoid a situation in which your case may be dismissed for “bad faith.” Contact an experienced bankruptcy lawyer who can help you navigate the, often times, tricky path through bankruptcy.
What Is Discovery In A Lawsuit?
A lawsuit is crafted of several different stages. In the civil proceedings there are certain litigation paths that must be taken depending on the route of the case. Discovery is in the pre-trail phase of a lawsuit and acts as the parties’ opportunity to gather information.
Upon the commencement of a civil action by filing a civil summons, the defendant is allowed to file an answer to the complaint, either admitting or denying allegations.
In response to the answer, the plaintiff’s lawyers then put together written questions known as “interrogatories,” which usually mark the beginning of the discovery phase in litigation. These are a series of questions compiled by the plaintiff’s for the defendant to answer. However, the defendant may also serve a set of interrogatories on the plaintiff(s).
In addition to interrogatories, the parties may request depositions. A deposition is an examination of a party or witness in a lawsuit. A deposition allow for each side to gather further information and allows opposing counsel the opportunity to know what a witness or party to a case may say at trial by allowing them to question or depose them.
Another tool in the discovery process are the requests for admissions. These are used to determine which issues or facts in a case are really in contention. If a party is willing to admit to something then it is not something that needs to be argued during a potential trial. Requests for admissions are done in writing.
This is just a brief synopsis of the different parts of discovery in a lawsuit. The important thing to remember is discovery is meant to gather or discover information so there are fewer surprises if a case does find its way to court.
