When someone contacts me because they are considering filing for bankruptcy, I often tell them to read over “Bankruptcy Basics” on the U.S. Courts website. I think that this website is a great resource because it “provides individuals who may be considering bankruptcy with a basic explanation of the different chapters under which a bankruptcy case may be filed and to answer some of the most commonly asked questions about the bankruptcy process.”

If you are in the process of deciding whether to file for bankruptcy, I highly recommend visiting the Bankruptcy Basics website as soon as possible.

The Minnesota Home Ownership Center recently blogged about how the “next wave of foreclosures is rapidly approaching Minnesota.” It predicted that this wave of foreclosures will have a large impact on the outer-ring suburbs of the Twin Cities.

Mortgage delinquencies are currently at historic highs. According to a recent report from Lender Processing Services more than 7.4 million home loans nationwide are in some stage of delinquency or foreclosure, with another 1 million properties either bank-owned or sold out of foreclosure.

If the blog entry on the Minnesota Home Ownership Center is correct, the current historically high mortgage delinquency rate will likely only become higher and “more historical.”

Sometimes, with its focus on bankruptcy and the current housing crisis, this blog can be quite serious – and even a little depressing. This clip from The Office always makes me laugh. Although when you find yourself in a situation where you might need to file bankruptcy it can be difficult to laugh, it’s still important to focus on the positives in your life and enjoy a little comic relief.

The Dakota County Community Development Agency runs the Mortgage Foreclosure Prevention Program for Dakota County residents. If you are a homeowner in Dakota County who may be facing foreclosure, or if you are already in foreclosure, click here for more information about the Mortgage Foreclosure Prevention Program.

Minnesota homeowners living outside of Dakota County can contact the Minnesota Home Ownership Center for a referral to a housing counseling agency in their area.

If you or your spouse may file bankruptcy after you divorce, it is important to know how bankruptcy affects some common issues in divorces.

Prior to 2005, a debtor who was able to show an inability to pay for property settlement debts was able to have those debts discharged in a bankruptcy. This is no longer the case, and thus every type of obligation to a spouse, former spouse, or child of the debtor is non-dischargeable. See 11 U.S.C. §523(a)(5). See also 11 U.S.C. §523(a)(15).

This means that child support obligations, spousal maintenance (alimony), and property settlements are generally non-dischargeable in bankruptcy.

From a practical standpoint, though, as I discussed in my previous post, one spouse may still be “on the hook” for a debt that the other spouse is obligated to pay under the property settlement of the divorce decree. If the debt is in both spouses’ names, but the husband is obligated to pay for it under the divorce decree, if the husband doesn’t pay it, the wife will still have to answer to the creditors. Thus, if the husband is not paying the debt that he is obligated to pay under the divorce decree, and it is negatively affecting the wife’s credit, the wife may either need to pay that debt herself or file bankruptcy in order to begin to rebuild her credit. The wife may also have a cause of action for contempt against her husband.

Marital liens in real estate become property of the bankruptcy estate, because the bankruptcy code provides that “all legal or equitable interests of the debtor in property as of the commencement of the case” are property of the bankruptcy estate. See 11 U.S.C. §541(a)(1).  This means that the trustee in a Chapter 7 bankruptcy case will often try to sell the marital lien interest. These liens may be sold at a discount. Thus, the debtor may be able to buy it back from the trustee.

In a Chapter 13 bankruptcy, a debtor must pay all amounts that he or she is required to pay under a domestic support obligation. Such obligations become due and payable after the petition is filed, and failure to make those payments is grounds for dismissal or conversion of the case. See 11 U.S.C. §1307(c)(11).

In order for a Chapter 13 plan to be confirmed, a debtor’s plan must provide for full payment of domestic support payments. This is because domestic support payments are a priority claim. See 11 U.S.C. §507(a)(1)(B). A Chapter 13 plan that does not provide for full payment of this priority claim is only allowed “if the plan provides that all of the debtor’s projected disposable income for a 5-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan.” See 11 U.S.C. §1322(a)(4).

In conclusion, bankruptcy generally does not have a huge impact on divorce-related debts, because of the protections provided by the bankruptcy code for spouses, former spouses, and children of the debtor.

If a divorcing couple decides that they need to file for bankruptcy, they have two more decisions to make:

(1) Should they file before or after they divorce?

(2) Should they file jointly?

If the couple is filing for Chapter 7 bankruptcy and their debts are joint debts, it usually makes sense from a financial and emotional perspective to file jointly before they divorce.

Why does it make sense from a financial perspective?

Attorney Fees. The couple can hire one attorney to represent them in their joint bankruptcy case. Typically, bankruptcy attorneys charge less for a joint Chapter 7 bankruptcy case than they charge for two separate individual Chapter 7 cases.

Filing Fee. Currently, the Chapter 7 bankruptcy filing fee is $299. A married couple filing a joint Chapter 7 bankruptcy petition will only have to pay for one filing fee. If the two parties filed for Chapter 7 bankruptcy separately, they would each have to pay the $299 filing fee.

Divorce legal fees. If the parties have filed for Chapter 7 bankruptcy jointly before beginning to work with their divorce attorneys, the parties will have less to decide (and argue about) during the divorce process. If the parties have accumulated a large amount of debt together, then that debt will have to be dealt with during the divorce process.  This generally results in higher legal fees.

Means Test. In order to file for Chapter 7 bankruptcy, the party or parties must satisfy the means test. The means test is based on the party’s income. In order to pass the means test, the debtor’s income must be below the median income for the debtor’s household in the debtor’s state.

If the parties file a joint petition before they divorce, it may be easier for them to satisfy the means test and be able to file for Chapter 7 bankruptcy, even though one of the parties may not have been able to satisfy the means test on their own.

Property Exemptions. The parties will be able to exempt more property if they file jointly than if they file separately.

Eliminating the problem of collection and contempt actions. Bankruptcy law does not allow a divorcee to discharge debts ordered in the divorce, but one problem that commonly comes up is a party’s failure to follow the divorce decree.

For example, if the couple’s debts are marital debts, but they are only in one spouse’s name, the couple’s divorce decree will order the parties regarding the division of this debt. It is important to remember that this decree is valid and enforceable between the spouses and the divorce court. However, the divorce decree will not alter the parties’ contract with the creditor.

Thus, if the debts are in the husband’s name, but the wife is ordered to pay part of these debts in the divorce decree, and the wife doesn’t pay her share, the husband is still “on the hook” with the creditor for those debts. The husband will be able to bring a contempt action against his ex-wife for her failure to comply with the divorce decree, but that will cost him money and take time. Also, if the ex-wife does not have the money to pay what she owes the creditor at that time, the husband’s credit will still be damaged and the creditor may take collection actions against him.

Why does it make sense from an emotional perspective?

Moving on with your life. Both divorce and bankruptcy are major life-altering events. If you are divorcing your spouse, and getting a “fresh start”, it might also be nice to have your debts discharged (if filing for bankruptcy makes sense in your situation).

What are some of the downsides of filing Chapter 7 bankruptcy jointly before the divorce?

The blame game. If issues arise during the bankruptcy process that may affect the outcome of the case (possible fraud, for example), the parties will likely play the “blame game” with each other.

Individual needs. It may make sense for one spouse to use the state exemptions and the other spouse to use the federal exemptions. This cannot be done if the parties are filing a joint Chapter 7 bankruptcy.

Cooperation and communication. People who are getting divorced are often doing so because the parties struggle with communication and are not able to cooperate. Filing a joint Chapter 7 bankruptcy requires the parties to cooperate with one another and to have good communication skills. Before a divorcing couple decides to file a joint Chapter 7 bankruptcy, they should evaluate their ability to act civilly towards one another.

What about Chapter 13 bankruptcy?

Generally, it is better for a divorcing couple to wait until after they divorce to file for Chapter 13 bankruptcy, and to file separately. Chapter 13 cases last a lot longer than Chapter 7 cases – they can last up to five (5) years. If the couple files jointly, then they will have to cooperate during that entire Chapter 13 case AND make joint payments.

This week I will feature a series on Bankruptcy and Divorce.  The first post in the series, an introduction to the financial issues a divorcing couple may encounter, is featured as a guest post on Your Minnesota Family Lawyer Blog. Your Minnesota Family Lawyer Blog is maintained by Jennifer R. Lewis Kannegieter, a Monticello, Minnesota family law and estate planning attorney dedicated to providing her clients with prompt, professional, personal service.  Subsequent posts in the series will be published here.

The New York Times recently posted this article about CitiMortgage testing out a deed in lieu of foreclosure program in New Jersey, Texas, Florida, Illinois, Michigan, and Ohio. According to the article, this new program “is similar to one announced last fall by Fannie Mae, the government-controlled mortgage company. Fannie is allowing homeowners to return the deed to their properties, then rent them back at market rates.”

Although the program is not yet available in Minnesota, I am glad to see that more options are being made available to distressed homeowners.

On the Credit Slips blog, Katie Porter recently posted a follow-up blog entry to an article that she wrote in 2007 about the failure of lenders to produce proper paperwork in bankruptcy mortgage claims.  The blog entry and the cases that she links to are worth reading.

When a homeowner is worried that they might lose their house to foreclosure, they are usually also worried about whether their state is a “recourse” or “non-recourse” state. In a non-recourse state, if the funds from the sale of the mortgaged property (the house) are  not enough to cover the outstanding debt (the amount the homeowner owes on the mortgage), the mortgage-holder may not have recourse against the borrower (through a deficiency judgment) after foreclosure. In a recourse state, the homeowner remains responsible for any remaining debt through a deficiency judgment.

Minnesota is generally considered to be a “non-recourse” state, although in certain situations mortgage-holders (or other creditors) may seek a deficiency judgment. Generally, if a foreclosure sale of a home is done by advertisement in Minnesota, no deficiency judgment is allowed. If, however, the homeowner has more than one mortgage on that property (a second mortgage, for example), then that mortgage-holder may sue for a deficiency judgment. In Minnesota, most foreclosure sales are done by advertisement.

Minnesota permits deficiency judgments in cases of a foreclosure by action. A foreclosure by action occurs when a lender forecloses on a property in court. This is a rare occurrence in Minnesota, but if your house is foreclosed on in this manner, it’s important to know that a deficiency judgment is permitted.

This is pretty confusing, right?

Luckily, there are some great resources available online that do a good job of explaining this in easy-to-understand language.

The blog entry “Sued – After a Foreclosure” on the Minnesota Home Ownership Center’s blog does a great job of explaining the operation of the Minnesota deficiency statute and Minnesota’s status as a “non-recourse” state.

The fact sheet “Understanding Deficiency Judgments” by the Minnesota Home Ownership Center, Volunteer Lawyers Network, and the Housing Preservation Project does an excellent job of explaining deficiency judgments in Minnesota.