Category Archives: Mortgages and Foreclosure

Should You Apply for a Forbearance?

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Lots of creditors are offering forbearance deals right now.   The thing to remember about a forbearance is that it doesn’t erase the debt — and that can be either a useful tool or an anchor around your future neck.

The first thing I will tell you about any forbearance agreement is to read it — all of it.  Ask questions, especially about the pay back and especially about interest rates and fees.  What will it ultimately cost you?  Then consider what it is that you are forbearing and what are your other options.

Credit cards are offering forbearance plans, and they can be really nice tools.  Ask all the questions, and then ask yourself one more.  What is the likelihood that I will be filing for bankruptcy before I get this account paid in full?  Remember, forbearance agreements are intended to be repaid, but if it is an unsecured debt and you wind up filing for bankruptcy anyway, the balance owed at the time that you file for bankruptcy is not likely to be repaid regardless.  So, doing a forbearance deal with credit card companies can be a useful tool, especially if it frees up cash for you to stay current on your home, your car or your utilities.

I will caution you that borrowing money with the intention of filing for bankruptcy and not repaying it is called bankruptcy fraud, and it is seriously illegal.  So, don’t enter into any agreement with the intention of not following through.  Understand, however, that intentions and future realities can differ for many very real reasons — including the simple fact that we are living in very uncertain times.

Many utilities are offering forbearance options as well.  Do what you have to do to keep the lights and the water on, but do stay informed about the policies and regulations governing shutting off service.  Knowing that can help you negotiate a better deal.  Also, if you wind up filing for Bankruptcy, the utility companies have some special rights.  They can require a new deposit in order to continue providing service after the case is filed.  Of course, you will have to pay for all service as the bills come due after you file as well.

Mortgage forbearance offers are different.  They frequently simply defer a few months payments with the expectation that they will all be repaid in a lump sum at the end of the forbearance period.  Sorry, but that is neither likely nor helpful.  A second option can be to apply for some type of permanent loan modification at the end of the forbearance period.  That would be more helpful (depending on the terms of the modification), but it can be difficult to predict at the beginning of the forbearance period what the likelihood is of getting a favorable modification some months in the future.

Counting on a future modification can wind up with a mortgage account falling further and further behind with not just missed payments but also a host of fees assessed by the mortgage company.

A mortgage forbearance may also add the missed payments to the end of the mortgage term.  Consider carefully how the accrual of interest will effect this.  I am frequently surprised by the number of people who don’t do the math to figure out just how much that forbearance will cost them.  It may still be the right decision, but once your future straightens out a bit, it may be very wise to start making small payments every month towards getting those payments paid sooner.

Another thing to consider is that a Chapter 13 bankruptcy is one of the best tools for getting current on a mortgage.  So, if you take a forbearance agreement hoping that you will get a loan modification or an extended time to get the payments current — and that doesn’t work out.  A Chapter 13 filing can give you up to five years to cure a mortgage arrearage.  A Chapter 13 filing can also deal with credit cards that have forbearance balances and give you limited abilities to get utility services back in good standing.

Always remember, no matter how bad things look, it is always worthwhile to know your options, and that includes knowing what a bankruptcy will or won’t do for you.

Elaine

 

 

 

Mortgage Payments and Coronavirus

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Before you call your mortgage company to find out what they can, or will, do to help you through this current mess we all find ourselves in, there are a couple of things you should know.

First, your mortgage company is going to have lots of options, and the first person you talk to may – or may not – know all of them.

Second, what your mortgage company can do for you will depend in large part on one thing — do they own your mortgage or are they merely the servicer.  You probably have no idea, but it doesn’t hurt to ask when you call.  If you write your mortgage check to Bank of America, they may actually own your loan — which is kind of what you expect.  On the other hand, your loan might be owned by a securitized trust that hires Bank of America to accept and process payments, make sure the taxes and insurance get paid that sort of thing, i.e., service the loan.  If your mortgage company is just the servicer and not actually the owner (or holder) of your note and mortgage, what they can do for you will be determined by their contract with the actual owner (sometimes referred to as the investors, although, that is not technically accurate).

Third, if your mortgage loan is insured by a U.S. Government program, that will also control, at least in part, what options your mortgage lender has.  That means that if you have an FHA insured loan or a VA insured loan or Fannie or Freddie, you can expect there to be regulations from FHA or VA or Fannie or Freddie or USDA Rural housing or whomever that will tell your mortgage company what they can and can’t do and what they should and shouldn’t do.

I know it is confusing, but knowing enough to ask your servicer for specifics can take some of the frustration out of the process.  You may read a news article about things that your mortgage company says it will do for home owners, only to call and be told that what you read in the news doesn’t apply to you.  Ask why it doesn’t apply to you, and then make sure it is right.  Mortgage companies really do make mistakes — often.

The next thing you need to know is to ask follow up questions.  You call your mortgage company, you are out of work until your employer reopens, what can they do for you.   They say they can agree to a 3 month deferment on your mortgage payments.  No payment necessary for three whole months!  Not so fast.  Your next question should be — and then what?  What happens to those three missing mortgage payments?  I can promise you that they won’t just go away.  There are a number of possibilities (including the one that I’m not thinking of, so please don’t assume this is a complete list).

One answer to this that I am already hearing is that after the three month deferment the missing mortgage payments are all due at once — along with the next month’s payment too.  So, the mortgage company won’t expect you to make payments for three months, but it will then expect you to bring those missing payments current at the end of the deferment period.  That is probably not a great option.

Another answer is that the missing payments will be added to the end of your mortgage loan.   That is a better option, but it is also not a great option.  Here is why.  Let’s say that your mortgage payment is $1000 a month on a 30-year-loan (360 months) with interest at 6%, and you are in month 99 (almost through with year 9).  Those three mortgage payments will defer to the end — with interest accruing for the next 21 years.  Now, I was an English major, and someone else should always check my math; but according to my calculations that means when you complete the 30 years of your original mortgage term, you will still owe over $10,000 — all because of those three missed payments.  So, if you are going to do this put yourself on a schedule to pay extra every month.  Then, at least once a year check your payoff against an amortization schedule to make sure you are getting those missing payments paid before the interest gets out of hand.  Oh, also ask how the escrow payments (taxes and insurance) will be handled.  If the lender advances the escrow portion of those payments you could wind up with a significant payment increase in the next year after your next escrow account analysis.

The next option is that you may be eligible for a loan modification at the end of the three months.  If you are, certainly apply for whatever you are eligible for.  Again, I will caution you to read the terms of the proposed modification carefully.  Historically, principal reductions have been rare on mortgage mods.

Probably the best option is for the mortgage company to put you on a schedule after the deferment period to cure the missed payments over a reasonable period of time.  If you can get it done in no more than a year, that is probably your best option.

Ultimately, however, if you and your mortgage lender can’t come to an agreement that you think is in your best interests, you might want to consider what a chapter 13 bankruptcy can do for you.  Chapter 13 is designed to give home owners an affordable means to cure a an arrearage or default on their mortgage.  In a chapter 13 you can take up to 5 years to cure a default, and deal with whatever other debt you have accrued along the way as well.

Elaine

Keep in Touch with your Lawyer!

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It is even more important than usual during Coronavirus days to keep in touch with your lawyer — even if all businesses in your area are closed.  Sure, it is always important for all kinds of mundane reasons, like a change of address; but now those worries that are keeping you awake at night?  Call or email your lawyer.  You never know what tricks your lawyer may have stuck up a sleeve, and even if all businesses are closed, lawyers are pretty good about keeping an eye on email.  You might also call the office number.  It might be answered, and it might have a recording giving you information on how to get in touch.

First of all, your lawyer should be keeping a close eye on the various Coronavirus relief bills passing through Congress.  Second, your lawyer should have copies of the actual administrative orders from your Mayor or your Governor closing businesses, etc.  Your lawyer can tell you if they apply to you and how they are or can be enforced.  Your lawyer should also have a feel for employment law issues that may be effecting you, whether you are being told to work or not to work.

A bankruptcy lawyer can also help you with deciding which bills to pay and which not to when money gets really tight.

If you are in a bankruptcy, your lawyer can help you with issues like the reach of the automatic stay and the discharge injunction — that includes helping you shut down the phone calls if some creditor decides bankruptcy doesn’t really apply to them.  If you are in a Chapter 13 plan your lawyer can explain to you what remedies are available to you if you can’t make your plan payments or you need to change your plan terms.

Your  lawyer can also explain to you what court activity is ongoing in your area — are Sheriff’s sales still being held, are foreclosure cases being filed and heard, what about garnishments and collection cases?

Do not just sit at home and make yourself sick with worry.  Lawyers are trained problem solvers.  Sure, we can’t solve all of them, but we can try.

Elaine

That Home Equity Line of Credit — Yea, It Really is a Mortgage

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A lot of the things my clients tend to be confused about, I understand.  There is one big exception, and clearly, I am the one who is confused here; because I hear this more often than not.  Clients come in and we talk about the mortgage on their house.  Then, I ask about the 2nd mortgage.  Oh, they don’t have a second mortgage.  No, nope, no way.  Well, what is this debt to Insert Name Bank?  Oh, that is just a Home Equity Line of Credit.  So, it is a second mortgage.  No, no, it isn’t a 2nd mortgage, we don’t have a 2nd mortgage.  It is just a Home Equity Line of Credit.

No.  It is a second mortgage.  (Well, this assumes that there is a first mortgage, but more on that later.)

Here is the scoop.  A mortgage is actually the name for a type of lien on real property.  If you borrow money — all at once, a little bit now and more later, received by cashier’s check or (shudder) by using a special credit card — however, you borrow it; if you borrow money and give the lender a lien on your home (or other real property) to secure payment of that loan — you have just given the lender a MORTGAGE LIEN.

There is no such thing as a Home Equity Lien, and if there were, it would just be a mortgage lien.  Seriously.  Google it.  Now, is that what your friendly banker called it when you were looking for a little cash to catch up some bills or fix up the kitchen?  Why, no.  Calling it a Home Equity Line of Credit just sounds so much better than a 2nd mortgage.  However, look at this carefully.  A Home Equity Line of Credit is a loan that is secured by the equity in your home.  That is a loan, secured by a lien on your home.  How is that anything other than a mortgage?

Now, about that whole first and 2nd thing.  Do you know the difference between a first mortgage and a 2nd mortgage?   The first mortgage was recorded in County records first.  Yep.  That is it.  Now, there can be some different consequences to a 1st and a 2nd mortgage.  There have been times when the tax code gave preferential treatment for first mortgages.  It is more common for first mortgages to include what is called an escrow account for the payment of property taxes and home owner’s insurance.  There are reasons why those things are true, but they have more to do with the fact that a first mortgage is generally incurred to buy the home, it is generally larger than a 2nd mortgage and it generally fits certain standard terms — 15, 20 or 30 years with a fixed monthly payment (unless there is an adjustable interest rate).

Second mortgages can be more flexible.  Frequently, a home equity line of credit has a flexible repayment period.  The principal amount of the loan can change.  It may be repaid in just a few years.

None of these things change the fact that a Home Equity Line of Credit is a loan that is secured by a lien on real estate (your home).  That makes it a mortgage.  If you already owe money on your home, then the home equity line is the 2nd mortgage (because you already had a first mortgage).  If your home was paid for when you applied for the home equity line, then the home equity line of credit will be the first mortgage even though it may not include an escrow account or be for a fixed term or for any of those other common characteristics of a first mortgage.

The whole home equity line of credit thing has been a real marketing coup for local banks, and it all happened when they came up with this cool name – home equity line of credit.  It just sounds so much better than a 2nd mortgage, but a rose by any other name is the same thing as a lien by any other name.  Call it anything you want, it is still a mortgage.

Elaine

What If Something Bad Happens During a Chapter 13 Plan?

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The answer to the question, what if something bad happens during a Chapter 13 Plan is – call your lawyer. Please notice, I did not say, call the Trustee. Even if you haven’t talked to your lawyer since your case confirmed, at least in the Western District of Oklahoma, your lawyer is still your lawyer until the case concludes, you fire him or the Court allows him to withdraw for some reason. The Trustee does not work for you, your lawyer does. Call your lawyer.

Now, for the rest of the story. Clients come to see me and are nervous about filing a five-year plan. What if something happens? Well, something will happen. It is called life. The problem with answering that question is that the answer is always going to be – that depends. The answer depends on exactly what happens, when it happens, what has or has not been paid in the Chapter 13, where you are in the plan, whether the case is confirmed or not. It just depends.

Losing a job in the last year of a plan is very different from losing one in the first year. Having a house burn down might change how hard you want to fight to save it. (Yes, I have had that happen to a Chapter 13 debtor.) The death of a spouse is just hard – all the way around, and being in a Bankruptcy at the time doesn’t make it easier. Totaling a car means having to get a new one. Divorce complicates a Chapter 13 in ways very few other things do. Regardless, you will have options; and only your lawyer can talk to you about them.

Still, there are some generalities. If you lose a job during a chapter 13, you will want to discuss with your lawyer whether your plan payment can be reduced, whether you should consider converting the case to a Chapter 7, whether you should consider seeking a loan modification on your mortgage, maybe you want to talk about whether or not you can sell the house. Maybe you should dismiss the chapter 13 with an eye towards refiling when you have found new employment. Maybe staying in with the smallest possible plan payment makes more sense. Maybe the best answer is some combination of the above.

Dealing with a Chapter 13 that has gotten into trouble is relatively easy when there is some flexibility in the plan. The worst cases are the ones where the Debtor was a year behind on his mortgage when the case was filed. The plan is all about saving the house. There is virtually nothing besides the house and the car getting paid in the plan, the plan payment was a real reach for the debtor before he lost his job, he is already at a full 60 months – and he loses his job. Well, you can’t extend that plan term. You can’t reduce the payment without giving up either the house or the car, because there is nothing else there. You can get the debtor a little bit of time to find a new job, but every plan payment he misses is going to increase the remaining payments – which were a stretch to begin with, before he lost his job. So, after three or four months the Debtor finds a new job that pays less than the old one, he is now three or four months behind on his plan payment. The remaining payments will have to go up to cover that, and he can’t do it. In that case, sometimes the best option is to dismiss and refile.

I want you to notice, though, that even with the facts above; there was still an option. Dismissing and refiling may not sound too fun after three or four years in a plan. The last thing you really want to do is start over, but at least in this case it means starting over with a much smaller mortgage arrearage than you had to deal with in the first place, and you get a whole new 60 months to cure it. It isn’t a great solution, but it can make the difference between saving a house and losing it.

So, if life hands you more than you can handle during your plan term. Call your lawyer. You will have options. They may not be wonderful, but you will have some. Oh, and don’t be surprised if your lawyer’s first suggestion is that you try to sit tight until you find a new job. You will always have more and better options employed than not.

Elaine

What Will I Have to Pay in a Chapter 13?

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A Chapter 13 Bankruptcy is basically a modified payment plan where you can restructure certain kinds of secured debt, get current on secured debt on which you have fallen behind (like a house or a car) and pay some percentage of your general, unsecured debt (like medical bills and credit cards).

Let me begin by saying that SOME percentage of your unsecured debt means just that – SOME. I say that to clients in my office, and they almost universally translate the word some to mean all. They are not synonyms. The actual percentage paid by most Chapter 13 debtors is closer to zero percent than it is to 100%, and most of us can afford to pay 0%.

So, what does that actually mean?

There are two primary factors that determine how much money you will have to pay to make a Chapter 13 plan work. The first is determined by what is generally known as the Means Test. The Means Test is basically a worksheet where you start with your income and deduct your reasonable and necessary living expenses until you come up with an amount left over. If that figure is positive, then you will have to pay that amount each month for probably 60 months to your general unsecured creditors (the credit cards, medical bills, personal loans, that kind of debt). In other words, if you have $112 a month left over, you will have to pay $112 each month for (probably) 60 months plus 10% as a trustee fee, so $123 a month, over the life of your plan for the benefit of the general unsecured creditors. Most of my clients are paying a lot more than that on this kind of debt when they come to see me. So, for most people flunking the Means Test and having to pay something to their general, unsecured creditors is actually an improvement!

The other factor is the kind of debt that you have. If you want to keep the house and the car and you owe money on them, you are going to have to keep paying for them. This really shouldn’t be a surprise. The car, in the Western District of Oklahoma, will have to be paid through the plan; meaning that the plan payment you pay to the Trustee every month will include enough for him to make your car payment for you. If you are behind on the car at the time that you file the case, you can expect that you will catch up on it (and probably pay it off) over the life of the Chapter 13 plan.

Your house is a little different. If you are current on the house at the time that you file for bankruptcy (in this district), you may continue to pay the mortgage payment directly. However, that means completely current. So, if your mortgage payment is due on the first, and late on the 15th, That means it is due on the 1st. So, if you file bankruptcy on the 2nd, that payment had better already have been made. If you are behind on your mortgage payment, then it will be paid through the plan and the plan will include enough money to get you caught up an d current on it over the life of the plan.

If you owe other secured debt, debt that is secured by a lien on a specific piece of property, and you wish to keep the property, then that debt will have to be paid during the life of the plan. Debts that are given certain priority for payment in the Bankruptcy Code must be paid in full over the life of the plan. For most people that means recent taxes, and past due child support or alimony, these are things that have to be paid over the life of the plan. What most people expect to see listed here but isn’t is student loans. Student loans are a whole different problem in a Chapter 13 that will be addressed separately.

So, what this means is that most Chapter 13 plans pay for the house, the cars, the taxes, the child support (if any), fees to support the Trustee’s office and the Debtor’s attorneys fees. Then, there will be some amount added to be shared amongst the general, unsecured creditors who are usually everybody else. That amount is determined by the Means Test, and in many cases it is less than my clients have been paying on that debt before they filed.

Now, I don’t mean to kid you. A Chapter 13 plan is not a walk in the park. There are good reasons why only about 30% of all cases filed successfully complete. It isn’t, however, nearly as bad as clients expect it to be.

Often when clients come to see me their mortgage company is wanting a year of missed payments made up in six months or less. They are facing a wage garnishment that will take 25% of their gross income. The IRS is threatening to levy on their bank accounts. There is a repo guy out looking for their car, and the lender wants all the missed payments plus late fees, plus interest plus the repo guy’s fees by Tuesday. A Chapter 13 plan, even if it is expensive, can be a huge relief after the financial pressures most of my clients find themselves facing.

So don’t be afraid to investigate a possible Chapter 13 filing. It can do things for you that you can’t get done anywhere else, and, although, it won’t be cheap, it may be more affordable than any of your other options.

Elaine

Taxes, Mortgages and Questions

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I don’t usually post about questions I don’t know the answers to.  Llooking stupid in public is just not something I go out of my way to do.  Today, however, is an exception.

Here is the question.  What are the tax consequences for someone who is in a Chapter 13 Bankruptcy in which a 2nd mortgage is being lien stripped (treated as wholly unsecured with a lien release at the end of the plan) if the mortgage company as part of the National mortgage settlement forgives the 2nd mortgage?

Answer?  I have absolutely no idea.  The general rule is that forgiveness of debt is taxable income.  There are three exceptions to that:  1.  if the debt is discharged in bankruptcy;  2.  if the Debtor is insolvent at the time of the transfer; or 3.  if the property was bought as the debtor’ homestead and the forgiveness qualifies for the Mortgage Forgiveness Debt Relief Act.

Problems — the Mortgage Forgiveness Debt Relief Act is set to expire the end of this year.  As far as I can tell extending it is not a partisan issue, it just is a not important enough to get it done when you could be out campaigning issue.  So, if the debt forgiveness isn’t done in time, that act sunsets December 31, 2012.  So, that might help you; and it might not.

Insolvency seems like a no-brainer, this question assumes a bankruptcy filing.  Except the IRS definition of insolvency includes exempt assets like retirement accounts.  That can be a problem.

Bankruptcy discharge should be the safe and easy one — except it’s not.   Here’s the problem.   Mortgage company issues its 1099 after the first of the year.  (Taking the forgiveness outside of the statutory relief, although, that would not apply to a rental property.)  Tax liability will be assessed on the 2013 tax return.  Debtor is in year two of a five year Chapter 13 plan.  Debtor doesn’t get his discharge until 2015.  Taxes have already been assessed.   Discharge exception might not work, but then again, it might.

Oh, and this is the simple reading of this issue.  I’ve been reading discussion between tax geeks that I don’t even understand about this issue.  Now, if you will excuse me, I’m going to go bang my head slowly against hard objects until I feel better.

Elaine

Mortgage Overcharges and Consumer Protection

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Recently, Bank of America agreed to a staggering settlement for mortgage fees improperly charged by Countrywide prior to the BOA takeover.  Henry Sommer, one of the Country’s leading Bankruptcy lawyers, scholars and consumer activists has posted some thoughts about that settlement on Credit Slips.  It is well worth reading.

Elaine

Mortgage Servicing — Thou Shall’t Not Lie, Cheat or Steal

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USA Today is reporting that Bank of America, as the purchaser of Countrywide, is paying $108 Million in penalty to the Federal Trade Commission (to be distributed amongst the effected parties).  The FTC discovered that Countrywide was charging excessive fees to home owners who were facing foreclosure.  These fees were for things like property inspections and landscaping (I assume that means mowing).  What Countrywide was doing was creating wholly owned subsidiaries to arrange for the services and then bill the accounts at an inflated price.

At the very bottom the article also mentions that Countrywide has been known to misrepresent the nature, and amounts due on loans, it looks like they may have discovered some false Bankruptcy claims and concealed fees.  This should be shocking.  It isn’t.  I sued Countrywide for its bankruptcy related accounting practices a few years ago.  What is more disturbing is that these practices, or variants on them, are widespread throughout the industry.

We don’t let debtors lie, cheat or steal in Bankruptcy.  It is high time we stopped letting creditors do it.

Elaine

Mortgage Lender of First Resort

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I frequently need to know who actually owns the notes and mortgages connected with my clients’ homes.  So, keeping an eye on who the players are on the National mortgage scene makes a certain amount of sense.

Here is an article from BusinessWeek that makes me reconsider my decision not to subscribe.  I mean, seriously, at $2.49 a month delivered automatically to my Kindle while I sleep — why am I not?  However, I regress.

This article makes two very serious points.  First, FHA is now backing more mortgage loans than Fannie and Freddie combined.  Why?  Simple, lower down payment requirement.  Second, 90% of the current mortgage market is guaranteed by the U.S. Government by way of FHA, Fannie, Freddie (and to a much lesser extent VA and FHLBB).

I can see how this happened.  The takeover of Fannie and Freddie was a reaction to events rather than a carefully planned policy choice, and what to actually do with them is going to be a great big, hairy mess.  Then, there has been enough going on with regulatory changes and policy decisions that making changes to FHA policies would require affirmative political effort.  Not making them is the default.  So, by default the U.S. Government has become the backstop for effectively the entire home mortgage market.  This is an amazing policy decision to be made by accident.

Elaine