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Quick Rules about Preserving Your Home through Bankruptcy

When does filing bankruptcy save your home?  When is “straight bankruptcy”—Chapter 7—the right tool, and when do you need Chapter 13?  

If your most important goal is to preserve your home, here’s how each kind of bankruptcy helps (or doesn’t help) in different circumstances.

1. If you’re current on your home mortgage(s) but struggling to keep that up, and are behind on some or many of your other debts:

Chapter 7:  Would likely discharge (legally write off) most if not all of your other debts, freeing up cash flow so that you can make your house payments. Would also stop those other debts from turning into judgments, which would likely be liens against your home. May also enable you to avoid falling behind on other obligations—income taxes, support payment, utility bills—which could also otherwise turn into liens against your home.

Chapter 13:  Does the same as above, plus is often a better way to deal with many other special debts, such as income taxes, back support payments, and vehicle loans. May be able to get rid of a second or third mortgage.  Is better at protecting assets, if you either have more equity in your home than your homestead exemption allows or have any other “non-exempt” asset(s).

2. If you’re not current on home mortgage(s) but are only very few payments behind, with no foreclosure started:

Chapter 7:  May buy you enough time to get current on your mortgage, if you’ve slipped only two or three payments behind. Most mortgage companies will agree to give you several months—sometimes up to a year—to catch up on your mortgage arrears. That’s a “forbearance agreement”—they agree to “forbear” from foreclosing as long as you make the agreed payments. Tends to work only if you have an unusual source of money (a generous relative or a pending legal settlement that’s exempt from the other creditors), or if the Chapter 7 filing will allow you to stop paying enough to other creditors so you will be able to pay off the mortgage arrearage quickly.

Chapter 13:  Even if you’re only a few thousand dollars behind, you may well not have enough extra money each month to catch up quickly on that mortgage arrearage.  Lenders seldom voluntarily give you more than 10-12 months to catch up, but a Chapter 13 forces them to give you a much longer period to do so—three to five years. That greatly reduces how much you need to pay towards the arrears every month, often turning the impossible into the achievable.

3. If you’re many payments behind on your mortgage(s), regardless whether a foreclosure has started:

Chapter 7:  Not helpful here unless you have some extraordinary means for paying off the large mortgage arrears. Buys only a few weeks of time, at most three months or so (if the mortgage lender chooses to do nothing while your bankruptcy case is pending). Also, cannot get rid of a second or third mortgage.

Chapter 13:  Again, gives you the option of up to five years to slowly but surely pay off the mortgage arrearage, during all of which time your home is protected from foreclosure as long as you maintain the agreed Chapter 13 Plan payments. Assumes that you can at least make the regular mortgage payment consistently, along with the arrearage catch-up payment. Does not, under current law, enable you to reduce the first mortgage payment amount, although again might be able to get you out of your second or third mortgage

If any of this looks like it could provide the help that your home needs, please give me a call. Remember: these are just the broad rules. There are lots of other twists and turns which will likely apply to you. To understand the advantages and disadvantages of each option, and to get practical advice about what direction to go, you should see an attorney. Let me show you how the law can help meet your needs.

 

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Foreclosure Rates Highest for Higher-Income Borrowers in Former Boom-Market States

In most parts of the country, foreclosure rates have been highest for low-income borrowers, and lowest for higher-income borrowers. But the exact opposite is true in “boom-market metropolitan areas located in California, Nevada and Arizona.

This is one of the most surprising finding of a report released a couple of weeks ago by the Center for Responsible Lending (CRL) called Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures. In my last blog I wrote about this report, focusing on its main headline story that 5 years into the foreclosure disaster, we’re not even halfway through it. But this conclusion that higher income homeowners are more prone to foreclosure in certain parts of the country is a real eye-opener.

This very thorough study of mortgages divided the borrowers into four categories:

Low-income: at 50% or lower than the area median income

Moderate income: at 50-80% of the area median income

Middle-income: at 80-120% of the area median income

Higher-income: at more than 120% of the area median income

Regional housing markets were also divided into four categories, based on appreciation in home prices between 2000 and 2005:

Weak-Market States:  Indiana, Iowa, Kansas, Kentucky, Michigan, Mississippi, Nebraska, North Carolina, Ohio, Oklahoma, Tennessee, Texas

Stable-Market States: Alabama, Arkansas, Colorado, Georgia, Illinois, Louisiana, Missouri, North Dakota, South Carolina, South Dakota, Utah, West Virginia, Wisconsin

Moderate-Market States: Alaska, Connecticut, Idaho, Maine, Minnesota, Montana, New Mexico, New York, Oregon, Pennsylvania, Vermont, Washington, Wyoming

Boom-Market States: Arizona, California, Delaware, Distr. of Columbia, Florida, Hawaii, Maryland, Massachusetts, Nevada, New Hampshire, New Jersey, Rhode Island, Virginia

For the weak-, stable-, and moderate-market states, the rates of foreclosure were highest among low-income borrowers, lower among moderate-income borrowers, lower still among middle-income borrowers, and the lowest among higher-income borrowers. But in the boom-market states, the foreclosure rates are completely opposite: highest among higher-income borrowers, lower among middle-income borrowers, lower still among moderate-income borrowers, and the lowest among low-income borrowers.

While it seems intuitive that the lower income borrowers would be less able to weather the storms of a harsh recession, why are the results topsy-turvy in the boom-market states?

Start by remembering that by the report’s definition most “higher-income borrowers” were not that wealthy:

While these borrowers may have had higher incomes (with a median of $61,000 for middle-income borrowers and $108,000 for higher-income borrowers), the extremely high cost of housing in these boom markets, even for modest homes suggests that the majority of these borrowers were not the very wealthy buying mansions, but rather working families aspiring to homeownership and the middle class.

But then the report made a fascinating discovery in looking at the incidence of high-risk features within mortgages, such as hybrid or option ARMs, prepayment penalties, or higher interest rates:

While in weak market areas, low-income and moderate-income families have the highest incidence of mortgages with at least one high-risk feature, the pattern is reversed in boom markets.

I suspect that because housing was so expensive in these boom-markets, even home purchases made by those in the higher-income categories used higher risk mortgages because a) they needed to stretch their housing dollar to afford what they were buying, b) property values were climbing so fast that everybody figured they could refinance later into a better loan, and c) sales were happening so quickly that the entire process got sloppy.

The end result is that mortgages with “high-risk factors” are resulting in more foreclosures, even if they belong to higher-income borrowers. There could be many explanations for this–for example, homes in those regions’ may be deeper “underwater,” or the unemployment rate may be higher there, either of which could push up the foreclosure rate. But overall the results seems to imply that a borrower’s good payment history is better predicted from the existence or absence of “high-risk factors” in the mortgage than from the borrower’s amount of income.

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“Not Even Halfway through the Foreclosure Crisis”?!

Going on five years into our foreclosure disaster, a major report is now authoritatively giving us that sobering news.

The Center for Responsible Lending (CRL) is a respected non-partisan research and policy organization with the mission of “protecting homeownership and family wealth by working to eliminate abusive financial practices.” In mid-November it released the results of its comprehensive analysis of foreclosures called Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures. This study reviewed and tabulated 27 million mortgages originated from 2004 and 2008, and looked at the borrowers’ performance on those loans through last February. As its title signals, the study addresses at how different socio-economic groups, different parts of the country, and different racial groups have been affected by the flood of foreclosures. Its findings contain a number of meaningful surprises, which I’ll tell you about some other time. But its first finding—that we’re not even halfway through these foreclosures—is what most caught my attention.

The analysis shows that of all mortgages entered into from 2004 through 2008, at least 2.7 million of them have been gone all the way through to completed foreclosure. This is about 6.4 percent of all mortgages entered into during that period of time. And this 2.7 million does not include foreclosures that have occurred in these last few years on earlier mortgages, those entered into before 2004.

Of this same set of 2004-2008 mortgages, another 3.6 million households are “at immediate, serious risk of losing their homes.” The study defined this category as those mortgages already in the midst of the foreclosure process, or more than 60 days delinquent. Not all of these will result in completed foreclosures, but a large percentage likely will.

So, about 2.7 million foreclosed, 3.6 million to go.

It’s important to realize that this 3.6 million in seriously troubled mortgages does NOT include other troubled mortgages which originated outside the 2004-2008 period, nor those which are performing decently now but will nevertheless go to foreclosure in the near future because of new unemployment, etc. So it is very likely that there will be more than that 3.6 million number.

 

I realize that for many people, this constant talk about foreclosures gets tiring, frustrating, even maddening.  Unless you are dealing with a foreclosure yourself, or are close to someone who is, it’s one of those things that’s in the news so much, year after year, that the stories start sounding the same so you start tuning it out.

But I can’t tune it out. I don’t want to tune it out. Much of my job is to listen attentively to those stories, told to me virtually every day by hard-working men and women who are fighting to save their family home, their place of shelter and stability and dignity. Behind every single foreclosure, and every threatened foreclosure, there is a very human story. Some of the stories are rather straightforward, but most are messy. Human beings being who we are, our lives don’t tend to travel down a neat and tidy path. My job is to take your financial story, lay out your options, and help you chose among them to get to the best place you can get to. Including with your home.

The country is nowhere close to working through its foreclosure epidemic. But let me help you get through your own personal part of it.

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Record Corporate Profits Are Not Lowering Unemployment Rate

U.S. corporations are making record profits quarter after quarter, yet unemployment seems to be stuck at a devastatingly high rate. Why aren’t these financially flush big businesses hiring?

I’ve been writing a string of blogs about how tax debts are dealt with in bankruptcy, and I’ll get back to that after today. This is the time of year when the nation’s major corporations report their 3rd quarterly profits, and so I found myself scratching my head about the disconnect between their huge profits and their lack of hiring. So I read a number of news stories and editorials and this is what I got out of them:

1.  Big businesses have gotten to be more “productive,” in the sense of producing more goods and services with less labor. That has happened partly through investments in labor-saving technology and partly by requiring employees to work harder and faster for the same pay. With the cut-throat labor market, companies don’t need to increase salaries to retain or replace their employees.

2.  Profits have increased because a larger percentage of sales for large U.S. corporations have been overseas. Around 40 per cent of their profits are from foreign sales. For many companies, sales are growing modestly in the U.S. while growing much faster elsewhere, especially in the “emerging markets” of China, India, and South America.  

3.  Relatively strong overseas sales come with job growth overseas instead of here. According to the U.S. Commerce Department, in the past decade, U.S.-based multi-national corporations added 2.4 million jobs outside the country while cutting 2.4 million jobs here. Jobs naturally grow where sales are growing–someone has to take customer orders at the 3,000+ KFCs in China! But of course there’s also increased foreign outsourcing of work that used to be done here, from manufacturing to computer programming.

4. Normally when businesses are more productive, resulting in more profits, they tend to expand, thus creating more employment opportunities. But this has not been happening for three reasons.

a. With the double-whammy of very high unemployment and loss of home values, U.S. consumers either don’t have the means or the attitude to spend money, so companies are leery about expanding to increase production.

b. The international business environment—particularly the European sovereign debt crises in Greece, Italy and elsewhere—is making big business cautious.

c. Political gridlock in Washington, D.C. makes business planning very difficult. With the Congressional deficit-reduction “super committee” scheduled to issue its report very shortly, big businesses have been sitting tight to see if this “super committee” will come up with its momentous compromise, and what it’ll consist of.

The bottom line: big businesses don’t need to hire to produce the goods and services they are producing, at least within the U.S., and they don’t want to expand and hire here because of lackluster consumer demand and high uncertainty in the world economy and in domestic politics.

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Federal Law Protects Renters from Foreclosure

A temporary federal law gives renters some protections against getting evicted from their homes when a bank forecloses on their landlord. The “Protecting Tenants at Foreclosure Act” is short—only two pages—and simple: after the completion of a foreclosure of a home or apartment building, the new owners of the property must allow  renters to continue staying there for either 90 days or through the end of their lease, whichever is longer. So even with a month-to-month rental, the renter would be allowed to stay for 90 days after the foreclosure. Of course have to pay rent and fulfill their side of bargain while they remain on the property.

Why has this been a problem? The public focus during this long foreclosure crisis has been on the millions of homeowners losing their single family homes. But many of these homes are in fact rented out to others. And there are also many foreclosures of multiunit residences—everything from duplexes to apartment buildings. In fact research by the National Low Income Housing Coalition estimated that “renters represent as many as 40% of the American families who will lose their homes in this crisis.”

While homeowners have long had an established set of protections during the foreclosure process, renters have had virtually none. Renters often had no idea that their landlord had fallen behind on mortgage payments and that their home was being foreclosed.  They found out only after the foreclosure sale had occurred and the bank or the new owner shocked them with eviction papers. The “Protecting Tenants at Foreclosure Act” provides at least a modest cushion of time in almost all situations, and the right to the full term of their lease for tenants who bargained for such longer leases.

This straightforward law contains very few exceptions. It does not apply if the tenant is also the owner of the property being foreclosed, or the owner’s spouse, child, or parent. The rental agreement must be genuine, and must provide for payment of rent at about fair market value (or with a legitimate governmental subsidy). Also, if after the foreclosure the new owner intends to live in the home as his or her primary residence, then the tenant must surrender the property after 90 days even he or she has a longer term.

This law is temporary in that it was to expire at the end of 2012. Last year’s financial reform law has extended that expiration to the end of 2014.

Maybe the most important part of the “Protecting Tenants at Foreclosure Act” is that it sets a threshold standard, but also explicitly states that it shall not “affect the requirements… of any State or local law that provides longer time periods or other additional protections for tenants.” During these last two years many states have recognized the need for tenant protections. If you are a tenant in a house or apartment that you are afraid is being foreclosed upon, contact our office to set up a consultation to discuss this and any other financial concerns you may have.

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10 Big Reasons to Get Legal Advice about Bankruptcy Before Selling Your Home

The SINGLE overarching reason to get advice from a bankruptcy attorney before selling your home is to save money, possibly a great deal of money.  I’ll tell you ten ways to do so—three today and then the rest in my next couple blogs.

1.  Avoiding judgment liens:  If some creditor has sued you in the past, that creditor likely has a judgment against you. You might not even realize or remember if this has happened to you. Or, a creditor may sue you in the near future, and get a judgment against you before the sale of your home closes. If a judgment has been entered against you, this usually means the creditor has a lien against your home. That lien amount is almost always substantially larger than the amount you owed the creditor. Most of the time, that judgment lien has to be paid in full before the house can sell. If the judgment is paid out of the proceeds of the house sale, this reduces the amount you receive. Or the lien could reduce the money you thought would go to more important debts, such as taxes, child support, or an ex-spouse. If there aren’t enough sale proceeds to cover the judgment, you will either have to pay the full judgment amount out of your pocket, or at least some discounted amount to get the creditor to release the lien. If you don’t pay it in full, you would likely continue owing the balance. And if the creditor won’t settle, you may not be able to go through with the sale. In contrast, either a Chapter 7 or 13 case often can get rid of that judgment lien and write off the underlying debt, allowing you to sell the home without paying anything on that debt.

2.  Stripping second and other junior mortgages:  Chapter 13 often allows you to “strip” your second (or third) mortgage from the title of your home. The law changes that debt from a secured debt to an unsecured one. It can do this when your home is worth no more than the first mortgage (plus any property taxes or other “senior” liens) by acknowledging that all of the home’s value is exhausted by liens that legally come ahead of that junior mortgage. As a result, these junior mortgage balances are thrown into the same pot as the rest of your other regular unsecured debts—all your other debts that have no collateral attached to them. When this happens, depending on your situation, you often don’t pay anything more into your Chapter 13 Plan. And even if you do have to pay something more because of that stripped “junior” mortgage, almost always you only have to pay pennies on the dollar. And you end up with your home completely free and clear of that mortgage.

3.  Buying time for a better offer:  A home sold in a hurry is seldom going to get you the best price. A basic rule of home sales is that the maximum price is gotten through maximum exposure. If you feel under serious time pressure to sell because of creditor problems, the extra time provided by filing either a Chapter 7 or 13 case could get you just the additional market exposure you need. No question–filing a bankruptcy can in some respects complicate the sale of your house, and there many situations when a bankruptcy filing will not likely help you reach your goals. But in the right situations the advantage of getting more time on the market far outweighs any potential disadvantage.

In my next blog I’ll give you more ways that bankruptcy can give you huge advantages involving your home. If some of these apply to your situation, they can totally change whether or not you should sell your home, and if so, when you should do so.

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Stopping the Foreclosure of Your Home Temporarily and Permanently through Bankruptcy

Both Chapter 7 and Chapter 13 can help you save your home. Which one is better for YOU?

You have almost for sure heard that the filing of a bankruptcy stops a foreclosure. You may have also heard that Chapter 13—the repayment version of bankruptcy—can be a good tool for saving your home in the long run. Both of these are true, but are only the beginning of the story. This blog today tells you more about stopping a foreclosure. My next blog will get into longer term solutions.

The “automatic stay” is the part of the federal bankruptcy law which immediately blocks a foreclosure from happening. The very act of filing your bankruptcy case “operates as a stay,” as a court order stopping “any act to… enforce [any lien] against any property of the debtor…  .”

But what if your bankruptcy case is filed and the mortgage lender or its agent can’t be reached in time so that the foreclosure sale still occurs? Or if there’s some miscommunication between the lender and its agent or attorney, with the same result? Or if the lender just goes ahead and forecloses anyway?

As long as your bankruptcy is in fact filed at the bankruptcy court BEFORE the foreclosure event, then that foreclosure is not legally valid, whether it occurred by mistake or intentionally. (This filing “at the bankruptcy court” is usually actually done electronically from my office, with a date and time-stamped record proving when the court filing took place.)

IF a foreclosure happens by mistake after the filing of your bankruptcy, lenders are usually very cooperative in legally undoing the foreclosure and its documentation. If your lender would fail to undo such a foreclosure after becoming aware of your bankruptcy filing, it would be in ongoing violation of the automatic stay, exposing itself to significant financial penalties. That would be rare.

Does it matter whether your bankruptcy case is a Chapter 7 or Chapter 13 one for purposes of the automatic stay?

No, the automatic stay is the same under both Chapters, and would have the same immediate effect.

On the other hand, how long the protection of the automatic stay lasts can definitely depend on which Chapter you file. That’s because even though you get the same automatic stay, the other tools each Chapter gives you for protecting your home are very different. So your mortgage lender may very well react quite differently depending on the Chapter you file, as well as on what you propose to do about your home and your mortgage within that Chapter. I’ll write about those options  in my next blog.

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The Option ARM Foreclosure Time Bomb Fuse is Burning . . . But Will it End with a Fizzle?

Does the recent increase in foreclosures signal the long-anticipated surge in defaults of Option ARMs (adjustable-rate mortgages) that were scheduled to reset their interest rates right about now?

That’s a question that came to mind when I noticed the recent uptick in new home foreclosures.

Option ARMs gave borrowers a choice of paying principal and interest, interest-only, or else lower payments covering only a part of the interest and none of the principal. Most people paid on the low end, which increased their principal balances every month. Plus many of them had low “teaser” interest rates. These rates would reset after 5 years, or sooner if the principal balance reached a certain threshold, say 120% of the original amount. People could get more house for less money, but with a greater gamble that house values would continue to rise.

Since $600 billion worth of Option ARMs were made from 2005 through 2007, we are now right in the thick of when they were scheduled to reset. A similar flood of resets among subprime mortgages in 2006 and 2007 likely was a major cause of the “subprime mortgage crisis” which ignited the Great Recession. Around that time lots of smart folks were warning about this huge second wave of mortgage defaults and foreclosures that was to hit now.

But it’s not happening, or at least not nearly with the intensity anticipated. Why not?

1. Because many of these mortgages never got as far as their reset dates. They fell into default as the economy got worse and property values declined. They’ve just been part of the mix of mortgages in the foreclosure pipeline through these last two-three years.

2. Something like 20% of the Option ARMs have been modified by mortgage lenders and servicers, many into fixed-rate mortgages. Although mortgage modification efforts overall have been roundly criticized for their ineffectiveness, the lenders recognized their self-interest in avoiding the anticipated Option ARM defaults and so they were proactive with this category of mortgages.

3. Because the economy has been so slow in its rebound, interest rates have stayed extremely low for much longer than most anticipated. As a result the interest rate resets have increased mortgage payments much less than expected. In fact, in some cases mortgage payments have actually gone down.

4. Unlike subprime loans which mostly went to homeowners with shaky credit scores, Option ARMs went to borrowers with average or better credit. Those that have not already defaulted, and who are getting relatively modest payment increases at reset time, tend to be borrowers who can better afford to make the payments.

However, there still are millions of Option ARMs, most of which ARE requiring payment increases when they reset.  A large percentage of ARMs are at least 30 days late. So although the reset impact is not nearly as bad as many anticipated, with the very shaky economy many homeowners with these mortgages, even if they had decent credit a few years ago, are very vulnerable now.

If you have an Option ARM, or any other kind of mortgage, and need advice about your options, please come in to see me.

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Is a New Wave of Foreclosures Rising?

In August, mortgage lenders started so many home foreclosures that the month-to-month increase was the biggest since August of 2007. For nearly a year the number of foreclosures has been relatively low as lenders have reacted to an explosion of challenges to the legality of their mortgage and foreclosure practices. But this new surge in foreclosure starts may reflect that the lenders think they have worked through these problems.

According to RealtyTrac, mortgage default notices–the first step in the foreclosure process—increased by 33% from July to August.

That increase has to take into consideration that July’s numbers had been relatively low. Not only had the number of foreclosure filings come down modestly—by 4%–from the prior month. They were also down significantly—by 18%–from a year earlier. In fact, July 2011 had the lowest foreclosure activity in 44 months.

Now with this 33% increase in August, the tide seems to be turning. But is it going to turn into a new wave of foreclosures?

That’s impossible to tell. Not only are there countless factors at play here, they shift all the time, reacting to the constantly changing environment.

Just take a look at one of the factors affecting how many foreclosures are filed: the ongoing legal challenges to foreclosures. These challenges are making their way through the court appeals systems. For example, just a couple days ago the Supreme Court of Alabama ruled that the embattled MERS (Mortgage Electronic Registration Systems) has standing to foreclose. That ruling will presumably open the foreclosure spigots in Alabama, because some lenders undoubtedly had held off on foreclosing while awaiting that ruling. Similar dynamics are at play in just about every state.

This means is that foreclosure trends can be very much a local and dynamic affair. This means you need local advice. Day in and day out I constantly deal with mortgage lenders, and help local homeowners make good decisions about their homes. Give me a call so that I can help you, too.

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