The good news is that most persons who are subject to the means test pass it with flying colors.  However, even if you “fail” the bankruptcy means test, and accordingly are required to file chapter 13, there’s still some good news: the U.S. Supreme Court ruled in Hamilton v. Lanning, 130 S. Ct. 2464 (2010), that the means test doesn’t dictate the payment level in a chapter 13 case.

This means that in chapter 13, the means test is effectively a dead letter, and the amount of your monthly chapter 13 plan payments is determined by your actual budget, according to how much you can pay after paying for all your monthly living expenses.  That’s right, your chapter 13 payment consists only of the money you don’t need to live on.

Go back and read the above paragraph again if you were thinking that the means test would push you into an unaffordably high monthly chapter 13 payment.  For the sixty months you are typically in a chapter 13, all you pay into your plan is what you can reasonably afford to pay.  And at the end, all the remaining balances on your debts are discharged, just as in chapter 7, except for the debts the bankruptcy law says are nondischargeable, such as student loans, child support and a few others.

Thanks to the Supreme Court’s ruling in Hamilton v. Lanning, the means test is never a reason that you can’t file bankruptcy under chapter 13.

Regardless of how attractive a short sale may seem, be aware that it can be difficult to obtain permission to proceed from the mortgage holder.  Also, short sales can create unexpected income tax problems for some people, and there can be other pitfalls as well.  As a result, lawyers usually don’t recommend that consumers attempt a short sale of their home.

Nevertheless, for those who are considering a short sale, you should know that they come in two varieties: (1) a short sale where the mortgage lien is released and you are also released from any liability on the mortgage note itself, and (2) a short sale where the mortgage lien is released but you are still liable the unpaid balance on the mortgage.

Here’s how a short sale works: let’s say you owe $200,000 on your home mortgage, but your home is only worth $150,000 due to a declining market in your area.  Obviously, no one is going to offer you enough money for your home to pay off the entire mortgage.  In this example, the only way a sale is going to happen is if the mortgage holder agrees to accept less than the entire balance at the closing.

If your real estate agent is able to convince the mortgage holder to proceed with a short sale, you will likely be accepting an offer from a buyer that is close to your home’s market value.  In our example, the closing will likely look something like this: an offer of $150,000, with about $6,000 or so going to the real estate agent for the seller’s commission, and about $144,000 going to the mortgage holder.

This is “short” by about $66,000 of the amount needed to pay of the mortgage, hence the term “short sale.”  A mortgage holder normally won’t agree to accept less than what it’s owed before releasing the mortgage lien, but it might do so to avoid an even bigger loss if it has to foreclose on the mortgage once you quit paying.  A short sale, therefore, simply means a sale where the mortgage lien is released, even though the entire mortgage balance is not being paid at the closing.

Now comes the important question: will the mortgage holder not only release the mortgage lien and allow the sale, but will it also release you from further liability on the mortgage note itself?

Obviously, much of the benefit of doing a short sale is lost if the mortgage holder won’t release you from further liability on the unpaid balance.  If this is the case, you might decide that doing a short sale simply isn’t worth it.  You should do everything possible to get the mortgage holder to agree in writing that you aren’t liable any further on the mortgage note.  If they won’t put it in writing, forget it; in all fifty states, a written contract cannot be modified by a verbal agreement.

In some cases, you might desire a short sale even if all the mortgage holder is willing to do is release the lien to allow the sale.  If this happens, be sure to have a plan to deal with the unpaid balance you will still owe on the mortgage note, even after your home has been sold.

Because mortgage foreclosure by sheriff’s advertisement sale is usually much cheaper and quicker than foreclosure by court action, mortgage lenders will nearly always foreclose by advertisement sale, which by law carries a six month redemption period.  This means that if you have only one mortgage on your home, you can very likely walk away from the home and its mortgage, without fear that you will have to pay the rest of the mortgage debt after foreclosure.

This means there is hope for those who believe they are tied to a home, living in serfdom and paying a mortgage they no longer can afford or want to afford.  Walk, and the mortgage debt most likely goes away, thanks to sections 580.23 and 582.30.

However, if you have a second mortgage, this strategy will not work to get rid of both mortgages.  This is because the second mortgage holder will not foreclose if you fall behind on payments (it would have to pay off the first mortgage holder to do so).  Instead, the second mortgage holder will eventually sue for a judgment if you fail to stay current on payments.

And if your property has a defect in the chain of title, or if there is some other reason (which may not be known to you) that the mortgage holder needs a court order reforming the title, then even the first mortgage will not be stopped from pursuing you if you walk away — because in that situation, the first mortgage holder will probably foreclose by court action, rather than by advertisement, in order to reform the title.

Thankfully, foreclosure by court action is rare.  For most Minnesota homeowners who fall behind on monthly mortgage payments, the foreclosure by advertisement sale puts an end to the entire matter.

How did this legal myth ever get started, if it’s only a myth?  First, in community property states (Minnesota is not one of these), the “community” is liable for the debts of either spouse.  While this does mean that in a community property state, joint marital property can be attached by a creditor of either spouse, that is a far cry from imposing actual personal liability on one spouse for the debts of the other spouse, and separately owned property remains free of claims of the other spouse’s creditors.

Second, the old common law doctrine of “necessaries” makes each spouse liable for debts incurred by the other spouse for necessary expenses.  These probably include basic medical care, some utilities, or other debts incurred for the purpose of meeting either spouse’s basic life necessities.  These elements can be difficult to prove, and the common law doctrine of necessaries is rarely invoked by courts today.

This means that in most situations, spouses are only responsible for the debts of the other spouse if an independent reason exists for such liability.  For example, you are responsible for your spouse’s credit card account only if you both signed the accountholder agreement, and you are responsible for your spouse’s mortgage debt only if you signed the mortgage note along with your spouse.  In short, you must have signed the agreement or contract in question to be held liable for the debt, whether the debt is your spouse’s debt, your boyfriend’s debt, your bother’s debt or your next door neighbor’s debt.

To put it another way, the creditor must be able to produce your signature on the contract, whether it’s your spouse’s debt or your debt or anyone else’s debt you can think of, in order for you to be held liable for the debt.

Why is this important?  In a divorce, it is common for the family court to apportion debts between the parties, for the purpose of holding each spouse harmless for some or even all the debts of the other.  It’s good to be aware of exactly for which debts that a creditor could have recourse against the other spouse.

For example, if the wife is not signed onto the husband’s credit card account, she is not going to be harmed by his failure to pay the debt, even if the divorce decree ordes him to pay it.  And if the husband later files bankruptcy and discharges the credit card debt, the wife will not be harmed by that either, because the creditor cannot claim she has to pay the debt, simply by reason of her prior marriage to him.

Knowing that spouses are not liable for each other’s debts should be a fundamental part of everyone’s basic legal knowledge and planning, and anyone who is married or considering marriage should be aware of this important rule.

You might think you heard that you had to wait ten years, but that’s from the Fair Credit Reporting Act’s rules on bankruptcy and credit reports.  Or seven years, but that’s from the Bible (see Deuteronomy 15:1 and 2).

No, three years is the rule, and it’s right there in the regulations for everyone to see.  HUD Regulation 4155.1 4.C.2.f. provides:

A borrower is generally not eligible for a new FHA-insured mortgage if, during the previous three years, his/her previous principal residence or other real property was foreclosed, or he/she gave a deed-in-lieu of foreclosure.

Exception:  The lender may grant an exception to the three-year requirement if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the borrower, such as a serious illness or death of a wage earner, and the borrower has re-established good credit since the foreclosure.

Divorce is not considered an extenuating circumstance.  An exception may, however, be granted where a borrower’s loan was current at the time of his/her divorce, the ex-spouse received the property, and the loan was later foreclosed.

Note:  The inability to sell the property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance.  HUD 4155.1 4.C.2.f.

While letting your home mortgage be foreclosed by the lender is traumatic for most people to think about, don’t view it as a foreclosure of your chances to ever buy another home again.  That’s simply not the case.

You can probably assume that filing bankruptcy likely harms your credit score in the short term.  (I say “likely” because the formula used by Fair Isaac to determine your credit score is more secret even than the formula for Coca-Cola, so nobody can say for sure.)  However, let’s look at an example so you can see what I’m talking about over the long term.

Let’s say you have $50,000 in credit card debt as a result of a long period of unemployment.  Although you’re working again, your household budget simply won’t allow you to pay both your living expenses and the monthly minimum payments on your credit cards.  You’re holding your financial house of cards together only through unusual sacrifices and occasional borrowing from friends and family.  Like everyone else, you don’t want to file bankruptcy because you believe in paying your debts.

But what if you did file bankruptcy?  Would it hurt your credit, or could it actually help you obtain credit later on?

Let’s say that you don’t file bankruptcy, and the $50,000 in credit card debt just sits there for years, with the balances declining hardly at all – or maybe the balances even increase over time.  With this approach, obtaining a mortgage or any other type of normal credit might well prove impossible, until the debts are fully or substantially paid off.

Now, instead, let’s say that you file bankruptcy and the court discharges the $50,000 you owe on the credit cards.  This may hurt your credit for a year or two, but during this time you can be living within your means on a household budget that actually works — a budget that isn’t skewed by the need to send a large chunk of money you don’t have to credit card monthly payments.  And there’s a good chance that since you don’t have any debts, now banks will lend you money on normal credit terms, such as for a mortgage or other necessary types of credit.

This is how bankruptcy can help you improve your credit score: by removing debt that otherwise would stay with you for years, debt that would prevent you from obtaining normal types of credit at normal rates of interest.  By removing the debt, you remove the reason why you can’t get normal types of credit, like a mortgage.  Once a couple of years have passed by since the bankruptcy filing, persons with stable incomes find that banks are eager to lend to them without regard to the bankruptcy.

Obviously, the above example doesn’t hold true for everyone.  Some people can pay down debt quickly and don’t need to consider bankruptcy.  If, however, you have overwhelming debt that can’t be brought under control within a reasonable time, concerns about the impact of a bankruptcy on future creditworthiness probably are misplaced.

The most important reason to list everything you own is that the bankruptcy law states that if you intentionally omit an item from the bankruptcy papers, that means you cannot keep it.  Think about that for a minute — someone who desperately wants to keep, say, his classic Model T Ford, and who misguidedly omits it from his bankruptcy papers, will lose the Model T once the trustee of the case discovers the car’s existence.

This would be especially unfortunate because if the Model T had only been listed, the debtor’s attorney almost certainly could have claimed it exempt, meaning it would not have been lost to the trustee.  Listing an item in the papers almost always gives the debtor a good chance the item can be claimed exempt, especially in Minnesota, where the exemption laws are very generous.

Another good reason to list everything you own is that it is a bankruptcy crime to intentionally leave any property or other items off your bankruptcy papers.  Why risk being charged with a federal crime when telling the truth about your assets is usually completely painless?

Finally, the bankruptcy law states that intentionally leaving property or other items off your bankruptcy papers constitutes grounds for being denied a discharge of debts in the bankruptcy.  In other words, concealing assets is capital punishment for your bankruptcy case — not for you personally, but for your hopes of discharging your debts, which was your whole reason for filing bankruptcy in the first place.

If you want to make sure you can keep all the things you own in your bankruptcy case, the first step is to tell your lawyer about everything you own.  Then, make sure you list all your property and possessions in the papers.  A good bankruptcy lawyer can usually help you protect everything you own, simply by listing the things you own and claiming them as exempt.

In Fisette, the debtor’s home appraised for $145,000.00, but the first mortgage had a balance owed of $176,000.00.  This rendered the second and third mortgages unsecured by any actual value in the homestead.  Accordingly, the debtor’s chapter 13 plan provided that under bankruptcy code section 506(a), the second and third mortgages ought to be considered as unsecured by any actual value, and therefore they were to be avoided or “stripped” from the homestead, meaning they would not have to be paid, except in part as unsecured creditors.

The appeals court agreed, noting that wholly unsecured junior mortgages are not protected by the anti-mortgage modification clause of section 1322(b)(2).

Under this ruling, junior mortgages can be stripped in chapter 13 if the value of the home is less the balance owed on the senior mortgage.  If the home’s value is greater than the balance owed on the senior mortgage, then the junior mortgage is at least partly secured and it cannot stripped.

The long-overdue ruling in In re Fisette brings Minnesota in line with the rest of the country on the matter of lien stripping.  Although a handful of Minnesota bankruptcy lawyers (including the author) have been practicing lien stripping for years, the result in the Fisette case removes all doubt regarding the validity of lien stripping in chapter 13.

The question is, just how should you create this list of debts?

The first thing to do is to collect all the bills you’ve received in the mail, including the ones from collection agencies or lawyers.  It’s likely that doing this will result in a complete list of debts most of the time, because if you owe a debt to someone, they are virtually certain to send you a bill in the mail.

The next thing to do is to just sit down and meditate — yes, you are reading this correctly — sit down and meditate upon the subject of what debts you might possibly have ever had  For example, a creditor might have lost track of your address or gave up temporarily on collecting from you, and therefore stopped sending you a billing statement.  Nevertheless, you still owe the creditor money, and you certainly don’t want to omit any debts from your bankruptcy petition.  Once you think of a creditor for whom you have no billing statement, look in the telephone book or on the internet to find the creditor’s address.  You don’t need the account number to have the debt discharged in your bankruptcy; you just need to list the creditor by name and address in the bankruptcy petition, with an estimated amount owing if you don’t know the exact amount you owe.

Finally, you might decide to order a credit report just to be safe.  Be sure to use www.annualcreditreport.com to order your credit report; this the free one Congress directed the credit industry to establish.  Do not type Free Credit Report or any similar phrase into your web browser, because doing so will bring to a website that will charge you for something you can get for free elsewhere.  Don’t be surprised if your credit report contains duplicates, or omits some creditors, or appears to be written in Egyptian hieroglyphics.  Credit reports are rarely entirely accurate, which explains why you can’t just print one out and give it to your bankruptcy lawyer.

You can often give your lawyer a stack of all your bills, supplemented by your list of additional debts, especially if you have a lot of different creditors.  Be sure to staple or clip together bills that are for the same debt, for debts that have been assigned to others for collection.

Following these steps to create your list of debts will assure that you don’t miss any of them, and it will also make your bankruptcy lawyer happy.