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What happens to my co-signer after bankruptcy?

A cosigner is someone who has signed up to guarantee payment of a debt if the primary debtor fails to make payments. A cosigner is also called a codebtor in bankruptcy. Co-signers are usually friends or family members with good credit who are added to a loan to provide added assurance to the lender that the loan will be repaid if the primary borrower (who wouldn’t qualify on their own) fails to make all payments. A bankruptcy by one cosignor affects the rights of the other cosignor.

Because of the personal relationship shared by most codebtors, many people who are considering filing for bankruptcy are concerned about the effect their bankruptcy will have on their cosigner. This is a very valid concern, because the cosigner has agreed to be responsible for the full amount of the debt if the primary debtor defaults on the loan. That means that if one co-debtor files for bankruptcy, the other is on the hook for the full payment.

Additionally, the cosigner must be listed as a creditor in your bankruptcy case. This is so they have notice of your bankruptcy, but also so that any claim they may have against you for defaulting on the loan is wiped out and does not come back to haunt you after you receive a bankruptcy discharge.

Bankruptcy Options

Chapter 7: Unfortunately, the cosigner gets no protection in Chapter 7 bankruptcy. While the person filing bankruptcy will have their personal liability wiped out by the Chapter 7, the cosigner will still be on the hook for the full amount of the discharged debt. Sometimes, the debtor in Chapter 7 may continue to pay a certain debt such as a home loan or auto loan so they can keep the house or car after bankruptcy. In such cases, the impact on the codebtor may be minimal. However, in many cases the debtor in Chapter 7 debtor stops paying the debt. In such cases, it may make sense for the cosigner to file for bankruptcy as well, especially if the debt is for a large amount such as a mortgage.

Chapter 13: In Chapter 13, however, the cosigner gets some protection from the creditor and also can have their liability removed completely if the debt is paid for through the Chapter 13 repayment plan.

In Chapter 13 bankruptcy, the cosigner is protected by the codebtor stay, which prevents creditors from contacting them and trying to collect the debt. This stay applies if: 1) the cosigner is an individual (as opposed to a corporation or partnership), 2) the cosigner did not become liable for the debt in the ordinary course of business, and 3) the debt must be a consumer debt; that is, a debt primarily for personal, family, or household purposes.  If the debt meets these criteria, the automatic stay will apply unless the creditor petitions the court to have it lifted.

The creditor can argue that the stay should be lifted if: 1) your cosigner (rather than you) received the consideration for the debt (i.e., your cosigner received the property the funds were used to purchase); 2) your Chapter 13 plan does not include payment of that debt; or 3) the creditor’s interest would be irreparably harmed by the stay (for example, if the bankruptcy filer might dispose of the property or if the property is rapidly decreasing in value). If the Court agrees and lifts the stay, then the creditor can attempt to collect the debt from the cosigner as if no bankruptcy had been filed.

If the Chapter 13 plan provides for the debt to be paid in full during the plan (usually 5 years) then the cosigner will not be liable for the debt once a discharge enters in the bankruptcy case. However, if the debt is not paid for in full, then the creditor can still attempt to collect the debt from the codebtor if the remaining balance on the debt is not paid following the Chapter 13 discharge. The creditor may also proceed against the cosigner if your Chapter 13 case is dismissed or converted to Chapter 7.

Because most cosigners are people you have a close personal relationship with, it is important to know how your bankruptcy will affect them. Having the advice of a bankruptcy lawyer can ensure that you cosigner issues are dealt with properly.

No Relief from Foreclosures on the Horizon

Notices of Default filed in Modesto in the past 12 months.

Notices of defaults have spiked in the Central Valley. The chart to the right is only for Modesto but it represents a similar trend throughout the worst hit counties in the Central Valley. The increase is partly due to the end of the year-long “freeze” in foreclosures because of the “robo-signer” scandal. As you may recall, in their rush to foreclose defaulted loans, lenders were filing false foreclosure notices and fraudulent legal actions. In the immediate aftermath, some lenders stopped foreclosing but the pace soon picked up when lenders realized that Washington wasn’t going to do anything about it. Since then, the only sanction has been lawsuits by the Attorney Generals of several States against the lenders. Settlement negotiations have been going on for six months with no resolution in sight since lenders are demanding immunity from future prosecution.

Throughout all of this, despite all the hype, there remains no effective help for upside down homeowners who are frustrated and angry at unfulfilled promises such as the HAMP Program which remains mostly ineffective at reducing loan costs to overwhelmed debtors. Instead, lenders seem to prefer foreclosure even if that results in less of a money recovery for their investors. As reported on foreclosureradar.com, Notice of Default filings in California are up 69.5%. In Sacramento, August NOD’s were up 85% over July. Much of this increase is Bank of America. Market watcher Dataquick.com reported that BofA foreclosure filings in California increased 200% between July and August!

Some have voiced their concern with BofA’s survivability as they continue to deal with the incredible losses from their Countrywide purchase. In July BofA reported an $8 billion 2nd quarter loss and there’s billions more of losses yet to go. A BofA spokesman stated that even this increase may not be enough. BofA appears committed to forcing as much bad debt off their books as they can as quickly as they can. Meanwhile, lawsuits continue to mount. Insurance giant, AIG, filed a $10 billion lawsuit against BofA in early September; and FNMA is reportedly about to file a $20 billion plus lawsuita against BofA and others.

What all of this means is that we’re in for more troubling financial times as lenders try to rebound from the deep recession caused by the collapse of the real estate bubble. Added to this is continued economic instability in California, nationally, and in fact world-wide all of which is causing buyers and investors to question whether now is the time to buy. California Association of Realtors (CAR) is predicting that sales will remain flat through 2011 and that property prices will fall 4%. They further project a small, less than 2%, price growth in 2012. CAR’s chief economist, Leslie Appleton-Young, stated: “the best decription of what can be expected next year is the market will be bouncing along the bottom.” … “One of the biggest uncertainties in today’s market is what are the negative equity homeowners going to do going forward and how big a percentage will end up in the foreclosure process”.

So the bottom line is insecurity on the economy and continued efforts by lenders to clear defaulted loans off their books. This means more short sales, more foreclosures and more REO properties. For some, this will spell an opportunity to acquire good properties at a low price with cheap loans. For others, it will be wait and see how low the markets go. None of this is good news for upside down owners hoping to save their homes. Looking forward to a 2012 Presidential election years, it is not at all likely that any further relief for homeowners can be expected before 2013.

Will I go to jail (in California) if I don’t pay my debts? What about if I file bankruptcy?

NO!  You will not go to jail if you do not pay your debts.  And you will not go to jail if you file bankruptcy. Prior to the mid 19th century debtors’ prisons were a common way to deal with unpaid debt. In 1833 the United States abolished Federal imprisonment for unpaid debts, and most states outlawed the practice around the same time.

Six states (Arkansas, Arizona, Illinois, Indiana, Minnesota, and Washington) allow debt collectors to seek arrest warrants for debtors in default if all other collection methods have failed.  In California, a bench warrant may be issued if the debtor fails to appear for an Order for Examination (“OEX”).  An OEX is a method creditors may use to enforce a judgment.  To have an OEX issued, the person you owe money must have already obtained a judgment which means you should have had notice of the lawsuit.  It is not, however, uncommon to not have notice.

The OEX is an order signed by a judge ordering the judgment debtor to appear to answer questions concerning their finances (assets, debts, income, and expenses).  If the judgment debtor fails to appear, the judge may hold the judgment debtor in contempt of court and issue a bench warrant.  It is the contempt of court for failing to obey a court order (“you must appear in court on such and such date”) which forms the basis of the bench warrant not the underlying debt.

Modesto bankruptcy attorney Brian Haddix can explain exactly how creditors may enforce their judgments against you and advise you as to your options on how to deal with your creditors.  Attorney Brian Haddix offers creditor and debtor services including debt settlement, debt litigation, and Chapter 7 and Chapter 13 bankruptcy.

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Bank of America Signs onto Principal Reduction Program

Bank of America announces in this press release that it has signed on to the principal reduction component of the Keep Your Home California program, which uses federal funds reserved for the 2008 rescue of the financial system to help homeowners behind on their mortgages.

According to the press release, Keep Your Home California’s Principal Reduction Program is part of a $2 billion, federally funded effort to help hard-hit families remain in their homes and ease the California foreclosure crisis. Bank of America has been engaged in a pilot of the principal reduction program since February, and is now moving into full participation to provide assistance to more qualified homeowners facing hardship. The bank is one of the largest servicers of single family mortgages in California, serving more than 2.2 million home loans.

For full details on the program, click here.

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Debt is the Slavery of the 21st Century

While this is a particularly strong statement, this article written by Brian Carr is relevant and thought provoking.  As Mr. Carr succinctly explains, debt means you owe someone and you must work to pay off that debt.  He points out that when you owe massive debt, the creditor owns you.  You are not earning money for yourself to be used to further your interests but rather satisfy the obligation you owe.  The creditor seeks every disposable dollar you earn to pay off the principal and interest that is accruing on that debt.  And the longer you take to pay it off by making minimum payments, the more, it seems, you owe (and the more money the creditor earns off of you).  The feeling is like a bottomless pit.

There are options and bankruptcy is one of them.  Modesto bankruptcy lawyer Briann Haddix can advise you on all of your options under the bankruptcy code.  For example, Chapter 7 allows a debtor to discharge their debts and retain certain “exempt” property.  In California, a debtor may keep up to $26,775 in value of vehicles, toys, money in bank accounts, and collectibles.  In the overwhelming majority of California bankruptcy case, debtors keep all of their property.

In Chapter 13, debtors keep all of their property but repay a portion of their debts over three years or five years.

Can I keep my house after bankruptcy?

The short answer is yes, but you must be able to make the payments.  In general, a Chapter 7 bankruptcy is not going to order a debtor to move out of their home.  The bankruptcy is not going to remove a debtor’s name from title to their house.  The only effect the bankruptcy will have is to discharge the debtor’s personal liability to repay the loan.  The bank (or lender) retains the lien (a.k.a. the deed of trust) against the property.  If the debtor does not or cannot make the payments, the bank will foreclose.  If you have late mortgage payments at the time you file a Chapter 7 bankruptcy, you will still have to come current on the payments either by paying the past-due amounts (the “arrearages”) or by negotiating a loan modification with the lender.

In Chapter 13, if you want to keep your home and you have late mortgage payments, you propose a Chapter 13 repayment plan that pays off the late mortgage payments over 36 or 60 months.  During this time, you also make the monthly mortgage payment.  Depending on which district you file in (i.e., the Eastern District of California), will determine whether you pay your monthly mortgage payment directly or whether you pay it though your Chapter 13 plan.

Modesto bankruptcy attorney Brian Haddix can explain and advise you as to what option is best for you.

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Is Debt Settlement Legitimate?

Many clients come to me after they have attempted to work out payment plans with their creditors, usually by signing up with a so-called “debt settlement” company.  Debt settlement is an alternative to bankruptcy that could be useful – if the debt settlement companies actually did any work.  Usually, I hear that all the company did was take the debtor’s money without doing any work.  A government investigation into the debt-settlement industry has found that many debt settlement firms misled consumers by claiming to be affiliated with federal stimulus programs and exaggerating their ability to reduce consumers’ loans.

The general debt settlement scheme tends to be a sixty-month plan in which the debtor forgoes paying their debts and instead pays the debt settlement company a set monthly amount.  The first eight to ten months of payments usually go to the pay the debt settlement company’s fees.  After that, the payments go into a “trust” account for the client that builds up value until there is a sufficient amount available for the debt settlement company to begin negotiating lump-sum settlements of the debtor’s obligations with the debtor’s creditors.

The problems begin when the creditors stop receiving their payments and begin calling the debtor six times a day.  The debt settlement company might send out cease & desist letters pursuant to the Fair Debt Collections Practices Act.  This requires the creditor to stop all phone calls but does nothing about the debtor’s obligation to repay the debt.

But the biggest problem is timing.  The sixty-month payment plan set up by the debt settlement company is longer than the four year statute of limitations a creditor has to file a lawsuit for breach of contract.  That means that the creditor will likely sue the debtor for breach of contract prior to the debtor completing the debt settlement company’s payment plan.  If the creditor wins, which is very likely, the debtor is now responsible for the original principal, accrued interest, attorneys’ fees, and cost of suit.  Furthermore, the debtor’s credit is trashed by years of non-payment, judgments, and possible judgment liens.

If you have questions about debt or your ability to repay your current obligations, make an appointment for a free initial consultation with Modesto bankruptcy attorney Brian Haddix.  Mr. Haddix has extensive experience in dealing with debt and creditor claims.  He can advise you about your options and let you know what is best for you.

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Flawed Foreclosure Documents Thwart Home Sales

The slowdown in foreclosures by banks appears to be creating a whole new set of problems, according to an article in today’s New York Times.  “This crisis takes a situation that’s already bad and kind of cements it into place,” said Joshua Shapiro, chief United States economist for MFR Inc., an economic consulting firm.

With the sudden halt of foreclosures, new buyers who were in the process of preparing to move into foreclosed homes now find themselves in limbo.  Amanda Ducksworth was supposed to move in to her new home this week, a three-bedroom steal here in central Florida with a horse farm across the road. Instead, she is camped out with her 7-year-old son at her boss’s house.

Like many buyers across the country, Ms. Ducksworth was about to complete the purchase of a foreclosed house when it suddenly went off the market. Fannie Mae, the giant mortgage holding company that buys loans from commercial lenders, is pulling back sales of homes that might have been foreclosed in bad faith.

There has been no foreclosure halt in California – yet.  But some in government, including Nancy Pelosi, are calling for an investigation into foreclosure fraud.

If you are facing foreclosure, you should call Modesto bankruptcy attorney Brian Haddix for a FREE BANKRUPTCY CONSULTATION

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Bank of America Halts Foreclosure Cases

Bank of America has temporarily frozen all foreclosures as it examines whether it rushed the foreclosure process for thousands of homeowner’s without reading the documents.  In an e-mailed statement, Bank of America said it would “amend all affidavits in foreclosure cases that have not yet gone to judgment.”

The reason for the halt stems from a document obtained by the Associated Press which  shows a Bank of America official acknowledging in a legal proceeding that she signed thousands of foreclosure documents a month without reading them.  The official, Renee Hertzel, said in a February deposition that she signed 7,000 to 8,000 foreclosure documents a month and typically didn’t read them.  Bank of America is the third bank behind GMAC Mortgage and JP Morgan Chase to temporarily halt mortgages.

The trend is troubling, to say the least.  At best it demonstrates sloppy legal work by the law firms hired by the banks – law firms that no doubt charge the banks hefty fees – a cost the banks no doubt eventually pass onto their customers.  At worst, it indicates wide spread fraud in the foreclosure process.  Regardless, it appears such practices are rampant in the industry.  All the attention could be good news for homeowners in the Northern San Joaquin Valley, however, which has been ground zero for the foreclosure crisis after the housing bubble burst.

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