Last week I started talking about little “surprises” that can happen after someone files a bankruptcy case. At the end of last week’s blog, I started discussing the issues that arise after (and sometimes significantly after) a person has received a bankruptcy discharge when someone who filed a bankruptcy attempts to refinance a mortgage that was in existence at the time the bankruptcy case was filed. Often, the mortgage company will continue to report the mortgage as “in bankruptcy” long after the bankruptcy case is done and over. Some, not all, mortgage companies do this - although the companies that do report mortgages as “in bankruptcy” are often the large, nation-wide mortgage issuers.
This report will cripple an individual’s attempt to refinance the mortgage through the company that first wrote the mortgage. When my clients ask what they can do to resolve this with the mortgage company, the response is typically that there is nothing to do. Why not? The debtor did not sign and file a reaffirmation agreement while the bankruptcy case was pending. Some mortgage services will tell clients who contact them regarding this that the client should contact his or her attorney regarding filing a reaffirmation agreement. And since this conversation typically takes place long after the bankruptcy case has been discharged, and closed, then the answer to the client’s request to file a reaffirmation agreement is that it is simply too late to do so - the Bankruptcy Court has lost jurisdiction over this when the case was closed.
This would be bad enough but there are two other features of this issue that I find particularly grating: first, the mortgage company will tell customers/clients that the reason their loan is still reported as being in bankruptcy is that the client did not sign a reaffirmation agreement. Creditors typically prepare reaffirmation agreements - the creditors are the entities that benefit from having a bankruptcy debtor reinstate his or her personal liability on a loan. Mortgage lenders typically do not propose reaffirmation agreements - and I can’t recall a time when the first mortgage company ever sent me a reaffirmation agreement!
Second, the failure to get the loan reported correctly is laid at the feet of the clients’s bankruptcy attorney - even though as a group we don’t prepare reaffirmation agreements - we don’t do the creditor’s work. So that’s the problem, but there is a fairly simple solution to this frustrating scenario. While the original mortgage issuer may not work with clients who have a bankruptcy on their record, there are plenty of other mortgage companies out there. And these companies typically are more than happy to make a fee from refinancing an existing mortgage at an interest rate that benefits the client. The “new” mortgage company will see the entry that your loan is in bankruptcy, but in that case the new company will typically want to get three documents to deal with this issue: a copy of the client’s exemption schedule, showing the real estate in question was listed as an exempt asset, a copy of the bankruptcy discharge and a copy of the client’s mortgage payment history.
A mortgage company must provide a payment history to customers who request it. That’s the solution to that “surprise.” If you are a client of our office and this comes up, just contact us - we’ll help you resolve this problem.
After discharge, my credit report isn’t accurate
Many of my clients have a pretty bad-looking credit report at the time they file. As we explain to our clients, one of the little surprises in store for people who file bankruptcy is that for the vast majority of them, their credit score improves after they receive their bankruptcy discharge. Why? One of the key factors in determining a credit score is the ratio of debt-to-income for any one person. So when a person with significant debt gets that debt discharged in a bankruptcy case, that person’s debt-to-income ratio improves - and in some cases improves rather dramatically. That assumes, however, that the reporters tell credit reporting services that a bankruptcy case has been filed, and following the client’s discharge, the creditors report the loan or account as “discharged in bankruptcy.”
Every now and then I get calls from clients telling me that even though their case has been discharged, their credit report still shows some creditors as reporting the client’s account as being in “serious default” or some other negative report. Mistaken creditor entries can frustrate a client’s ability to receive financing for some necessary purchase. The solution to this problem is fairly straight-forward. There are three main credit reporters in the United States: Experian, Equifax and Trans Union.
The first step is for the client to find out which credit reporting service has the incorrect entries (it might be one, more than one or all three). Once that is known, the client should go to the credit reporting agency’s website and click on the link (all three credit reporting companies have one) that allows you to dispute your credit report. Follow the directions (you’ll need your bankruptcy case number) and after you submit the dispute, a research department will take over and determine if, in fact, the credit report filed by the creditor is in error. If the researchers decide there is an error, the credit report is fixed, and that is that.
If that doesn’t work, there’s a law firm out of Salt Lake City, Utah, that has made a specialty of resolving inaccurate credit reports. Please contact our office for their information if you ever have a discharged debt that the creditor mischaracterizes.
My bank account was “frozen” after my case is filed.
This particular unpleasant surprise doesn’t happen very often (thank goodness) and it only happens to one type of client: a chapter 7 client who has a Wells Fargo bank account (either checking or savings, or both). If that client has a balance in either a checking or savings account with Wells Fargo, and the account balance in one or both accounts exceeds $5000, Wells Fargo will “freeze” the account and notify the bankruptcy trustee that an individual filed a bankruptcy case, and let the trustee know the balance. In the meantime, the client can’t access the money in his or her account! And it’s not necessary that the bankruptcy debtor owed money to Wells Fargo when the case was filed; Wells Fargo has software that informs the bank when any depositor files a bankruptcy case. So the Wells Fargo policy of freezing large-balance bank accounts applies to every bankruptcy debtor who carries that large balance.
To my knowledge, Wells Fargo is the only bank that has this policy. And Wells Fargo will only freeze an account if the balance is at or exceeds the magic $5000. If you are unlucky enough to have this happen to you, the fix we employ is contacting the bankruptcy trustee. If the account balance is exempt (and it almost always is), the trustee of the case will normally notify Wells Fargo that the account balance can be released to the bankruptcy debtor. Of course, if all or part of the balance is not exempt in the bankruptcy case, then the trustee will not take action to release the balance.
The easy way to prevent this is to not carry a large balance in checking or savings in a Wells Fargo account if you are planning to file bankruptcy. There is nothing wrong with withdrawing sufficient amounts from checking or savings to make sure that account balances are less than $5000. After the case is filed, the money can be re-deposited in the Wells Fargo account without problems. If you choose this course of action, please be mindful of the fact that your cash on hand must be scheduled in your bankruptcy case. The only way to protect property in a bankruptcy case is to identify the property and value the property accurately on your schedules. Any omission of assets is problematic in a bankruptcy case; the intentional concealment of assets is criminal, and if discovered will lead to a denial of a bankruptcy discharge, at best.
What about the “unknown” asset?
While it is unusual for an individual to own an asset without knowing about it, it’s not unheard of. The common example is when parents have created a life estate interest in their home, and given a remainder interest to their children. Often one or more of the children know that their parents have done this, but not all children have been notified. If one of the children in the dark about mom and dad’s real estate files a bankruptcy case, that child holds a real estate interest that should be disclosed in bankruptcy schedules. But since the child is not aware of mom and dad’s estate planning, the remainder interest is not included in the bankruptcy case. Or a client has sold a vehicle privately to another person. The client has signed off on title, with the understanding that the buyer will handle the title transfer. And the child doesn’t know about it until mom and dad want to sell the house or when the last surviving parent passes away. Or the client doesn’t realize that title hasn’t been transferred.
When these things happen, clients should contact our office immediately - this is not a big problem unless a client chooses not to disclose the existence of the asset in the bankruptcy case. Even if the case has long since been closed, if the property interest existed at the time the client filed a bankruptcy case, it must be disclosed when it is discovered.
It is possible that a significant portion, if not all of the asset is not exempt under bankruptcy law. If that is the case, clients need to understand that the bankruptcy trustee will take control of the asset and will liquidate the asset to pay creditors. It can be disappointing to clients who feel that they’ve lucked into some financial good fortune to find out that instead they will have to turn over all or part of an asset to a bankruptcy trustee. But that is a much better result than getting a bankruptcy discharge revoked for failing to disclose the existence of the asset and having that asset liquidated by the trustee, anyway.
The best way to avoid this potential complication is to try to be as complete as possible in determining the assets you own before your bankruptcy case is filed. I tell my clients if they are not sure whether or not they own property with another person, or if title has been transferred to a vehicle, that they should check with the offices that record property interests and issue vehicle titles to make sure the clients understand what assets are owned in their name. When in doubt, check!
Your Car Insurance
One of the least-anticipated complications coming out of a bankruptcy case has to do with car insurance. If you file a bankruptcy case, and shortly after filing, cancel your current insurance to try to obtain a new policy at a better rate, you might be in for an unpleasant surprise. Car insurers will often place individuals who have filed a bankruptcy case into the risk pool (for reasons unknown to me). Potential clients should understand that this does not typically happen if there is no cancellation of insurance. That is, if you maintain current status with the insurer you had at the time your case is filed, there usually is no increase in premium. The “catch” is when you try to buy a new policy from a different insurer. So if you are thinking of filing a bankruptcy case, you should be mindful to keep your car insurance payments current, at least for several months after filing, or else risk a big increase in premium payments.
These are some of the common complications that can come up. Most, as you can see, are avoidable with some foreknowledge and communication with your bankruptcy attorney. And the vast majority of our clients do not encounter these complications. But in case something unexpected does come up, always contact your attorney. Together, you will be able to smooth out any complication that comes up.
