1099-C Cancellation of Debt

There is a common belief that a 1099-C means that the debt in question has been cancelled and that no further collection may be made by the creditor.  However, this is not the law.  A 1099-C filed by a creditor with the IRS, standing alone, does not mean that the debt has been cancelled.

Pursuant to the Internal Revenue Code, creditors are required to file 1099-C even though an actual discharge of indebtedness has not yet occurred or is even contemplated.  Rather, there may be an event “deemed” to constitute a discharge of the debt solely for purposes of determining the reporting requirement to the IRS.  The courts have held that a “Form 1099-C” is not an admission by the creditor that it has discharged the debt or can no longer pursue collection.

Pursuant the IRS regulations, there are 8 identifiable events which require the creditor to file a 1099-C: (1) a discharge of indebtedness in bankruptcy (2) a cancellation or extinguishment of an indebtedness in a receivership, foreclosure or similar proceeding (3) a cancellation or extinguishment of debt upon the expiration of the statute of limitation (4) a cancellation or extinguishment pursuant to an election of remedies (5) a cancellation or extinguishment of debt where debt unenforceable pursuant to probate or similar proceeding; (6) a discharge of indebtedness pursuant to agreement between the creditor and debtor for less than full consideration; (7) a discharge of indebtedness pursuant to a decision by the creditor to discontinue collection activity and  (8) the expiration of the nonpayment testing period.

So what does this mean?  This means that unless you have received something from the creditor stating that the debt is forgiven in addition to the 1099-C, they still have a right to collect on it unless one of the above exceptions applies.  Collection on debt where a 1099-C has been issued is happening to many people in California who have junior deeds of trusts against their homes.  They received a 1099-C from the lender and then years later someone who bought the debt starts foreclosing on the property.

So what should you do?  If you have received a 1099-C from a lender, especially a lender with a lien against your home, you should call the lender and see if they have actually “forgiven” the debt.  If they have, you need something in writing that says exactly that i.e. the creditor is not going to pursue any further collection on the debt.  In addition, if the lien is against your home, the lender must reconvey the deed of trust.  If the lender will not issue you a letter saying that the debt has been forgiven, you need to seek legal counsel immediately.  A 1099-C without further evidence stating the debt was forgiven is a ticking time bomb. 

1099-C issues are complicated and generally misunderstood.  If you have questions, seek counsel.  I see people for a FREE 30 minute consultation in my offices located in Walnut Creek and Brentwood. 

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING A DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.   © 2015

HAMP Loan Modifications - The Truth be Told

Everyone has had the experience of thinking that something just is not right.  Ok, we know that something is wrong.  We know it is rotten.  It may have been the time your teenager was going to a study group on Saturday night or maybe you got passed over for a job even after your boss tells you that everyone is being treated equitably.   We have all been there.

We knew that things were rotten with the Home Affordable Modification Program (“HAMP”).  How many times could the Bank lose the paperwork, pay stubs?  How long could a modification be in underwriting?  The Trial Payment Plan (“TPP”) said it was 3 months, but it had been 12 months.  How could the Bank not have received the Trial Payments when they had received all of the regular monthly payments prior to HAMP?  How could a loan modification be approved and then denied 6 months later? 

Well in the case of Bank of America and BAC Home Loan Servicing, the facts are starting to come to light.  In a Second Amended Consolidated Class Action Complaint filed in Massachusetts, the Plaintiffs allege that Bank of America systematically failed to comply with the terms of HAMP.  It alleges that the Bank had financial incentive to avoid modifying home loans and to continue to keep a mortgage in a state of default or distress and to push loans toward foreclosure.  According the Compliant, this was especially true when the loans were owned by a third party investor and the Bank was merely servicing the loan. 

Recently, a declaration filed in the case by a former Bank of America employee alleges that employees were told  “to lie to customers and claim that Bank of America had not received documents it had requested, and that it had not received trial payment(when in fact it had).  We were told that admitting that the Bank received documents would “open a can of worms” since the Bank was required to underwrite the loan modification within 30 days of receiving those documents, and it did not have sufficient underwriting staff to complete the underwriting in that time.”  In addition, the employee alleges “Employees were rewarded by meeting a quota of placing a specific number of accounts into foreclosure, including accounts in which the borrower fulfilled a HAMP Trial Period Plan.”         

If you applied for a loan modification with Bank of America or any other HAMP servicer and you think you should have been approved, you should complain to the Bank, the California Attorney General and you should try to join a class action lawsuit.  If you are still in the house, apply again for a loan modification and put in the hardship letter all evidence you have that you were wrongly denied before.    

Character counts.  At the end of the day, what we do matters.  If your house is a big deal to you, then act like it is a big deal.  If you should have received a loan modification, you need to speak up.  If you don’t, they win.  

This is a complicated area of the law and I recommend you to seek legal counsel prior to taking any action on a loan modification or proceeding with a short sale or foreclosure.  There may be personal and tax liability. I provide a free 30 minute consultation at all of my offices located in Walnut Creek and Brentwood.       

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION. © 2013  Joan M. Grimes. (925) 939-1680 Grimesbklaw.com

Joan's Interview With On The House

Listen to Joan Grimes interview on America's #1 Home Improvement Radio Show, On The House with The Carey Brothers that took place on March 2. Joan discussed options for underwater homeowners, Short Sale and more.

Debt Forgiveness on Lines of Credit

The Loan Balance is Gone…. Really?

I have received many calls in the past month from borrowers who have received letters from their mortgage lenders stating that the lender is going to forgive the balance on their line of credit in the next 30 days if the borrower does not call to decline the offer.  Yes, you read that right.  No strings attached.  The balance on the loan will be gone.

So who is doing this?   So far, most of the letters have been coming from Bank of America and Chase.  However, given the requirements of the National Mortgage Settlement, I think we can expect to see the letters from all the Big Five i.e. Ally Financial, Inc. formerly GMAC Mortgage, Residential Capital, Bank of America,  f/k/a Countrywide Home Loans Servicing, Citigroup, Citibank, CitiMortgage, JPMorgan Chase and Wells Fargo Bank.

So, what is the catch?  The catch is that when the debt is forgiven, a 1099c is going to be sent to the borrower for the amount forgiven.  What this means is that amount forgiven is going to be considered income at your current tax rate unless one of the exceptions to the income recognition rule applies.

So what are the exceptions? 

#1- The borrower filed bankruptcy before the debt is forgiven.  The bankruptcy does not have to be finished, but it does have to be filed prior to the end of the 30 days.

#2- The borrower is insolvent.  What this means is that the borrowers does not have assets such as 401k/IRA/pension benefits or other assets.  Many a person has believed themselves to be insolvent only to be informed that those assets they cannot currently reach are still assets for determining solvency.   If you think you are insolvent, be sure to talk to your tax advisor within the 30 day period to confirm.

#3 The Debt being forgiven falls under business debt exception

#4 The Debt being forgiven falls under the farm debt exception.

#5 The Debt being forgiven was one of the original loans used to purchase the home.

#6 You fall under the short sale and mortgage forgiveness act which is still in effect until January 1, 2013 which provides that to the extent the money was used to purchase the property or make significant improvements to the property and it has been your home for the last 2 of 5 years, you do not owe taxes

In conclusion, if you receive one of these letters, I recommend you seek legal counsel immediately to determine whether this offer is in your best interest.  This is a complicated area of the law.  A real estate or bankruptcy attorney should be able to make to an analysis of your situation quickly which will allow you to decide if the debt forgiveness is in your best interest.

I see people for a FREE 30 minute consultation at my offices in Walnut Creek and Brentwood.

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE FOR BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.   (925) 323-7772.           

 © 2012 Joan Grimes

National Mortgage Settlement

Listen to Joan Grimes recent interview on America's #1 Home Improvement Radio Show, On The House with The Carey Brothers and Rebecca Cole.  Joan discussed the National Mortgage Settlement and how it affects you, Short Sale and Mortgage Forgiveness and more.

Principal Reductions on Mortgages

Don’t Miss the Boat

Starting this summer, we have been seeing more loan modifications with principal reductions.  Yes, you read that correctly.  The loan modification that came in this morning was from Wells Fargo Home Mortgage and includes a principal reduction of $295,000 leaving a new principal balance of $290,000 on a primary residence that assessed at $285,000.  This is an immediate principal reduction, no strings attached.  We are also seeing principal forgiveness earned over three years and principal forgiveness on lines of credit.

What is causing the change in heart by the lenders?  It is the National Mortgage Settlement (“Settlement”) which started on March 1, 2012 and continues to September 1, 2016.  Servicers covered by the Settlement are Ally Financial, Inc. GMAC Mortgage, Residential Capital, Bank of America, BAC Home Loans Servicing- f/k/a Countrywide Home Loans Servicing, Citigroup, Citibank, CitiMortgage, JPMorgan Chase and Wells Fargo Bank.  Fannie Mae and Freddie Mac loans serviced by the above lenders are not eligible for benefits under the Settlement.

Under the Settlement, no borrower is “entitled” to a modification.  However, servicers receive “credits” toward the value of the “Consumer Relief” they have committed to provide over 3 ½ years through loan modifications and principal reductions.  The Servicers have committed to credits of over $16 Billion dollars under the Settlement. 

Under the Settlement, “Consumer Relief”  granted between March 1, 2012 and February 28, 2013 will receive a 25% bonus credit, so motivation exists for servicers to move quickly this first year. 

Principal write downs will be more available on lower valued properties that are “more” underwater.  The Borrower is also going to need to have adequate income, but still have a hardship.  The settlement provides for principal reductions by at least 10% to achieve target of 31% of Debt to Income (DTI) and 120%  Loan to Value (LTV). Under the terms of the Settlement, 85% plus of the first lien credits are to be for owner occupied loans within the conforming GSE limits.  Loans are 30 days delinquent/imminent default; pre-modification LTV greater than 100% with post-modification target DTI of 31% and post modification LTV less than or equal to 120%.

If your house is really underwater and you really want to keep the home for the long term, I strongly urge you to apply for a loan modification/ principal reduction.  You have nothing to lose.  It is a huge amount of work, but if you are approved, it will be worth all the effort.

However, prior to accepting any loan modification/principal reduction, seek legal counsel.  Every loan modification/principal reduction has the potential adverse personal liability and tax consequences.  If there is a principal reduction, the lender will be required to issue a 1099c which will be considered ordinary income unless you meet certain limited exceptions. If there is a junior lien on the property, a principal reduction prior to a Chapter 13 filing may prevent you from being able to avoid the lien in bankruptcy.

In conclusion, this is a great opportunity to keep your home.  However, this is a complicated area of the law.  No final paperwork should be signed accepting any modification/ principal reduction without the advice of legal counsel. A real estate or bankruptcy attorney should be able to make to an analysis of your situation quickly which will allow you to decide if the modification is the right decision for you.

I see people for a FREE 30 minute consultation at my offices in Walnut Creek and Brentwood.

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE FOR BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.   (925) 323-7772.           

© 2012 Joan Grimes

Beware of Friends and Family

Co-Signing and Joint Ownership

After being a bankruptcy attorney for over 25 years, there is one thing I know for sure---sooner or later one of your friends or family will ask you to co-sign a loan for them or ask you buy something with them. It may be a car, boat, timeshare, vacation cabin, investment property or building. All you have to do is keep breathing and this will happen to you.

Co-signing or buying anything with a friend or family will have consequences. Here is just the tip of the iceberg.

1. Co-signing on a loan to something will affect your credit. It increases your debt to income ratios and it will reduce your ability to get other loans. Your credit will take an immediate hit.

2. When you co-sign on a loan or purchase agreement, you are jointly and severally liable on the whole obligation i.e. if the other person doesn’t pay, you are on the hook for the whole amount. The fact that you own only a portion of the boat, trailer, house etc per your agreement with the other owners is irrelevant to the lender. If the other co-signers stop paying, you responsible for the full balance still due and owing. Your credit score will fall if there is a default. It doesn’t matter if only 1 spouse signed. California is a community property state. One spouse can bind the other.

3. There is a HUGE difference between co-signing on a personal loan and real estate loan. If you default on a personal loan even if it is secured by a boat, trailer or car, the worst thing that is going to happen is the lender will repossess the collateral and get a judgment against you for the deficiency balance on the loan. However, if you co-sign a real estate loan, that loan will be characterized as recourse loan unless it is non-recourse debt which in California means it was a loan used to purchase a 1-4 unit property and YOU live in the property. If the loan is not a non-recourse debt and there is a default, there may be personal liability and tax liability.

4. Never underestimate the IRS and California State Franchise Board. When a lender determines that a debt is uncollectable either because it is time barred or a deficiency is prohibited by state law or the parties agree to a settlement for less than the balance due and owing, the lender is REQUIRED to issue a Cancellation of Debtor Statement known as 1099c if the lender is forgiving $600 or more. You NEED to know your tax liability BEFORE you get the 1099c. There are ways to minimize the tax liability. 

Do not jeopardize your future. If your friends or family ask you to co-sign on a loan or buy something with them, JUST SAY NO. If you have the resources to GIVE them money, that is a better option. If you have already co-signed a loan and you think there is going to be a default on the loan, seek legal counsel immediately. This is a complicated area of the law, but a real estate or bankruptcy attorney should be able to make to an analysis of your particular situation fairly quickly which will allow you to determine your personal liability and tax liability in the event of a default.

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION. GRIMESBK.AW.COM

© 2011 Joan Grimes

Is This the Bottom? Is this a Good Time to Buy?

 Home Affordability

Lately, everyone seems to want to know whether I think this is the bottom and do I think this is a good time to buy a house?  The short answer is that home affordability depends on a person’s financial situation.

We have just gone through an economic cycle where the home affordability model was determined by how much house one could buy for the lowest monthly payment.  As we can see, there are significant problems with this economic model.  I would argue that a better economic model for home affordability is either (1) how much secured debt can you pay off prior to retirement or (2) is the price-rent ratio on the home appropriate given the investment of funds.

A good rule of thumb is that a person can payoff 2-2.5 times their gross household income in secured debt over the course of their working life and go on vacation and have a child or two.  Therefore, if a family’s average gross household income is $100,000, they should not have a home loan which exceeds $250,000.  This is assuming a 30 year fixed loan.  If a borrower has less than 30 years remaining work time, the amount should be reduced accordingly.   If the home loan is kept to 2-2.5 time gross household income, there will be adequate income for retirement savings which will be needed to eat when we can no longer work.  Anything more than 2-2.5 will cause the finances to be out of balance and risk inadequate savings for retirement.

Another way to look at this economic model is to see the value of the investment in relation to rent paid for a similarly situated property.  If you could rent the house you need for $2,500 per month, your yearly rental expense is $30,000.  If you currently have debt against the same house of $600,000, then the price to rent ratio is 20.  What this means is that you would have to rent that same house for 20 years before you would have 1 dime in profit assuming you were paying principal.  Since the likelihood that you are going to live in the same house for 20 years is not great and you are not paying principal equal to rent, it probably is not a good investment.  That is the reason that we would like to see the price to rent ratio less than 10, if possible.  If the price to rent ratio is 10 or less, you should be able to afford a 30 year fixed mortgage on the property with 20% down payment and still save the first 10% of income for retirement.

In conclusion, this is probably not the bottom based upon what people can really “buy” in a home and price-rent ratio are just starting to make sense in parts of Contra Costa County.  There is still a huge “speculator” part of the market in Contra Costa County as indicated by the amount of debt against real property given the average household income in Contra Costa County.  But there will always be speculators; I just don’t encourage you to be one of them.  It is better to watch them on TV.

If you are having financial problems, seek legal counsel.  You did not make this real estate meltdown.  There are serious personal liability and tax consequence of a short sale and foreclosure.  Make sure you understand your legal rights prior to undertaking either a short sale or allowing your property to be foreclosed.  Do not lose sleep and your sanity worrying about financial problems.  Help is available to you just like it was to the Bank, Investment Companies and the Insurance Companies.

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN  MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.  

© 2011  Joan Grimes

Advice From People Who Filed Bankruptcy

 I have been asking people who come into my office if they have any advice/regrets about their actions prior to filing bankruptcy.  Here is their advice:

1. Seek Legal Counsel.  Don’t wait to find out your options.  Almost every person said they wish they had come in sooner.  Many have said they would have done things differently had they known the law and available options.

2. Don’t borrow or take money from your 401k, IRA, Savings Account, Children’s Saving Account, Deferred Compensation to cure to the default.  So many people regret borrowing or taking a distribution from their retirement plan.  Unfortunately, many people don’t know that this money, if borrowed, must be repaid in full or it will be considered income and taxed accordingly.  In addition, this tax cannot be discharge in bankruptcy.  It is heart breaking to see people take money out of their retirement to stay current on the mortgage, to only lose the house at the later time, but are still responsible for tax liability of the distribution.  

3. Don’t borrow money from family or friends to stay current on mortgage or other bills.    Family and friends want/expect to be repaid irrespective of whether you file bankruptcy.   In the eyes of the bankruptcy code, your family and friends are just another lender and will not receive preferential treatment.  

4. Don’t juggle credit cards to pay mortgage.  Cash advances and balance transfers may cause problems in a bankruptcy.  In addition, depending on the type of real estate debt you have, a short sale or foreclosure may be possible without a bankruptcy.  However, if you run up your credit cards trying to keep the house, a bankruptcy may be evitable.

5.  Don’t leave house until property forecloses or short sale is complete.  Almost every person that has left their home prior to the foreclosure or short sale being completed regrets the decision.  Once you stop paying on the mortgage, your rent is “free” with the exception of paying the Homeowners Dues and keeping insurance on the property.  Further, since you are still responsible for the maintenance  of the property until the foreclosure or short sale, you might as well enjoy it and save some money.  No reason to pay rent any soon than necessary.

6.  Don’t let your cultural pride stand in the way of you making sound financial decisions.  There is nothing to be ashamed of.  You did not make this economic meltdown.  You are not responsible for the economic collapse facing the Bay Area.  The economy of your parents’ generation is not the same as today.   

7.  Don’t co-sign for anyone.  No one can promise the future.  So many clients regret co-signing for a friend or relative. Co-signing for cars, furniture, Time-Shares and homes seemed like a good idea, but times change and suddenly there is a default.  Worst of all, don’t co-sign on Student Loans.  The default  rate by students who have had a friend or family member co-sign is much higher and YOU CANNOT DISCHARGE CO-SIGNED STUDENT LOANS IN BANKRUPTCY!

If you do not have sufficient income to pay your bills as they come due and owing, you should seek legal counsel before withdrawing any monies from a retirement account, savings account or taking a loan against your home or car.  These are difficult times, but do not miss the help and protection provided by the Bankruptcy Code and California law by waiting too long.  Just because this ship is underwater does not mean that you should give up your life vests that you will need to keep you afloat!

Want to learn more, listen to Joan Grimes recent interview on the Bay Area Real Estate show on FOX NEWSRADIO 910 AM with Krista Mashore.  Joan reveals some of the regrets she hears from clients filing bankruptcy. 

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE BANKRUPTCY.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.              

© 2011 Joan Grimes

Consumer Stress Test - Call To Action

 Everywhere we turn there seems to be a “stress test”.  First, the stress test is performed by my cardiologist to make sure my arteries aren’t clogged.  Thankfully, they aren’t.  My doctor just says that I need to lose 20 pounds, get more exercise and I will hopefully live to be at least 80.  Then, there was the government’s “stress test” for banks.  The “too big to fail” group passed which was not surprising after Congress passed the Troubled Asset Relief Program (“TARP”),which allowed them to borrow money at 0% and then charge borrowers 5%+ for the same money.

So, I decided we need to have a “consumer stress test” since I plan to live to 80 years old and I am not “too big to fail.”  Let’s see if we, as consumers, pass the “consumer stress test”:

1. Do you have credit card debt?  If you do, this is not a good sign.  Credit card lenders are like drug dealers.  Drug dealers give away drugs to get kids hooked and credit card lenders give away money to get consumers hooked.  They will give you money until you stop paying the balance in full each month.  They know it is just a matter of time before you will stop paying off the balance and then it is all over. It is a win-win situation for them every time.  Stop using credit cards, pay off them immediately. “Doctor’s” first piece of advice:  If you can’t pay off the balance in full in the next 12 months, see an attorney for options.

2. Do you have a car loan?  If you do, this is not a good sign.  Cars are depreciating asset.  If you have a car loan with a payment of $400 per month, you need to make $800 per month to just make that payment of $400 because of state, federal, social security and other applicable taxes.  Is that car really worth it?  Probably not.  If you cannot pay off that car loan in the next 2 years, see an attorney for options available to you.  “Doctor’s” second piece of advice: next time you purchase a car, no car loan.  Save until you can buy without a loan.

3. Do you have home loans?  If you have home loans that exceed 2-2 ½ times your gross household income, this is not a good sign.  What we know is that having home loan debt that exceeds 2-2 ½ times your gross household income, makes you “house poor” meaning you are spending too much of your income on shelter. For example: if you make $50,000 a year, your home loan should not exceed $125,000.  If your home loan balances exceed 2-2 ½ times your gross household income, see an attorney for options available to you.

4. Are you putting at least 10% of your gross household into a 401k/IRA/savings each year?  If not, this is probably the worst of sign of all.  We will need money when we can no longer work and want to retire.  If your income has recently been reduced, you can also reduce the amount you put into your 401k or IRA, but don’t stop thinking about tomorrow.

If you don’t take care of your money, no one will.  Everywhere we turn, there is someone trying to get it.  If you did not pass the consumer stress test, seek legal counsel.  The government may not be willing to give us money or let us borrow at 0% interest like they did for the banks, but we do have the Bankruptcy Code which can give us a fresh start.  We must take the time to think about tomorrow.  It will be here sooner than we think.   

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE BANKRUPTCY.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.

Why Most Loan Modifications Don’t Work

Everyday people come into my office saying that they have been working on a loan modification for months or even years.  They have applied for the Home Affordable Modification Program (“HAMP”). They have done trial modifications, then been denied.  They have then applied for the lender’s “in house” modification program, then been denied.  They have gone to NACA and been denied.  Some people hire mortgage attorneys to file suit against the lenders.  The bottom line is that most loan modifications don’t work.  Why?

First, a loan modification does not reduce the balance on the loan.   The best we have seen is where the investor waives the accrued interest on the loan.  If a person tells you they got a principal reduction, it usually means that a portion of the loan balance is now a silent second which will need to be paid at the time of sale of the property or as a balloon payment later.

Second, a loan modification will require payment of principal.  Therefore, if you have an option arm loan (also known as a pick-a-payment) or an interest only loan, the loan modification payment in all likelihood will be higher than your prior payment amount.  Also, loan modification payments will include an impound for taxes and insurance which will further increase the monthly payment.     

Third, a loan modification payment will again start with a teaser interest rate of 2%-2.5% and then rise over time.  Furthermore, if you miss any payments on the loan modification, the lender in many cases has the right to go back to the original payment terms and resume the foreclosure from the prior point without starting over.

Fourth, a loan modification requires documented income sufficient to qualify for a real loan i.e. either a 30 or 40 year fixed loan.   If a borrower did not qualify for a 30 year fixed 5 years ago, how are they going to qualify now?  If a person does not receive a regular paycheck, monies need to be going through a bank account to show income.  Loan modifications are much harder for self-employed individuals.

Fifth, even a trial modification does not guarantee a permanent modification.  I have clients who have been in trial modifications for over 1 year with no permanent modification.  The lenders are being paid to work on modifications.  The loans are in default.  They are receiving default servicing fees.  They are in no rush to do a loan modification. 

Sixth, there is no requirement for lenders to do loan modifications.  The lender can do the “Net Present Value Test” and simply say “no” to the requested modification.  As a practical matter, this means that the lender looks at  the borrower’s long term ability to pay on a modification combined with the present value of the investor’s investment i.e. the collateral. Therefore, if you live in a “low” foreclosure area such as Danville or San Ramon, the likelihood that an investor will want to “get out” now, is very high.  On the other hand, if the value of the investment is very low at this time i.e. the value of the home is low, the lender will be more inclined to approve the modification.

In conclusion, most loan modifications make no sense for borrowers.   There will be no principal reduction or long term payment reduction.  Where loan modification make the most sense is where the balance on the first mortgage is close to the fair market value of the property and the borrowers have the ability to pay on a real loan i.e. a 30 year fixed with an impound for property taxes and insurance.  If you are considering a default on your home or considering a loan modification, I urge you to seek legal counsel as soon as possible to fully understand the consequences of the decision and the other options available to you.  In see people for free 30 minute consultations in my offices located in Walnut Creek, Antioch and Brentwood.    

WE ARE DEBT RELIEF AGENCY AND HELP PEOPLE FILE FOR BANKRUPTCY. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UP IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.

Buy and Bail 2011

There is no question that it is very, very difficult to see people moving into your neighborhood buying your same house with better upgrades for half the price.  It can make your blood boil.  And then you find out that they bought this new home at half the price while they still owned the first house that was completely underwater and now they are letting the first house go into foreclosure.  This is crazy.  This is Buy and Bail.   

Buy and Bail is really just strategic default planning.  The current home no longer makes financial sense and I need a roof of my head.  And, oh by the way, it looks like a good time to buy.  This is absolutely fine. 

Buy and Bail is a problem if you commit loan fraud in the process.   In 2008, the government tried to crack down on Buy and Bail by banning the use of rental income from an existing home to qualify for a new mortgage loan unless the first property had at least 30 percent equity.  Unfortunately, recently, we are seeing many new instances where rental income is being allowed with no equity in the existing home. 

If you tell the new lender or agent of the new lender i.e. mortgage agent that you are going to rent out the old house, but really don’t intend to rent it out, you have a problem.  If you say that rent on the old place will conveniently be the same as the mortgage payment, but you know that rents in the area are only one half of the mortgage, you have a problem.

Buy and Bail is a problem if you have junior lien(s) on the old house that are recourse loans i.e. they were not the original loan or loans used to purchase your primary residence.  If you have recourse debt and don’t qualify for bankruptcy, you will be stuck with the debt.  If you qualify for bankruptcy, the new home loan payment may be so low that you do not qualify for a Chapter 7 and will be stuck in a Chapter 13 for 3-5 years paying back some or all of your creditors.

Buy and Bail is a problem if the foreclosure or short sale of the old home leaves you with tax liability.  Every transfer of real property is a taxable event.  There is no free lunch with the IRS and State Franchise Board.  If there was cash out or accrued interest on the old home, you will need to know whether you will have any tax liability if the property is later foreclosed or short sold.

Buy and Bail is a problem.  It is very tempting, but it can end up very bad.  Remember, if something sounds too good to be true, it is!  A Buy and Bail may put you in the middle of the ocean without a paddle.  Don’t do it.  If you are considering a Buy and Bail, seek legal counsel prior to proceeding. Buy and Bail has serious consequences which should be analyzed by a bankruptcy or real estate attorney prior to commencing the purchase of a new home.  This is a complicated area of the law, but a bankruptcy or real estate attorney should be able to make an analysis of your particular situation fairly quickly.  I see people for a free 30 minute consultation in my offices located in Walnut Creek, Antioch and Brentwood.

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE BANKRUPTCY.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN   MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.

In Limbo: The Forever Trial Modification

Every day, at least 1 person comes into my office complaining that they have made all of their payments under a trial loan modification, but there has been no permanent modification.  According to the latest numbers, only 4% of all trial modifications under HAMP have become permanent.  The Treasury indicated in December, 2009 that it would start fining lenders for failing to complete loan modifications, but we have seen little improvement yet. 

Borrowers are told a host of explanations as to why there has been no permanent loan modification on their loan including missing paperwork, the loan is with a negotiator or simply that the loan modification takes time.  While all of these explanations may be true, the result is that borrowers throughout the country are left in limbo not knowing whether they should try to stay or make preparations for leaving the home.  To make matters worse, most borrowers know that the loan modification documentation signed by them warns that foreclosure may be immediately resumed from the point at which it was suspended if this trial modification plan terminates and no new notice of default, notice of intent to accelerate, or similar notice is required. What should they do?

In order to reduce some of their anxiety, I ask them to work through a simple 3 step process to see if any loan modification really makes any sense for them.

        Step 1- What are the terms of the loan modification being offered?  There are many types of loan modification/forbearances being offered by lenders.  However, the one most helpful to borrowers is HAMP which stands for Home Affordable Modification Program.  Lenders are not required to participate in this plan.  However, the biggest lenders including Bank of America, JPMorgan Chase Bank, Wells Fargo Bank, Citibank and American Home Mortgage Servicing are participating.  The program lowers the interest rate to 2% for years 1-5 and increases the interest rate over the next 3 years until it is fixed in year 8 at approximately 4.5% -5.0% for the remaining term of the loan or in some instances extending the loan term to a 40 year loan.  If the trial period is not for a HAMP loan modification, you should immediately contact the lender and apply for HAMP loan modification.

        Step 2-  Can you pay off the principal balance?  A good rule of thumb is that a borrower can payoff 2-2.5 times their gross household income in a home loan over the course of their working life and go on vacation and have a child or two.  Therefore, if a family’s average gross household income is $100,000, they should not have a home loan which exceeds $250,000.  This is assuming a 30 year fixed loan.  If a borrower has less than 30 years remaining work time, the amount should be reduced accordingly.  If you determine that you are never going to “own” this property, is this the best use of your money?  If you didn’t have this huge mortgage payment plus property taxes, insurance and maintenance, could you be putting away more money into retirement or maybe saving for a home you could actually “own.”

        Step 3- Is the loan modification payment less than I would pay in rent?  Assuming, the above calculation shows that you will not be able to pay off the balance of the loan over the course of your remaining work career, is the loan modification payment still less than I would pay in rent?  Depending on where you live, the loan modification payment may still be less than rent you would pay in your immediate area.

Loan Modifications are difficult.  Most of these loans were made with little or no documentation and now the lenders seem to be requiring full loan documentation at the beginning, middle and whenever they feel like it until they decide a loan modification is granted or denied.    If you are in a forever trial modification, I urge to continue a dialogue with the lender seeing if any new programs have become available which may help you.  In 2010, we expect lenders with the assistance of the federal government to roll out additional loan modification programs. I recommend calling the lender at least once a week.  Continue to ask if there is anything new available.  A 4% permanent loan modification rate is not good, but if it improves, you do not want to miss the modification which may allow to retain your home.   

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.

© 2011 Joan M. Grimes. Grimesbklaw.com

Beware of the HOA

Dues, Assessments, Liens and Foreclosures

Last week, a person came into my office saying he received a letter from his Homeowners Association (“HOA”) offering to rent his house to him. Needless to say, he was not happy. He knew he was behind on HOA dues, but his lender hadn't even started foreclosing on his house.

Welcome to the new frontier of the mortgage crisis in California. The homeowner's HOA had foreclosed on his property before the lender. While this has been common in Hawaii for years, this is relatively new in California. If you are behind on your HOA dues or assessment, here is the California law you need to know.

HOAs are regulated by the California Davis-Stirling Common Interest Development Act in Civil Code Section 1367 et seq. Pursuant to Davis-Stirling, an HOA can levy dues and assessments necessary for the development. A regular or special assessment is a debt of the owner. If an owner is behind on dues or assessments, the HOA can record a lien against the property. At least 30 days prior to recording the lien, the HOA is required to notify the owner by certified mail.

The recording of a lien does not automatically allow a foreclosure by the HOA. Rather, an HOA may not foreclose until the amount of the delinquent dues and assessments secured by the lien, exclusive of any accelerated assessments, late charges, fees and costs of collection, attorney's fees, or interest, equals or exceeds one thousand eight hundred dollars ($1,800) or the assessments secured by the lien are more than 12 months delinquent. In addition, the HOA still maintains its rights to proceed in state court against the owner for delinquent dues and assessments.

If the HOA decides to proceed with a foreclosure of its lien, in most instances it will proceed with a non-judicial foreclosure pursuant to CC 2924 which will require the a Notice of Default and Notice of Sale. If the HOA does foreclose on its lien, the owner still has a 90 day right of redemption and the HOA would still be taking the property subject to any senior liens.

Therefore, if you are behind on your HOA dues and assessments, you need to be aware that the HOA can foreclose before your lender and become your landlord. If you are trying to buy the maximum amount of time in your home prior a foreclosure, it may be better to keep your HOA dues current.

If you are filing bankruptcy or have filed bankruptcy, there are special rules you need to know. First, all dues and assessments which come due prior to the date of filing are included in the bankruptcy discharge. HOWEVER, under 11 USC 523(a) (16), Congress carved out a special exception as to post-petition dues and assessments. Specifically, the owner continues to be responsible for all dues and assessments which came due after the filing of the bankruptcy as “long as the debtor or the trustee has a legal, equitable or possessory ownership interest” in the property i.e. until someone forecloses or buys your property, you are responsible for the HOA dues and assessments. Therefore, if you do not pay your HOA dues or assessments after a bankruptcy filing, do not be surprised to find yourself being sued in state court by your HOA or having your property foreclosed.

In conclusion, beware of the HOA. They know where you live. This is a complicated area of the law and I recommend you to seek legal counsel prior to allowing your HOA dues or assessments to become delinquent. Like everything else in life, there are consequences to actions as well as inaction. In this case, there may be personal liability and tax consequences. I provide a free 30 minute consultation at all of my three offices located in Walnut Creek, Antioch and Brentwood.

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.

© 2011 Joan M. Grimes. Grimesbklaw.com