Bankruptcy v. Deed In Lieu of Foreclosure

/10 Comments/in , , , , , /by

Foreclosure Sign in Front of HouseClients have frequently asked us what is the difference between a deed in lieu of foreclosure and a bankruptcy?

First, a deed in lieu of foreclosure (DLF) is when the homeowner signs over and transfers the deed to the home to the mortgage company without the legal process of a foreclosure. Most people believe this will look better on the credit report than a bankruptcy or a foreclosure. This is possible, however a DLF does not wipe out the pre-existing debt on the home as a bankruptcy would do. In other words, you as the homeowner would still owe the deficiency debt on the mortgage, the DLF just saved the mortgage company the time and expense of foreclosing. It does not eliminate the debt you owe them! This is the same on a “short sale”.

The mortgage company will eventually sell the home, usually at a loss, and demand you pay them the difference in money unless you have agreed in writing to wipe out the debt still owed. This debt is usually several thousands of dollars and possibly tens of thousands of dollars.  The difference in what you owe the mortgage company and the amount they sold the house for is called a “deficiency balance”.

If you do not pay the mortgage company the money they have demanded, they could sue you for the difference they lost from the sale of the home. The mortgage company will usually win the lawsuit because you do owe them the deficiency balance unless you have reached an agreement with them saying that you will not owe the deficiency balance.

In the alternative, the mortgage company could believe the debt is “uncollectable” from you and forgive the debt.  You may think, “that’s great!”  However, there’s a catch. The mortgage company will try to “write off” these thousands of dollars of loss on their taxes by filing a 1099(c) with the IRS eliminating your debt to them.  The drawback is the IRS will consider this “forgiven” debt to be gross income if it totals more than $600. In other words, you don’t have to pay back the full amount of the debt but the IRS will tax you on that forgiven debt as gross income. For example, the mortgage company losses $50,000 on the sale of your home.  The IRS will expect you to pay taxes on the $50,000.  If you are in the 25% tax rate, you would have to pay $12,500 in taxes to the IRS.  If you do not have the $12,500, the IRS could start assessing you penalties and interest. That could, in turn, lead to the garnishment of your paystubs!

In contrast, a bankruptcy will usually eliminate any deficiency balance you owe the mortgage company.  Therefore they cannot sue you or attempt to collect the deficiency balance you owe them. The IRS usually cannot tax you for the deficiency balance you owe the mortgage if you file the bankruptcy.  If you file bankruptcy, you are considered insolvent, and the IRS must waive the tax liability on the 1099 if you are deemed insolvent.

In conclusion, consider your options. However we believe surrendering the home in bankruptcy and wiping out any deficiency balance and eliminating your other unsecured debts, such as credit cards and medical bills, is usually a better alternative than a deed in lieu of foreclosure.

What To Look For In A Credit Card After Bankruptcy

/in , , , , , /by

Credit Card DebtYes, credit cards are the evil culprit for many folks who have had to file bankruptcy, but credit cards are not entirely terrible.  Having a credit card helps in many ways to help build your credit, you just need to get the right one that is tailored for you and your needs.  For someone who is coming right out of a bankruptcy, all you wish to do is move forward and a credit card is one of your first steps in establishing good credit.  There are a few things that you need to look for in one when you are ready to start establishing credit.

What are the start up fees?  Are there hidden fees?

Many cards do not have an application fee, but will have annual fees that will be incurred in the future and in many cases, you must pay it when you first sign up for the card.  You will want to do thorough research on this, because in some cases, the annual fee may be low, but the hidden fees may hit you hard!

What is your interest rate?

This is a given.  Just like you would not want to buy a car with a high interest rate, you do not want a card with one either.  Once you leave a balance (i.e.: you do not pay the card off immediately after using it) your credit card company is going to charge interest.  Even if you are not using the card, they will still charge interest on the balance of the card.

Keep your balance low

Credit bureaus do not determine your score solely by whether or not you have made your payments on time.  They also look into your balances.  You do not want to have a high balance on a card because it will bring your score down.  A high balance is how much you owe on the card.  If you have a card that only has a $300 credit limit, you need to try to keep your balance owed on the card under $150.

Get a secured credit card

This is sometimes, but not always, a great way to start to establish credit.  You will have to put money “down” on the card (which is what your credit limit is based upon, for example, you put $300 down, then your credit limit would be $300.)  You will need to look into it whether these cards report to the credit bureau.  If they don’t, the card won’t help you establish payment history.

The Basics of Understanding Financial Statements for Your Business

/1 Comment/in , , , , /by

There are two financial statements that you must provide for your business when you file personal bankruptcy: the income statement or profit and loss and the balance sheet. We will look at the financial statements for a small plumbing business, ABC Plumbing. We encourage you to click on the blue links to open examples of a profit & loss statement and balance sheet. This is a simplified approach to the financial statements, so you should seek advice from your accountant should you have questions when preparing the financial statements for your business. We will also only be looking at Operating Income and will not consider interest income, interest expense or other non-operating items that most businesses incur.

Read more

What Financial Statements are Required for a Business if I’m Filing Bankruptcy?

/in , , , , , /by

If you are self-employed or own your own business, you should prepare monthly financial statements to understand how your business is performing.  Realistically, financial statements are often the last thing a small business owner worries about.  He or she is usually more concerned about how to make the next sale or generate the next contract.  However, when an individual files bankruptcy, the financial statements of the business are required to determine the profitability of the business as well as the value of the business.

For our purposes, there are two basic financial statements for your business that will be required when you file personal bankruptcy:  a profit and loss and a balance sheet.

Better Business Bureau Logo

The profit and loss reflects the profitability of the business over a period of time.  It takes into consideration the business’s income, expenses and the resulting profit or loss.  The period of time could be weekly, monthly, quarterly, annually, etc.  For the bankruptcy, we will want the profit and loss for each of the six months prior to filing bankruptcy as well as a current period year-to-date.  For example, if you are filing bankruptcy in April 2011, you would need the profit and loss statements for October, November, and December 2010 as well as January, February and March 2011.  In addition, an April 2011 year-to-date profit and loss would also be required.  We will look at the component of a profit and loss in more detail in another blog post.

The balance sheet reflects the value of the company at a point in time.  It is usually considered the most important financial statement for the business, but oddly enough, it is often overlooked by everyone except for your accountant and banker.   The balance sheet takes into consideration the profit or loss for the company as well as the assets and liabilities for the company.  A balance sheet is sometimes referred to as the thermometer of the business, since you can use it to check the business’ “temperature” to determine if it is “healthy – 98.6” or “sick – 102.”  The balance sheet reflects the true value of the business at a point in time, such as March 30, 2011.  If on March 30, 2011 your business has a value of $10,000, you should be able to sell the business for $10,000 if you have a willing and able buyer.  We will look at the components of a balance sheet in another blog post.

Preparing and understanding the financial statements for your business can be an overwhelming task.  Many small businesses purchase accounting software to help them prepare the financial statement or they may hire an accountant to assist the business owners.  Let’s look at a simplified version in the blog post, The Basics of Understanding Financial Statements for Your Business.

Can I Open A New Bank Account After Filing Bankruptcy?

/1 Comment/in , , , , /by

[youtube]http://www.youtube.com/watch?v=zCUagYJnLOw[/youtube]

 

Yes. There is no law that prohibits a debtor from opening a bank account after filing bankruptcy. However, if you owed money to a bank (i.e. for a credit card, loan, overdraft fees, etc.) and they were included in your bankruptcy, chances are you might have a difficult time opening an account with that institution.

You may need to shop around in order to find a bank that is willing to open a new account.

Prior to filing bankruptcy, if you have an account with a bank that you owe money to, your attorney may recommend that you close that account and open a new account at a bank where you have not borrowed funds or owe money. Generally speaking, it is best to open a new bank account before you file bankruptcy to ensure that you have a bank account with an institution who you do not owe money to.

How To Get Financing For A House After Bankruptcy?

/2 Comments/in , , , , , /by

[youtube]http://www.youtube.com/watch?v=dQ6Uwjk2cAs[/youtube]

 

Many people assume that because they have had poor credit and needed to file bankruptcy to get their fresh financial start that their ruined credit will prevent them from financing and purchasing a home. That is not necessarily the case but certain factors will affect the ease and timing of a new home purchase.

The Waiting Period

Family-in-Front-of-HouseBankruptcy will remain on your credit report for up to ten years but that doesn’t mean you have to wait that long to finance a new home. Through the thousands of cases that we have filed over the years we have seen numerous clients be able to purchase a new home as little as two years after filing bankruptcy. However, that doesn’t necessarily mean that you will get the best rates for your mortgage so soon after bankruptcy. Generally, you can get good rates after four years depending on whether you experienced a foreclosure, deed-in-lieu of foreclosure, or a short sale of your previous home.

The FHA requires as little as 3.5% down after two years to qualify for a loan. Some lenders may even qualify you just six months after bankruptcy but will do so with a higher interest rate and down payment. Fannie Mae and Freddie Mac, the two privately owned companies who dominate 90% of the conventional mortgage industry and are heavily regulated by HUD, have a variety of waiting periods based on various factors. If extenuating circumstances exist such as job loss, serious illness, severe injury resulting from an accident, or death, Fannie Mae and Freddie Mac’s waiting period is 3 to 7 years after foreclosure. Without extenuating circumstances, the waiting period is 5 to 7 years to obtain a conventional loan. If you want to buy after a deed-in-lieu of foreclosure (the exchange of the deed to your house for a considerably smaller sum than what it would cost the bank to go through a lengthy and expensive foreclosure process) the waiting period is 4 to 7 years or 2 to 7 years with extenuating circumstances. You must wait two years after a short sale, i.e. your lender agrees to the sale of your home for less than you owe on the note. Your new home purchase must be a principal residence, not a vacation or rental home.

Improving Your Qualification for Financing a New Home

Bankruptcy, foreclosure, deed-in-lieu of foreclosure, and short sales will have a negative impact on your credit score. Anyone who tells you otherwise isn’t telling you the whole truth. However, you can use the time between filing your bankruptcy an getting a new mortgage to rebuild your credit which, in turn, will improve your financing options.

If your credit reports shows open and overdue balances, contact all three credit reporting agencies and insist that your debt be shown as included (and therefore wiped out) in the bankruptcy. Make sure any other errors on your report are also corrected.

You might want to get a secured credit card, which gives you a credit limit equal to the amount you deposit in the bank. It may only be a $200-$500 limit but it erases any danger of running up your card to uncontrollable levels. Pay your credit card bill every month on time and often the secured credit card can be converted to an unsecured card in 12-18 months for good credit behavior.

Installment loans can help rebuild your credit too. Be prepared for very high interest rates on vehicle loans at first but they can also be refinanced within a few years of good credit behavior. Also, student loan (not discharged in bankruptcy) repayment can be another good way to restore your credit by paying them on time.

For more information on how to rebuild your credit after bankruptcy review our 6 Steps to Rebuilding Credit After Bankruptcy blog post series. This will be important to helping you reestablish your credit so that you can achieve the best financing rates possible for your new home purchase.

Budgeting After Bankruptcy: Step #5 – Use Technology to Help You

/in , , , , /by

Step #1: Determine Your Average Monthly Income
Step #2: Know Your Expenses
Step #3: Create a Balanced Budget
Step #4: Review Your Budget Regularly
Step #5: Use a Technology to Help You

Step #5: Use Technology to Help You

By this time you’ve completed the “meat and potatoes” steps (Steps 1 through 3) that allow you to create your budget and you should be reviewing your budget regularly (Step 4). Now, how can we make following your budget and gaining your financial freedom even easier? Let’s use technology!

Laptop IconI’ll admit it – I’m a huge technology guy. I use it in all kinds of areas of my life and I think we can leverage the power of technology to make our lives much easier. There are a ton of different pieces of budgeting technology. Here are a couple of our favorites:

Mint.com: This is probably my favorite of all of the online budgeting tools. Mint.com allows you to link your bank account to a budget. It uses 128-bit SSL encryption to protect your information – that’s the same security technology that banks use to protect your online banking. Mint.com will pull your bank account information and categorize what has been spent into different categories. You can then set goals (based on your budget) and it will track your progress towards reaching those goals. One of the best features is that you can look at your budget on any given day and see how much you have spent on each category (food, personal care, bills and utilities, mortgage / rent, etc.) and how much more you have to spend for that month. This is a great way to continually monitor your performance in a visual and easy to understand way. The best thing – Mint.com is free. You can sign up and get started in less than 10 minutes, and they also have iPhone and iPad applications.

Wesabe.com: Wesabe.com isn’t a whole lot different than Mint.com. I think Mint.com is a little bit better at being an overall budgeting package but what I really like about Wesabe.com is it ties in the presence of an online community. In other words, when you sign up for an account you can ask questions and discuss your budget with others. We have seen that people have a greater chance of success when they can voice their accomplishments and potential hurdles with others.

Another option is to create a Microsoft Excel template. This is easy to do and can be done in less than five minutes. However, I really like the way Mint.com and Wesabe.com show you what you are spending in a graphical format. It’s one thing to be told what you are spending money on but to actually be shown is a whole different ballgame.

In the future we expect the two tools discussed above and other online money management programs to use historical data and demographics, including geography, to show you what other people in a similar situation are spending each month.

Regardless, you can use online tools to simply the budgeting process. Do the legwork to put a great budget together then use one of these, or any other online tool to help you lower your expenses and increase your savings and the amount of money in your pocket at the end of each month.

Budgeting After Bankruptcy: Step #4 – Review Your Budget Regularly

/1 Comment/in , , , , /by

Father and Daughter on ComputerStep #1: Determine Your Average Monthly Income
Step #2: Know Your Expenses
Step #3: Create a Balanced Budget
Step #4: Review Your Budget Regularly
Step #5: Use a Technology to Help You

Step #4: Review Your Budget Regularly
The first three steps in this series are really the “meat and potatoes” of creating a budget after filing bankruptcy. This next step discusses techniques that can be used to ensure that you stick to your budget and the financial freedom you have worked for.

Once your budget is completed it is critical that you regularly review your budget. Contrary to what many people think – your budget should not be set in stone. Instead, your budget is a malleable and ever changing guide. It is important to change your budget as it becomes necessary.

Your budget will largely mirror your life events and goals. If you have children who are preparing for college then you may find it necessary to set aside a little money each month for college savings. Similarly, you may have a car that is 15 years old and you know that you need to be saving for a new car. Your budget will need to reflect your goals and priorities.

It is also important to review your budget regularly because in doing so you may be able to catch “cash leaks” or other areas of the budget that are understated. Catching these pitfalls of your budget early will allow you to adjust your budget and will greatly increase your chances for success.

During the bankruptcy process we will speak with many of our clients about budgeting post bankruptcy. There are areas within your bankruptcy, such as Schedules I and J, which may help you draft your own budget. I typically encourage my clients to take their budget and put it on their refrigerator or next to their computer. Your budget should be strategically located in a place where you will look at it often so you can measure your success or be aware of potential stumbling blocks. Again, this really comes back to that “financial honesty” that we discussed in prior posts.

Reviewing your budget regularly will allow you to maximize your chances of success and, just as important, increase your surplus at the end of each month.

Budgeting After Bankruptcy: Step #3 – Create A Balanced Budget

/in , , , , /by

Step #3: Create a Balanced Budget

So far we have discussed the importance of getting accurate information for determining your income by reviewing at least the last several months of paystubs and we have discussed the incredibly important task of getting a “financially honest” expense report. The next step in putting together a successful budget after filing bankruptcy is putting it all together to create a balanced budget.

Step #1: Determine Your Average Monthly Income
Step #2: Know Your Expenses
Step #3: Create a Balanced Budget
Step #4: Review Your Budget Regularly
Step #5: Use a Technology to Help You

Pad and Paper IconPositive Cash Flow

The first thing to look at is whether or not you have a surplus of money or if you are “in the red” and have a negative amount of money left over each month. If you have extra money left over each month then that is a good problem to have. I would encourage you to look back over your expenses and make sure that you are using realistic numbers. If you have a budget based on realistic expenses, then have you begun to put money aside in an emergency fund? Retirement? Saving for your children’s education? There is a long list of things that you can always be putting your surplus money towards. Doing so ensures that you become financially stable and secure.

Negative Cash Flow

If you have a negative amount of money then tough decisions are ahead. If you are in the red then you have two choices – you can increase your income or decrease your expenses. Unfortunately, your ability to increase your income is most likely limited. Therefore, look to your expenses. Some of the most common money pits for people are food and entertainment. Look to see if you are eating out too much. Or maybe you’re going to see too many movies? (It’s insane what it costs to go see a non-matinee movie nowadays!) Start chipping away at your expenses until you have a positive cash flow each month.

The “Balanced” Budget

The core of this blog post is to have a “balanced” budget. That term has a couple different meanings. First, we want your budget to be balanced in the sense that we want your income to be greater than your expenses. We hope you will have a positive cash flow.

Also, we want your budget to be balanced in the sense that you shouldn’t cut everything out of your budget that isn’t a necessity. Instead, you need to go to the movies every once in a while. It’s important that you go out to dinner. Your kids should be involved with athletics. Your budget is going to mirror your lifestyle. You can have a huge cash flow each month but if you are miserable because you don’t have any extracurricular activities then you will quickly burnout and abandon your budget. In other words, have a life! On the other hand, if you plan for these extracurricular events but ensure that you do so within your budget then you are more likely to lead a more balanced life, which will greatly increase your chances of following your budget.