Foreclosure problems

There are two ways to foreclose a mortgage in Minnesota, one is “by action” and one is “by advertisement”. 

The methods are set out in Minn. Stat. Chapters 580 and 581. 

A foreclosure “by action” means that the lender sues you, gets a judgment, and then has an auction of your collateral. A foreclosure “by advertisement” means that the lender sends you notices, publishes in a legal newspaper, and has a sheriff's sale, but there is no court involvement. “By advertisement” is somewhat cheaper and somewhat quicker, and it is the way virtually every Minnesota residential mortgage is foreclosed. 

The difference, from the borrower's standpoint, is that a foreclosure “by advertisement”, with a six month redemption period, means that the lender cannot come after you for a deficiency (a short-fall between the loan amount and the price at which the lender sells the home to another person). So, if your mortgage is $150,000, and the lender forecloses the loan “by advertisement” and with a six month period of redemption, even if the lender sells the home to a third party for $100,000.00, you will not owe the lender any money. (This assumes you don't do anything stupid, like destroy the house!)

If it is a conventional mortgage, the usual thing that happens is that Wells Fargo forecloses “by advertisement”.

However, if it is a VA mortgage , the Veterans Administration may well pursue you for any deficiency. The same thing applies to a Rural Housing loan through the US Department of Agriculture (formerly Farm Home Administration). It appears that an FHA loan has the authority to pursue you, but I have not seen that happen in practice.

So, you need to be certain what kind of mortgage you have.

Bankruptcy Reform 7 years later.

Bankruptcy Reform 7 years later.

     A friend reminded me that October 17 was the anniversary of the effective date of the "Bankruptcy Reform" act.  Then-President George W. Bush signed the law earlier, but most parts of the law became effective October 17, 2005.
     Some things have changed greatly, some things have not.
     Frankly, the changes have been less horrible than many of us (including me) feared.
     Bankruptcy has become more complicated, and therefore more expensive.  For instance, I now have to gather up paystub information for the prior six-plus months, and complete a form called a means test.  Very fortunately, if the result is "under median", we only have to complete two or three of the multi-page form.
     Another change has been the requirement to get pre-bankruptcy credit counseling from an approved counseling agency.  Because that was relatively unusual back in 2005, we thought that would be a substantial impediment to clients being able to file.  However, a whole new industry seems to have grown up to provide credit counseling on-line or by telephone.  There are probably at least forty such counseling companies who are approved in Minnesota.
     What has not changed is that clients are still in a lot of pain when they come in;  what has not changed is that people tend to throw in all their financial reserves in an effort to avoid having to file;  what has not changed is that people are very reluctant to file a bankruptcy.
     On that "happy" note, I will close this post;  however, I add that I am grateful that despite the best efforts of the credit card industry, which lobbied so hard for the 2005 law change, the bankruptcy law still generlaly works so that I can still help people shed their financial "millstone".

Jail for hiding "stuff"

The news today reports that ex-baseball star Lenny Dykstra pled guilty to several counts of bankruptcy fraud in federal criminal court.  The court's docket says: 
The Defendant Lenny Kyle Dykstra (1) pleads GUILTY to Count 1s,10s,12s. The plea is accepted. The Court ORDERS the preparation of a Presentence Report. Sentencing set for 9/3/2012 01:30 PM

Mr. Dykstra filed bankruptcy in California back in 2009, after playing professional baseball for the New York Mets.  There was a lot of activity in the case -- there are 528 entries on the docket -- and I have not slogged through them.  The news reports are that he hid $200,000 worth of baseball memorabilia and other items from his bankruptcy trustee.  Obviously the trustee found out about the hidden items and "turned him in" to the federal prosecutors.

Much like Denny Hecker here in Minnesota, this is an extreme case, likely prosecuted to send a message to other Americans who want to file bankruptcy.

Court cases abound with statements to the effect that "bankruptcy is for the poor but honest debtor".  Most of the time the items that bankruptcy filers try to hide are far, far less than the amount of the debt they would have gotten rid of had they played straight with the bankruptcy system.

After all, the bankruptcy trustee cannot keep the items for himself or herself;  the trustee has to liquidate the assets and turn them into cash.  The obvious target audience is the person who filed the bankruptcy case.  My experience is that bankruptcy trustees will gladly set up a payment plan for you to use to "buy back" your excess assets.  And, remember, the assets the trustee can take are those which are above the exemptions the law allows.  Minnesota law allows a person to keep a home with equity of more than $300,000;  federal bankruptcy law allows a person to keep a home with equity of $10,100.00 and another $11,975.00 of any property.  In both cases, this in addition to a modest car, retirement accounts worth up to $1,000,000.00, and about $10,000.00 worth of household goods.

The moral of this post:  Level with your attorney and with your trustee about what you own.  You can probably keep much more than you expect, and you can buy back the rest over time.  The cost of doing so is surely much, much less than the penalty of getting your bills back, even though you filed bankruptcy, not to mention the possible criminal penalties.

Engagement rings

     The exempt status of engagement rings in Minnesota, when using the state exemptions, has not been clear for a while.  Several years ago the legislature enacted a law that specifically said that "wedding rings" are exempt up to a certain dollar amount (about $2500).  Unfortunately, some trustees have claimed that because the law says "wedding rings", that the law did not exempt engagement rings. 
     The on-line version of the law says that exempt assets include:

(c) The debtor's aggregate interest, not exceeding $1,225 in value, in
wedding rings or other religious or culturally recognized symbols of
marriage exchanged between the debtor and spouse at the time of the
marriage and in the debtor's possession.

This provision was enacted in 2005 -- Chapter 137.  The original bill, HF 473, said:

 1.15     (c) the debtor's aggregate interest in wedding rings, not
 1.16  to exceed $1,225 in value, held primarily for the personal or
 1.17  family use of the debtor or a dependent of the debtor.

The conference report to HF 473 said:

 1.18     That the House concur in the Senate amendment and that H.F.
 1.19  No. 473 be further amended as follows:
 1.20     Page 1, line 17, delete "wedding" and after "symbols"
 1.21  insert "of marriage exchanged between the debtor and spouse at
 1.22  the time of the marriage and"
 2.1      We request adoption of this report and repassage of the
 2.2   bill.

     I think someone was trying to be culturally sensitive and muddied the statute by dropping in the phrase "or other religious or culturally recognized symbols of marriage exchanged between the debtor and spouse at the time of the marriage" and not setting it off by commas or parentheses.

The real-world problem is that bankruptcy trustees (and possibly other creditors too) read the statute as follows:

(c) The debtor's aggregate interest, not exceeding $1,225 in value, in
wedding rings exchanged between the debtor and spouse at the time of
the marriage and in the debtor's possession.

      In other words, they ignore the phrase "or other religious or culturally recognized symbols of marriage" and claim that the phrase exchanged between the debtor and spouse at the time of the marriage modified wedding rings, not "other symbols" (whatever other symbols means).
 
      Their claim is that an engagement ring is not a wedding ring and also that it was not "exchanged between the debtor and spouse at the time of the marriage"
    
     Recently Judge O'Brien had a case in which the trustee was making that argument.  Fortunately, the judge did not agree and ruled that the debtor's engagement ring and wedding ring, as a set, were exempt.

     There is an undercurrent in the case however.  The trustee is claiming that the debtor tried to conceal the existence of the engagement ring and is trying to get the judge to rule that the debtor cannot exempt the ring -- even though it would otherwise be exempt -- because the debtor tried to "hide it".

     So, that leads to one of the "unwritten rules" -- "If you want to keep it, you have to list it."