Interviewer: What happens with foreclosure, this is what someone’s going to be experiencing and this is when they would start trying to consider or start considering Chapter 13?
Brad Weil: Foreclosure is state-specific, it varies state to state. California is what we call a non-judicial foreclosure state, meaning that the lender does not have to sue you to foreclose on you. Instead of mortgages in California, we have what is called Fugitive Trust. And what that means is there is a trustee who is appointed by the lender that will conduct the foreclosure sale. So, in California, it’s a two-step process. The first step is the issuance of the Notice of Default, which is a notice that you have defaulted on your mortgage and your lender intends to foreclose on you. That usually is issued if you are 90 days delinquent.
If you’ve missed more than three payments, the lender can issue a Notice of Default. Once a lender issues a notice of default under California state law, you have the right to cure in a lump sum, so you can reinstate the loan by paying the arrears in a lump sum. A lot of people don’t have the means to do that. The lender has to wait 90 days and they can then issue what’s called a Notice of Trustee’s Fail assigning a specific date that the property will be sold on. As long as you file the bankruptcy no later than the day before the foreclosure’s sale, Chapter 13 will stop the foreclosure’s sale.
The requirement of Chapter 13 is that you resume your pre-default regular monthly mortgage payments beginning in the month after we file for you. However, your only alternative under the state law is to clear the arrears on a lump sum, which a lot of people cannot do. So, the bankruptcy allows you to take those arrears and spread them out over a 5-year period while resuming your monthly mortgage payment. The reason that’s important is that once the lender issues a Notice of Default, under California state law, they are not allowed to accept payment from you. So, you couldn’t pay the mortgage if you wanted to. If you want to just try to start paying your mortgage again, they can’t accept those payments because if they do, it resets the foreclosure timeline and they don’t want to do that.
They actually won’t accept payments from you. Again, a lot of people just say “You know what? I had a hardship back. I’m on my feet. I got a new job. They won’t accept my payments. I don’t know what to do”. And I’ll say well, you’ll have to do Chapter 13 because when you’re in Chapter 13, they have to accept your payments. So, a lot of people use Chapter 13 to get their mortgage payments accepted by the lender.
Interviewer: What about back taxes that are owed to the IRS? Would Chapter 13 protect against that?
Brad Weil: Yes. Chapter 13 applies to the IRS. The IRS is a debt collection agency that represents the federal government. They’re collected just like everyone else. And when you file the bankruptcy, they have to stop debt collection activities, like garnishments, levies. They may have already placed a lean against some of your assets, the lean is valid. In bankruptcy, you would have to avoid like a second or a third but you can avoid it if the circumstances are right and we actually just do that for the client of ours. But the — when it comes to the government, there’s what we call priority debt and non-priority debt. If the debt is a priority, which usually is 3-years old on a filed return, it has to be paid in full. If the debt is non-priority, which is more than 3-years old on a filed return, let’s say you owe money for 2010 and you filed your return in 2011 when you were supposed to, that debt is probably non-priority and can be discharged.
It’s important to know what debt is the priority and what debt is non-priority. It’s also important to know whether or not you filed your returns. A lot of our clients, especially business owners, have un-filed returns and sometimes, they don’t even know about it. I had a gentleman the other day that had un-filed returns for 2011, and he didn’t even know. And he said “No. I filed my tax return for 2011” and he said “No, I couldn’t do the IRS.’ He called his tax guy; his tax guy forgot to mail it in. So, they were trying to correct some — a debt that they claimed he owed for 2011 that he didn’t owe once he filed the return. So, sometimes, you know, you may be in trouble with the IRS and you don’t even know about it because your tax guy hasn’t done what they’re supposed to do.