DO NOT MOVE….I REPEAT….

DO NOT LEAVE YOUR HOME…  UNTIL THE BANK FORECLOSES OR THE SHORT SALE IS COMPLETED 

Every day people come into my office indicating that they moved out of their home many months (or even years ago) and the bank still has not foreclosed.  They are now concerned because the city is sending them bills for maintenance on the property and the Homeowners Association is suing them for back payments even though they are no longer living at the home.  If you are behind on your mortgage, have tried a loan modification and have been denied or know you will not be able to keep the home, what should you do?

First, DO NOT MOVE… I REPEAT…DO NOT MOVE UNTIL THE BANK FORECLOSES OR THE SHORT SALE IS COMPLETED.  You are now living in your home without paying your mortgage.  It is free!  You should not start paying rent someplace else when you can live in your home for free.

Second, KEEP UP THE PROPERTY.  YOU ARE STILL RESPONSIBLE FOR THE PROPERTY UNTIL THE BANK FORECLOSES OR THE SHORT SALE IS COMPLETED.  So, even if you moved, you are still responsible for the maintenance of the property and payment of any Homeowner Association dues.  You do not need to pay the property taxes, but you should maintain the homeowners insurance.  Therefore, if you are still responsible for the maintenance and HOA payment, you might as well enjoy the property and the amenities.

Third, CONTINUE TO TALK TO YOUR LENDER TO SEE IF ANY NEW OPTIONS ARE AVAILABLE TO YOU.  Starting January 1, 2011, the State of California is offering new assistance programs through your lender if you are behind on your mortgage. 

Fourth, SEEK LEGAL COUNSEL.  Depending on your situation, a real estate or bankruptcy attorney will be able to advise you whether a short sale may be a better alternative for you than a foreclosure.  Also, if you have other debt which you are unable to pay off such as credit cards, lines of credit or car loans, a bankruptcy may be the best alternative for you.  However, if  you are no longer in the home, the debt against the property cannot be used to offset income.  Therefore, if you (or your family) have income over the average median income in California (Family 1- $47,234, Family 2-$61,954, Family 3-$67,562), you will want to file the bankruptcy case prior to leaving the home.  Leaving the home prior to the bankruptcy filing may mean the filing of a Chapter 13 repayment plan versus a straight Chapter 7 where no debts must be repaid.

In conclusion, do not move until the Bank forecloses or the short sale is completed.  It is still your home until the bank forecloses which can be months or years from the time you stop paying.  The average time of a foreclose in California is now 451 days from the date of default.  That means potentially 451 days of FREE RENT or more.  Since you are still responsible for the property, you might as well enjoy it.  This is a complicated area of the law.  You are in the deep end of the pool.  Do not swim alone.  The buddy system is essential.  Seek a buddy in legal counsel prior to taking any action.  I see people everyday 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 FOR 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.  GRIMESBKLAW.COM

  © 2011 Joan Grimes

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

Should You File for Bankruptcy?

A common question people ask me is whether they should file for bankruptcy. They don’t want to file, but they also know that they cannot continue with the status quo. Here is what I ask them:

1. Can you pay your bills as they come due and owing?

2. Can you pay off your credit card bills in full in the next 12 months?

3. If you own a house, do you have a fixed rate mortgage that you can payoff by the time you retire? Is your house worth what you owe against it?

If you have answered “no” to any of these questions, you should be considering whether a fresh start through bankruptcy maybe the right decision for you.

A fresh start has been provided to the Banks, the Investment Companies, and the Insurance Companies and a fresh start is available to consumers. Most home loan made between 2001-2007 could not be paid off on a person income. More than anyone, the banks knew that a person can only pay off in home loan debt of 2-21/2 times their gross household income in this lifetime and save for retirement and raise a child or two.

A fresh start for a consumer is usually a Chapter 7 bankruptcy. A Chapter 7 is a straight bankruptcy also known as a liquidation case. In a Chapter 7 case, all assets and liabilities are included and the Chapter 7 Trustee will have the right to liquidate non-exempt assets for the benefit of creditors. In exchange for including all assets and liabilities, an individual’s promise to pay on most debts are forgiven through a discharge.

In most cases, there are no assets available to creditors because all of the assets are exempt or encumbered by liens to the full extent of their value. Exempt assets that the Chapter 7 Trustee cannot reach include 401k, IRA, Annuity, retirement plan, equity in a car up to $3,525, most household goods and furnishing, life insurance, most personal injury actions, and then $23,250 in other assets such as motorcycles, boats, RV or additional equity in cars or other items.

Most people who are having problems paying their bills qualify for Chapter 7 Bankruptcy either because their income is low or because their mortgage payments and other secured loans such as car loans are too high in relation to their income. However, a person should not delay in seeking legal advice. The loss of a home prior to a bankruptcy filing either through a short sale or foreclosure may make an individual’s income too high for a Chapter 7 and the only option will be Chapter 13 repayment plan which will last between 3-5 years. In addition, there may be personal liability and tax consequences which could have been eliminated in a bankruptcy.

In conclusion, if you are having financial problems, seek legal counsel. You did not make this real estate and credit card 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. © 2010

Joan M. Grimes. Grimesbklaw.com

Can I Just Walk Away?

Foreclosure Sales and Bankruptcy

When a person is behind on a home loan, it is very common to think a foreclosure sale will solve all their problems with regards to the home.   However, all too often, a foreclosure sale is just the start of the problems.  In some cases, the cause of the problem is a junior lien which starts collecting.  In other cases, it is an unexpected tax bill as a result of the foreclosure sale which the borrower was unaware. 

In many cases, a bankruptcy filing prior to the foreclosure sale would have discharged the liability on any additional loans on the property, avoided the tax liability completely and allowed the person to stay in the property several additional months.  Additionally, a foreclosure sale prior to a bankruptcy filing may cause a person not to qualify for a Chapter 7 bankruptcy leaving a person in a Chapter 13 bankruptcy for 3-5 years.  What should a person consider prior to allowing a property to be sold at a foreclosure sale?

First, prior to allowing a property to be sold through a foreclosure sale, (1) determine the affect of the foreclosure sale on your credit, (2) is there any personal liability on a lien after the foreclosure sale which could be discharged in a bankruptcy filing and (3) is there any tax liability which could be discharged through a bankruptcy filing prior to the foreclosure sale.

Second, could a Chapter 13 bankruptcy filing avoid a junior lien on your principal residence which would have allowed you to retain the real property?  Under the Bankruptcy law, a junior lien on a person’s principal residence which does not attach to equity in the real property, can be avoided through a Chapter 13 Plan.  For example, if the current fair market value of a principal residence is $250,000 and the balance on the first deed of trust is $300,000, then a junior lien could be avoided through the Chapter 13 Plan. A Chapter 13 also allows a person to cure a default on a home loan over time which may be all that is necessary to avoid a foreclosure sale.

Third, are there any other reasons that a bankruptcy filing may be appropriate prior to a foreclosure sale.  The most common reason is that there is significant unsecured debt which can be discharged in the bankruptcy.  In addition, a bankruptcy filing will allow a person to remain in the property additional time.

In conclusion, a foreclosure sale of real property without a bankruptcy filing may be the right decision.  However, a foreclosure sale may have serious personal liability and tax consequences which should be analyzed by a bankruptcy or real estate attorney prior to the foreclosure sale.  This is a complicated area of the law, but a bankruptcy or real estate attorney should be able to make to an analysis of your particular situation fairly quickly.  I see people for a free 30 minute consultation at my offices in Walnut Creek, Antioch and Brentwood. 

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE FOR 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.               

 © 2010 Joan Grimes

Late on Mortgage Payments? Is a Loan Modification for You?

 In the last column, I discussed the “overall” problems with loan modifications. Specifically, that most of the programs do not give any meaningful modification to the loan and there is no “upfront” approval or denial of the modification prior to entering into the trial modifications payments.

Since the column was published, I have received many calls wanting to know more nuts and bolts information about the current state of loan modification programs. So here is what I know after 2 years.

1. Income- The borrower needs to have documented income.  If the borrower 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.

2. Loan Modification Payments include 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 will in all likelihood 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.     

3.  There are no principal balance reductions.  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 is 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.

4.  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 word on the street is that “new” people who are applying for modifications will have their underwriting done prior to starting the trial modification and that the modification is guaranteed.  However, I will believe it when I see it. 

5.  Consider filing bankruptcy to discharge credit card and other unsecured debt before applying for loan modification.  When you apply for a loan modification, the lender will run your credit.  While a low credit score will not prevent a modification, the less unsecured debt you have, the more money you will have available to make the modification payments.  A Chapter 13 may also be available to avoid a junior lien on your home.    

6.  Net Present Value Test.  This is the mystery calculation used by investors to determine whether a loan modification should approved.  What we do know is that 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 weighs heavily in the calculation.  Therefore, if you live in a “low” foreclosure area such as Danville or San Ramon, the likelihood that an investor will want “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.  However, if you are considering a 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.    

*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.   

© 2010 Joan Grimes



If Your Ship is Sinking, Don’t Give Away Your Life Vest!

One of the saddest things is when a person comes into my office explaining that they have waited to come in until they have used up all their savings, retirement funds, equity in their home and/or have gotten a loan on their car just to keep paying their credit cards and other debts.  This just breaks my heart because it was completely unnecessary.

The Bankruptcy Code does not want or encourage people to wait until they have used up all of their assets to file bankruptcy.   In fact, the Bankruptcy Code and California law discourages these actions by specifically protecting certain assets in a bankruptcy case from the reach of creditors.  So what  are some of the assets which are generally protected and what actions should you be taking to protect these assets?

Retirement Accounts- All private retirement plans and profit sharing plans are exempt.   Also, exempt are IRAs, IRA rollovers, Roth IRA and Keogh plans held by self employed individuals to the extent necessary for the support.   Therefore, you should not be using retirement accounts to pay credit cards, bringing home loan payments current on a house that is underwater or other bills which could be discharged in a bankruptcy.  Every withdrawal from a retirement account will be taxed on both federal and state levels as well as incurring the 10% penalty for early withdrawal unless it falls under an exception for early withdrawals.  If you are in your 30’s-40’s, a withdrawal of $1,000 will amount to a loss of $10,000 in retirement income.  If you are in your 20’s, a withdrawal of $1,000 will amount to a loss of $20,000 in retirement income.  The withdrawal of even smallest amount will be a huge reduction in retirement income later.

Homestead Exemption- The California homestead exemption applies to your principal “dwelling” on the date the bankruptcy petition is filed.  The minimum homestead exemption in California effective January 1, 2010 is $75,000.  The exemption is increased to $100,000 if the you or your spouse reside in the homestead or at least other one member of the family resides in the residence and does not own an interest in the residence.  The homestead exemption is increased to $175,000 if you or your spouse meets the minimum age of 65, is disabled or meet the “low income” qualifications’.  Therefore, if you still have equity in your home, do not use it to pay dischargeable debt such as credit card or personal loans.

Personal Property, Cars and Jewelry-   A person can generally exempt all household furnishing and goods, wearing apparel, appliances, books, animals, crops or musical instrument held primarily for personal, family or household use as long as any individual items could not be sold at a garage sale for more than $525.00.  In addition, a person can have  equity in a car and certain amounts of jewelry depending on the exemptions used in the Bankruptcy case.  Therefore, no loans should be taken out on a vehicle which is paid off.

Wildcard Exemption-  If the homestead exemption is not used as discussed above, a person can have in addition to the car, jewelry and household goods and furnishing exemptions, retirement accounts and the other exemptions provided under California law, a person can have up to $23,250 in cash and other assets at the time of the bankruptcy petition which will be exempt.  That means there is no reason to sell the RV, boat or use up your savings unless that is really want you want to do so.  However, if you are not going to be paying your credit card or other installment debt, you should make sure that you are not putting money in a bank or credit union where you have debt.  Many banks and credit union have agreements that allow set-offs if a loan is in default from other checking or savings accounts.

Personal Injury and Workers Compensation Awards-  Personal injury settlements are generally exempt under “lost compensation” and future earning awards are exempt to the extent reasonably necessary for support.  In addition, Workers Compensation Awards are exempt.

Life Insurance-  Term Life Insurance is generally exempt and Universal or Whole Life up to a cash value of $11,800.  Therefore, term life/whole life insurance should not be cancelled since it is much more expensive to obtain as you get older.

The purpose of the Bankruptcy Code is to provide people with a fresh start.  A fresh start does not mean empty cupboards, empty retirement accounts, empty savings accounts or no equity in a car or home.  We are all living longer and we will need food in our cupboards, money in our retirement accounts and a car that is paid off. 

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!  

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.              

© 2010 Joan Grimes

Should I Stay or Should I Go?

To say that these are difficult times in the real estate market would be an understatement.  The melt down began with an extended boom fueled by cheap money followed by a rapid contraction of the credit supply.  This lethal combination has led to an unprecedented decline in housing values.  I have no doubt that the real estate market will come back and thrive.  However, in the meantime, does it make financial sense to stay in a home that is underwater; where the value may not come back for 10-15 years and you may only be paying interest on the loan?  What is a person to do?

The mortgage industry and government would like us to feel a moral obligation to repay our debts.  The argument goes that we are sending the wrong message to our children and community if we default on a loan where we had the ability to make the payments.  Never mind that Wall Street banks and investors are voluntarily defaulting on office building, hotels and commercial properties across the nation.  Morgan Stanley recently decided to stop paying on five San Francisco office buildings and no one is saying they have a moral obligation.  It was a strategic decision to let the properties go rather than invest more money.

  A decision to voluntarily or strategically default on a loan can be a very emotional decision.  However, if we take the emotional side out of the equation, what does it look like from a purely financial and legal standpoint?  From a legal standpoint, there are three questions when contemplating a default on a home loan.  They are the following: 1) how will default affect my credit? 2) will there be any personal liability from the default? and 3) will there be any tax liability?  In addition, from a financial standpoint, how does the continuing payment of this debt affect other areas of my life?

As a general rule, under California law, a short sale or foreclosure can remain on a person’s credit for up to 7 years.   Personal liability on a home loan is determined by the character of the loan at the time the loan was originated and then by the manner in which the lender chooses to foreclose.  Generally, a loan or loans used to purchase a 1-4 unit property occupied by the borrower will have no personal or tax liability unless it is excluded loan product such as many types of governmental loans such as VA loans.  On the other hand, home loans which were not used to purchase a 1-4 unit property occupied by the borrower such as refinances, lines of credit or loans on investment properties, may have both personal and tax liability.

Even after considering the legal issues, we still need to think about a voluntary default from a financial point of view.  Is being “house poor” causing you to not properly fund your retirement, your children’s college education or preventing you from paying bills as they come due or taking your family on vacation? 

In conclusion, a voluntary default may be the right decision for you just as it was for Morgan Stanley.  It was a business decision for Morgan Stanley and it should be for you too.  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 decide if a voluntary default is the right decision for you and your family.

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.              

 © 2010 Joan Grimes



411 on Bankruptcy

When people come in for an initial consultation, they want to know three things. First, is bankruptcy appropriate for their financial problems? Second, what options are available under Bankruptcy Code? And third, how will bankruptcy affect their lives after the bankruptcy is done.

Bankruptcy may be the appropriate remedy if a person is having difficulty paying their bills as they come due and owing, have credit card debt they have been unable to pay off or have long term debt such as home loans which they are having difficulty paying.

The most common form of bankruptcy is a Chapter 7. A Chapter 7 is a straight bankruptcy also known as a liquidation case. In a Chapter 7 case, all assets and liabilities are included and the Chapter 7 Trustee will have the right to liquidate non-exempt assets for the benefit of creditors. In exchange for including all assets and liabilities, an individual’s promise to pay on most debts are forgiven through a discharge.

In most cases, there are no assets available to creditors because all of the assets are exempt or encumbered by liens to the full extent of their value. Exempt assets include IRA or retirement plans, equity in a car up to $3,525, most household goods and furnishing, life insurance and then $23,250 in other assets such as balances in bank accounts or additional equity in cars or other items.

A Chapter 13 is a Consumer Reorganization which is usually used when a borrower needs one of the special “bells and whistles” provided by the Code. The most common bells and whistles are that the Debtor has non-exempt assets that they want to keep or they have a junior lien on a primary residence that does not attach to any equity which could be avoided in a Chapter 13 or maybe they have a car loan which is older than 910 days which they can reduce to the current fair market value.

The Chapter 7 process usually takes approximately 4 months from the date of filing to closing of the case. While a bankruptcy can stay on a person’s credit for a maximum of 10 years, Fannie Mae’s guidelines provide that a person will be eligible to purchase with a FHA loan product in as little as 2 years after the closing of the bankruptcy. New credit is usually granted within 1 year, but at lower limits and higher interest rates. The Chapter 13 process takes between 3-5 years, but provides greater relief in many situations.

Most people who are having problems paying their bills qualify for Chapter 7 Bankruptcy either because their income is low or because their mortgage payments and other secured loans such as car loans are too high in relation to their income. However, a person should not delay in seeking legal advice. The loss of a home prior to a bankruptcy filing either through a short sale or foreclosure may make an individual’s income too high for a Chapter 7 and the only option will be Chapter 13 repayment plan which will last between 3-5 years. In addition, there may be personal liability and tax consequences which could have been eliminated in a bankruptcy.

In conclusion, if you are having financial problems, seek legal counsel. You did not make this real estate and credit card meltdown. Do not lose sleep and your sanity worrying about financial problems.

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.  

© 2010 Joan Grimes

And the Scam Goes On

In every scam, the victim must be desperate. They must “believe” they are going to miss out or possibly die without the product or service. It doesn’t matter what the product or service is although sex, money and death are big sellers.

The mortgage scam was no different. It brought the promise of the American Dream of Homeownership through no money down, interest only or option arm loans.

The loan modification scam is a continuation of mortgage scam. The victim is still desperate, but now they are desperate not to lose the “American Dream.” It is now the promise of a lower fixed monthly payment and a principal reduction.

Most modifications are scams because they do not reduce principal or payment amounts. Get the borrowers to start making “trial” payments and then repeatedly ask for documentation. These are really just “Hope” modifications. Nothing concrete, just the hope of something in the future like a Hail Mary pass with 30 seconds left in the game.

The lenders know that if the borrower keeps making “trial” payments and “updating” their paperwork, they will have one less property on their books, will have time to negotiate with their mortgage insurer, investor and in some instances investigate the borrowers to see if there has been any irregularities in the loan process. Few people get a meaningful modification. The best we have seen is the accrued interest write down by Wells Fargo Bank on the World Savings Pick-a-Payment loans. I am sure that there will be a few modifications with 40-50% write down of principal, but as an attorney who represented banks for 20 years, they are only going to do it if they made a mistake and are required to make the modification. They didn’t get rich by giving away money.

Most modification programs are scams because there is no up front approval or denial. The borrower submits documentation and begins trial payments not knowing if they will be approved or denied for many months or years. In the meantime, every month their credit score is being reduced because they are not paying “as agreed.” The fact is that property valuation and income/debt ratio analysis is a secret and is never disclosed. The borrower has no ability to determine why they have been denied for the modification. What should they do?

In order to reduce their anxiety, I ask them to work through a 3 step process to see if a modification makes sense.

Step 1- What are the terms of the modification? Is the modification just putting the late payments at the end or is there an interest rate or principal reduction?

Step 2- Can you pay off the balance? A good rule of thumb is that a borrower can payoff 2-2.5 times his gross household income in 30 years 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. If you determine that you are never going to “own” this property, is this the best use of your money?

Step 3- Is the modification payment less than I would pay in rent? Assuming, the above calculation shows that you will not pay off the balance, is the modification payment still less than rent?

Most loan modifications programs make no sense. There will be no principal or long term payment reduction. It is a temporary band-aid. If you are in a trial modification, I urge to consider whether this is in your best interest. The lenders have no problem doing what is in their best interest and you should not either.

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 SHORT SALE OR FORECLOSURE. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.

© 2010 Joan Grimes

Do you have a Junior Mortgage on Your House?

Lien Stripping in Chapter 13

One of the great advantages of a Chapter 13 bankruptcy at this time is ability to strip a lien on your principal residence that does not attach to any equity. Here is a common example: Principal residence has current fair market value of $300,000. The first mortgage has a balance of $400,000 and the second mortgage has a balance of $100,000. Because the second mortgage does not attach to any equity in the property, the lien can be avoided or “stripped” in a Chapter 13 thereby removing the balance of $100,000 at the completion of the Chapter 13 case.

When does a Chapter 13 lien stripping case make sense? First, the principal residence must be your principal residence i.e. where you sleep at night. Second, you don’t want to file a Chapter 13 to strip a lien unless you really, really want to stay in this house. Third, the balance on the junior lien needs to be large enough combined with other debt to make a Chapter 13 advantageous i.e. you don’t want to file Chapter 13 to avoid a lien of $10,000. 

If a Chapter 13 is sounding like something that might work for you, there are several other things to consider. First, we must make sure all of the owners of the property and all of the people who signed on the mortgage note at we need to strip are filing bankruptcy. For example, if the property is owned by both you and your spouse, we cannot strip off the mortgage unless both of you are filing bankruptcy. Second, in order to strip off the mortgage, we have to prove that your real property is not worth more than the payoff balances on the other senior mortgages. That is, we need to prove that there is no value, not even one dollar, left in your real property to “secure” the mortgage we are trying to strip in the Chapter 13. Third, you need to have a “real” senior mortgage or at least a reasonable “hope” of you through a modification. The best senior mortgages for lien stripping cases are 30 year fixed that you can really afford or a mortgage that has been modified into a loan you can afford. If the senior mortgage is going to reset into a payment you cannot afford in 1,2,3 or 4 years, there is no reason to spend the money to strip a junior lien and then lose the house to a foreclosure by the senior lender later.

In conclusion, there has never been a better time for Chapter 13 lien stripping cases. Home values are low and the number of junior liens that do not attach to any equity are at an all time high. This is truly the lemonade out lemons recipe if you are intending on staying in your current residence and meet the requirements for a Chapter 13. Prior to simply walking away for your current residence, it may be a good idea to consider a Chapter 13 and see what it can do for you.

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 SHORT SALE OR FORECLOSURE. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.

© 2010 Joan Grimes

How to Avoid Bankruptcy

 Everywhere we go today, someone has a friend or neighbor who has either filed bankruptcy or is contemplating bankruptcy. If your friend or neighbor has lost a job, lost their savings in the stock market crash or has a house hopelessly underwater, there may be no other option.

However, for most of us, bankruptcy need not be part of our future. However, it will take careful planning and constant vigilance. We are bombarded everyday with marketing trying to convince us that things are necessary today whether a new car, kitchen or mattress. In order to avoid the pitfalls of overextending yourself, here is a easy to remember guideline.

1. Cash is King. If you don’t have cash, you don’t buy it. This principle should apply to all purchases with the exception of a house. If don’t have the money to purchase that car outright, you shouldn’t be purchasing it. A new car loses between 20-30% of their value when they are driven off the car lot. In the old days, we were told to be a new car because it was more dependable. You didn’t know the history of the car. However, we the development of Car-Fact and more dependable cars, used cars should be considered and encouraged. If you are able to save enough money to buy a new car outright and you still want to use that money to buy a new car, that is up to you. However, it is my experience, that a person who is able to save enough money to buy a new car will use that money for something else.

2. A House is Shelter. It is not an investment. An investment is something other than your shelter. It may be good investment for your heirs, but for you, it is just shelter. As long as we cannot eat our homes, they are not an investment. The goal should always be to pay off your home so you have a place to live once you no longer working. A good rule of thumb is that a home loan should never be more than 2-2.5 times your household gross income. Therefore, if your family’s gross household income is $100,000., the home loan should never exceed $250,000. As a percentage of your income, a house payment including principal, interest, taxes and hazard insurance and mortgage insurance should not exceed 30% of your take home pay. Also, remember that if you have an interest only or option arm loan, you are in reality renting your home. You can only own your home if you are paying off the principal. We know that if the home loan is kept to reasonable amount, there will be no need to for credit card use or other uses of credit.

While these simple principals may seem obvious right now in the middle of the current economic crisis, we should try to think more about them for the good times ahead. Credit will again flow easily and there will be marketing people on every corner trying to sell us the newest shiny products for us to consume today. However, let us try to be a little older and wiser the next time through. Remember, cash is king and house is just shelter. We make a house a home, not the other way around.

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 SHORT SALE OR FORECLOSURE. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.
© 2010 Joan Grimes