The news means test numbers went into effect on May 1, 2012. The median incomes for Minnesota increased; this means that it may now be easier for some people to qualify for Chapter 7 bankruptcy than it previously had been.

Here is a link to the updated median incomes for the means test:

http://www.justice.gov/ust/eo/bapcpa/20120501/bci_data/median_income_table.htm

In Wentzel v. CitiMortgage, Inc., the Honorable Michael J. Davis, of the United States District Court, District of Minnesota, provides us with a reminder of why it is SO important to “get it in writing.” In this case, the Plaintiffs (Richard & Debra Wentzel), experienced financial difficulty and contacted CitiMortgage to see whether they qualified for a loan modification.

(Sidenote: Plaintiffs contacted CitiMortgage because they had received notice that their loan was being transferred to CitiMortgage, but later on CitiMortgage told the Plaintiffs that they were waiting to receive an Assignment from the previous company. So, the Plaintiffs made an unjust enrichment claim against CitiMortgage based in part on Plaintiffs’ allegations that CitiMortgage had not demonstrated that it is assignee of their mortgage and note.)

In August 2008, Plaintiffs were told they qualified for an adjusted payment of $832.58/month. In July 2009, Plaintiffs spoke with a CitiMortgage representative who told them they were not in danger of foreclosure, but the next week they were told by someone else that they had to pay $1,332 in July and August to avoid foreclosure. In February 2010, Plaintiffs were told they qualified for a lower payment of $1,250.74, and that the paperwork for the loan modification would arrive by UPS. Plaintiffs made those payments in March 2010 through November 2010, but they never received the promised paperwork. When Plaintiffs sent in their December 2010 payment, CitiMortgage refused to accept it, and allegedly told Plaintiffs that they were waiting for an assignment from Harmonic Mortgage (who Plaintiffs originally obtained their loan from in April 2006) before proceeding further.

In February 2011, CitiMortgage wrote to Plaintiffs and told them that they had been pre-approved for a modification in February 2010, but that the modification was closed in April 2010 due to not receiving a response from the Plaintiffs. Plaintiffs claimed that they responded to ALL of CitiMortgage’s requests.

On March 17, 2011, when CitiMortgage refused to accept their monthly payment, CitiMortgage told them, “As you know, your loan is in foreclosure.”

Plaintiffs sued CitiMortgage for breach of contract, promissory estoppel, fraud and misrepresentation, consumer fraud pursuant to Minn. Stat. 325F.69, and unjust enrichment. CitiMortgage moved to dismiss, using Rule 12(b)(6) – failure to state a claim upon which relief may be granted.

The Court dismissed all of the Plaintiffs’ claims EXCEPT their claim for unjust enrichment. The reason for the dismissal of the breach of contract, promissory estoppel, and fraud and misrepresentation claims was based on the Plaintiffs not having their loan modification agreement in writing, and the fact that Minn. Stat. 513.33 requires credit agreements to be in writing. Plaintiffs’ claim for consumer fraud was dismissed because a public benefit is required to use the Private Attorney General Statute (Minn. Stat. 325F.69) and the Plaintiffs’ claim was based solely on the communications between Plaintiffs and CitiMortgage; there were no allegations by Plaintiffs that CitiMortgage made misrepresentations to the public.

The Court found that Plaintiffs had properly asserted a claim for unjust enrichment, and thus that claim was not dismissed.

The major lesson in this case, for a homeowner who is in the process of getting their loan modified, is to do everything possible to get something in writing from the bank. Until you have something in writing, the bank can change the terms of your modification at its own whim (or let your house go into foreclosure after it has told you your loan is modified and after it has accepted many modified payments from you). The phone conversations that you have with the bank are not enough –  you need to get it in writing!

According to a recent CNN Money article, up to 200,000 borrowers with Bank of America mortgages could obtain a reduction in the amount of principal that they owe on their mortgage, thanks to a recent settlement between the five major mortgage servicers, the federal government, and the attorneys general of 49 states and District of Columbia. According to the article, the possibility of obtaining a principal reduction  ”only applies to the mortgages [Bank of America] owns and some that [Bank of America] services for private investors. Loans backed by government-controlled agencies like Fannie and Freddie or insured by the Federal Housing Administration are not eligible for the program.” The article goes onto say that Bank of America has already identified the borrowers who may qualify and plans on reaching out to them as soon as the settlement is approved by the court. This could be great news if you are one of the lucky 200,000 borrowers.

Will the Mortgage Forgiveness Debt Relief Act be renewed? I wish I knew the answer to that question. Right now, there is a lot of uncertainty about the renewal of the Mortgage Forgiveness Debt Relief Act. According to the IRS website, the Mortgage Forgiveness Debt Relief Act “applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.”

Any time that you owe a debt to someone (or an entity – such as a corporation), and that debt is forgiven or canceled, the IRS says that the amount of debt that is forgiven or canceled is income.  You also usually “get” to pay taxes on that income.

The Mortgage Forgiveness Debt Relief Act provides some homeowners with tax relief. If your home is encumbered by an underwater mortgage and you lost your home to a short sale, deed in lieu of foreclosure, or foreclosure, then the Mortgage Forgiveness Debt Relief Act might apply to you. If it applies to you, then you can exclude certain cancelled debt on your principal residence from your income (and that means you wouldn’t have to pay taxes on that “income”).

Unfortunately, the Mortgage Forgiveness Debt Relief Act expires at the end of this year (2012), and no one knows yet whether it will be renewed. My hope is that it will be renewed, because without its renewal, there could be a lot more former homeowners in serious financial trouble (owing a significant tax debt after losing their home).

If the Mortgage Forgiveness Debt Relief Act is not renewed – or if it doesn’t apply to you – there are still other ways (proving insolvency and bankruptcy) to possibly prevent owing as much in taxes. My advice is that if you are having difficulty paying your mortgage and you think that you may be losing your house to foreclosure, deed in lieu of foreclosure, or a short sale, consult with an experienced CPA or accountant as soon as possible. That way you can do everything possible to reduce the amount that you could owe.

This article in the Detroit Free Press, part 1 of a 3-part series, discusses how Fannie Mae claims that it tries to keep families in their homes, while at the same time pressuring banks to foreclose. Alan White, a law professor at Valparaiso University and a leading national expert on the foreclosure crisis, is quoted in the article:

“Fannie just wants to clean up its balance sheet and get these loans off the books while taxpayers are eating these losses,” White said, referring to the multibillion-dollar federal bailout of Fannie Mae in 2008 and the rising cost to taxpayers.

“And Treasury and the FHFA are letting them get away with it. It’s a huge waste. Wealth is being destroyed, people are losing houses needlessly, and taxpayers are losing money.”

The article also cites examples of banks requesting a delay in the foreclosure process in order to allow short sales or loan modifications to occur, and Fannie Mae declining those requests and insisting that the banks proceed with foreclosure.

From the ELHP Minnesota website:

The Emergency Homeowners’ Loan Program (EHLP) can provide eligible homeowners with a 0% interest, forgivable loan that pays past-due mortgage payments (principal, interest, taxes, insurance, attorney fees), as well as a portion of the homeowner’s FUTURE mortgage payment for 24 consecutive months (up to a $50,000 limit) provided that certain eligibility requirements are maintained.

If you are eligible for EHLP, you have a very tight timeline during which you must apply – you must apply by July 22, 2011. For more information on how to apply, visit the official EHLP website.

The Minnesota Home Ownership Center and Fannie Mae have entered into a partnership “to accelerate the response time for struggling Minnesota families with loans owned by Fannie Mae.”

If your loan is owned by Fannie Mae, and you are struggling with your mortgage payments, you should contact the Minnesota Home Ownership Center ASAP.

If you are unsure about whether Fannie Mae owns your mortgage, here is a link to a blog post that explains how to find out who owns your mortgage.

It is very common for people in dire financial situations to borrow money from relatives. A lot of times, Debtors feel nervous about not paying back their relatives before filing bankruptcy. If a Debtor pays back a relative before filing bankruptcy, they could very likely end up regretting that decision. This is because of the definition of “preferences” under Section 547 of the Bankruptcy Code.

There are 2 kinds of preferences with which Section 547 is concerned. The first type of preference is payments totaling $600 or more to any one creditor made during the 90 days before you file bankruptcy.

The second kind of preference is any payment made to “insiders” in the year before you file bankruptcy. What is an “insider”? The term “insider” includes but is not limited to: relatives of the debtor; general partners of the debtor and their relatives; corporations of which the debtor is an officer, director, or person in control; officers, directors, and any owner of 5 percent or more of the voting or equity securities of a corporate debtor and their relatives; affiliates of the debtor and insiders of such affiliates; any managing agent of the debtor. 11 U.S.C. § 101.

Whether certain payments qualify as preferences is something that you will need to discuss with your bankruptcy attorney.  Payments that may be considered preferences must be disclosed on your bankruptcy petition, on the Statement of Financial Affairs.

If you are at a point where you are thinking that you may have to file for bankruptcy, you should contact an attorney before paying back any insiders. Otherwise, if you do end up having to file bankruptcy, the bankruptcy trustee may be able to avoid those preference payments. That means that the trustee can demand those payments from your relative – and the trustee may even sue  them to get the money back from them. That could lead to an awkward Thanksgiving dinner or family reunion.

In a consumer bankruptcy case,  a person’s gross income is used to calculate whether the debtor is above or below the median income for means test purposes.

People often confuse gross and net (or “take-home”) income, and that is understandable, because most people’s household budgets operate according to their take-home pay. However, when you are trying to determine whether your household income is above or below median income, it is determined according to your gross income – not your take-home pay.

If you have self-employment income, in order to determine your income for means test purposes, you will need to have an up-to-date profit and loss statement. It is also very important for self-employed people to keep good records and documentation (think: bank statements, receipts, etc.).

In 2005, BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act) was passed. For more information about BAPCPA, through the lens of the U.S. Trustee Program, see this website.

One of the most “fun” parts of BAPCPA is the application of the means test in a consumer case (Form B22 in a bankruptcy petition).  Here is an example of Form B22A. If your household income (for the last 6 months before you file your bankruptcy petition) is below the median income for your household size in your state, then the means test is pretty easy. If your household income is above the median income, then the means test becomes more complicated.

How do you know if your household income is above the median income for your state? Here is a link to the numbers as of November 1, 2010. The numbers change pretty regularly, so it’s also a good idea to check here and make sure that the numbers you are accessing are the most recent numbers. If you are filing a consumer Chapter 7 Bankruptcy and your income is over the median income, Form B22 becomes a bit more complicated for you. Depending on the results of your Form B22, you may not qualify for a Chapter 7 Bankruptcy, and may be required to file a Chapter 13 bankruptcy instead.