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.

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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.

 

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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.

 

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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.

 

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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.

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

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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.

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Ten Terrific Tools for Saving Your Home through Chapter 13–Part 2

Here are the other 5 powerful home-saving tools. Chapter 13 isn’t for everyone. But these tools, especially in combination, can often give you what you need to tackle and defeat your mortgage and other home-debt problems.

In my last blog I gave you the first five of ten distinct and significant ways that Chapter 13 can save your home. I’ll summarize those here briefly, and then give you the other five in more detail.

Chapter 13 enables you:

1…. to stretch out the amount of time you are given to catch up on missed mortgage payments, giving you as long as 5 years to do so.

2. … to slash your other debt obligations so that you can afford your mortgage payments.

3…. to permanently prevent income tax liens, child and spousal support liens, and judgment liens from attaching to your home.

4…. to have the time you need to pay debts that cannot be discharged (legally written off) in bankruptcy, all the while being protected from those creditors messing with your home.

5…. to discharge debts owed to creditors which could have otherwise put liens on your home.

6…. to get out of paying all or some of your 2nd or 3rd mortgage ever again—IF the value of your home is no more than the balance of your 1st mortgage. This “stripping of junior mortgages” under Chapter 13 continues being used more and more as home property values continue to head downward in so many parts of the country.

7…. to take extra time to pay back property taxes, while protecting the home from tax and mortgage foreclosure. This is particularly important if you have a mortgage on your home. That’s because virtually all mortgages require you to keep current on the property taxes. So not only does Chapter 13 protect you from the property tax authority itself, more importantly it prevents your mortgage lender from using your property tax arrearage as a justification for foreclosing on your home.

8…. to favor many home-related debts—such as property taxes, support liens, utility and construction liens– that you probably want to pay. You generally can’t get rid of these special kinds of liens on your home, but Chapter 13 allows—indeed requires—you to pay them in full before you pay anything to your other creditors. So in many situations your regular creditors’ loss is your home creditors’ gain, and thus your gain, too.

9…. to get rid of judgment liens in many situations, so that they no longer attach to your home. Although this can also be done in Chapter 7, it’s often all the more helpful in a Chapter 13 when used in combination with these other tools.

10…. to sell your house without the pressure of a foreclosure sale, either just a short time after filing the Chapter 13 case, or sometimes even three, four years later. You may need to or be willing to sell and downsize, but not until a kid finishes high school or you reach an anticipated retirement date. Chapter 13 may allow you to delay selling and curing part of your mortgage arrearage until then, allowing you to preserve your family home in the meantime.

 

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Ten Terrific Tools for Saving Your Home through Chapter 13–Part 1

Powerful Chapter 13 gives you tools to solve your mortgage problems from a number of different angles.  Plus it gives you other tools to deal with tax, support, and judgment liens on your home.

In my last blog I showed how a straight Chapter 7 bankruptcy case can sometimes help you enough to save your home. Or at least it can help you hold onto your home for as long as you need to.  But Chapter 7 can only give limited help, sufficient only in limited circumstances. Chapter 13, on the other hand, provides you a much more powerful and flexible package, with a range of tools for addressing just about all debt issues involving your home.

Here are the first five of ten distinct and significant ways that Chapter 13 can save your home. I’ll give you the other five in my next blog.

A Chapter 13 case enables you:

1. … to stretch out the amount of time you get for catching up on missed mortgage payments, giving you as long as 5 years to do so. A longer repayment period means that you can pay less each month, making it more likely that you will actually be able to catch up and keep your home. Throughout this catch-up period, you are protected from foreclosure as long as you stay with the payment program, one that you propose.

2. … to slash your other debt obligations so that you can afford your mortgage payments. The mortgage debt—especially your first mortgage—is highly favored within Chapter 13. So you are usually allowed—indeed required—to pay most of your mortgage payments in full, while being allowed to pay only as much as you have left over towards your “general unsecured” debts—those without any collateral, such as most credit cards, medical debts, and many other types of debts.

3. … to permanently prevent income tax liens, child and spousal support liens, and judgment liens from attaching to your home. This stops these special creditors from gaining dangerous leverage over you and your home.

4. … to have the time to pay debts that cannot be discharged (legally written off) in bankruptcy, all the while being protected from those creditors messing with your home. That applies when the tax, support or other lien was not filed before the Chapter 13 is filed—the example immediately above. But this also applies if the lien is already in place, giving you the opportunity to pay the debt while under the protection of the bankruptcy laws, undercutting most of the leverage of those liens against your home. And at the end of your case, the debts are paid and those liens are gone.

5. … to discharge debts owed to creditors which could otherwise attack your home. For example, certain income tax debts are discharged, leaving you owing nothing. But if instead you had not filed the Chapter 13 case, or delayed doing so, a tax lien could have been recorded on that tax debt. That would have required you to pay some or all of the balance to free your home from that lien. Even most conventional debts can turn into judgment liens against your house after a lawsuit is filed. And certain judgment liens may or may not be able to be taken care of in bankruptcy.  If instead you file a Chapter 13 case to prevent these liens from happening, at the end of your case the debt is gone, and no such liens ever attach to your home.

Again, see my next blog for the other five house-saving tools of Chapter 13.

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Getting Just Enough Help for Your Home through Chapter 7

When does filing a Chapter 7 “straight bankruptcy” case help you enough so that you don’t need a 3-to-5-year Chapter 13 case?

If you are behind on your mortgage payments but want to keep your home, you have likely heard that a Chapter 13 “payment plan” is what you need. And that IS a powerful package, with an impressive set of tools to deal with a wide variety of home-related problems—everything from the mortgages themselves to property taxes, income tax liens, and judgment liens.

But what if you need to discharge other debts to get a fresh financial start, and have managed to fall only a couple of months behind on your mortgage? Or what if you are not keeping the house, but just need a little more time to find another place to live?

Then you may well not need a Chapter 13 case, and can maybe avoid the disadvantages it comes with—mostly, that it takes so much longer and generally costs lots more than Chapter 7. This extra time and cost can be well worthwhile when you need the great advantages of Chapter 13, but let’s look at ways that Chapter 7 can do enough for your home:

In a Chapter 7 case:

1. The “automatic stay”—the bankruptcy provision that stops virtually all actions by creditors against you or your property—applies to Chapter 7 just as it does to Chapter 13. So the filing of a Chapter 7 case STOPS a foreclosure in its tracks, just as quickly as a Chapter 13 filing. But if you are just trying to buy time to save money for a rental, the tough question is HOW LONG that break in the mortgage company’s foreclosure efforts will last, and how much extra time it’ll buy you. An aggressive creditor could quickly ask the court for “relief from the stay”—permission to resume the foreclosure process—thus potentially getting you only a few extra weeks. Or on the other extreme, a mortgage creditor could just do nothing for the 3 months or so until your Chapter 7 case runs its course and the “automatic stay” expires with the completion of your case. So, Chapter 7 often does not come with much predictability about how much time you’d gain. On the other hand, your bankruptcy attorney may well have experience in how fast certain mortgage lenders tend to ask for “relief from stay” under facts similar to yours.

2. Chapter 7 stops—at least briefly—not only mortgage foreclosures, but also prevents other potential liens from being placed against your house, including the IRS’s tax liens and judgment liens. But why would the few weeks or months that Chapter 7 gains make any difference with these kinds of creditors? In the right set of facts, it can make many thousands of dollars of difference.

• A timely filing of a Chapter 7 case can prevent you from having to pay a debt that would otherwise have become a lien against your house. For example, let’s say you have an older IRS debt that meets the necessary conditions for discharge, and you also have a little equity in your home but not more than your homestead exemption allows. If you waited until after the IRS recorded a tax lien for that debt against your house, that lien would continue being attached to your house even if you filed a bankruptcy and would eventually have to be paid. However, if your Chapter 7 filing happened before the IRS recorded a tax lien, the “automatic stay” would prevent that tax lien from being filed, the tax debt would be discharged forever, and your home’s equity would be preserved.

• Or if instead let’s say you have a debt that is NOT going to be discharged in bankruptcy—say a more recent tax debt—but you also had some assets that you were going to have to surrender to the Chapter 7 trustee, what we call an “asset case.” If again you filed the bankruptcy case before the recording of the tax lien, your Chapter 7 trustee could well pay those taxes as a “priority” debt in front of any of your other debts, potentially leaving you with no tax debt at the completion of your case.

3. Chapter 7 allows you to concentrate on your house payments by getting rid of your other debts. If you’ve managed to keep current on those mortgage payments, but don’t know how long you will be able to do so, the relief you get from discharging your other debts greatly improves your odds of staying current on your home long term. Or if you have missed only a few mortgage payments, AND can reliably make future ones, PLUS enough to catch up on your arrearage within year or less, then Chapter 7 would like very likely do enough for you. Most mortgage creditors will let you enter into an agreement –often called a “forbearance agreement”—to catch up the missed payments by paying a sufficient specific amount extra each month until you’re caught up, again, as long as that period of catch-up time is relatively short. Otherwise, you may well need a Chapter 13.

 

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Reasons to Do a Short Sale? Maybe Not

Besides avoiding a foreclosure and its hit on your credit record, you may have other sensible reasons for looking into a short sale of your home. Let’s consider those other reasons.

In my last blog I showed how a short sale may be harder to pull off than expected, and how they can be dangerous if you do not get advice from knowledgeable professionals looking out for your interests. Simply put, you should not assume that any particular solution is the right one without knowing all your options. And that means asking whether the reasons you are pursuing one option might or might not actually be better served through a different option.

So here are some sensible reasons to consider doing a short sale:

1. You can’t afford the house anymore and so believe you have no choice but to get out.

If your income has been cut or the mortgage payments have gone up so that you cannot keep up those payments, and yet you can’t sell your house in the normal fashion because it’s worth less than the mortgage balances, then a short sale may be a good way to escape the house and its debt.

But maybe you have important reasons to stay in your home. Your family may benefit from staying for deep personal reasons—such as not leaving your kids’ school district or maintaining family stability. If you leave this home it may be a long time before you would have the financial means to buy again. So there may be ways to lower the cost of keeping your home. A mortgage modification may now be more available than in the last few years because of the recent large mortgage fraud settlement with the major banks, and other improved programs. A Chapter 13 case in bankruptcy court may enable you to eliminate or drastically reduce a second mortgage balance, and either eliminate, reduce, or delay payments on other liens on the house. And either a Chapter 7 or 13 could reduce or eliminate other debts so that you could better afford to pay the home obligations.

2. You’ve heard that bankruptcy does not allow “cram downs” of mortgages on your home. So you see no way out of your second mortgage other than getting them at least a partial payment through a short sale in return for writing off the rest of that debt.

You’ve been doing your homework if you understand that mortgages secured only by your primary residence cannot be “crammed down,” reduced in bankruptcy to the value of that residence, unlike lots of other kids of secured debts.

But there’s a big exception, one that keeps getting bigger as home values continue to decline in many areas. If your home is worth less than the balance of your first mortgage, so that there is no equity at all in your home for the second mortgage, then through a Chapter 13 case you can “strip” this lien off your home. That means that your second mortgage debt can be paid very little—sometimes even nothing—during your 3-to-5 year Chapter 13 case, and then written off completely. This not only saves you from paying the 2nd mortgage payment from then on, it reduces your debt on your home forever, making hanging onto your home economically more sensible. If this second mortgage strip applies to your situation, then you will pay less each month for a home with less debt on it.

3. You may be induced to do a short sale not just because of your voluntary mortgage debts on your home, but because of various other usually involuntary ones which have attached to your home’s title, like one or more tax, judgment, support, utility, or construction liens.

You may have found out that your title is saddled with other obligations, and in fact you may well be under a great deal of pressure to pay one or more of these obligations. The IRS and support enforcement agencies can be especially aggressive. So you would understandably feel that you have no choice but to sell your home to get that aggressive creditor paid. And since you have no equity in your home, you can only sell it on a short sale. But the problem is that the more lienholders you have, the more challenging a short sale becomes. And even if it does succeed, the troublesome lienholder may agree to sign off for less than the balance, leaving you still being pursued by it.

I can’t cover here how a Chapter 7 or Chapter 13 case would deal with each of these kinds of lienholders. That’s a many-blog discussion, and would depend on each person’s circumstances. But often you would have options that would give you more control over your home and over your financial life than would happen in a short sale. Considering what is at your stake, it certainly makes sense to consult an attorney who is ethically bound to explain all the options in terms of your own goals and best interests.

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