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June 18, 2009
BANKRUPTCY RULES YOU SHOULD KNOW
June 30 is fast approaching. Like many other Certified Public Accountants across the state, that is the date that I must complete my 80 hours of continuing education that is required every two years.
This week I attended an informative seminar put on by Attorney Peter Kaplan. Peter is a bankruptcy attorney located in Salem Massachusetts who I have referred many satisfied clients to in the past.
Like me, many of you are aware that a bankruptcy can get you out of debt in a hurry, but you might end up giving away some of your assets in exchange for that freedom. This is known as a Chapter 7 or “Straight Bankruptcy”. Many of these cases are “no asset” cases, meaning that no assets are available to creditors because the debtor’s assets are fully exempt.
Less known is the Chapter 13 Bankruptcy. This type of bankruptcy eliminates some debt and reorganizes other debt to allow you to keep your property. They typical Chapter 13 filer is a person who is about to have their house foreclosed upon. Filing for Chapter 13 bankruptcy stops the foreclosure proceedings in its tracks and gives the debtor time to catch up on past due debt.
The thing that I found interesting about the Chapter 13 bankruptcy proceedings is that second mortgages, home equity loans and the like can be wiped out if these second mortgages are considered unsecured. Any second mortgage is considered, for these purposes, unsecured if the fair market value of the property is less than the existing first mortgage. Here is an example:
EXAMPLE #1: Assume the fair market value of your home is $370,000 and you have a first mortgage of $376,000 and a 2nd mortgage of $95,000. The second mortgage will be treated as unsecured and will be treated in the same way as credit cards. It will either be wiped out or paid off for pennies on the dollar.
EXAMPLE#2: Lets say that you also have a car that you bought more than 910 days ago (2.5 years) for $45,000, it is now worth $10,000, and you still owe $20,000. Under Chapter 13, your auto loan will be “crammed down” to $10,000, the FMV of the car, and the balance of the loan will be treated like other unsecured debt and either be forgiven or paid off for pennies on the dollar.
If you are having trouble with your finances, don’t hide your head in the sand. Seek out the assistance of a bankruptcy attorney before your home gets foreclosed upon and prior to paying off any large debts or selling off your assets. Get advice! If your financial situation is repairable without going bankrupt, some law offices, like Peter Kaplan’s, also offer alternatives such as credit counseling and debt consolidation.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Friends of the Saugus Senior Center and is a member of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions, please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org