Bankruptcy and
Mortgage Deficiency Basics
Chapter 7 and Chapter 13
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
What is bankruptcy?
Federal court process by which a debtor can discharge or
reorganize their debts.
Intended to provide the honest but unfortunate debtor with a
“fresh start.”
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Why file bankruptcy?
(Or, what are the upsides?)
 Automatic stay of all debt collection action. (Including
lawsuits, foreclosures, collection calls, etc.)
 Financial “reboot”
 Discharge all dischargeable debts
 Eliminate risk of deficiency (where it exists)
 Eliminate some tax debts
 Eliminate credit card debt
 Get a “fresh start”
 Look better to lenders (yes, it’s true!)
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Why not file bankruptcy?
(Or, what are the downsides?)
 FICO hit (immediate but recoverable).
 Stays on credit for 10 years.
 Some debts can't be discharged (student loans
especially).
 May have to part with some property (rare, but it
happens).
 Financial affairs will be scrutinized to some degree.
 Expense and time.
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Chapter 7
 “Straight” bankruptcy.
 “Liquidation” of non-exempt assets, sale and
distribution to unsecured creditors.
 About 3 months (in most circumstances)
 Rarely loss of property.
 Keep home if loans stay current.
 Yes you CAN discharge some taxes. (“Old and
moldy” rule)
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Chapter 7 Eligibility
 Must “pass” means test.
 Adjusted income after below median for state.
 Must take “credit counseling” class. (Sort of like
traffic school for bankruptcy only much shorter.)
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Chapter 13
 3 to 5 year process in which “some” debts are repaid with
“disposable income.”
 Disposable income is calculated by a strict formula.
 Good: “Super discharge” Can provide discharges of some
debts that a Chapter 7 may not.
 Good: May allow homeowner in default to keep their home.
 Good: May allow a homeowner to “lien strip” junior deeds of
trust that are “wholly unsecured.”
 Bad: Keeps the debtor in the bankruptcy system for the whole
time.
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Chapter 13 Eligibility
 No more than $360,475 in unsecured debt, and
$1,081,400 in secured debt.
 Must have “regular source of income.”
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Keeping your property in
bankruptcy
 It’s simple: Stay current on the payments!!!!
 Houses and cars treated similarly with minor
differences in “reaffirmation” requirements.
 As a practical matter, statutory exemptions protect
most property.
 Redemption of property back from trustee.
 Chapter 13 keeps everything unless Ch 13 plan
doesn’t pay out as much as a liquidation.
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Exemptions
(“Home Owner”)
 Depends on your situation:
 If you have equity in your home above the value of all
combined loans:
 $75k if single
 $100k if “head of household
 $175k IF
 <65 years old
 Mentally or physically disabled, or
 <55 years with household income <$15k
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Exemptions
(“Non-Home Owner”)
 $24,250 “wild card” Can be used for anything:
cash, securities, property, art.
 Usually covers most personal property
 Timing of filing can be managed to protect certain
items
 All “post petition” wages and income
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Other Exemptions and
Concepts
 All “post petition” wages and income
 All IRA,s 401k’s, 529’s (some limits may apply)
 Most cars, jewelry, art, clothing, furniture, etc.
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Can I “keep” anything out of
bankruptcy?
 No!!!! All financial affairs (assets, debts, etc.) must be fully
disclosed.
 Intentional omissions or misrepresentations in Bankruptcy is a
federal crime.
 But it’s a disclosure issue: You can pay anyone you want.
 If you want to lose a piece of property, the easiest way to do that
is to fail to disclose in in your schedules.
 Recent client who “assumed” that taxes had nothing to do
with bankruptcy.
 Another client who “forgot” she owned a house that she’d
recently sold. Indicted.
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Consequences of bankruptcy
non-disclosures?
 Possible loss of discharge
 May be charged with a crime.
Just don’t do it.
 A good bankruptcy lawyer can fix ANYTHING but
a lie.
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Bankruptcy
Process and Procedures
 Starts with filing a “Petition and Schedules” with the
Bankruptcy Court.
 Which Court depends on your residence.
 All filings online through CM/ECF system.
 Usually only one appearance at “meeting of creditors.”
 Chapter 7: Usually done three months from filing unless
there is property to be administered by the trustee.
 Chapter 13: Can take up to 5 years to payoff the plan
and get the discharge.
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Cost and Attorneys fees
(Unfortunately, it ain't free to go broke.)

Fees are highly variable, depending on location, attorney’s experience,
attorney’s other business.

You WILL get what you pay for. (At least on the low end. Few things
more dangerous than an underemployed attorney.)

Do your best to get an “all in” arrangement.

Under most circumstances Chapter 7 MUST be paid pre-filing. (Your
attorney can't be a “creditor”).

Chapter 7: “Simple” cases, anywhere from $1,700 to $3,500 depending on
complexity of assets and debts.

Chapter 13: $3,500 to $7,000, again, depending on complexity of assets
and debts.

Chapter 11? $20,000 to….
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Can I represent myself?
 Sure. You can also do your own knee surgery.
 Generally not a good idea because the requirements
are highly technical and the penalties for error can
be very costly.
 Lots of calls from people who have spent 6 to 12
months screwing up their own bankruptcy.
 Costs way more in the long run.
 Do it right. Do it once.
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
What about “bankruptcy
petition preparers?”
 Another bad idea
 They’re not lawyers. They’re form fillers.
 They can’t give legal advice.
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Loan Modification in
Bankruptcy
 Yes you CAN modify mortgages while in bankruptcy. The
question is whether the bank will do it.
_____________________________________
 Remember: Banks are stupid. They are not able to hold
two concepts in their brain at the same time. Like loan
modification and bankruptcy. It causes their wires to cross.
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Strategic Defaults
 The conscious and deliberate decision to “walk
away” from a mortgage.
 Usually because the loss in market value means that
the investment no longer makes any sense.
 Can be stressful.
 But, it can also bail you out of a very bad financial
position.
 Controversial.
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Who’s doing it?
 Mortgage Bankers Association of America walked
away from a $79 million obligation in 2010.
 Studies show that:
 20% of homeowners will walk away when the loan-tovalue ratio drops below 75%.
 63% of people will walk away when deficiency hits
$300k.
 Estimates are that 15% of all foreclosures are
“strategic.”
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Why?
 “Clean break” from the bank and avoids the months and months
of uncertainty and negotiation with a large lending institution
that probably doesn’t really want to modify the loan anyhow.
 If there is any risk of a deficiency, the foreclosure will in all
likelihood nuke that lien, and a bankruptcy will discharge the
underlying obligation.
 Starts financial rehab faster.
 May have better tax implications than a short sale or deed in lieu.
 Loan mod can make the homeowner stuck in a house that may
never recover its value.
 See 60 Minutes piece by Morley Safer on May 9, 2010.
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Mortgage Deficiencies
 What is it?
 The amount of the unpaid mortgage debt that remains
after foreclosure, short sale, trustee’s sale or deed in
lieu.
 Example: House worth $400k. Mortgage of $475k. If
bank takes property valued at $400k back, deficiency
will be $75k.
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Can the bank get a
deficiency from me?
 Under some circumstances.
 Is a question of state law, even in a federal bankruptcy.
 California law only:
 Not allowed for “Purchase Money Mortgages.” Literally
the mortgage (or HELOC) that was obtained for the
purpose of, and actually used for, the purchase of the
property.
 Not allowed for loans in which the bank actually takes the
property back by non-judicial foreclosure.
 Not allowed on first mortgages in which the lender has
agreed to a short sale.
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Most likely deficiency
problems
 Investment property second deed of trusts (“DOT”).
 Personal residence HELOCs, (seconds or thirds) obtained AFTER
purchase of property. E.g. Home improvement loans, home equity
loans taken out to pull some cash out of the property.
 May present tax problems in the form of “cancellation of debt”
(“COD”) income.
 Cancellation of a debt is taxable as ordinary income unless

Debt is cancelled in bankruptcy.

Property is primary residence. (At least until 2013)

Debtor is balance sheet “insolvent” when debt is canceled.
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
How to deal with
deficiencies
 Pay it.
 Discharge it in bankruptcy
 Negotiate a discount.
 Banks typically sell this debt “by the pound.” Meaning that
they aggregate large portfolios and sell the lot to bottom
feeders and collection agencies. Usually for 3 to 5 cents on
the dollar. Anything over that is gravy.
 Success with this will depend on how likely the owner of
the debt thinks they will be able to get more.
 High income or significant wealth? You’ll pay more.
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Conclusions
 Don’t do your own knee surgery. These issues are not
easy to sort out. Talk to a lawyer (and a tax accountant).
 Even so, in the hands of a qualified and experienced
attorney, most of these problems have relatively simple
legal and financial solutions.
 Simple doesn't mean easy: Can be very stressful, and can
make you feel like you’re quite alone.
 Only regret any client has ever expressed is that it took
them so long to take the plunge.
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m
Thank you.
David C. Winton, Esq.
2 Ranch Drive, Suite 8
Novato, CA 94945
Tel: 415.421.5800
www.dcwintonlaw.com
Email: david@dcwintonlaw.com
Bankruptcy and
Deficiency Basics
Chapter 7 and Chapter 13
Law O ffice s o f Dav id C. Wint o n/ (415) 421 -5800/ www.dcwint o nlaw.co m/ dav id@ dcwint o nlaw.co m