A Big Benefit to Owing Lots of Business Debt: Skip the “Means Test” and Qualify for Chapter 7

If you owe more business debt than consumer debt, then you avoid not only the “means test” but also some other roadblocks to a successful post-business Chapter 7 bankruptcy case.

What’s the “Means Test” and Why it Matters?

Bankruptcy law says that if your income is more than a certain amount, you have to pass a “means test” to be able to go through a Chapter 7 case successfully. One way to avoid this “means test” is by having less income than the permitted “median family income.” But the “median family income” amounts are relatively low. If your income is at all above the applicable median amount, you have to go through the “means test,” with a significant risk of being forced into a 3-to-5-year Chapter 13 payment plan instead of three-month Chapter 7 “liquidation.”

Debtors with More Non-Consumer Debts than Consumer Debts

You can skip the “means test” altogether if your debts are NOT “primarily consumer debts.” This way you could be eligible for a Chapter 7 case even if your income is above the median level. Indeed, you avoid other kinds of “presumptions of abuse” as well, not just the formulaic “means test,” but also the broader “totality of circumstances” challenges. Congress has seemingly decided that if your debts are mostly from a failed business venture, you should be permitted an immediate Chapter 7 “fresh start,” regardless of your current income and expenses.

What is a “Consumer Debt”?

The Bankruptcy Code defines a “consumer debt” as one “incurred by an individual primarily for a personal, family, or household purpose.”

The focus is on the purpose for which you incurred the debt in the first place. If you made a credit purchase or took out the loan exclusively, or even mostly, for your business, then it may well not a “consumer debt.” That is a factual question that must be decided separately for each one of your debts.

“Primarily Consumer Debts”?

The Bankruptcy Code does not make this crystal clear, but generally if the total amount of consumer debt is less than the total amount of non-consumer debts, your debts are not “primarily consumer debts.” And then you do not have to mess with the “means test.”

Seemingly Consumer Debts May Not Be

Small business owner often financed the start-up and ongoing operation of their businesses with what would otherwise appear to be consumer credit—credit cards, home equity lines of credit and such. Given their purpose, these may qualify as non-consumer debts in calculating whether you have “primarily consumer debts.” This is definitely something to discuss with your attorney to consider how the local judges are interpreting this issue.

Unexpectedly High Business Debts Can Help

Sometimes business owners have business debts larger than they thought they had, which could push their non-consumer debt higher than their consumer debt. For example, if you had to break a commercial lease when you closed your business, the unpaid lease payments projected out over the intended term of the broken lease could be huge. Or your business closure may have left you with other hidden debts, such as obligations to business partners or unresolved litigation, with tremendous damages owed. The silver lining to these larger-than-expected business debts is that they may allow you to skip the “means test” and other grounds for dismissal or conversion to Chapter 13, allowing you to discharge all your debts through a Chapter 7 case when you could not have otherwise.

 

/by

Getting a Handle on Your Income and Business Taxes Through Bankruptcy While Your Business Forges Ahead

Could your small business survive and even thrive if you could just get better terms for payment of your back tax debts?

The owners of just about every struggling sole proprietorship have income and business tax problems. When you are barely scraping by, needing every dollar to pay the absolutely necessary keep-the-business-running expenses, you can find yourself unable to scrape together the money to make your estimated personal income tax payments each quarter. If you have an employee or two, it can be all too tempting to use the withheld payroll tax money for some critical business or personal expense instead of paying it over to the IRS. So even when business improves, once you fall behind with your taxes it’s terribly difficult to catch up, to be simultaneously paying both your current and past tax obligations. This especially true considering accruing late charges and interest, which can greatly increase the amount you must pay to catch up.

Add to the mix the IRS’ limited flexibility on payment terms for back taxes, plus its extraordinary collection powers against you and against your business and personal assets, and it’s no wonder that back taxes are often the most urgent problem for a business owner trying to figure out what to do.

If your business is a sole proprietorship in your name, or in your name and that of your spouse, a Chapter 13 case would very likely give you a series of advantages in dealing with your past due tax liabilities, while allowing your business to continue to operate. (If your business is instead in the form of a corporation, or if your debt amount is larger than a certain threshold, you may not qualify for Chapter 13 but instead need to consider Chapter 11 or other options, a discussion which is beyond the scope of this blog.)

A Chapter 13 bankruptcy could help your business survive by significantly reducing both your business and personal monthly debt obligations, and the tax debts themselves as well as the rest of your debts. As for the back taxes:

• some of the taxes or penalties may be written off (“discharged”) altogether;

• payments on the remaining tax debts would usually be stretched out over a much longer period than the taxing authorities would otherwise allow, thereby greatly reducing the amount you would need to pay each month; and

• ongoing interest and penalties usually stop accruing, so that the payments you make pay the tax debts off much more quickly.

So Chapter 13 almost always gives you both immediate month-to-month relief easing your business and personal cash flow, and long-term relief reducing what you must pay before you are tax debt free, and completely debt free.

 

/by

Oregon Foreclosures Likely Shifting to Judicial Process

Oregon foreclosures of residential properties will likely be shifting from nonjudicial to judicial process, and the shift has already begun with some servicers, namely Wells Fargo and its subsidiaries. Oregon is one of 24 states that provides a nonjudicial foreclosure process, which is how most delinquent residential mortgages are foreclosed since this has been a faster and cheaper process for lenders.

One reason for the shift to more judicial court actions is because judges have started blocking nonjudicial foreclosures for failure of lenders to record ownership history of the trust deeds, as required for nonjudicial foreclosure. The shift will mean that the process will possibly take longer to clear titles following the sheriff sales. It will also take lenders considerable time to review and shift gears on pending foreclosures. Lenders may decide the cost and time expense are worth more certainty with the judicial process.

The good news for borrowers subject to the judicial foreclosure process is they will now have a judge to hear their complaints, if they challenge the filing. This right is currently unavailable unless a lawsuit is filed by the borrower to stop a nonjudicial process from continuing forward. However, under a judicial foreclosure, if homeowners don’t challenge a filing, the lenders could get a sale date more quickly and possibly expedite the process. It also does not require the recordation of beneficiary history, so it can result in cleaning up any messy title situations the lender may face. This means a defaulting borrower will need a good defense in order to realistically challenge a judicial foreclosure, but the court will have to make a decision before the foreclosure can happen. There could be more opportunities for workouts and settlements too.

One huge risk is that, currently, Oregon law protects homeowners from being pursued by lenders for their losses for homes that sold for less than the balance on the loan. However, if a lender pursues judicial foreclosure, if someone moves out of the home before the foreclosure complaint is filed, they could lose this protection and may be personally liable for the deficiency. (This problem is going to be fixed by a new law that goes into effect soon). Homeowners will also lose the right to cure, which gives them up to 5 days prior to a nonjudicial auction sale date to pay the missed payments and lender fees to end the foreclosure; but they will gain the right of redemption under the judicial process which gives them up to six months to repurchase the home for what it sold for at the foreclosure sale. This could mean homes will be vacant for longer periods and be difficult to immediately resell.

 

/by

Irony by Perjury Adds Insult to Injury: from Lender Robo-signing to Foreclosed Homeowners Begging for Scraps from the National Mortgage Fraud Settlement

Homeowners who lost their homes to foreclosure may need to commit perjury to get restitution payments though the settlement.  That would be the deepest kind of insult on injury.

In the last blog, I explained what a homeowner who lost a home to foreclosure (from 2008 through 2011) will have to assert to get his or her small share of that $1.5 billion pot of money:

1. “Borrower lost the home to foreclosure while attempting to save the home through a loan modification or other loss mitigation effort.”

2. “Servicer errors or misconduct in the loss mitigation or foreclosure processes affected the borrower’s ability to save the home.”

While these may seem superficially sensible, in practice they are very troublesome, especially because the statements must be made under penalty of perjury.

As to the first statement, what “other loss mitigation effort” “to save the home” will be considered sufficient to be able to make that statement? Must that effort have continued right up to the foreclosure date to be considered to have “lost the home to foreclosure while attempting to save the home”?  How is the former homeowner to know whether he or she can make this statement truthfully?

The second statement is even more of a problem. How can the former homeowner know whether “servicer errors or misconduct in the loss mitigation or foreclosure processes affected the borrower’s ability to save the home”? The robo-signing of foreclosure documents—mortgage servicers’ false assertions made under oath by the thousands—were only discovered through borrowers’ attorneys’  aggressive discovery efforts during litigation. In this nationwide settlement, the five banks are not admitting ANY wrongdoing or liability. (For example, see the non-admission clause in the Federal Release, Exhibit F in the Wells Fargo settlement documents, paragraph F on page F-11, which is page 232 of the 315 pages of those documents.) Presumably the banks are not now going to start admitting wrongdoing on a case-by-case basis so that borrowers can answer this statement accurately.

So to receive the restitution payment a former homeowner will have to sign a statement under penalty of perjury affirming the truthfulness of one statement that is so vague as to be in many situations meaningless, and the truthfulness of a second statement the accuracy of which is unknowable.

There may yet be a partial solution, to at least the first required statement about the extent of borrowers’ efforts to save the home. The claim form to be sent out to the borrowers’ by the yet-undesignated Settlement Administrator may give enough guidance about this. A tentative 3-page claim form has been prepared by the Monitoring Committee for possible use by the Settlement Administrator. It may create a bright line between qualifying and non-qualifying borrower efforts. We don’t know yet because although this tentative claim form is being made available for companies applying to become the Settlement Administrator (the application deadline is April 30, 2012), it is not being released to anyone else.

But even so, I see no conceivable way that the second statement about “servicer error or misconduct” can be made known to the borrowers in order for them to be able to assert that under penalty of perjury. The banks are not going to admit to wrongdoing as to two million or so homeowners in direct contradiction of their non-liability assertion in the settlement documents.

So here’s the moral irony:

1. The banks were accused by the federal government and 49 states of a long list of allegations of serious wrongdoing which take 10 pages to detail (see pages F-2 through F-11 of the Federal Release in the settlement documents referred to above). These allegations include fraud and misrepresentations of numerous kinds, including in the form of many thousands of perjured documents submitted to courts over an extended period of time. The banks do not admit to any of these allegations or to any resulting liability.

2. Now the banks have negotiated with the governmental entities to pay restitution for their extensive alleged wrongdoing, and in particular to homeowners who’ve already lost their homes to foreclosure. But as a precondition to receiving that restitution, these former homeowners will in many cases be faced with a moral dilemma: can they sign a statement under penalty of perjury asserting that their “ability to save the home” was affected by “servicer errors or misconduct” when they do not know whether such errors or misconduct happened as to their mortgage, and if so whether it had any effect on their “ability to save the home.”

3. Because the “Monitoring Committee” has made clear that the “Settlement Administrator” will not be required to get documentation from borrowers about their statements on the claim forms, borrowers are seemingly being encouraged to make statements that will in many cases be vague and factually unverifiable, while asserting the truthfulness and accuracy of those statements under penalty of perjury.

4. The banks, having admitted to no fault, having paid their modest penalty, and having foisted this moral conundrum onto the foreclosed borrowers, can now wash their hands entirely of the matter. They no longer care how each borrower handles the matter since the pot of money does not change. The money just shifts out of the hands of the perhaps more carefully honest borrowers who disqualify themselves by admitting that they cannot swear to the fact that they lost the property because of lender wrongdoing.

5. Thus this settlement process has lowered borrowers—through circumstances almost entirely outside their control—to the moral level of the original robo-signers: “just sign here and don’t worry what the statements say or what they mean.”

/by

Update on the Cash Distribution to Foreclosed Homeowners from the National Mortgage Fraud Settlement

What qualifies you to receive the $1,500 to $2,000 restitution payment for losing your home to foreclosure? More clues have just become available.

 The “largest consumer financial protection settlement in US history,” the $26 billion national mortgage fraud settlement, was announced with great fanfare in February. More than a month later, on March 12, 2012, the details of the settlement were finalized and hundreds of pages of settlement documents were signed and finally made public. But all those pages still did not at all make clear how a person whose home was foreclosed will qualify to get the money.

To remind you about this, most of the money in this settlement is earmarked for current homeowners for loan modifications, refinances, and other ways to help them hold on to their homes. But just shy of $1.5 billion is for those who’ve already had their homes foreclosed. That’s the subject of this blog.

This part of the settlement applies only to:

  • foreclosures that occurred during the calendar years 2008 through 2011
  • mortgages held or serviced by Bank of America, Wells Fargo, J.P. Morgan Chase, Ally Financial/GMAC and CitiGroup and their affiliates
  • mortgages on which at least 3 payments were made and the property “was not abandoned by the homeowner or condemned prior to the time of the foreclosure sale” 
  • “owner-occupied, one-to-four unit” residence in all states except for Oklahoma, which is not participating in this settlement

Find out if your mortgage is included in this settlement pool by going to the special settlement website for the banks’ toll-free phone numbers and websites.

But once you are in this pool, what further conditions, must you meet to get the money? The initial settlement documents last month surprisingly did not make this clear. They just stated that “cash payments” from the $1.5 billion fund would be provided to borrowers whose homes were foreclosed during the 2008 through 2011 period and “who submit claims arising from the Covered Conduct [the alleged mortgage servicing and foreclosure fraud]; and who otherwise meet criteria set forth by the State members of the Monitoring Committee.”

So if you are a foreclosed homeowner, do you only get the settlement money if you can show your foreclosure happened because of your bank’s alleged misconduct? Has the “Monitoring Committee” provided any more information on this or any other criteria to be used?

Two and a half months after the February 9 announcement of the settlement, there is still no definite answer to the first question. And the second question? The 14 state attorneys general on the “Monitoring Committee” has curiously not directly told foreclosed homeowners anything more about the qualifying criteria, apparently because that will be the job of the “Settlement Administrator.” But in the last few days this Committee HAS indirectly provided some important clues about the criteria through its release of two documents:

The RFP states the following:

Borrower Certifications:

In addition to the baseline eligibility criteria listed above, eligible claimants must also complete a claim certification form in which they certify under penalty of perjury to the following:

  • Borrower lost the home to foreclosure while attempting to save the home through a loan modification or other loss mitigation effort.
  • Servicer errors or misconduct in the loss mitigation or foreclosure processes affected the borrower’s ability to save the home.

But those two requirements are not clear either. What would be considered an adequate attempt by the borrower to save the home? For example, if you simply made a number of unsuccessful attempts to get the lender to respond to phone messages—would that be enough? And how are you going to know when a bank’s misconduct “affected” your ability to save the home when the bank is providing you that kind of information and not admitting anything? Indeed, in this entire multi-billion dollar settlement the banks are not admitting to a single act of misconduct!

The First Addendum—released just a few days ago on April 20—gives some further clues, albeit maddening ones. Here is a pertinent question from the Addendum and the Monitoring Committee’s response:

Question #12: Will the Settlement Administrator be required to request and review documentary proof from claimants who submit claim certification forms in order to determine eligibility?

Answer: No. Other than reviewing the claim certification forms to ensure that claimants properly made the required certifications, the Settlement Administrator will not be required to request and review documentary proof from claimants in order to determine eligibility.

So to receive the settlement money, it looks like you as a foreclosed homeowner will have to sign a claim form stating under penalty of perjury that the foreclosure occurred in spite of you efforts to save the home, AND the foreclosure occurred because of the bank’s “errors or misconduct”—which you may well have no way of knowing about. But, it looks like you will not need to provide any documentation to verify your statements. It is unclear whether information will be provided by your bank to the Settlement Administrator which might contradict your statements—for example asserting that you did not attempt to contact the bank to try to save the home. And if that occurs, there’s also no indication how such disputed facts would be resolved.

Stay tuned here, and on the settlement website, for answers to these continuing ambiguities.

/by

Dealing with Accusations of Business Fraud through Bankruptcy

When a small business fails, its owner or employer is sometimes accused of causing or hastening that failure through fraud or intentional bad behavior. If that person is already considering filing a bankruptcy to deal with the financial fallout of the closing of the business, how are those accusations going to be handled in that bankruptcy case?

A bankruptcy filed after the failure of a business tends to be more acrimonious than in a straight consumer bankruptcy because:

• The relationship between debtor and creditor is often more personal and intense—such as between business partners, between a key employee and the owner, or between the owner and investors who were friends or a relatives. So the failure is taken more personally, and the person who lost money is more likely to feel a sense of betrayal.

• The business context often provides many all-too-convenient opportunities for the debtor to bend the rules or behave underhandedly, especially “when desperate times call for desperate measures.” On the other hand, actions that the debtor took in good faith at the time may simply look inappropriate in hindsight.

• There is often more money at stake, money which these kinds of creditors can less afford to lose than a conventional commercial creditor. So it’s harder for these creditors to just write it off and walk away.

So if you have been accused by a former business partner, investor, or similar business creditor of some sort of business fraud, or fear that you will be so accused, does this mean that you should avoid filing bankruptcy? Of course you will want to discuss a serious matter like this very thoroughly with your bankruptcy attorney, perhaps in consultation with your business or litigation attorney if those accusations have already ripened into a lawsuit against you. But, interestingly, there are a set of practical reasons why those kinds of accusations often go away, or at least are reduced in seriousness, when you file a bankruptcy.

1. Automatic stay

The filing of your bankruptcy case stops, at least temporarily, any litigation against you already in process, and prevents a lawsuit from being filed or any other collection action to be taken against you. This pause in the action at least gives your adversary the opportunity to consider whether continuing to pursue you would truly be worthwhile.

2. More difficult to make a case against you

That pause is valuable because your bankruptcy filing changes the rules of the game, mostly in your favor. When you file your bankruptcy, you make it harder for your creditor to win against you. It’s no longer enough to merely establish that you owe him or her some money. Once you file bankruptcy, for the debt not to be discharged the creditor must also establish that the debt is based on one of a relatively narrow set of facts involving fraud, misrepresentation, embezzlement or theft, fraud in a fiduciary capacity, or an intentional and malicious injury to person or property.

3. Proof of your true finances

The documents you are required to file under oath in your bankruptcy case should show your angry creditor, and maybe more importantly his attorney, that even if the case against you was successful, you have no pot of gold with which to pay a judgment. Most sensible people do not like “spending good money after bad”—paying thousands of dollars to their attorney only to get a judgment that could never be collected, or only so slowly that the additional expense would simply not be worth all the risk and effort.

So, notwithstanding the tendency for small business-spawned bankruptcies to be more contentious, filing such a bankruptcy can create decisive advantages for you if you are being pursued for an alleged business fraud—you decrease your opponent’s odds of winning and increase his costs of pursuing you.

 

/by

Protecting Yourself When Your Business Has to Throw in the Towel

If you’re seriously considering closing down a struggling business, you are likely very concerned about personal damage control: how do you end the business without being pulled down with it?

My last blog was about saving your business through a Chapter 13 case. I can explore that option with you when you come in to see me, but let’s assume here today that either before or after talking with me you’ve made up your mind to close the business. And let’s keep it simpler by assuming that your business is or was a sole proprietorship, as I did in the last blog, and that you truly need bankruptcy relief because of the totally unmanageable size of the debts.

Lots of considerations come into play, but let’s focus on two main ones—assets and debts—in looking at three options: 1) a no-asset Chapter 7 case, 2) an asset Chapter 7 one, and 3) a Chapter 13 case.

No-Asset Chapter 7 for a Fast Fresh Start

After putting so much effort and hope into your business, once you accept the reality that you have to give up on it, you understandably may just want to clean up after it as fast as possible. And in fact a “straight bankruptcy” may be the most consistent with both your gut feelings and with your legal realities.

IF everything that you own—both from the business and personally—fits within the allowed asset exemptions, then your case will likely be relatively simple and quick. A no-asset Chapter 7 case is usually completed from start to finish in about three months. And if none of your assets are within the reach of the trustee, there is nothing to liquidate and distribute among your creditors. The liquidation and distribution process can take many additional months—or even years, so avoiding that streamlines a Chapter 7 case greatly.

But this assumes that all your debts can be handled appropriately in a Chapter 7 case—the debts that you want to discharge (write off) would be discharged and those that would not are ones that you either want to or are able and willing to pay. The debts you want to pay may include secured debts like vehicle loans and mortgages; debts you are able and willing to pay may include certain taxes, support payments, and perhaps student loans.

Asset Chapter 7 Case As a Convenient Liquidation Procedure

If you do have some assets that are not exempt, that alone may not be a reason to avoid Chapter 7. Assuming that those are assets that you can do without—and maybe even are happy to be rid of, such as if they came from your former business—letting the bankruptcy trustee mess with them instead of you doing so may be a sensible and fair way of putting the past behind you.

That may especially be true if you have some debts that you would not mind the trustee paying out of the proceeds of selling your non-exempt assets. You can’t predict with certainly how a trustee will act and how much if any would trickle down to which creditors, but this is something to keep in mind with this option.

Chapter 13 to Deal with the Leftover Consequences

Even if you’d prefer putting your closed business behind you quickly, there may be fallout from that business that a Chapter 7 would not deal with adequately. For example, if the business left you with substantial tax debts that cannot be discharged, non-exempt assets that you need to protect, or a significant mortgage arrearage, Chapter 13 could sometimes save you thousands of dollars and provide you protection from and a better way of dealing with these kinds of creditors. Deciding between Chapter 7 and 13 when different factors point in different directions is where you truly benefit from having an highly experienced bankruptcy attorney help you make that delicate judgment call.

 

/by

Your Sole Proprietorship Business Rescued by Chapter 13

Do you have a small business in your own name that would be successful if it only got a break from its debts? A Chapter 13 case would likely greatly reduce both your business and personal monthly debt service while you continued to run your business.

Although Chapter 13 is sometimes called the “wage earner plan,” it is not at all restricted to wage-earning employees. In the Bankruptcy Code Chapter 13 is actually titled “Adjustment of Debts of an Individual with Regular Income.” That word “Individual” makes clear that a corporation cannot file under Chapter 13. But if you are a person who owns a business that is operated in your own name, or that of you and your spouse, then you and business are treated as a single legal entity. The business’ assets are just part of your personal assets; its debts are just part of your debts. This is true regardless if your business is operated under an assumed business name, as long as you have not gone through the formalities of creating a corporation, a limited liability company, or other separate legal entity for your business.

Here’s how Chapter 13 works to help your sole proprietorship business:

1) Chapter 13 deals with your business and personal financial problems in one package. In a sole proprietorship you are individually liable for all debts of your business, along with your personal debts. So as long as you qualify for Chapter 13 otherwise, you can simultaneously resolve both business and personal debts with that one option.

2) Stop both business and personal creditors from suing you and shutting down your business. The “automatic stay” imposed by the filing of your Chapter 13 case stops ALL your creditors from pursuing you, including both business and personal ones. Your bankruptcy case will stop personal creditors from hurting your business, and business creditors from taking your personal assets.

3) Keep whatever your business assets you need to keep operating. If you do not file a bankruptcy, and one of either your business or personal creditors gets a judgment against you, it could try to seize your business assets. Also, if you filed a Chapter 7 “straight bankruptcy,” under most circumstances you could not continue operating your business. However, Chapter 13 is designed to allow you to keep what you need and continue operating your business.

4) Keep critical business and personal collateral. If you are behind either on business or personal loans secured by either business or personal collateral, Chapter 13 will at least temporarily stop the repossession of the collateral, and often give you an opportunity to either lower the payments or at least have some time to catch up on your late payments. In certain limited situations—such as some judgment liens and some 2nd/3rd mortgages—the liens can be gotten rid of altogether. Overall, through Chapter 13 you are provided ways to keep collateral that you would otherwise lose, and often do so under much better payment terms.

5) Solve both business and personal tax problems. Business owners in financial trouble are often in tax trouble, which Chapter 13 addresses well. The program is designed so that at the end of a successful Chapter 13 case, you will have either written off or paid off all your tax debts and will be tax free.

 

/by

Is the Home Affordable Refinance Program (HARP) 2.0 New and Improved Enough to Help YOU?

Under new rules coming on line, HARP is now available for refinances no matter how far your home is underwater. The 125% loan-to-value cap is no more.

The purpose of the Home Affordable Refinance Program has been to enable homeowners who could not otherwise qualify for a refinance do so, thereby getting a lower interest rate and lower monthly payment, making more likely that they could afford to stay in their homes. 

Until this revamped version of HARP, homeowners could not qualify if their existing mortgage was more than 125% of the value of their home. In the new improved version announced way back in October, this condition was eliminated. But it has taken until a few weeks ago for Fannie Mae and Freddie Mac to release their formal guidelines, update their approval software, and start getting lenders on board.

In this blog I will give you a short list of the main conditions for HARP 2.0 eligibility, and then provide a few good sources for more detailed information.  

Eligibility

1. Your mortgage loan must be owned or guaranteed by Fannie Mae or Freddie Mac. Why? Because these entities were effectively taken over by the government near the beginning of the real estate market crash, and so the federal government can require them to follow new refinancing rules. HARP operates through Fannie and Freddie, and so loans owned by private lenders aren’t in the program. However, a large majority of home mortgages are held by Fannie or Freddie, so there’s a good chance yours is as well. You can find out by checking these two websites: www.fanniemae.com/loanlookup  or www.freddiemac.com/mymortgage. (If you instead you have a VA, FHA, or USDA home loan, they each have their own refinancing programs.)

2. Your loan must have been sold to Fannie or Freddie on or before May 31, 2009.

3. Your loan was not refinanced through HARP previously. No second bites at this apple. One small exception—if you happened to refinance your Fannie Mae mortgage from March through May of 2009. Also, prior non-HARP refinances are not a problem.

4. Your current loan-to-value must be greater than 80%. Although HARP is not limited to underwater loans, you can’t have more than 20% equity. Presumably, homes with an equity cushion are either more likely to be refinanced on the private market, and any event their owners will be motivated to preserve their equity. The point of HARP is to enable refinances which could not otherwise happen, and to give help and motivation to homeowners who have little or no equity.

5. Must be current on the mortgage—no late payments in the last 6 months, maximum of 1 in the last 12 months. Given that this program will leave the homeowner with a loan with little or no equity, and often with serious negative equity, the borrower must show a very clean recent payment history. However, many other requirements have been loosened, for example automated appraisals will be permitted instead of needing on-site ones (since the home value is not important here), and income verification will be less often required, making self-employed people more likely eligible.

CAUTION: Lenders have a fair amount of discretion to alter these rules, so refer to your lender for the details, and it may well be worth shopping for eligibility and better refinance terms.

Resources for More Information

1.  A good general new story about the HARP changes, from the website edition of the Philadelphia Inquirer.

2. The best detailed description I could find of the new program, in a website called bills.com.

3. Some experts’ opinions about the impact of HARP 2.0 in a Wall Street Journal blog.

4. A HARP 2.0 eligibility calculator on Zillow.com.

/by

Foreclosure Mediation: An Inexpensive Tool to Keep Homeowners in their Home

, ,

With nearly 3 million homes lost to foreclosure and an expected additional 10 million homes in the near future, what is a troubled homeowner to do?

In February 2012, the National Consumer Law Center published its fourth report on foreclosure mediation .

They found that:

  • Foreclosure mediation programs and conferences provide substantial community benefits at little or no cost. Mediation fees average from none to less than $1,000. Yet, investors lost an average $145,000 per home foreclosure in 2008, and foreclosures just in California have resulted in nearly $500 billion in aggregate costs.

 

  • Effective mediation programs do not prolong foreclosures.

 

  • Foreclosure mediation programs should connect borrowers with housing counselors. Borrowers who receive housing counseling are much more likely to avoid foreclosure, and obtain affordable as well as sustainable loan modifications.

 

  • Not all foreclosure mediation programs are equal. All states should adopt foreclosure mediation programs with enforceable standards and robust outreach as permanent features of state foreclosure laws as quickly as possible.

 

  • Mediation programs must ensure that the FHFA’s new servicing guidelines do not lead to unnecessary foreclosures.

 

  • Strong foreclosure mediation programs can work hand-in-hand with other tools to rebuild the nation’s broken mortgage market and should be used to maximize HAMP modifications. The modified loans’ default rate over 1 year dropped from 56.2% in 2008 to 25.7% in 2010. HAMP loan modifications were the most sustainable of all with a 17.3% (2011) redefault rate after 1 year.

 

  • Policymakers can use mediation programs to help preserve minority homeownership; gains made over the last decade are vanishing.

 

Borrowers in mediation must receive accurate information about an increasingly unaffordable rental market. Renters, especially those who are low-income, are more than twice as likely as homeowners to spend more than 50% of income for housing. Mediation programs should refer all homeowners to housing counselors to evaluate the costs of renting before giving up on saving a home.

/by