What Everyone Should Know About Chapter 13 and SSDI Benefits

Many times, individuals whose only income is Social Security Disability Insurance benefits (SSDI) have difficulty keeping up with paying creditors and debts and may have to file for Chapter 13 bankruptcy. There can be a deep internal struggle with choosing this path due to the fear of losing their SSDI benefits.

The Social Security Act provides protection to Americans who become disabled and have worked long enough and paid Social Security taxes. Disability benefits are available to those (previously and currently) employed workers and their survivors who have paid into the system and can no longer work. These benefits, although helpful, equate to only a portion of what a working individual previously earned.

If an individual receives approval to collect disability benefits, the amount of the benefit is not determined by the severity of the disability or their earnings when they were employed. The Social Security Administration calculates the amount of Social Security taxes an individual has paid on their income over the many years they’ve worked and averages them. A formula is applied to this average using percentages called “bend points.” As a result, any person’s benefit payment will only amount to a percentage of what their earnings were while working. Payment benefits paid to individuals and/or their survivors through SSDI payment ranged from $700-$1,700 per month in 2017.

In almost all cases, this protection will not be overruled by bankruptcy. The most common protection for these benefits, by statutory definition, is that Social Security income is excluded as income being available to repay creditors. In other words, these benefits are not calculated as disposable income or financial assets to determine payment amounts used to pay back unsecured creditors.

42 U.S.C. 407 (Section 207 of the Social Security Act) provides protection in the form of a broad federal non-bankruptcy exemption. The statute provides that “none of the monies paid or payable or rights existing under this subchapter [of the Social Security Act] shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of bankruptcy or insolvency law.” Other federal laws allot exceptions to this protection outside of bankruptcy for established child support or alimony obligations, federal taxes or other obligations to the federal government. Most times, even debtors that have these responsibilities will still have protection of their benefits in bankruptcy. However, other bankruptcy laws, such as priority creditor laws, may require these responsibilities be paid from another income source.

To reiterate, in several instances, Congress has clearly stated that Social Security benefits should not be included in determining financial assets that are used to compensate creditors in a bankruptcy case. Additionally, the Social Security Administration has said it will not honor court orders to turn over an individual’s Social Security benefits to a bankruptcy trustee.

The Social Security Administration has very strict guidelines on what their benefits can be used for as they were created to assist disabled individuals with basic needs such as food, clothing and shelter. Because of this, you should keep your SSDI benefits in a separate checking or savings account and keep accurate records of income and expenses, so they are traceable. Commingling of your household income and your Social Security Disability benefits may cause confusion and complications. Keeping these monies separate will help you avoid losing protection of those benefits.

Still have unanswered questions or have a unique case not addressed here? Please schedule a free consultation with Veitengruber Law in Bordentown or Wall, NJ to learn how you can continue to receive your income from disability payments while filing for bankruptcy.

Image: “Surprise” by Tobias Scheck – licensed under CC 2.0

Advertisements

Can I Accept a Cash Gift While in Chapter 13?

chapter 13 bankruptcy

Filing for a chapter 13 bankruptcy in New Jersey means you’re taking steps to right your financial situation, which may have gotten off-kilter. Some of your debts will be reduced or eliminated through the bankruptcy process, and your remaining debts will be reorganized in such a way that makes them manageable.

After your chapter 13 case has ended, you and your bankruptcy attorney will agree to a repayment plan that is typically laid out over a 3-5 year period, making your monthly payments much lower. Once you’ve been granted a chapter 13 reorganization, you are generally not permitted to take on any new debts until you’ve successfully paid off your existing debts.

Incurring a new debt after filing for chapter 13 bankruptcy is only allowed if you get specific court permission, and this will be granted in very select circumstances only. So, if you’re contemplating buying a new car or making another relatively large purchase, be aware that court approval is needed first. If you fail to get court approval before taking on more debt during your bankruptcy repayment period, your case can be dismissed.

I need a working car; what are my options while in bankruptcy?

With all of that being said – you’ve found yourself in a pickle. While you’re exceedingly grateful for the opportunity of a chapter 13, you may now discover that your vehicle has “died,” and the best financial choice is to replace it rather than to continue making expensive repairs. This is a valid example of when you could petition the court to be able to take on an auto loan, but BE CAREFUL.

Before doing so, pour through all of your financials with a fine toothed comb. You must be absolutely certain that you will be able to make the new loan payments in addition to your debt repayment plan as laid out in your chapter 13 case.

Another question that many debtors have involves receiving a cash gift after filing for chapter 13. Let’s say that your mother, who knows your family needs a working vehicle so that you can get to work and earn money, wants to help you out by gifting you some or all of the money needed to buy that vehicle.

Can I accept cash gifts while in bankruptcy?

Yes, in short. But, before you accept any money from anyone, you are required to report it to your bankruptcy trustee. Any incoming money, above and beyond your paycheck, whether via gift or other windfall (inheritance, etc), is considered to be additional income in the eyes of the bankruptcy court.

Unless you receive only a very nominal gift (for example, $50 in a birthday card), it is of the utmost importance that you report any and all cash gifts while you are working on paying off a chapter 13 bankruptcy.

If your question has not been answered in full here, please contact your NJ bankruptcy attorney, who is best equipped to answer specific questions about your unique case details.

Can I “Cramdown” my Mortgage in a NJ Chapter 13 Bankruptcy?

While it may invoke images of a young parent’s attempt to eat dinner in between meeting the constant needs of a new baby, the term “cramdown” actually has nothing to do with food (at least in our context).

Debtors who file for a chapter 13 bankruptcy have determined that they can no longer stay above water paying their monthly expenses for their current lifestyle. Chapter 13 applicants typically have a dependable job with a decent income, and they are able to pay back at least a portion of the money they owe to creditors.

During NJ chapter 13 bankruptcy proceedings, a reconfigured payment plan will be laid out for the debtor that will allow them to avoid losing valuable assets. A home loan modification and a reorganization of other unsecured debts may also be part of a chapter 13 plan.

What exactly is a “cramdown?”

Another very effective strategy employed in many chapter 13 reorganization plan is called a “cramdown.” In order for a debtor to “cram” a loan down, it must be a personal property loan, like a loan for a car, home furnishings or appliances, or investment property. An important restriction here is that, unfortunately, mortgages on principle residences cannot be crammed down.

Here’s how it works:

Let’s make it easy and use a car loan as an example. These types of loans are often crammed down in chapter 13 cases due to the rapid depreciation of all vehicles immediately upon being purchased.

If a debtor borrowed $30,000 to buy a car a number of years ago, and today still owes $20,000 on that loan, it’s important to learn the current market value of the car. Let’s say the vehicle is only “worth” $15,000 now (we’re using easy figures for this example – your numbers may vary). Even though the debtor technically owes $20,000 to the creditor, a chapter 13 allows them to cram that balance down to the amount the car is actually worth. In this case, the debtor will benefit from a reduction of his loan balance by $5,000, only owing the current value of the vehicle, or $15,000.

This same process can be applied to other personal property loans that are currently upside down. To be upside down on a loan means that a debtor owes more than the property is currently worth. The cramdown strategy can only be used during a chapter 13 bankruptcy.

The amount “left over” when a loan is crammed down in a chapter 13 will be treated like the rest of the debtor’s unsecured debts, which include loans for things that are not physical property. A portion of a debtor’s total unsecured debts can be discharged, but only after they have completed their chapter 13 payment plan (which is usually spread out over 3-5 years).

The most common types of unsecured debts in New Jersey today are credit card debt and medical debt. Other examples include personal loans, student loans, alimony arrears and child support arrears. Not all debt is dischargeable in bankruptcy. Discuss your specific debt with your bankruptcy attorney.

In addition to the lump sum reduction in the amount due on a loan, a chapter 13 bankruptcy cramdown allows many debtors to reduce the interest rate they are currently paying on some (or all) of their personal property loans.

There are other benefits to a loan cramdown as well as some limitations and timelines that must be closely adhered to. Talk to your New Jersey bankruptcy attorney to learn more, and to find out of a chapter 13 bankruptcy could be the answer you’ve been seeking.

Can my Landlord Evict me if I File for NJ Chapter 13 Bankruptcy?

Living paycheck-to-paycheck is the way of life for many Americans, and unfortunately, it doesn’t seem as though this has the potential to change any time soon. With the Mortgage Crisis of 2007 having lasting effects on the US real estate market, many former homeowners were forced to give up their underwater homes and downsize. Many of these people did not take on a new mortgage, but decided to become renters – at least until the real estate market righted itself.

The new renters brought on by the Mortgage Crisis (which had aftershock effects lasting well past 2010) plus those Americans who were already renting prior to 2007 combined to create a large population of US renters. While some renters have since been able to secure mortgages, a plethora of tenants feared losing yet another home to foreclosure and have continued to rent property in NJ.

The struggle of not knowing whether or not you’ll have enough money to cover your monthly living expenses is real. As of the end of 2016, nearly 11% of New Jersey residents were living at or below the poverty level, which is an excessively high number. For these New Jerseyans, figuring out how to stretch their low income to pay for food, housing and utilities is a daily burden that weighs on them constantly.

As a renter in New Jersey, filing for chapter 7 bankruptcy no longer prevents a landlord from initiating the eviction process. New legislature in 2005 protected homeowners but not tenants in chapter 7 cases. Those renters who need to file for bankruptcy to get out from under crushing debt cannot do so with a chapter 7 without risking eviction.

Although chapter 13 bankruptcy doesn’t completely wipe out debts like a chapter 7 discharge does, the good news for NJ renters is that it offers protection from eviction. All back rent that you owe your landlord can be included with your other debts when you file. A chapter 13 bankruptcy can save you from eviction by creating a payment plan wherein you will repay your landlord the arrears you owe over a set period of time that is considered reasonable.

As long as you continue to make all of your chapter 13 repayments (made through your bankruptcy trustee who then pays your creditors/landlord) along with your current rent payments, you cannot be evicted due to being behind on your rent. Your chapter 13 repayment plan will be structured in such a way that you can afford in comparison with your unsustainable living expense schedule prior to filing for bankruptcy.

It’s important to note that in order for you to avoid eviction via chapter 13 bankruptcy, you must be able to prove that you have enough income to afford your repayment plan with enough money left over every month to be able to make your current rent payments on time and in full. In addition, any landlord may evict a tenant who has endangered the property in question through illegal activities such as drug use, drug distribution or breaking the lease agreement in other dangerous ways, even if they have filed for a NJ chapter 13 bankruptcy.

 

Image: “Evicted” by Gideon – licensed under CC 2.0

Stripping a Second Mortgage in a Chapter 13 Bankruptcy

Many people have taken out a second mortgage on their home. These second mortgages are usually referred to as home equity loans, because they are based on the amount of equity you have in your home. Your original mortgage loan’s value vs what your home is worth, along with your credit score determines how much money you can borrow through a home equity loan.

Typically, these loans are paid to homeowners in one lump sum so they can do home renovations or repairs. Some people use home equity loans to pay off a large debt with a high interest rate or to buy a vacation home. A home equity loan can seem extremely advantageous if you’re in need of some fast money, however the danger is that if you fail to repay the loan, you could lose your house.

Getting in over your head with your mortgage has been a popular theme in the past decade, so if you’re finding that you can’t make both your first and second mortgage payments, you’re not alone. Luckily, you do have some options.

If you could eliminate your second mortgage, would that make your monthly living expenses doable? Wishing you never took out that home equity loan? Filing for a NJ chapter 13 bankruptcy might be right for you.

A process known as ‘lien stripping’ can essentially erase that second mortgage, but this process is only available to debtors who file for chapter 13 bankruptcy. Additionally, in order to qualify for a lien stripping, your first mortgage balance must be higher than the current value of your home.

For example, if your first mortgage balance is $300,000, but your home is currently worth $275,000, you have zero equity in the property. In fact, you’re said to be ‘upside-down’ or ‘under water’ in regards to your first mortgage.

A $25,000 second mortgage would qualify to be stripped via chapter 13 bankruptcy in New Jersey. Upon application for a chapter 13 bankruptcy, your debts will be reorganized so that you can afford your monthly payments on all of your secured debt. In a chapter 13 bankruptcy, a second mortgage is referred to as a junior lien, and will be lumped in with all of your unsecured debts.

Throughout your chapter 13 repayment plan, you only have to pay a percentage of the total lump sum of all of your unsecured debts because they are considered “non-priority” debts. Upon successful completion of your bankruptcy payment plan, you will be granted a discharge. A chapter 13 discharge will put the lien strip into motion, and you will no longer be responsible for any remaining balance on your home equity loan or second mortgage.

The same is true for homeowners who also have a third mortgage on their home. If you want to stay in your home and would be able to afford your mortgage plus monthly living expenses if only you could “get rid of” your second or third mortgage(s), ask George about filing for a NJ chapter 13 today. You only have debt to lose!

 

Purchasing a New Jersey Home from a Bankrupt Seller

In today’s housing market, there are still a significant number of homeowners who are in danger of foreclosure. These homeowners usually owe more than their home is currently worth, so they are said to be “upside down” or “underwater.” If they are unable to refinance, and cannot keep up with their payments, they will be foreclosed upon, and are likely to declare bankruptcy at that point.

Should you pursue a short sale on a home that is awaiting foreclosure?

If you already own a home, are pre-approved financially, have plenty of available cash, and at least several months to spend devoted to the complicated process that is a short sale on a foreclosed home, only to have the seller declare bankruptcy and possibly even cancel the whole thing, then yes, a foreclosure might be the right gamble for you.

Beware, though, because as stated, it is highly likely that the seller will declare bankruptcy before the sale is completed, greatly reducing the likelihood that a short sale will close. Short sales rarely yield substantial profits for the seller, so the seller was likely pursuing a short sale in order to reduce the damage to their credit that would result from a foreclosure. However, if they’ve decided to go ahead and file for bankruptcy, the negative effect it will have on their credit is likely to overshadow any benefit from the short sale.

If they were to continue with the short sale despite having filed for bankruptcy, the seller could actually be negatively affected. Their filing for bankruptcy places their belongings, including their house, into a bankruptcy estate, so they don’t have the power to close a short sale easily. If the owner is determined to complete the short sale–normally against the recommendation of their bankruptcy attorney–they will need to pay said attorney an extra fee to pursue permission from the court.

If they obtain permission to close on the short sale, the owner will need to move out of the home much more quickly than if they were to wait out their bankruptcy proceedings. The only potential benefit to the owner comes from the peace of mind that may result from having avoided foreclosure.

With all these complications, it may seem like it’s not worth it to pursue short sales in foreclosure situations at all. However, there are a number of benefits that might be quite appealing: competitive pricing, smaller down payment and closing cost, and a shorter escrow period, to name a few major advantages.

So, if you are going to attempt to purchase a house that has been foreclosed upon, or a house that is in bankruptcy court, don’t go it alone. You will need the expertise and guidance of an experienced bankruptcy attorney. Your real estate agent will be happy to help you find advantageous listings, but consult with a bankruptcy attorney to have help navigating the complicated process to follow. A real estate agent is NOT an attorney, and can in no way fill that role.

Never skip inspections! They may be even more necessary in a short sale situation, but never less so. A 2011 survey conducted by Harris Interactive reported that 72 percent of U.S. homeowners agree the home inspection they had before they purchased their current home helped them avoid potential problems; 64 percent of respondents reported that their home inspection saved them money.

While it is a bit of a gamble to invest in an inspection when you don’t yet have signed contracts, it’s a much bigger gamble to sign papers on a home you haven’t had inspected. If a homeowner didn’t have the money to pay their mortgage, it’s unlikely that they’ve been able to keep up with regular maintenance. If you can’t arrange an inspection, and you don’t have hundreds of thousands of dollars to spend on potential repairs, don’t close the deal on a property, no matter how enticing the price tag.

The takeaway: if you have the time and money to spend on a home that may never be yours, and you find a house that is listed at a price that might make it all well worth the hassle, then take your attorney with you–and buckle up for a wild ride!

Image: “Mortgage Rates” by Mark Moz – licensed under CC by 2.0