Once a primary mortgage is underwater (i.e., the payments left on the mortgage are higher than the total value of the house), the second creditor holding the second (or higher) mortgage is in a precarious situation. At this point the homeowner has plenty of options in this situation, including discharging it in bankruptcy and then stripping the lien in Chapter 13. Another option is to settle the second mortgage with the bank. This option has its benefits and drawbacks.

On the “benefits” side, it’s one thing if you’re making the payments, but it’s another entirely if you’re falling behind. If you file bankruptcy, the bank loses its loan, and worse, if your house goes into foreclosure, then it gets zip. Thus, it may very well be willing to settle on your mortgage for maybe ten to fifteen cents on the dollar. If you hire a New York bankruptcy lawyer, you can even use the threat of bankruptcy as a bargaining tool. The benefits of the settlement are that it won’t appear on your credit score, which is a far better alternative to a foreclosure appearing on it, and you’ll be able to start rebuilding equity in your home. Finally, if your house does end up in foreclosure, the deficiency can stay on your credit report for many years, allowing the creditor ample time to collect on them, so a settled mortgage reduces the likelihood that you’ll be hounded by debt collectors.

As for drawbacks, given the precarious situation, a settlement is only as good as your income is secure. If you lose your job, or your partner does, then the settlement will fall apart and bankruptcy will be the only option. Conversely, settling a mortgage depends on the creditor’s assessment of your situation. If you’re current on your mortgage payments and there’s no reason to believe your income will go away any time soon, the bank is unlikely to agree to a settlement. Finally, if you settle on a mortgage, you will have to pay income tax on the forgiven sum, so the better the deal you get, the more you’ll end up paying in income taxes. Just don’t be surprised if you receive an IRS 1099-C form from the bank. If the prospective income tax you’ll pay is high, then bankruptcy may be a better option.

Settling an underwater second mortgage can go either way for homeowners, so every situation is different. Consequently, it’s a good idea to have an experienced New York bankruptcy attorney look your case over, especially if you’re considering filing in Chapter 7 or Chapter 13.

For more questions about settling underwater mortgages, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

On February 7, 2012, the National Association of Consumer Bankruptcy Attorneys (NACBA) published the results of a survey of its 860 of its members. It found that a whopping four out of five bankruptcy attorneys reported a “major jump” in student loan debtors seeking counseling with bankruptcy attorneys. The NACBA characterized the problem as the “Student Loan Debt Bomb.” The accompanying report contains several interesting findings.

Specifically, 48 percent of the attorneys said they saw a “significant increase” in potential clients, while 33 percent described the increase as “somewhat.” As for more concrete numbers, 23 percent saw a potential client increase of 50 to more than 100 percent over the last three to four years. 39 percent reported an increase in potential clients with student loans growing at a rate of 25 to 50 percent. The report doesn’t say, but that’s 53 percent of the 860 attorneys seeing at least a 25 percent growth in potential cases.

Unfortunately, potential cases will likely stay that way due to the onerous requirements of the “undue hardship” exception to student loan dischargeability. 95 percent of the surveyed bankruptcy attorneys believed that few people would successfully discharge their debts. The student debt problem gets more complicated when students’ parents are taken into account. Many of them are seeing their retirement finances crippled by the loans they co-signed on behalf of their children. Default data are hard to come by because the Department of Education uses a two-year “cohort default rate,” which only takes a snapshot of defaults over a recent, moving time period. The report relays that according to theChronicle of Higher Education, the default rate for loans belonging to 2005 graduates is 20 percent. The total default rate could easily be significantly higher.

Importantly, the report staunchly advocates for eliminating the undue hardship completely, which would allow anyone to discharge their student loans in a Chapter 7 bankruptcy so long as they passed their state’s means test and met the other criteria required by the 2005 bankruptcy law. This would take the bankruptcy law’s approach to student debt back to what it was in the 1970s, before the initial time limits were put in place.

The question isn’t whether student loans will become a serious political issue but when. So far, aside from the Student Loan Bankruptcy Fairness Act in the House of Representatives and its counterpart in the Senate, the Fairness for Struggling Students Act, there is very little political will to deal with this problem. For those who have student loans, the likelihood of default will increase so long as jobs are scarce and wages are low. If you have student debt and are encountering financial hardship, consulting with an experienced New York bankruptcy lawyer can help. A Chapter 7 filing can eliminate other debts, freeing up income for other uses.

For more questions about student loans, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

Most New York bankruptcies are either in Chapter 7 or Chapter 13. The two chapters provide benefits and drawbacks to petitioners, which means there are good reasons to file in one chapter and not another. For example, if you borrow money to buy a car, have a relative co-sign on the loan, and then run into financial troubles, filing a Chapter 7 bankruptcy might not do you much good. The lender will simply enforce payment by the relative, and this is without discussing repossession of the vehicle, exempting it, or signing a reaffirmation agreement. Filing in Chapter 13, though, might actually resolve the situation in your favor.

Why? Because Chapter 13 of the bankruptcy code (Title 11, Section 1301) creates a “co-signer’s automatic stay” that forbids creditors from enforcing payment on loan from someone other than the petitioner who happens to have co-signed the loan. In terms of the example above, the lender would be barred from pursuing payment from the relative who co-signed your auto loan. If it does so, you as the petitioner can file a lawsuit against the lender for violating the stay. The co-signer cannot initiate the suit, but he or she can join yours. Chapter 13 creates the “co-signer’s automatic stay” to ensure that the lender cannot obtain more from the petitioner than is allowed under the resulting repayment plan.

The Chapter 13 “co-signer’s automatic stay” has a few exceptions. If the petitioner gave something to the co-signer, then the lender can obtain that from the co-signer. Obviously, if the petitioner’s bankruptcy is closed or converted to a Chapter 7 or Chapter 11 case, the co-signer loses the benefits of the stay. Finally, but most importantly, if the Chapter 13 repayment plan does not cover the full amount owed on the loan, then the lender can recover the remainder from the co-signer. Remember, the purpose of the extra protection is to ensure the bank doesn’t obtain a windfall from the petitioner’s Chapter 13 filing by accepting payments from the petitioner’s repayment plan and then collecting the full balance of the loan from the co-signer.

Thus, if you have a loan that a friend or family member co-signed for, and you’ve run into financial difficulties, filing in Chapter 13 might be to your advantage. It’s small complications like these that make hiring an experienced bankruptcy attorney worthwhile.

For more questions about co-signed loans, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

The Federal Reserve tracks the amount of “nonrevolving” consumer debt in the United States. “Nonrevolving debt” contrasts with “revolving debt,” the difference being that revolving debt represents a set amount of credit that one can borrow in any amount at any time but can still reuse it once it’s paid off. Nonrevolving debt means the loan is paid off in fixed amounts over time and is often referred to as “installment credit.” In other words, revolving debt is mostly credit card debt while nonrevolving debt is any other unsecured credit. One component of nonrevolving debt is education loans, but the Fed doesn’t separate this out for the public, leaving experts to guess at its amount. Estimates vary, but according to an article in USA Today last October, total student debt has already crested the benchmark of $1 trillion. Beginning in 2011, it became common knowledge that student loan debt had exceeded credit card debt. It continues to grow, with many implications.

Primarily, people worry that government subsidized student loans (now the Department of Education directly loans the money itself) and the near non-dischargeability of student debt in bankruptcy thanks to changes in the bankruptcy code in 1998 and 2005 are leading to increasing amounts of student loan debt even though mortgage debt and credit card debt dropped or stabilized after the housing bubble popped. The phrase “student loan bubble” also entered the American lexicon in 2011. Worse, defaults are increasing and the Department of Education doesn’t track their total number.

This is a bad situation, and there are many things New Yorkers can do to avoid education debt. First, make sure that embarking on higher education leads to practical outcomes. Colleges get paid no matter what happens to their students (and drop-outs). There are some ways to reduce the costs: save money before going, choose less prestigious schools that provide scholarships over expensive name brand ones, do not attend a for-profit university, go part time, live with friends and family, work while in school, curb unnecessary expenses, and complete your studies as quickly as possible. Finally, use the Bureau of Labor Statistics Occupational Outlook Handbook to determine if your preferred field is in demand, especially if it’s a professional program.

If you must take out student loans, federal loans provide some advantages, namely that the interest rates are often lower and many of them are eligible for Income-Based Repayment (IBR) or Income Contingent Repayment (ICR) programs. These repayment options prevent student debt from seriously reducing debtors’ living standards. Private loans do not offer these options, as they are certain money losers for lenders. Finally, do not co-sign a loan nor ask a friend or relative to co-sign unless the loan offers easily achieved conditions for releasing the co-signer. Few things are more discouraging than hearing stories about college graduates who die young and leave their co-signatory parents to pay off a large, useless student loan.

If you already have student debt, consulting with an experienced New York bankruptcy attorney can help. A Chapter 7 bankruptcy can free up income for other uses including loan repayment.

For more questions about student loans, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

When homeowners are deeply underwater on their mortgages and also have a second mortgage or home equity line of credit, they might be able to negotiate with the bank holding the second mortgage. The resulting settlement occasionally comes to a fraction of the total loan, and it’s understandable for people to wonder why second mortgagee would be willing to agree to such a serious loss. Banks have their reasons.

The key point is that the second mortgage isn’t secured, so it’s likely easily dischargeable in a Chapter 13 bankruptcy in which the lien on the house will be removed as well. In a Chapter 7 filing, the debt is discharged but the lien on the house remains intact. This can still result in favorable negotiations with second mortgagees, but if debtors are willing to give up on the property, then filing Chapter 7 is a good idea because the second mortgagee is more likely to sue on the mortgage note rather than foreclose on the house. In different circumstances, i.e. if there’s any equity in the house, the bank will be far less willing to settle. One thing underwater homeowners may want to consider is appraising their house’s value so they can determine if the loan has any equity in it.

Another reason banks are willing to negotiate is they know that they will lose everything if the debtor’s house goes into foreclosure. Because they’re in line after the primary mortgagee, if a foreclosure proceeding begins, they know they won’t get the house, no matter what it’s worth. The house at least has some resale value for the first bank. Consequently, once a homeowner falls behind on a second mortgage on an underwater home, the bank knows it’s probably going to lose money. Sure, sometimes homeowners get a break and find a new job or get a raise, but that’s unlikely. Homeowners who are still current on their payments, though, are less likely to receive sympathy from lenders.

Ultimately, lenders will figure out which mortgages are high-risk and which are not, and they might calculate a settlement is worth getting only 10 to 15 cents on the dollar. Once the loan isn’t secured, the negotiating power shifts to the homeowner. Thus, consulting with an experienced New York bankruptcy attorney can result in a fair settlement or a Chapter 7 discharge, whichever debtors think is right for them.

For more questions about mortgage settlements, underwater homes, second mortgages, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

One creditor that can cause more hassles in a Chapter 7 New York bankruptcy than others is the government, specifically the IRS, New York’s Department of Taxation and Finance, or municipal revenue agencies. The bankruptcy code is kinder to the IRS than other creditors, but while tax debts generally receive “priorities” in bankruptcy—meaning they can’t be discharged and must be repaid—there are conditions in which the bankruptcy code allows a discharge.

Debts to the IRS must meet five criteria:

(1) The debt must be at least three years older than the tax deadline of the year it was due, including extensions.

(2) Petitioners must have filed a tax return including that debt more than two years before filing bankruptcy. If they’ve filed more recently, they will be denied a discharge.

(3) The petitioner must have filed a non-fraudulent tax return the year the debt was due.

(4) The IRS must assess the tax at least 240 days before the petitioner files bankruptcy.

(5) The petitioner is not guilty of tax evasion.

After their bankruptcy cases begin, petitioners must then prove that they filed income tax returns for the previous four years before the 341 meeting with the creditors. If creditors request it, petitioners will have to file the returns with the bankruptcy court and provide them to other creditors or the Trustee if requested.

The critical issue is point three, that the petitioner must have filed a tax return with the debt. The reason is that the IRS will assess tax on unfiled returns, meaning petitioners can’t simply decline to file a return. Rather, they must file a return and not pay the full amount. Consequently, finding oneself in the circumstances that allow a discharge of a tax debt can be quite difficult to meet. Obviously, the government will do everything it can to collect its revenue. This is why hiring an experienced New York bankruptcy attorney is important to handling a Chapter 7 bankruptcy.

For more questions about tax debt, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

Short selling a home in New York is one alternative for resolving the underwater mortgage. Others include refinancing, loan modifications, deed in lieu of foreclosure agreements, and of course bankruptcy. The short sale, though, is quite common and the process is essentially simple. The homeowner sells his or her house for less than the remaining balance on the mortgage, but the homeowner still must resolve the deficiency, which is the difference between the sale price and what’s left on the mortgage. There are several things worth knowing about short sales.

First of all, banks will avoid canceling the deficiency, which makes this a critical point when negotiating a short sale agreement. If the bank says nothing, homeowners can expect to be stuck with the bill. Even if the bank does agree to forgive the remaining balance, the homeowner must claim that as income and pay income tax on it. This is the IRS Form 1099-C. Consequently, those considering short sales need to consider what happens to the deficiency and how much it will cost them in income tax payments.

Next, it’s important to note that homeowners who have multiple mortgages on their homes will have more work to do because all mortgagees must approve the short sale. Things can get especially tricky if more than one mortgage will end up deficient, but if the alternative is bankruptcy or foreclosure, lenders will have an incentive to negotiate.

Executing a short sale isn’t always easy. Banks won’t give in easily to homeowners who aren’t in a hardship situation. Those who have high incomes or retirement investments that can be used to pay mortgage balances will have difficulty gaining approval. Buyers can sometimes withdraw if they find better options, so asking the buyer to deposit money in an escrow account can prevent the deal from falling through. Ultimately, consulting with professionals in real estate, tax, and law is usually a wise move.

Finally, those who are underwater on their mortgages and are suffering financial difficulties can avail themselves of the federal government’s Home Affordable Foreclosure Alternatives Program (HAFA). Those who meet the eligibility requirements can avoid paying on deficiencies and receive up to $3,000 if they successfully complete a short sale.

Underwater homes are a real tragedy for New Yorkers, but they can be dealt with through effective use of professionals. Just remember that filing bankruptcy can also be a strategic option worth exploring.

For more questions about short sales, underwater homes, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.