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When You Should Avoid Using Chapter 13 to Save Your Home

Chapter 13 provides awesome tools for hanging onto your home. Yet sometimes Chapter 7 is enough and better.

 

Chapter 13 and Your Home

Chapter 7—sometimes called “straight bankruptcy—is much simpler and takes much less time than Chapter 13, the version of bankruptcy with a three-to-five-year court-approved payment plan. But Chapter 13 can help in so many ways with home-related debts that people who are behind on their mortgage or have other kinds of liens on their home tend to leap to that option.

In upcoming blogs I’ll talk about all the many ways that Chapter 13 can help. But to give you a taste of them, some of the main ones include:

1. More time to catch up on any back mortgage payments: Chapter 7 gives you a limited amount of time, usually a year at the most, to catch up. Chapter 13 often gives you years, which greatly reduces how much you have to pay each month to eventually get current.

2. Stripping second or third mortgage:  Under Chapter 7 you have to simply pay any junior mortgages. Chapter 13 gives you the possibility of “stripping” a second or third mortgage lien off your home title, potentially saving you hundreds of dollars monthly, and thousands or even tens of thousands of dollars in the long run.

3. The flexibility that comes from getting extended protection from your mortgage holder(s): Chapter 7 gives you at most only about three or four months while your mortgage holder can’t foreclose and your other creditors can’t take action against you or your home. In contrast, under Chapter 13 you could potentially be protected for years. This can often give you creative ways to meet your goals, such as letting you delay selling your home for several years.

4. A good way to catch up on any back real property taxes: Filing a Chapter 7 case doesn’t protect you from property tax foreclosure—beyond the three, four months that the case lasts. Chapter 13 protects you and your home while you gradually catch up on those taxes, in a court-approved plan that also incorporates your mortgage(s) and all other debts.

5. Protects your home from previously recorded and upcoming income tax liens: Chapter 7 usually does nothing to address tax liens that have already been recorded on the home, or to stop future tax liens on income taxes that you continue to owe after the bankruptcy case is completed. In contrast Chapter 13 provides an efficient and effective procedure for valuing, paying off, and getting the release of tax liens. And the IRS/state cannot record a tax lien on income taxes while the Chapter 13 case is active.

That may all sound pretty good (and there’s more). But still, Chapter 13 may be neither necessary nor appropriate in your situation.

Consider Chapter 7 Instead of Chapter 13 When Chapter 7 is Enough

If you are behind on your mortgage payments, but could realistically catch up within about a year, you may not need the stronger medicine of Chapter 13. If you could catch up after writing off all or most of your debts in a Chapter 7 case, and by being financially very disciplined for that one year, that would likely be the wiser way to go.

Most mortgage lenders will negotiate a “forbearance agreement” with you after you file a Chapter 7 case, allowing you to stay in your home and to catch up on your mortgage arrearage by paying a certain amount extra per month. How much time you will have to get current on your mortgage depends on your lender’s practices, your payment history with that lender, and other related factors.

Considering the benefit of getting to your fresh start in a year or so, instead of three to five years, be sure to carefully discuss with your attorney whether solving your mortgage arrearage problem through Chapter 7 looks feasible. Of course also look at all the other advantages and disadvantages of these two options in light of all the rest of your financial circumstances.

Consider Chapter 7 When Chapter 13 Will Not Likely Do Enough

As powerful as Chapter 13 can be, it has its own limitations regarding home debts. For example, it does not have the ability to reduce your first mortgage payment or mortgage balance. It can’t reduce your annual property taxes or discharge (legally write off) any property taxes.  And if you subsequently cannot maintain the payments you agree to in your Chapter 13 plan, you could very well lose the protection against foreclosure and other collection efforts against you.

Especially if your home is under water—you owe on it more than it’s worth—try to think practically about whether the effort to keep the property will be worth the effort. Even if you do have some equity in the property, if you are really going way out on a limb to catch up on the mortgage arrearage and other debts related to the home, carefully consider whether you will really be able to pay what you are arranging to pay. If you pay a bunch of extra money over the course of a year or two only to not be able to maintain the necessary payments and lose the home, you could waste a lot of your time, money, and effort.

As you honestly discuss with your attorney your financial goals, consider whether filing a Chapter 7  case and letting your house go would actually be a better way to meet your (and your family’s) real needs. Chapter 13 should not be a last-ditch long-shot. Be honest with yourself that you may be trying to hang onto a house that you won’t be able to even with all the help that Chapter 13 can provide.

 

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Five Tremendous Tools to Save Your Home through Chapter 13

Powerful Chapter 13 gives you tools to solve your mortgage and other home lien problems from a number of different angles. 

 

The Limits of Chapter 7 “Straight Bankruptcy”

In my last blog I described how a Chapter 7 case can under certain circumstances help you enough to save your home. Or in other situations it can at least help you delay a foreclosure for as long as you need.  But Chapter 7 can only give limited help, maybe enough if you aren’t too far behind on your mortgage circumstances, or you don’t have other kinds of lienholders causing problems.

The Extraordinary Tools of Chapter 13

Chapter 13, on the other hand, provides you a range of much more powerful and flexible tools for solving many, many debt issues so that you can keep your home.

Here are the first five of ten significant ways that Chapter 13 can save your home (with the other five to come in my next blog).

Under Chapter 13 case you can:

1.  stretch out the amount of time for catching up on back mortgage payments for as long as 5 years. This is in contrast to the one year or so that most mortgage lenders will give you to catch up if you do a Chapter 7 case instead. This longer period can greatly lower your monthly catch-up payments, making more likely that you would succeed in actually catching up and keeping your home. Very importantly, throughout this catch-up period your home is protected from foreclosure as long as you stay with the payment plan, one that you propose. Within limits you can later modify that plan if your circumstances change.

2. slash your other debt obligations so that you can afford your mortgage payments. The mortgage debt—especially your first mortgage—can’t be significantly changed under Chapter 13. So you are usually required to pay your full monthly mortgage payment, and to catch up any arrearage, but to accomplish this you are allowed to pay to most of your other debts.

3.  permanently prevent income tax liens, and child and spousal support liens, and such from attaching to your home. The “automatic stay” preventing such liens under Chapter 7 last usually only about 3 months, and there’s no mechanism for dealing with these kinds of debts. Instead under Chapter 13, these liens are prevented throughout the three-to-five-year length of the case.

4.  have the time to pay debts that can’t be discharged (legally written off) in bankruptcy, all the while being protected from those creditors attacking your home. So even if a tax or support lien is already in place before you file, you are given the opportunity to pay the debt while under the protection of the bankruptcy laws. That undercuts the leverage of those liens against your home. Then by the end of your case, the debts are paid and those liens are released.

5.  discharge (write off) debts owed to creditors which could otherwise attack your home. For example, certain (generally older) income taxes can be discharged, leaving you owing nothing. But had you not filed the Chapter 13 case, or delayed doing so, a tax lien could have been recorded, which would have required you to pay some or all of the balance to free your home from that lien. Even most standard debts can turn into judgment liens against your house once you are sued and a judgment is entered. Depending on the facts, a judgment liens may or may not be able to be gotten rid 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 attach to your home.

See my next blog post for the other five house-saving tools of Chapter 13.

 

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When a Chapter 7 “Straight Bankruptcy” Helps You Enough on Your Home

A 3-to-5-year Chapter 13 case is often the right tool if you are behind on mortgage payments. But sometimes the simpler Chapter 7 is enough.

 

Chapter 13 Is a Powerful Package

If you want to keep your home but are behind on your mortgage payments, a Chapter 13 “adjustment of debts” is often what you need. It comes with an impressive set of tools to address many home debt problems. It gives you more time to catch up on the mortgage, may enable you to “strip” a second or third mortgage off your title, and gives you very helpful ways for dealing with property taxes, income tax liens, judgment liens, and such.

When Chapter 7 is Enough  

But what if you have managed to fall only a few months behind on your mortgage, and could afford the payments if you just got relief from your other debts?

Or what if you aren’t even keeping the house, but do need a little more time to find another place to live?

Then you may not need a Chapter 13 case, and could save the extra time and cost that it would take compared to Chapter 7. In the right situations Chapter 13 is highly worthwhile because of what it can do. But if you don’t need those advantages, Chapter 7 may be adequate and appropriate.

Buying Just Enough Time for What You Need

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 just as quickly as a Chapter 13 filing.

But Chapter 7 usually buys you much less time than a Chapter 13 could.

If you are not very far behind on your mortgage payment(s) and want to keep your home, when you file a Chapter 7 case your mortgage lenders will usually give you several months to catch up on your back payments. You must immediately start making your regular monthly payments, if you had not been making them, and must enter a strict schedule for catching up on the arrearage. In return the lender agrees to hold off foreclosing, as long as you make the payments as agreed.

If instead you are not keeping the house but just need to have more time to save money for moving into a rental home, a well-timed Chapter 7 case will buy you more time in your house. During that time you don’t pay mortgage payments, enabling you to get together first and last month’s rent payment, any necessary security deposit and other moving costs.

The tough-to-answer question is how much extra time would a Chapter 7 filing give you. It mostly depends on how aggressive your mortgage company is about trying to start or restart the foreclosure efforts.  A pushy lender could, soon after you file your case, ask the bankruptcy court for “relief from the stay”—permission to start or restart the foreclosure process. If so, then your bankruptcy filing would buy you only an extra month or so.

Or on the other extreme, a mortgage lender could potentially take no action during the 3 months or so until your Chapter 7 case is finished. At that point the “automatic stay” protection expires, and the lender can start or restart the foreclosure. Or it may sit on its hands even longer. During the height of the mortgage crisis a few years ago, mortgage lenders were so backed up and so reluctant to foreclose, that many homeowners were living in their homes without making payments for a year or two! That is mostly a thing of the past but it goes to show how open-ended this situation can be at times.

Your bankruptcy attorney will likely have some experience in how aggressive your particular mortgage lender is under facts similar to yours.

Stopping Dangerous Liens Against Your Home

Chapter 7 prevents potential liens from being placed against your home, especially important when the lack of a lien makes all the difference. This can occur with IRS and state tax liens and judgment liens. A timely filing of a Chapter 7 case could result in paying nothing on a debt vs. paying it in part or in full.

Consider the example of an older IRS debt that meets the conditions for discharge (legal write-off in bankruptcy), in a situation in which you have equity in your home but no more than would be protected under the homestead exemption. If you did not file a bankruptcy until after the IRS recorded a tax lien for that debt against your house, that lien would continue being attached to your house in spite of your bankruptcy. You would have to pay the tax debt in order to get the lien released when you sold or refinanced the house.

However, if your Chapter 7 case was instead filed before the IRS recorded a tax lien, the “automatic stay” would prevent that tax lien from being recorded, the tax debt would be discharged and never have to be paid.

Discharge Other Debts So You Can Afford to Pay Your Mortgage Payments

Chapter 7 allows you to focus your financial resources on your house payments by getting rid of your other debts.

If you’ve managed to keep current on those mortgage payments, but fear you can’t continue to do so because of financial pressure from other debts, the relief you get from discharging those other debts can allow you to stay in your home long term.

Or you may have missed only a few mortgage payments, AND, after discharging your other debts, can reliably make future monthly payments plus enough extra to catch up on your arrearage within year or less. If so, then Chapter 7 would like likely do enough for you. Most mortgage creditors will make arrangements with you –called a “forbearance agreement”—to catch up the missed payments by paying a sufficient specific amount extra each month until you’re caught up, as long as that catch-up time is relatively short.

However, if after discharging your other debts you could not catch up on your arrearage within about a year, you may well need the extra firepower of Chapter 13 to buy you more time.

 

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Are These Sensible Reasons to Do A Short Sale? Maybe, Maybe Not

Let’s look at some commonsensical reasons to do a short sale of your home and see if they make sense.

 

My last blog post showed how a short sale may be harder to achieve than you might think, and how they can be dangerous if you do it without advice from an attorney looking out for you.

So today we follow up by looking more closely at why you would do a short sale. Besides probably the most common one of simply trying to avoid the bad credit of a foreclosure, which we addressed last time, here are some other common reasons:

1. No Choice, Can’t Afford the House

If your income has gone down or your mortgage payments have gone up so that you can’t keep making the payments, it may make sense to downsize—sell your home and rent. And if you can’t sell your home because it’s worth less than the mortgage balances, then a short sale may seem to be the only way to leave the home and its debt behind.

However…

Monthly rental payments have climbed significantly in the last several years as more people have lost their homes to foreclosures, and less young people have been able to afford or qualify for a mortgage because of the tough employment market and skyrocketing student loan debt.  Demand has outstripped the supply of rental housing in many markets, greatly increasing the cost to rent.

Also, you have many legitimate tangible and intangible reasons to stay in your home. If you leave this home it may be a long time before you would have the financial means to buy again, especially with the tighter credit standards that are likely to be in place for years. Property values in many parts of the country have gone up significantly in the last year or two and seem to be on a trajectory to continue doing so. So you may be building equity in your home soon. And your family may benefit from staying in your home for deep personal reasons—to maintain family stability, to avoid leaving your kids’ school district, and such.

So if there would be a way that you would be able to afford your home, that way would be worth considering carefully.  

2.  Can’t Reduce House Mortgage Payments, Right?

It’s true that you are largely stuck with whatever your monthly first mortgage payment amount is. And if you are behind on those payments, you will have to catch up if you want to keep your home.

However…

If you have a second (or third) mortgage, you may be able to “strip” that mortgage off your home’s title so that you would not need to make that mortgage’s monthly payments. This can happen under a Chapter 13 “adjustment of debts” 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.

By “stripping” this second mortgage from your home, your debt on that mortgage debt would be treated as an unsecured debt, just like all of the rest of your conventional unsecured debts (credit cards, medical bills and such). This means you would pay that mortgage debt during your 3-to-5 year Chapter 13 case as much, but only as much, as you could afford to pay on it, which is often not much—sometimes even nothing. Then at the end of the case, whatever has not been paid by then is discharged–legally written off completely.

As a result you avoid having to pay the monthly second mortgage payments, and the debt against your home is significantly reduced. These—along with the other benefits of Chapter 13—can potentially make hanging onto your home both financially feasible in the short term and financially much more sensible in the long term. You would pay less each month for a home with much less debt on it.

3.  Needing to Resolve Other Liens

You may feel compelled to do a short sale not just because of your mortgage obligations, but because of one or more other obligations which have attached to your home’s title, with a tax, judgment, support, utility, or construction lien.

You may be under a great deal of pressure to pay one or more of these obligations. The IRS, state tax, and child support enforcement agencies can be especially aggressive. So you could understandably feel that you have no choice but to sell your home to get that aggressive creditor paid, and to sell by short sale if necessary.

The problem is that the more lienholders you have, the more creditors must be corralled into accepting less than their full balance in return for releasing their lien on your home. And even if the special lienholder releases its lien for less than full payment so that the short sale succeeds, you will continue owing the balance, and likely continue being pursued for payment.

However…

Either Chapter 7 or Chapter 13 bankruptcy can often deal well with each of these kinds of lienholders. Both may be able to “void” judgment liens. Chapter 13 is particularly adept at attacking tax and support liens and their underlying debts. Furthermore, you can be protected for years from any further collection efforts by these otherwise very powerful creditors, in ways that no other legal procedure could accomplish.

Conclusion

Bankruptcy options often give you more control over your home and over your financial life than would occur through a short sale. Given what’s at stake, it certainly makes sense to consult an attorney about your options. Your attorney is on your side, legally and ethically bound to explain all your options as they relate to your personal goals and your best interests.

 

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Automatic and Immediate Protection from Your Creditors

How does bankruptcy stop garnishments, foreclosures, and repossessions?

 

Filing a bankruptcy case gets immediate protection for you, for your paycheck, for your home, and for all your possessions. This “automatic stay” provides this kind of protection for you and your property the moment either a Chapter 7 “straight bankruptcy” case or a Chapter 13 “adjustment of debts” case is filed. Virtually all efforts by all your creditors against you or anything you own comes to an immediate stop.

“Automatic Stay” = Immediate Stop

“Stay” is simply a legal word meaning “stop” or “freeze.”

“Automatic” means that this “stay” goes into effect immediately upon the filing of your bankruptcy petition. That filing itself, according to the federal Bankruptcy Code, “operates as a stay” of virtually all creditors’ actions to pursue a debt or take possession of collateral. Since the filing of your case itself imposes the stay, there is no delay or doubt about whether a judge will sign an order to impose the “stay” against your creditors.

Creditors Need to Be Informed, Sometimes Directly

Although the protection of the “automatic stay” is imposed instantaneous, practically speaking your creditors need to be informed about the filing of your case so that they are made aware that they must comply with it. If your creditors are all listed in your bankruptcy case documents, they should all get informed by the bankruptcy court within about a week or so after your case is filed. This doesn’t take any additional action by either you or your attorney (beyond making sure all of your creditors are listed in the schedule of creditors filed at the bankruptcy court). If you have no reason to expect any action against you by any of your creditors before that, just letting them all be informed by the court is usually all that’s needed.

However, if you are expecting some action by any of your creditors quicker than a week or so after filing the case, be sure to talk with your attorney about it. That way any such creditor can be directly informed by about your bankruptcy filing to stop whatever collection action it was contemplating. Make sure you and your attorney are clear which of you is informing that creditor and in what way.

Creditor Action Taken Unexpectedly

But what if a creditor has not yet been informed of your bankruptcy filing when it takes some action against you or your property in the days after your bankruptcy filing but before it finds out about it?

If this happens, the “automatic stay” is so powerful that in most circumstances such a creditor must undo whatever action it took against you after your bankruptcy was filed, even if this creditor honestly did not yet know about your filing. For example, if after your bankruptcy is filed a creditor files a lawsuit against you or gets a judgment on a lawsuit that it had filed earlier, the creditor must dismiss (throw out) its lawsuit or vacate (erase) the judgment.

 

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Advantages of Being in Control of the Timing of Your Bankruptcy Filing

Don’t get rushed into filing bankruptcy when the timing’s not right. Filing at the right time could save you thousands of dollars.

 

Timing Does Not Always Matter Much, But It CAN Be Huge

Many laws about bankruptcy are time-sensitive. And those time-sensitive laws involve the most important issues—what debts can be discharged (written off), what assets you can keep, how much you pay to certain creditors, and even whether you file a Chapter 7 case or a Chapter 13 one.

It is possible that the timing of your bankruptcy filing does not matter in your particular circumstances. But given how many of the laws are affected by timing, that’s not very likely. It’s wiser to give yourself some flexibility about when your case will be filed. If you wait until you’ve lost that flexibility—because you have to stop a creditor’s garnishment or foreclosure—you could lose out on some significant advantages.

Today’s blog post covers the first one of those potential timing advantages.

Being Able to Choose between Chapter 7 and Chapter 13

Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” are two very different methods of solving your debt problems. There are dozens and dozens of differences. You want to be able to choose between them based on what’s best for you, not because of some chance timing event.

To be able to file a Chapter 7 requires you to pass the “means test.” This test largely turns on your income. If you have too much income—more than the published median income for your family size and state—you can be disqualified from doing the get-a-fresh-start-in-four-months Chapter 7 option and be forced instead into the pay-all-you-can-afford-for-three-to-five-years Chapter 13 one.

The “Means Test” Income Calculation

What’s critical here is that income for purposes of the means test has a very special, timing-based definition. It is money that you received from virtually all sources—not just from employment or operating a business—during the six full calendar months before your case is filed, and then doubling it to come up with an annual income amount. For example, if your bankruptcy case is filed on September 30 of this year, what is considered income for this purpose is money from all sources you received precisely from March 1 through August 31 of this year. Note that if you waited to file just one day later, on October 1, then the period of pertinent income shifts a month later to April 1 through September 30.

So if you received an unusual chunk of money on March 15, that would be counted in the means test calculations if you filed anytime in September, but not if you filed anytime in October. If that chunk of money pushed you over your applicable median income amount, you may be forced to file a Chapter 13 case if your bankruptcy case is filed in September. But not if you filed in October because that particular chunk of money arrived in the month before the 6-month income period applicable if you waited to file until October.

Conclusion

Being able to delay filing your bankruptcy in this situation—here literally by one day from September 30 to October 1—allows you to pass the means test and therefore very likely not be forced to file a Chapter 13 case. Being in a Chapter 13 case when it doesn’t benefit you otherwise would cost you many thousands of dollars in “plan” payments made over the course of the required three to five years. Clearly, filing your case at the tactically most opportune time can be critical.

The sooner you meet with a competent attorney who can figure out these and similar kinds of considerations, the sooner you will become aware of them and the more likely problems like the one outlined here can be avoided. 

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Your Bankruptcy Rights vs. Creditors’ Rights to “Not be Deprived of Property without Due Process of Law” under the Fifth Amendment

The U. S. Constitution doesn’t talk about it, so how does filing bankruptcy give you the power to stop a foreclosure?

As you’ve probably heard, bankruptcy is explicitly covered in the Constitution. But not much.  All it says is that Congress has the power “to establish… uniform laws on the subject of bankruptcies throughout the United States.”  (Article 1, Section 8, Clause 4.) Not a word about the rights and obligations of the person filing bankruptcy. Nor about the rights and obligations of creditors.

The Fifth Amendment talks about the rights of creditors when it says that a person shall not “be deprived of… property, without due process of law.”  So let’s say you have entered into a contract to pay a loan taken out on the purchase of your home, and that contract includes a condition that the creditor can take your home when you don’t maintain the payments on the loan.  If indeed you do not make payments, the creditor’s contractual ability to take your home is a property right it then owns. It bargained for that right with you when it lent you the money to purchase the home.

But you’ve heard that bankruptcy DOES have the power to stand in the way of your mortgage holder’s right to foreclose on the mortgage. Where does that power come from?

According to the U. S. Supreme Court, which dealt with this issue a number of times during the Great Depression in the 1930s, that power “incidentally to impair or destroy the obligation of private contracts… must have been within the contemplation of the framers of the Constitution.” Continental Bank v. Rock Island Ry., 294 U.S. 648, 680-81 (1935). The Court’s rationale was that because Congress was given “the express power to pass uniform laws on the subject of bankruptcies,” delaying the exercise of creditors’ rights “necessarily results from the nature of the power.”

But, showing this isn’t so straightforward, later that same year the Supreme Court struck down an amendment to the bankruptcy law that had been enacted in 1934 to address the massive number of farm foreclosures. One of the reasons the law was ruled unconstitutional is because it took away from the mortgage-holding bank a property right: the “right to determine when such [foreclosure] sale shall be held, subject only to the discretion of the court.” Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 594 (1935).

So Congress quickly changed the law that same year to try to meet the Court’s objections. When that new law came before the Court, this time it was upheld, in an opinion written by the same justice, the eminent Justice Louis Brandeis, who had written the above opinion striking down the earlier law.

This time the bank holding the farmer’s mortgage based its argument that the law was “unconstitutional… mainly upon the… assertion is that the new Act in effect gives to the mortgagor [the farmer filing bankruptcy] the absolute right to a three-year stay; and that a three-year moratorium cannot be justified.”

After listing numerous ways in which the three-year stay was conditioned for the protection and benefit of the creditor, Justice Brandeis concluded that this stay, and the entire new law, was constitutional, as follows:

The power here exerted by Congress is the broad power “To establish… uniform Laws on the subject of Bankruptcies throughout the United States.” The question which the objections raise is… whether the legislation modifies the secured creditor’s rights…  to such an extent as to deny the due process of law guaranteed by the Fifth Amendment. A court of bankruptcy may affect the interests of lien holders in many ways. To carry out the purposes of the Bankruptcy Act, it may direct that all liens upon property forming part of a bankrupt’s estate be marshalled; or that the property be sold free of encumbrances and the rights of all lien holders be transferred to the proceeds of the sale. Despite the peremptory terms of a pledge, it may enjoin sale of the collateral, if it finds that the sale would hinder or delay preparation or consummation of a plan of reorganization. It may enjoin like action by a mortgagee which would defeat the purpose of [the new law] to effect rehabilitation of the farmer mortgagor. For the reasons stated, we are of opinion that the provisions of [the new law] make no unreasonable modification of the mortgagee’s rights; and hence are valid.

Wright v. Vinton Branch of Mountain Trust Bank of Roanoke, 300 U. S. 440, 470 (1937)(emphasis added, internal case citations omitted).

That why your bankruptcy filing powerfully stops a home foreclosure, even though the Constitution doesn’t say anything directly about this, and even though stopping that foreclosure impinges on a property right of your foreclosing mortgage lender.

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A Combination of Chapter 13 Tools for Saving Your Home, Illustrated

It’s often the combination of tools that come with Chapter 13 that allows you to keep your home. Because Chapter 7 has only some of these tools, sometimes it can’t do nearly as much for your home as Chapter 13 can.

 

Please read my last blog. There I laid out an example to illustrate how much a Chapter 13 case can do—on multiple fronts—to enable you to keep your home. That example also shows why sometimes Chapter 7 is not effective for that purpose. Today I explain how Chapter 13 can pull it off.

To summarize, here is a list of this hypothetical person’s debts:

  • first mortgage arrears: $5,000
  • first mortgage balance: $230,000
  • second mortgage arrears: $3,000
  • second mortgage balance: $50,000
  • past-due real estate taxes: $2,000
  • judgment lien from unpaid medical debt: $8,000
  • 2009 income tax with tax lien recorded against the home: $3,000
  • 2010 and 2011 income tax: $5,000 (no tax lien, yet)
  • credit cards: $18,000

A Chapter 7 “straight bankruptcy” would discharge (write-off) all or most of the credit card balances, as well as the medical bill that turned into the judgment, and likely even get rid of that judgment’s lien on your home title. That would save you about $26,000, and take away the threat to your home from the judgment lien.

But that still leaves both mortgage arrears, the past due real estate taxes, and many thousands of dollars of income tax debts, one holding a tax lien on the home. This debtor can afford to pay a total of $1,500 per month to all creditors, but with a $1,000 first mortgage and $300 second mortgage regular payment, that leaves only a measly $200 per month for the mortgage arrearages and all the taxes. Looks quite hopeless.

And yet, here is how Chapter 13 could be the solution:

1. Stripping second mortgage: In this example the home is now worth $225,000, less than the $230,000 balance on the first mortgage. So there is no equity in the home securing that second mortgage. Under these conditions, Chapter 13 can legally turn that second mortgage balance into an unsecured debt. (This cannot be done under Chapter 7). As a result, the debtor no longer pays the $300 monthly mortgage payment, freeing up that amount to pay other more important creditors. So instead of $200, there’s now $500 per month available to pay the remaining creditors.

2. Plan payment of $500 per month: Paying this $500 per month into a 36-month Chapter 13 payment plan results in a total of $18,000 paid ($500 X 36 = $18,000), or a total of $30,000 in a 60-month plan ($500 X 60 = $30,000). The length of a plan depends on a number of factors. But in this case let’s assume that the plan will run only as long as it takes to pay all secured and priority creditors—here, the first mortgage arrears and all the property and income taxes. That’s $5,000 of arrears, $2,000 of property tax, $8,000 for all the income taxes, or a total of $15,000. Interest needs to be paid on the property tax and on the portion of the income taxes with the tax lien, but Chapter 13 often allows those debts to be paid faster to lessen the amount of interest. The plan payments also need to pay the Chapter 13 trustee– usually a percentage of the amount flowing through the plan–plus whatever portion of the debtor’s own attorney’s fees not paid before the filing of the case. To simplify the calculations, let’s estimate that the total amount that the debtor would need to pay into the plan would be $20,000. At $500 per month, that would amount to 40 months of payments. (In some situations, the unsecured creditors would also need to be paid a certain amount of money or a certain percentage of their debt. In that situation, the $500 payments would need to be paid into the plan that much longer.)

3. Continuous protection from the creditors by the “automatic stay’: During the entire length of the Chapter 13 case—this estimated 40 months–the “automatic stay” would be in effect, preventing any of the creditors—the mortgage lenders, the property tax creditor, or the IRS—from taking any action against the debtor or the debtor’s home. So the first mortgage lender would not be able to start or continue a foreclosure because the monthly payments or the property taxes weren’t current. The property tax creditor itself could not conduct a tax foreclosure. And the IRS could not enforce its tax lien nor could it record a new one for the more recent tax debts.

4. Debt-free: At the end of the 40 months or so, the first mortgage and property taxes would be paid current, all of the income taxes would be paid in full, the tax lien would be released, and all the (remaining) unsecured debts would be discharged, leaving the debtor debt-free.  

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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.

 

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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.”

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