This court case should be of concern to you if you intend to walk away from your home because you are delinquent or if your are so “underwater” with your mortgage that it does not make sense to fight to keep a home that may never be worth what is owed on it.   If you do walk away (without filing bankruptcy), your lender may sue you on the mortgage loan contract instead of foreclosing.  The lender would refrain from foreclosing to avoid a legal requirement associated with foreclosure that would require the lender to appear before a judge to argue that the foreclosure sale price was reasonable.

In my article, I pointed out that this change in the law might encourage more people to file bankruptcies since a bankruptcy can discharge any deficiency claim.

However, there is another potential problem area that could arise if your lender holds off on foreclosing.  This problem area relates to homeowners’ association (HOA) dues.

Under Georgia law, homeowners’ associations enjoy special protections.  Unpaid dues can automatically can become liens that encumber your property.   As HOA lawyers read the law, if you file a bankruptcy and surrender your home, your delinquent HOA dues as of the date of filing will be discharged.  However, ongoing dues that accrue after the filing remain your obligation until title passes.  In other words, if your HOA dues are $100 per month and you file Chapter 7 bankruptcy on February 28, your dues begin accruing again on March 1.  If your lender does not foreclose until November, you would, in theory, be responsible for 8 months of dues, or $800, after your filing, even though you have stated  your intention to surrender your house in bankruptcy.

Obviously, a provision of the law that involuntarily re-obligates you to hundreds or thousands of dollars of monthly dues on an asset you have surrendered seems contrary to the public policy associated with bankruptcy.  Nevertheless, this is how lawyers for homeowners’ associations read the law.

I discussed this issue with an attorney at a law firm that represents HOA’s in the Atlanta area and throughout Georgia.   This lawyer offered the above explanation of the law but he said that as a practical matter, his firm has not and does not plan to sue a homeowner for HOA dues that arise after a bankruptcy case has been filed, as long as the homeowner vacates the premises.  However, the homeowner is presumably fair game if he remains in the house (or rents it out) while the bank is dilly-dallying about foreclosing.

He also advised me that his firm does not report post-petition HOA delinquencies to credit bureaus.

The problem here, of course, is that the HOA lawyer’s explanation of policy is just that – a voluntary policy.  Is it possible that this HOA law firm or one like it could change its policy?  Is it possible that the HOA itself might sell this receivable to a debt buyer who would not hesitate to sue you?

I would not assume that an HOA or a debt buyer will necessarily write off otherwise collectible debt, but until this issue is litigated in a Georgia court, we will not know the answer to this issue.  I do think that a homeowner who remains in a house after surrendering that house in a bankruptcy will face an increased likelihood of an HOA lawsuit.  I will also continue my practice of rejected the HOA contract as part of my bankruptcy filings.

This individual earns over $100,000 annually, but, unfortunately he used to earn more than double this amount.  His problem was not the mortgage, but his other bills, including a very high car payment and a mortgage payment arising from a failing real estate investment.

Not surprisingly the foreclosure notice got his attention.  He immediately took action by calling me to discuss Chapter 13 bankruptcy and by contacting his mortgage company to discuss repayment options.   By the Wednesday prior to the pending foreclosure sale scheduled for the following Tuesday, my client had provided me with enough information so that I could prepare a rough draft of a Chapter 13.   In this case, by the way, my client and I entered into an agreement whereby he paid me around $300 to open a file and to start entering information into my petition preparation program.

On the pre-foreclosure Wednesday he called to say that after a lot of discussion he was expecting a decision the next day from his mortgage company but that if he did not hear from them by mid-day on Thursday, we would be proceeding with the Chapter 13.  A few hours later he called back to say that his mortgage company had agreed to postpone the foreclosure until September and that the Chapter 13 was on hold for now.

Let’s analyze what my client did right and what he did wrong.

On the positive side, he did the following right:

• he did not panic – he approached the problem as a business problem not as a personal, moral failure
• he began to address the problem early.  His first contact with me was literally the day he received the foreclosure notice.  He correctly guessed that the negotiation process with the lender would take several weeks
• he took a two step approach to the problem – he opened negotiations with his lender, and at the same time he started planning for a Chapter 13
• he retained me early on in the process and paid me a small sum ($300) to start the petition preparation process.  He also obtained his credit counseling certificate shortly after our first meeting.  Contrast that to some of the potential bankruptcy filers who call me on the Friday before foreclosure looking to start the process.
• he convinced his lender to delay the foreclosure by two months – a 2 month delay is preferable to a 1 month delay in that my client now has enough time to try and sell his home

Now, what did he do wrong?

• my main criticism is his failure to get a written confirmation of the suspension of the foreclosure.  What if the lender’s representative failed to communicate with the foreclosing attorney?  What if the lender’s representative is simply dishonest?  Can a verbal promise by a lender’s representative to delay a foreclosure be enforceable?  What would the remedy be?

I am very wary of relying on verbal promises.  In law school, my contracts professor once made the comment that “an oral contract is worth the paper it is written on,” and I do not disagree.

I did find a California state appellate case in which an appeals court found that a homeowner who relied to his detriment on a broken promise by a lender to delay a foreclosure had a cause of action for money damages.  However, even in this California case (which would not serve as binding precedent in Georgia) the foreclosure was not reversed and the only issue to be considered by the trial court on appeal was money damages.  Add to this months and months of delay and I wonder if the homeowner in the California case felt that he won anything.  (Thanks to Michael Renne and his San Francisco Bankruptcy Law blog for his post about Garcia v. World Savings.)

When your home is at risk, I would not rely on any verbal promises from your mortgage company.  I would also not rely on an email as the admissability of emails as evidence is questionable.  Instead I would suggest that you ask for a faxed letter from your lender or its attorney on letterhead, with the original mailed to you.  Further, if you enter into an agreement with the lender directly, you should contact the foreclosing attorney’s office (with a copy of the foreclosure suspension letter) to confirm that they are aware of the deal as well.

Chapter 13 bankruptcy is a tool that can be used to save your home from foreclosure.  But the big question sometimes isn’t “can I save my home,” but “should I save it?”

We all know that there’s been an epidemic of foreclosure resulting from the recent economic downturn.  Jobs were lost, values plummeted, and foreclosures have been on the rise.

So it’s natural to wonder, “can I file Chapter 13 bankruptcy to save my home from foreclosure?”  However, when you meet with a bankruptcy lawyer to explore your options, you need to explore all your options—bankruptcy and otherwise.  And that might be not saving your home.

When you’re having financial problems and seek advice, you should take the opportunity to review your entire financial situation.  Can you afford your vehicle payments? Can you “tighten the belt” and cut back on some unnecessary expenses?  And most significantly, “should you try to save your home?”

In my Charleston, South Carolina bankruptcy practice, I get calls every week from folks facing foreclosure.  The potential bankruptcy client’s question is always a “can we?”  Can we stop foreclosure?  Can we make the lender listen?  Can we catch up on these payments we’ve missed?  Can we protect our home? Can Chapter 13 bankruptcy help?

But I always focus on the “should we.”  Here are some factors to consider when deciding whether you should use Chapter 13 to keep your home:

• Can you afford the mortgage payments?  Do you have large house payments you can’t really afford, perhaps with more than one mortgage?  For example, it may be that you can afford payments of $1800 a month, but your current payments are $2800 per month.  Absent a mortgage modification, that’s a tough nut to crack every month.
• Is your interest rate scheduled to adjust?  It may be that you can afford your payments now but maybe not once your payments adjust.
• Do you have equity in your home?  (Equity is the value of the property less any liens (like mortgages, outstanding taxes, assessments, and home owner’s dues).  Lately, I’ve been getting calls from clients who not only have no equity, but actually have “negative equity.”  For example, your house might be worth $250,000 and you owe $350,000.  If that’s the case, you might not want to try to save your home from foreclosure.  You’d actually have more equity if you rented!
• Is this where you want to live for the indefinite future?  If not, perhaps you should use your financial problems to reevaluate where you want to live.  Perhaps renting in another area would lessen your commute or allow your children to enroll in a better school?

These are just a few factors you should consider.  You should weight all the pros and cons of saving your home. You can then have your bankruptcy lawyer help you decide whether filing Chapter 13 bankruptcy to save your home really makes sense.

Jonathan’s note: in addition to the very relevant points Russ makes, let me add this:  if you decide that saving your house in a Chapter 13 does not make sense, a “fresh start” Chapter 7 could be appropriate.  Similarly, you can still file a Chapter 13 to reorganize  your other debts while you surrender your home.   My point – personal bankruptcy is not a “one size fits all” solution – a good bankruptcy lawyer can offer you several options to consider, many of which you may have never considered.

If there is one lament that I hear from my colleagues, it is this – “I wish my clients would call me earlier, when there is time to evaluate bankruptcy and non-bankruptcy options.”  Sometimes, when there are only days or hours to go before a foreclosure, an emergency Chapter 13 may be your only choice.   Even if bankruptcy is something you really do not want to think about, you would be wise to establish a relationship with a bankruptcy lawyer before you end up facing a crisis.

I know that in some bankruptcy filing districts, on-going payments are collected by the trustee and paid through the trustee’s office.   The trustees in the Northern District of Georgia do not do this as a matter of course.

This means, therefore that Chapter 13 debtors have the significant responsibility for paying their mortgage payments on time each month after their cases are filed.  If you miss one or two payments, the mortgage lender can and will file a Motion for Relief from Stay.  They will argue that your missed payments reflect your inability to afford your mortgage and that bankruptcy protection ought to be lifted so that the mortgage lender can foreclose.

As a rule, bankruptcy judges are reluctant to lift the stay because doing so would mean that you will lose your homes, perhaps because of an emergency or unexpected situation beyond your control.  I have argued a number of Motion for Relief hearings and in almost every case, the judge will give my client “one more chance” to keep his home.  Usually this means that you will have to cure the “post-petition” arrearage over the next  six months.

Attorneys that represent mortgage companies know that they are unlikely to get the stay lifted, so they are usually agreeable to a deal, at least the first time a post-petition delinquency happens.

However, and this is a big however, the a consent agreement with your mortgage company to deny its motion for relief from stay comes at a cost.  Not only will you have to repay your missed post-petition payments over a short (usually 6 month) period of time, but you will also have include late payments in this agreement.  The lender’s attorney will also include a hefty attorney’s fee provision – usually $600 to $750 for the privilege.

A case I am working on right now should give you and idea about how this consent order process works.   My client fell behind on his mortgage payments by two months in October and November.  I did get a letter from the mortgage company’s attorney but my client did not have the cash.  The creditor’s attorney filed a motion for relief in December with a hearing scheduled for mid-January.  Just a few days ago, my client called to say that he had the missed two months payments and that he had sent the money in to the mortgage company.

The lender’s attorney takes the position that it had to file a motion and that it will go forward with its motion.  Our options are to settle by paying the $750 + the two missed late payments of about $90 each – a total of $930, or we can take our chances in front of the judge.   Will the judge deny the motion on the grounds that the payments have been made, but still award attorney’s fees because the lender had to retain counsel?  What if the judge is in a really bad mood and decides to lift the stay on the grounds that the debtor was technically in default?

The choice, of course, is the hands of my clients, but I can guess what they will decide.  Even though they feel that they are being held up by the mortgage lender, they will take the deal and pay the $930 so they can sleep at night and not worry about possibly losing their house.

This particular case is probably a winner – I believe I could convince the judge to reduce the attorney’s fee demand because the missing two months have been paid.   Usually, the consent deal involves paying two or three months over time and my argument that fees ought not be added is much weaker.

So, bottom line – if you are in a Chapter 13 and you fall behind on your mortgage, or insurance lapses on your house and the lender files a legitimate motion for relief from stay, you can figure that you are going to get stuck paying $600 to $750 in attorney’s fees to the mortgage company’s lawyers.

Georgia, as you may know is a “non-judicial foreclosure” state, meaning that in the event of a default in payments, a lender does not have to go to court to retake his property.  Instead, the lender need only give notice of the pending foreclosure to the homeowner, then advertise for four consecutive weeks the foreclosure sale in the official newspaper of the county where the property is located.  Then the lender’s attorney can sell the property at open auction on the first Tuesday of the following month.  In a worst case scenario, a foreclosure in Georgia can be completed in as little as 45 days.

Eviction, too, is not forgiving.  Georgia law offers no safe haven or notice period for a tenant who discovers too late that his rental payments were ending up in the pocket of his landlord, rather than as payments to a mortgage company.

Countrywide is now owned by Bank of America (as of July, 2008) and the Countrywide/Bank of America plan is designed to settle complaints filed against Countrywide by several state Attorneys General over predatory lending practices.

This foreclosure prevention plan will start in December and will reduce mortgage payments for eligible homeowners to no more than 34% of the borrower’s gross income.  Countrywide is now in the process of screening its files and will notify eligible borrowers.

The BankruptcyProf blog, edited by Professor Jonathan Hayes of the West Los Angeles School of Law explains why sub-prime mortgages are a problem and why this market collapsed.  The explanation consists of a PowerPoint presentation using stick figures.  If only Economics 101 was so clear and enlightening.

Take a look and let me know what you think.

• out of control fees and costs added to mortgage loan balances
• failure of mortgage companies to properly account for payments
• refusal or failure of mortgage companies and their counsel to resolve disputes amicably

The Times tells the story of a Georgia couple – the Atchleys – who filed Chapter 13 and paid their mortgage but found themselves on the receiving end of multiple motions for relief asserting that mortgage payments had been made.  In addition to the stress and cost of dealing with these inaccurate motions (which would be withdrawn at the last minute), the Atchley’s discovered that their payoff balance was being adjusted higher and higher with questionably fees and costs.  The Atchleys eventually sold their house but now the United States Trustee has sued Countrywide claiming that its pattern of conduct was an abuse of the bankruptcy system.

The Atchleys decided to sell their home, and contend that they lost over $20,000 in equity.  I have seen similar cases in my own practice.   One case in particular comes to mind.  My client filed bankruptcy to stop a property tax sale, and subsequently fell behind in her ongoing mortgage payments.  She then decided to sell her condo (there was significant equity), the closing attorney gave her a payoff figure that seemed extremely high.  I looked at the payment ledger and I saw overcharges and double billing.  One item showed a charge of $650 as attorney’s fees arising from a Motion for Relief.  However the Order on the Motion for Relief provided for only $550 in attorney’s fees and my client had already paid that fee directly when she cured her post petition arrearage.  There was also a $2,500 "analysis charge" that no one could explain.

While Chapter 13 remains the only option to stop a foreclosure, you should realize that there is a good likelihood that if you file, your payoff balance will go up and that you may have limited recourse to challenge these charges.

Thanks to my colleagues at Clark and Washington for bringing the New York Times article to my attention.

• housing prices (the value of homes in most places in the country has gone down)
• interest rates
• inflation
• the stock market
• our trade imbalance with other countries
• the decline of the dollar
• oil prices
• the stability of the stock market and commodities markets
• employment
• foreclosures

CNN and Fortune Magazine have produced a television program called "Busted – Mortgage Meltdown" that explores all of the implications of our mortgage crisis.  I suspect that the show will end up on-line but for now, you can visit the multi-media online companion to the show. 

Thanks to Paula Wethington from the blog Monroe on a Budget for writing about the CNN/Fortune program on her blog.