November 24, 2017

File Bankruptcy if You are not Broke? Maybe Not Such a Crazy Idea

owe too much on mortgageThe Atlanta Journal Constitution ran a front page story on Sunday, April 14 entitled More than 40% of Georgia Homes Underwater.  The AJC reporter notes that “there’s not another metro area in the United States with as many concentrated pockets of mortgage holders who are underwater in their homes.  No place else comes close.”

Your house is considered underwater if it is worth substantially less than what you owe.  From the mid-1990’s through the mid-2000’s, home values in metro Atlanta rose and mortgage lenders offered outrageous deals to encourage residential purchases.  It was common to see interest only loans or 100% financing which required nothing down from the purchaser.

As long as home prices kept rising, you could refinance over and over, and even take cash out.  Rising prices minimized the risk to lenders so loan underwriting standards were lax.  I regularly spoke to potential bankruptcy clients who earned $50,000 to $70,000 annually but were living in $350,000 to $400,000 homes.  They were meeting with me to deal with excess credit card debt – in many cases, these folks kept their expensive homes even while filing bankruptcy.

When the real estate market crashed in 2008, your home value may have plummeted, but the mortgage obligation remains.  Thus, as the AJC points out, there are many areas in metro Atlanta where homeowners are making mortgage payments on homes that may never increase in value to the balance on the loan – the mortgage is kind of a permanent rental. [Read more…]

Can You be Sued for Non-payment of your Mortgage if You Do Not Reaffirm?

I recently received an email from a blog reader asking about his obligations to his mortgage company when he does not reaffirm:

I have read your blog and you are very through so I write you with hopes that you might answer this question for me. I file Chapter 7  in 08, and did not reaffirm my loan. I am still living in the house and did make some payments. However, i have not for the last 8 months. It is my understanding that I must sign a document to reaffirm and that continuing payment in itself is not a reaffirmation…or?  Well it gets a little more complicated.  My house is valued at $410,000 and the bank has offered me a deal that is going to be hard to refuse. They have agreed to let me do a short re-fi in the amount of 180k.  If I agree to that is that in itself a reaffirmation?

Here is my response: in most cases, when you take out a mortgage loan, you are signing two different types of agreements.  The first type is a promissory note whereby you personally agree to make the payments.  The second type of obligation creates a property lien, meaning that you, as the owner of the property, pledges that property as collateral for the loan.

When you file a Chapter 7 and receive your discharge, your personal obligations are extinguished.  However, a Chapter 7 discharge does not eliminate the mortgage company’s lien against your property.  If you “reaffirm” your mortgage, you are actually reaffirming the promissory note and your personal obligations to pay.

For years, many bankruptcy attorneys advised their clients to avoid signing reaffirmation agreements for mortgages, car loans or any other secured debt.  The reasoning – even without a personal “guarantee” lenders are protected by the property lien.  If the lender is willing to accept payments (the so-called “stay and pay” option), the now discharged debtor keeps his property, keeps making payment, but does not have personal liability on the note. [Read more…]

Federal Mortgage Assistance Programs Modified to Include Bankruptcy Debtors

Every week I receive several phone calls from homeowners who want to take advantage of the federal HAMP (Home Affordable Mortgage Program) but do not know where to start.  Often these callers are behind two or three months and are receiving foreclosure notices, but they really do not want to file Chapter 13 before exhausting all non-bankruptcy alternatives.

These homeowners may have received foreclosure notices that suggest that the mortgage lender intends to negotiate or modify their mortgage.   Georgia law now provides that all foreclosure notices must include a “negotiation provision.”   O.C.G.A. Section 44-14-162.2 provides:

Notice of the initiation of proceedings to exercise a power of sale in a mortgage, security deed, or other lien contract shall be given to the debtor by the secured creditor no later than 30 days before the date of the proposed foreclosure. Such notice shall be in writing, shall include the name, address, and telephone number of the individual or entity who shall have full authority to negotiate, amend, and modify all terms of the mortgage with the debtor, and shall be sent by registered or certified mail or statutory overnight delivery, return receipt requested, to the property address or to such other address as the debtor may designate by written notice to the secured creditor.

However, in real life, very few of these homeowners have had much success in reaching a deal with their lenders.

What about the highly touted HAMP program?   A quick search on the Internet reveals dozens of articles suggesting that, to date, HAMP is not working.

Now comes word that the federal government has modified HAMP to include homeowners in bankruptcy with new guidelines effective on June 1.   Supplemental directive 10-02 specifically addresses the applicability of HAMP to homeowners in bankruptcy. [Read more…]

Another Debtor Ripped Off by a Foreclosure Relief Scam (Part One)

This afternoon (September 9), I had a chance to observe a very interesting case heard by one of the judges in the Northern District of Georgia.  The issue at hand was a motion filed by a mortgage creditor to “validate” a foreclosure that had been cried out on the courthouse steps back in July.

The mortgage creditor went first and presented her client’s case:  the debtor had filed a bankruptcy on the morning of July 7, 2009 minutes before the lender sold the debtor’s house on the courthouse steps.  The lender was not aware of the filing and proceeded to foreclose.  When the lender’s attorney returned from the courthouse, he discovered that a bankruptcy had been filed, so he did not record the deed.

Instead, the lender retained bankruptcy counsel who filed a motion have the bankruptcy annulled and the foreclosure validated.   If validated title would pass and the lender would now be the title owner of the property.  In such a situation the debtor’s bankruptcy would offer no protection and the debtor would be subject to eviction.

The mortgage company’s attorney noted that this was the fifth bankruptcy filed by the debtor and his wife, and the third case filed this year to stop a foreclosure.   In none of the cases filed this year did the debtor or his wife make any payments to the trustee or pay anything to the mortgage company.  In none of these cases did the debtor or his wife file any of the required bankruptcy paperwork.

Clearly the debtor and his wife were acting in bad faith, argued the mortgage company’s lawyer, and they should not be allowed to misuse the bankruptcy process.

What would the debtors have to say?  [Read more…]

Loan Modification Myths Busted

Can you modify your mortgage loan to reduce your principal balance? your interest rate?  other terms of your mortgage?  Over the past few months, I have heard a lot about mortgage modifications but very few details have emerged and I know of no one who has actually and successfully modified his mortgage.

I may be on the right track in obtaining more information.  One of my new colleagues at Solo Practice University (where I teach a class about creating a Social Security disability practice) is an attorney in New York who has actually represented clients and has obtained mortgage modifications.  She will be teaching a class about real estate law at SPU and I hope to be able to pick her brain about mortgage modifications.

In the meantime, here is a link to a recent blog post that Stefanie wrote entitled The Top 5 Loan Modification Myths.   I hope that more solid information from legitimate professionals who understand mortgage modification becomes available so I can bring it to you in the pages of this bankruptcy blog.

Why Has the Sub-Prime Mortgage Crisis Been so Toxic to the United States Economy

In my last post, I attempted to offer a simple explanation about how the housing market in the United States got into trouble.   In this post I want to discuss some of the highlights (or lowlights) of what this crash means to you.

Let’s start with some of the financial institutions that invested so heavily in those profitable subprime mortgages and securities that were created to allow investors to sell and resell parts of these mortgages.  When you hear the term “securitization” it means that an investment banker has created a security (think share of stock) from a package of loans.   Lenders and investment bankers got fat and greedy.

Remember the old line, solid mortgage lenders like Countrywide, Chase and Bank of America?  Remember the investment banking giants like Merrill Lynch and Lehman Brothers.  These institutions had made so much money lending, servicing and selling subprime loans and securities derived from those loans that they took outrageous risks. [Read more…]

A Simple Explanation of the Sub-Prime Mortgage Meltdown

The U.S Federal Reserve anticipates that in fiscal year 2009, the Unites States’ economy may shrink between 0.5% and 1.3%.   By historical standards, this means that we are in a serious recession.  This slowdown may be attributed to many factors – an increase in unemployment, a lack of consumer confidence, a lack of confidence in the investment community and an overall reduction of the amount of liquid assets in our banking system.    Perhaps the biggest factor that has hurt the American economy (and the world economy as well) is what can only be called a collapse of the housing market in the United States.  Many lenders have gone bankrupt, housing values have diminished and many homeowners are in trouble.   Because the housing market is so big it affects every facet of the American economy and when the housing market is in trouble the entire financial foundation of the United States will be in trouble as well.  How did we get here and what are the solutions?

Why is the housing market in the United State in trouble?   A big part of the problem arises from a collapse of  the so-called “subprime” mortgage market.  Until just a few months ago, subprime lending – or lending to credit challenged borrowers was a big profit center for many banks and mortgage lenders.   Subprime lending was so profitable that many lenders changed their business models to accommodate the demand for subprime credit.  Subprime loans, or more accurately, pieces of subprime loans, were sold off by loan originators as securities in the stock market. [Read more…]

Are Mortgage Modifications in Bankruptcy a Good Idea – Part Two

Earlier this month, I wrote a post on this blog setting out the question of whether Congress should enact legislation empowering bankruptcy judges to modify the terms of mortgages within a Chapter 13 bankruptcy.

Several of my colleagues in the Bankruptcy Law Network have argued that adding this power to the authority of bankruptcy judges will help stem the foreclosure crisis we are seeing in many cities and towns and that so called “voluntary” mortgage modification programs created by mortgage lenders has not and will not work.

Bankruptcy Law Network founding member Cathy Moran, who I respect greatly, has created a special advocacy page on her website that you can use to encourage your elected representatives to support mortgage modification in bankruptcy.  At  the same time Cathy notes that the judicial mortgage modification legislation now circulating in Congress leaves many unanswered questions.

North Carolina bankruptcy attorney Adrian Lapas, writing on the Bankruptcy Law Network blog, makes a compelling case in favor of judicial mortgage modification – click on the link to read Adrian’s post.

What, then, are the arguments against judicial mortgage modification.   A thoughtful and well reasoned argument against modification comes from Andrew Grossman of the Heritage Foundation.   Mr. Grossman argues that judicial mortgage modification will impose uncertainty and financial loss on mortgage lenders, thereby increasing the cost of mortgage loans in the open market.   Credit, therefore, would further tighten, causing additional limits on mortgage availability. [Read more…]

Are Mortgage Modifications in Bankruptcy a Good Idea – Part One

There has been a lot of chatter on bankruptcy blogs and bankruptcy lawyer forums about the possibility that Congress will amend the bankruptcy laws to give judges the power to modify mortgages.   To offer some perspective, bankruptcy judges have long had the power to modify vehicle loan contracts and other secured debt claims but never mortgage debt.

When I first started practicing bankruptcy law some 20 years ago, I was introduced to the term “cram down” which is a kind of bankruptcy lawyer slang for the process of forcibly changing the terms of a contract against a creditor’s interests.  In a typical car loan cram down, you might enter into bankruptcy with four years remaining on a five year note, a monthly payment of $530 per month, an interest rate of 12% and a total outstanding balance of $28,000.   After cram down the interest rate might be 6% and the outstanding balance may be $18,000 (which represents that approximate value of the vehicle) and the monthly payment to the creditor within a Chapter 13 plan might be $250 per month.

As you can see from this example, the purpose of a cram down is to bring a debtor’s obligation more in line with the value of the collateral and prevailing interest rates.  I suspect that Congress allowed cram downs on car loans because it saw a problem in the market place whereby consumers with poor credit were ending up with unreliable used cars at unreasonable terms in the secondary market.

Debtor’s attorneys also included cram down provisions in Chapter 13 plans to modify the terms of other secured loans, such as furniture and jewelry.  However, home loans were specifically excluded from cram down.

In 2005, with the enactment of the BAPCPA changes to the bankruptcy laws, Congress added restrictions to the power of judges to cram down vehicle purchase loans.   In other words the era of freewheeling bankruptcy cram downs was over.   Under the amended law, vehicles purchased less than 910 days prior to the filing of a bankruptcy case were not subject to cram downs.

These new restrictions on the authority of a judge to forcibly modify the contractual terms between a debtor and his car finance company were the result of extensive lobbying on the part of the automobile industry who argued that market forces, not bankruptcy judges ought to set the terms of vehicle purchase financing.

There has been no organized effort to change the rules regarding vehicle cram downs.   Instead, Congress has turned its attention to mortgage loans.   Perhaps this is not surprising since the federal government, through its mortgage guarantees, now owns or controls a fairly significant chunk of mortgages owed by Americans.

Legislation is now circulating in Congress that would allow a bankruptcy judge to change the terms of a mortgage, which would involve such things as:

  • reducing the outstanding balance to line up with the current market value
  • modify the terms (monthly payments)
  • change the interest rates

The sense among bankruptcy lawyers is that if this legislation makes it into law, Chapter 13 bankruptcy will become a viable and attractive option to middle class families who might never have considered bankruptcy relief.   Mortgage debt is often a family’s largest obligation and an opportunity to “re-write” one’s mortgage at more favorable terms while at the same time reducing credit card debt and canceling unfavorable leases and service contracts may very will put the bankruptcy option on the table.

Is it a good idea to enable mortgage loan cram downs?   If you have a mortgage and have been contemplating bankruptcy should you wait?  We’ll explore those questions next….

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