Bankruptcy May Increase Your Options in Foreclosure

Foreclosure is a common predicament faced by many people filing bankruptcy, and is an issue that affects homeowners at every income level. If you are behind or “in arrears” on your mortgage payments for more than a couple months, chances are your primary mortgage lender will send you a pre-foreclosure notice demanding that you make payment otherwise they will take legal action. Eventually if the mortgage is not brought current, a mortgage lender will initiate a foreclosure proceeding. Once served with the notice of sheriff’s sale that formally commences a foreclosure proceeding, most homeowners have six weeks until their house is sold at the county sheriff’s office and then six months thereafter to remain in the home through the redemption period*.

If you want to save your home and stop a sheriff’s sale, bankruptcy can help. While both Chapter 7 and Chapter 13 bankruptcy will stop the ticking clock of a foreclosure or sheriff’s sale, Chapter 13 may also help you save your home by providing a way for you to pay mortgage arrears over time through a Chapter 13 payment plan, while still resolving other unsecured debts such as credit cards that may restrict your cash flow. Either form of bankruptcy puts an automatic stay on the foreclosure process—that is to say, it freezes the foreclosure process—from the moment a bankruptcy petition is filed, providing you with crucial time while your sheriff’s sale is temporarily stayed.

Even if you want to move forward without your home, Chapter 7 bankruptcy or Chapter 13 bankruptcy can provide months more time in the house without mortgage payments, truly offering a fresh start and way to rebuild your finances for what’s next. And because bankruptcy is a long term solution to dischargeable debts, you won’t receive a deficiency judgment or taxable 1099 on a foreclosed or short sold property once you receive a discharge in bankruptcy.

If you are in the midst of foreclosure, the best time to take advantage of your bankruptcy options is prior to the sheriff’s sale. Even after a sheriff’s sale, you may still have options to extend the time you can stay in the home and also discharge of the underlying debts.

This website has extensive information on the foreclosure process in Minnesota, what Chapter 13 can do to help you save your home, and how bankruptcy can minimize your debt while maximize the time you can stay in the home should it go through foreclosure.

*The foreclosure process, timeline and other requirements of law vary on the type of real estate owned and the type of foreclosure proceeding commenced by a lender, amongst other factors. The information provided here represents the general foreclosure process in Minnesota and you should always consult an attorney for how the law applies under your specific circumstances.

Popular misconception: Chapter 13 is not necessarily a 100% repayment plan

While Chapter 13 is in many ways a debt repayment program, it is not necessarily a
100% repayment plan. This is a surprisingly common misperception that I’ve heard a few times from clients who have been advised to file Chapter 13 rather than Chapter 7. Yes, it’s true that some debts will be repaid 100%, yet usually these are the types of debts that you actually want to have paid in full: arrears on your home mortgage or income taxes that cannot be discharged in any form of bankruptcy. In fact, most Chapter 13 plans provide for only a fractional dividend to be paid to unsecured creditors such as credit cards, medical bills, personal guarantees, etc. That percentage varies for each person, and may be as low as 5% or 10% in some cases—a far better repayment than most creditors would accept in a debt settlement outside of bankruptcy . And in Chapter 13, even a low dividend is paid over three to five years, rather than in a lump sum up front. After the three to five years of a Chapter 13 plan being paid timely each month, whatever amounts remain on dischargeable debts is then discharged… Bankruptcy works again to provide real debt relief.

So if your attorney advises you that Chapter 13 is the only bankruptcy option
available, dig a little deeper into what this means for you. What would your
monthly Chapter 13 plan payment be, and for how long would you need to pay this?
Run the numbers considering the total amount you would pay for Chapter 13
against the total debt that would be resolved in Chapter 13. If Chapter 13
allows you to get out of your debts for a fraction of what is owed, that
may be a great alternative over continuing to wrestle to pay your debts 100%.

You’ve Just Been Served with a Lawsuit, Now What?

It’s common for people who have consumer debts such as credit cards and medical bills to be sued and have judgments entered against them prior to filing bankruptcy. The first thing to realize is this is all very normal. In fact, lawsuits are so common that the threat of wage garnishment stemming from a judgment is one of the leading motivations for people to file bankruptcy sooner rather than later.

The second thing to realize if you have been sued is that lawsuits move fast and your money and earnings are at risk. In Minnesota, lawsuits are generally initiated when the plaintiff serves the defendant with a summons and complaint stating the basis for the lawsuit and amount owed. For lawsuits involving the collection of debt such as credit cards, the complaint typically will set forth the outstanding balance owed as well as tack on accrued interest and attorney fees. From the date that a summons and complaint are served, the defendant has 20 days to submit an answer or the plaintiff can quickly ask the court for a default judgment. Once a judgment is entered, the creditor is now a  judgment creditor” and has additional remedies available to collect on the amount owed, including garnishment of wages and levying any bank account that is linked to the “judgment debtor”.

Bankruptcy stops a lawsuit the moment a bankruptcy petition is filed with the court. If
the lawsuit is still pending at the time the bankruptcy is filed, a judgment cannot be entered. However if the lawsuit has already been reduced to a judgment, the judgment can still be discharged by bankruptcy. In some circumstances money that has been garnished from wages or levied from a bank account prior to the bankruptcy can be returned to you. There is a process to remove judgments post-bankruptcy discharge, which is advisable to help restore credit quicker after bankruptcy.

If you have been served with a lawsuit, you may wish to act fast to consult your bankruptcy options within the first couple weeks. While it’s generally best to head off a lawsuit before it gets to the point of judgment, you still have options even after a judgment is entered. A bankruptcy attorney can clearly explain what you can expect as far as the lawsuit, judgment and the return of any garnished or levied funds are concerned. Just remember that the legal process moves quickly and prevention is the best defense.

Lynn Wartchow is the founding attorney of Wartchow Law Office and has represented clients in Chapter 7 and Chapter 13 consumer bankruptcy proceedings since early 2005.

When sales tax threatens a business: Chapter 11 may be the answer

When I became aware of a popular local restaurant and bar recently close its doors due to unpaid sales tax and subsequent state shutdown, I had to wonder why no one suggested that the owners file a Chapter 11 business reorganization. True, I cannot be sure that the owners did not consult an attorney and make the decision not to file Chapter 11, but I have my doubts. The establishment was a long-standing popular Minneapolis hotspot, overflowing with patrons bursting out the doors even on weeknights—how could they not be making a decent profit? The zoning of the neighborhood may be to blame, which dictates a mandatory portion of receipts must be from food rather than alcohol, or the sales tax and penalties spike. Here in Minnesota, if a business that sells alcohol is delinquent in paying its sales tax, it can expect to have its liquor license posted within a month. Once a liquor license is posted, the business is not allowed to purchase liquor from wholesalers and distributors until they pay the tax in full, thereby leaving the business with a dwindling supply of inventory to sell to the public while it tries to generate enough revenue to pay the tax bill. Unlike other types of creditors that may be more negotiable, the state’s taxing authority is an unyielding force of government that demands payment under the threat of immediate adverse action. With the Minnesota Department of Revenue, you have to pay to play, and if you want to run a bar, you better pay your sales tax on time each month.

With one not-so-obvious exception: Chapter 11 business reorganization. While this means a business must file for bankruptcy, bankruptcy doesn’t necessarily mean it will go out of business. Quite the opposite—Chapter 11 is a mechanism established under federal law that provides significant flexibility for businesses to reorganize any number of liabilities so long as they can achieve future cash flow to actually stay in business. First and foremost, from the moment the Chapter 11 is filed, the state cannot post the liquor license—this is why it’s so important to head off the posting ideally before it happens. As for resolving the unpaid sales tax bill, the Bankruptcy Code generously allows businesses five years to repay federal and state tax liabilities. A five-year tax repayment plan sure beats the one month notice of liquor license posting.

Of course, other debts can also be reorganized in Chapter 11. Unsecured debt may be reduced to a fraction and paid over time while secured debts and financing agreements may likewise be restructured over more time with principal and interest reduced, and any other number of issues are given more flexibility inside a Chapter 11 bankruptcy proceeding. It should go without saying that, just as with most everything in life, it’s best to explore the bankruptcy option as early as possible and get an idea of what Chapter 11 may look like under your business’s specific circumstances.

The best general advice for a restaurant or bar struggling under sales tax liability: Talk to an attorney that does Chapter 11, and ideally before things go from bad to worse. Even if “bankruptcy” has not been part of your vocabulary before, it could be the solution that keeps your doors open and gets your business back in the black. As for the local favorite restaurant and bar I mentioned earlier in this post, I wish we had met sooner and hope you reopen soon.

Keep reading for more information about Sales Tax Obligations and Chapter 11 Business Reorganization.

Attorney Lynn Wartchow has represented Chapter 11 business reorganizations proceedings involving restaurants, bars, nightclubs and other businesses in Minneapolis since 2008.