Debt Settlement vs. Bankruptcy

Clients come into my office every week saying that they are in a debt settlement plan, BUT are now being sued by a creditor or they have received a 1099c income statement from a creditor that was included in the debt settlement plan.  How can this be?

First, just because you are in a debt settlement plan, it does not mean that a creditor cannot sue you on account.  It happens every day.  In some cases, the lawsuit is because a debt could not be included in the settlement because a creditor would not agree.  In other cases, the reason for the lawsuit was that the creditor was not receiving payments from the debt settlement plan in an amount that would satisfy the creditor.   

Second, just because you are in a debt settlement plan, it does not mean that the creditor will not issue you a 1099c for that portion of the debt which is forgiven.  In fact,  the IRS REQUIRES creditors to issue a 1099c to individuals where more than $600 in debt is forgiven.  Therefore, if you settle with a VISA for $5,000 on a $50,000 bill, you will receive a $45,000 1099c which will be considered income to you and will be taxed at your current tax rate.

Third, just because you are in a debt settlement/consolidation plan, it does not mean that your credit will not affected or that creditors will stop calling you.  Creditors can still contact you for the collection of debts they are owed unless or until you file bankruptcy. Also, a debt settlement program will impact your credit in the future and have long-term side effects because you will have late payments and even when you settle, your credit report will not show that the account was paid in full.

Debt settlement plans are alternatives to bankruptcy.  If you do not qualify for bankruptcy, then you will have no choice but to proceed with the settlement or consolidation plan. However, most people DO qualify for bankruptcy and in fact, most qualify for a Chapter 7 which requires NO payments back to creditors.  Even, if you do not qualify for a Chapter 7, the payments in Chapter 13 will in almost every instance be significantly lower than what you are paying to the debt settlement or consolidation company.  Better yet, there will be no 1099c received after the bankruptcy because Bankruptcy is one of the exceptions to the debt forgiveness rule.

In conclusion, these are very tough times.  You are not alone.  If you are having trouble paying your bills as they come due, I recommend you seek legal counsel before you enter into a debt settlement or consolidation plan.  Know all of your options and then you will be able to make the best decision for you and your family.  I see people for a FREE 30 minute consultation at my offices locate in Walnut Creek, Antioch and Brentwood.

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  (925) 323-7772     © 2011 Joan Grimes

California Foreclosure Process - Know the Timeline

       As we head into the fall of 2011, we are seeing more and more nonjudicial foreclosures being started by lenders.  In California, if you are behind on your home loan, your lender will typically use a nonjudicial foreclosure process known as a trustee’s sale to sell your home.  While it is possible for a lender to use a judicial foreclosure process which is filed through a state court action, the judicial foreclosure process is much more expensive and takes longer.  The only time we typically see a judicial foreclosure is when the lender is certain that the borrower has sufficient income or assets to pay a deficiency balance….think doctors, investment bankers.

The following is the minimum timeline for a nonjudicial foreclosure in California:

Day 1- For loans made between January 1, 2003 and December 31, 2007 on residential one-four unit owner occupied properties, California Civil Code Section 2923.5(a), requires the lender to contact the borrower by phone or in person to assess the borrower’s financial situation and explore options for avoiding foreclosure.  During the conversation, the lender must inform the borrower of the right to meet with the lender within 14 days.  The lender must also give the borrower the toll free number for finding a HUD certified housing counseling agency. 

Day 31- The Notice of Default (“NOD”) is recorded in the county where the real property is located.  Within 10 days after recordation of the NOD, a copy of the NOD must be mailed by registered or certified mail to the borrower and to any parties with a recorded Request for Notice. The NOD must run 3 months before the Notice of Sale can be posted.

Day 116-121- The Notice of Trustee’s Sale must set forth the date, time and place of the Sale.  It must also include the total amount of the unpaid balance and reasonably estimated costs, expenses, and advances at the time of the initial publication of the Notice.  The Notice must be recorded, posted, published and also mailed by registered or certified mail as well as first class mail to the borrower.  The Notice must run once a week for 3 consecutive weeks in a newspaper of general circulation.

Day 135- Up to 5 business days before the Trustee’s Sale, the borrower may reinstate the loan i.e. bring current by paying the missed payments plus allowable costs.  If the Sale is postponed, the date for the borrower to reinstate is postponed accordingly.

Day 141- At the Trustee’s Sale, the property is sold through a public auction to the highest bidder.  The borrower still has the right to redeem the property, but he must pay the entire debt, plus interest and costs before the bidding begins at the Sale.

        Most nonjudicial foreclosure in California take far longer than 141 days because the foreclosure process will be put on hold during a loan modification or short sale.  However, there is no requirement for the foreclosure to be put on hold and a borrower should not count on additional time.  This is a complicated area of the law and the implications for personal liability and tax liability are great.  If you are considering a default on your home, 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.    GRIMESBKLAW.COM

© 2011 Joan Grimes

New Law on Short Sale - What you Should Know to Protect Yourself

Effective July 15, 2011, California Code of Civil Procedure (“CCP”) 580(e) was amended to prohibit a deficiency judgment on any loan secured solely by a deed of trust on a 1-4 unit dwelling sold in a short sale.  Enough legal jargon…what exactly does this mean and how does apply to you?

First, it means that if your lenders agree to a short sale, it will release you from your personal liability on loans secured solely by a deed of trust against a dwelling of 1- 4 units.  If the lenders want the short sale to go through, they will have to be satisfied with the proceeds from the sale.  The banks can no longer demand that borrowers sign promissory notes… AND no more tricking borrowers into believing that releasing of the lien was in fact releasing their personal liability.  The lenders do not have to agree to the short sale, but if they agree, they cannot come after you once the short sale is completed.  However, if you think this is too good to be true…you’re right. Keep reading!

Second, there is no requirement for a release of personal liability on anything other than a consensual lien i.e. no requirement to release judgment lien or liens placed on the property such as by a homeowners association or taxing authority.  These parties do not have to agree to accept the proceeds from the sale as payment in full. The forgiveness of personal liability also does not apply to borrowers who are corporations, limited liability companies, limited partnership or political subdivision of the state.  In addition, it also does not prohibit the lender from obtaining a judgment for fraud with respect to the short sale or waste committed to the property.

Third, CCP 580(e) does not release you from any tax liability.  Remember, every short sale has tax implications. The IRS/State Franchise Tax Board wants to know two things: 1) Did you make any money on the deal and 2) Did you borrow any money which was not repaid?  If you made money on the deal, including taking out cash to buy another house, car, pay off credit card, you may have a gain. If you borrowed money which was not repaid, you will have Cancellation of Debt Income (“CODI”).  CODI will be taxable to you at your current tax rate unless an exception applies. Make sure you know all the tax implications before the short sale is completed.  If there is CODI, it can be discharged in bankruptcy, but only if the bankruptcy is filed prior to the short sale being completed.

In conclusion, CCP 580(e) is a mixed bag for consumers.  It may help reduce personal liability while increasing tax liability.  There is no question that this new law is going to hurt the lenders and help the IRS and State Franchise Tax Board.  This will be found money for the tax man.  Borrowers will see the forgiveness of personal liability and completely disregard the tax consequences.   Don’t be one of those people!  If you are considering a short sale, seek legal advice prior to starting the short sale process.  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 consultations at my offices located in Walnut Creek, Antioch and Brentwood.

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  (925) 323-7772     

© 2011 Joan Grimes

Credit After Foreclosure, Short Sale or Bankruptcy

Are you worried about your credit after a foreclosure, short sale or bankruptcy?  Specifically, do you want to know when you reasonably expect to buy another home?  If this is concern for you, here is an overview of Fannie Mae credit guidelines. 

Foreclosure Sale-  A borrower will be eligible to obtain credit to purchase another principal residence 7 years from the date of the foreclosure sale.  However, if a borrower has “extenuating circumstances” they may be eligible for a loan in 3 years.  Extenuating circumstances are nonrecurring events that are beyond the borrower’s control that resulted in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations such as illness, divorce, job loss or reduction of income.

Short Sale-  A borrower will be eligible to obtain credit to purchase another principal residence 2 years from the date the short sale is completed, but the borrower is limited to a maximum loan to value ratio of 80%.  If the borrower has “extenuating circumstances” as set forth above, the maximum loan to value ratio could be 90%.  If the loan(s) are current at the time of the sale, it may be possible to qualify even sooner depending on your circumstances.  Short sales can be reported various ways by the lenders, but the most common is a “paid in full” with a “settled for less than owed” code from the reporting agencies.  If the loan(s) are delinquent, the loans will also indicate delinquent status i.e. 60, 90, 120 or 150 past due.

Bankruptcy-  A borrower will be eligible to obtain credit to purchase another principal residence 4 years from the discharge or dismissal date of a Chapter 7.  In a Chapter 13 case, it is 2 years from the discharge date or 4 years from the dismissal date.  In a Chapter 13 filing, the borrower is given credit for repaying some or all of their debt.  On the other hand, if the Chapter 13 is dismissed, the time period will be 4 years.   There is an “extenuating circumstances” allowance in Chapter 7 cases, but not in Chapter 13. 

Re-Establishing Credit- It is very important that borrowers re-establish credit after a bankruptcy case and improve credit after a short sale or foreclosure.  To have credit, you need to use credit.  Probably the most important thing to do besides allowing time to pass is to open a few new credit accounts, use the credit and make payments in a timely manner.  To the extent there is a mix of old and new credit accounts, that is preferred.  Credit histories that include older, established accounts generally represent lower credit risk.  However, an older, established credit history that has many new accounts may indicate that the borrower is overextended.  Also to this point, we do not recommend any borrowers to use more than ½ of any credit available on an account. 

In conclusion, the above is an overview of Fannie Mae’s credit guidelines for credit after a Foreclosure, Short Sale and Bankruptcy.  However,  there are lenders who do not sell their loans to Fannie Mae or other governmental agencies.  Therefore, if you have a foreclosure, short sale or bankruptcy, it may be possible to obtain a home loan prior to the time frames set forth above depending on your income, down payment and other extenuating circumstances.  Also, it should be noted that Fannie Mae is having problems of its own.  Therefore, it is important to keep asking if there have been any changes to the guidelines.  Foreclosures, Short Sales and Bankruptcy are very serious matters.  You are in the deep end of the pool.  Before attempting to proceed with a short sale, foreclosure or bankruptcy, I urge you to seek legal counsel about the options available to you.  I see people every day for a FREE 30 minute consultation 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.   GRIMESBK.AW.COM  (925) 323-7772     © 2011 Joan Grimes

Debt Collectors Calling You?

Know Your Rights

When people come into my office, one of the first things they talk about is the endless calls from debt collectors both at work and home.   If you are receiving calls and letters from debt collectors on consumer debt i.e. debts incurred for personal, family and household purposes, here is the law you need know. 

1.     First Contact-  The first communication to you by a debt collector whether on the phone or in writing, must (a) describe the purpose of that communication and (b) inform you that any information that it obtains from you will be used for collection of the debt.

2.     Disclosure of Identity-  Whenever a person representing a creditor or debt collection agency contacts you, the person must correctly identify himself and must not misrepresent himself  or the entity he represents.

3.     Right to Dispute Debt-  When a debt collection agency initially contacts you or within five days of the initial contact, it must notify you in writing of your right to dispute the debt and to obtain verification of the debt, and it must provide you with verification if you request it.  If you do  not believe the debt is enforceable i.e. the lender doesn’t have the original note, it was not properly perfected or the amount of the debt is incorrect, this is a right time to request verification and dispute the debt.

4.     Right to Stop Communications- You have  the right to require a debt collection agency to stop contacting you!!!  In addition, your spouse,parent (if the debtor is a minor) or guardian can also require that such communication stop. To do this, it is necessary that you ask the debt collection agency IN WRITING, to do so.  While such a notice halts communications, it does not stop the debt collection agency from filing a lawsuit to collect on the debt.

5.     Obligation to Respect Your Privacy – You absolutely have the right to specify what times are ok and what times are not ok for debt collectors to call you.  Collectors are permitted to act on the assumption that anytime between 8 a.m. and 9 p.m. debtor’s local time are convenient to the debtor, but a collector cannot assume that those times are ok once the debtor notifies the collector that any portion of that period is, in fact, inconvenient and unsuitable for the debtor.  In addition, the debtor can also specifically request that the collector not contact the debtor at work.

6.     Communications to Your Employer  A collector may only communicate with your employer to verify your employment, to locate you, or to garnish your wages. 

7.     Communications with Family Members-  A collector is prohibited, with certain exceptions, from attempting to collect a debt by communicating information regarding the debt to any of your family members.  However, a collector can communicate with your spouse, can contact any family member to locate you and contact your parents if you reside with them.  The California statute prohibiting contacting family members no longer applies once the debt becomes a judgment.

The above highlights your rights in California with respect to collection of consumer debts.  If you are receiving calls and letters from debt collectors, I urge you to seek legal counsel before entering into any debt consolidation programs either with the lender or a third party. I see people every day for a FREE 30 minute consultation at my 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 Grimes



Top 10 Signs You Should See a Bankruptcy Attorney

These are difficult times and it is easy to ignore the signs of trouble when you are overwhelmed with work, spouses acting like children, children acting like teenagers and teenagers just being completely out of control.  So, to help you sort out the kind of trouble which warrants a visit to a bankruptcy attorney, here are my Top 10 signs you should see a Bankruptcy Attorney:

     10.  People are taking pictures of your house and it is not because they love your yard.

      9. You are contemplating taking money from your retirement account and you are not retired.

      8. You have taken money from your retirement account and you are not retired.

      7. You know all your creditors by their caller ID numbers.

      6. You cannot pay off your credit cards in full in the next 12 months and continue to eat.

      5. You go to get in your car and it is gone.

      4. You have run out of relatives willing to lend you money.

      3. Your wages are being garnished or your bank account has been levied.

      2. Your house is so far underwater that the sharks are circling and you do not live in a flood plain.

      DRUM ROLL PLEASE,

      1. You are actually contemplating moving in with your mother-in-law.

       If any of the above things are happening to you or have happened to you, it is time to see a bankruptcy attorney.  You did not make this economic meltdown, but you can make the CHOICE to stop letting it control your life.  The real estate speculation game is over for now. The banks won this round, but don’t let them continue to dictate your life.  Cut your losses now and leave the casino i.e. the house/car/motor home that is worth less than you owe on it.  Reclaim your financial future.  Save cash for your retirement.  It is much easier to buy food with cash than sheet rock.  There is not going to be any principal or long term payment reduction on home loans.  The banks are protected by this government and until that changes … (never), consumers must stop giving all the cards to the banks.  Cash is king.  If you don’t have the money to buy something outright, wait until you do.  The lenders have no problem doing what is in their best interest and you should not either.  I see people every day for a 30 minute FREE consultation at my offices 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  SHORT SALE OR FORECLOSURE. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION. GRIMESBKLAW.COM (925)323-7772

© 2011 Joan Grimes



Penny Wise, Pound Foolish - Filing Bankruptcy without a Bankruptcy Attorney

When a person is experiencing financial problems and knows a Bankruptcy must be filed, it is very tempting to consider filing without an attorney.   However, before you start down the road of filing on your own and opening up a GOLD MINE for the bankruptcy trustee and your creditors, consider the following:

1.  If you miss even one exemption for which you are entitled or the timing of bankruptcy filing is not correct, all the savings you made by filing on your own are GONE.  If you do not properly exempt assets, the bankruptcy trustee WILL take your assets and sell them for the benefit of creditors.  The Trustee is not there to help or educate you!  Their job is to maximize the recovery for creditors AFTER paying themselves.  Let me tell you that this is happening every day.  I can’t even begin to tell you the number of times I have seen trustees take money from bank accounts, tax refunds, jewelry and vehicles because the Debtors did not have representation.  

2.  If you omit property either intentionally or inadvertently, the trustee can take the omitted property and sell it for the benefit of creditors or can move for a denial of discharge.

3.  If you miss or don’t include debts, either intentionally or inadvertently, the debt may be deemed nondischargeable or the court may move for dismissal.

4.  If you don’t understand the Means Test, you may not qualify for bankruptcy or may end up filing the wrong type of bankruptcy case.

5.  If you have a business and your bankruptcy case is not filed properly, you may end up losing the business or assets of the business.

6.  If you are on title to bank accounts, personal property or real property with relatives, the trustee or creditors may attempt to take the property even if you claim to have only bare legal title versus an equitable interest in the property.  Do you understand the effect of inheritance after a bankruptcy filing?

7.  If you don’t understand real property law, you may end up filing an unnecessary bankruptcy or alternatively may increase your personal and/or tax liability by completing a short sale or foreclosure prior to the bankruptcy filing.

8.  If you don’t understand tax law and own real property or have significant amounts of debt, don’t even think about filing bankruptcy on your own especially if you have assets such pensions, IRA, 401k or other assets such as annuities.  You don’t want to trade bank and credit card collectors for the IRS or State Franchise Board.  The fact that you currently do not have equity in the property is irrelevant.

In conclusion, filing bankruptcy on your own is almost always a very bad idea and ends up costing more in the long run because of assets lost or other problems with the bankruptcy case.   The above is just a few of the issues which must be addressed prior the bankruptcy filing.  Bankruptcy is very complicated area of the law and is a mine field for the unwary.   Even attorney who are general practitioners will not generally file bankruptcy cases because of the complexities involved in the filings.  If you don’t have the money to file bankruptcy at this time, you should still seek legal counsel and discuss your options.  Most bankruptcy attorneys allow payment of fees over time.  Don’t be a Penny Wise and Pound Foolish.  I see people every day for FREE 30 minute consultations at 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  (925) 323-7772  © 2011 Joan Grimes

Student Loans and Bankruptcy

If you are thinking about filing bankruptcy, but are worried about your ability to get student loans either for yourself or a dependent in the future, you are not alone.  If you are worried about repaying student loan debt, you are not alone.   These concerns are so common that the Bankruptcy Code specifically addresses them.  

Let’s address the easy issue first: Getting student grants and loans after a bankruptcy.  The Bankruptcy Code provides that no governmental unit may deny a student grant, loan, loan guarantee, or loan insurance to a person that is or has been a debtor in a bankruptcy case.  What this means is that student grants and loans are available to people filing bankruptcy as long as you meet other grant or loan program qualifications.  You should expect a credit report to be run when obtaining a student loan or grant. Therefore, it is a good idea to minimize other debt.

 Now for the more difficult problem: Repaying student loans.  The current Bankruptcy Code provides that student loans or obligations to repay funds received as an educational benefit, scholarship or stipend are not dischargeable in bankruptcy unless it would impose an undue hardship on the debtor. What this means is that 1) the debtor must show an inability to maintain a minimal standard of living based on current income and expenses, 2) that the existence of these additional circumstances is likely to persist for a significant portion of the repayment period, and 3) that the debtor has shown a good faith effort to repay the debt.  These conditions are extremely difficult prove and  there is a recent bankruptcy case in San Francisco where the bankruptcy judge held that a “minimal standard of living” does not mean a middle class lifestyle and the debtor can be required to make “major personal and financial sacrifices.” 

The good news is that on March 30, 2010, Congress enacted legislation to revamp the federal student loan program.  The new law eliminates fees paid to private banks and will expand the Pell Grant Program.  In addition, starting July 2014, the program will allow students to cap repayment at 10% of income above a basic living allowance.  In the meantime, if you have student loan debt which you cannot repay, I suggest you contact your lender and enroll in the Income Based Repayment Program (IBR). This program is designed to help people pay back their loans at a rate proportional to their income. 

The student loan debt crisis WILL be the next big crisis after we finish with the mortgage crisis.  There is more student loan debt in this country than credit card debt.  I fully expect some type of relief to be provided for student loan debt again under the Bankruptcy Code.  It is just going to take time.  However, I expect the relief provided will be dependent on a person showing evidence that some payment has been made on the debt. 

In conclusion, student loan debt should be avoided, unless it is absolutely clear that a future career will be sufficient enough to pay back the debt.  I strongly encourage you to minimize student loan debt for undergraduate school. Live at home, get a part time job.  Don’t sell out your future and the future of your children.   If you have other debt which can be discharged in bankruptcy, seek legal counsel.  Discharging other debt and focusing on the repayment of student loan debt will make it easier for you.  I see people every day 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. 

© 2011 Joan Grimes



You Can't Take It With You...Or Can You?

FIXTURES

When a person knows that a home is going to be lost in a foreclosure, it is very tempting to try and take everything that is not nailed down and sometimes stuff which is nailed down.  Sometimes, the homeowner thinks they have a right to take everything they purchased or maybe they think the removal of the property will not affect the value of the property.    However, before anything is removed from a home in foreclosure, here are the laws you should know.

First, under California Civil Code Section 2929, “no person whose interest is subject to the lien of a mortgage may do any act which will substantially impair the mortgagee’s security. “  A violation of this law, will give rise to a claim for “waste.”  Also, while California Civil Code Sections 580(b) and (d) create bars to deficiency claims by a lender after a trustee’s sale, there is an exception for “bad faith waste.”

Second, bad faith waste is anything done with reckless, intentional or malice towards the lenders.  So, if property is intentionally removed from the property even if it was not done with recklessness or with malice and it substantially impair a lender’s security, a claim for waste will still remain.  The statute of limitations for bringing the claim will usually be 4 years from the date of the foreclosure.

Third, claims for waste usually arise when fixtures or permanent items are removed.  An easy definition of a fixture is anything nailed down or becomes permanently attached to a property whether inside the house or outside.  So that means the following should not be removed:  built-in anything including bookcases, bbq and shutters.  It also means that light fixtures, doors and tile work should not be removed.   If it is nailed down, screwed in or was especially made for the house, it should stay with the house. 

Fourth, a claim for waste can continue in bankruptcy under Bankruptcy Code Section 523(a)(6) if the court finds a wrongful act, done intentionally and which necessarily causes injury and is done without just cause or excuse.  The possibility of a claim being made is REAL.  We had a judgment entered against a debtor in Oakland in 2010 for waste for removal of fixtures valued at $77,000, 

In conclusion, if a property is going to be lost in foreclosure, nothing should be removed from the property if it is nailed down or has become a permanent part of the property.  It is fine to take the washer/ dryer, refrigerator and anything that is just plugged in.  If you have a favorite lamp or chandelier and want to take it, it should be replaced with a similar quality product.   

If you going to be losing a home, 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.  I see people every day 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

Bankruptcy & Employment Discrimination

The Law You Should Know

Finding a job has never been harder.  Concerns about employment discrimination can be very important during the job hunt.  If you are looking for a job or have a job and are experiencing financial problems which may cause you to file bankruptcy, here is the law you should know. 

1. A private employer may have the right to discriminated against a prospective employee based on a prior bankruptcy filing.  There is a split on authority on this issue.  The 9^th Circuit which includes California has held that a prospective employer did not violate the Bankruptcy Code Protection against discriminatory treatment as specified in 11 USC 525 unless the Debtor’s bankruptcy status was the sole reason for denial of employment.  Comeaux v. Brown & Williamson Tobacco Co., 915 F.2d 1264 (9^th Cir. 1990) In the Comeaux case, the employer ran a credit check and decided not to hire the employee and thus the bankruptcy file was not the “sole” reason for the decision not to hire.  On the other hand, the 3^rd Circuit and the majority of courts that have considered this issue have held that a private employer has the right to discriminated against a prospective employee based on a bankruptcy filing.  Rea v. Federated Investors, 627 F.3d 937 (3d Cir. 2010).   There is no time limit on asking although it will only show on a credit report for 10 years from the date of the bankruptcy filing.

2. A private employer cannot terminate or discriminate with respect to a  current employee solely because an individual has been a debtor under the Bankruptcy Code.  However, the Bankruptcy Code does not prohibit an employer from terminating a current employee because they default on a loan usually a loan with the employer.  It is an open question of whether a private employer can terminate an employee when the employee was not on notice of a termination provision when the loan was made to the employee.  11 USC 525(b)

3. The government whether a city, county, state or federal government or any unit thereof, may not deny, revoke, suspend or refuse to renew a license, permit, charter or deny employment, terminate the employment of, or discriminate with respect to any prospective employee solely because he/she  is or has been debtor under the Bankruptcy Code.  The governmental provision is much broader than the private employers because 525(a) added the phrases “deny employment to” as a prohibited act. 

In conclusion, the only safe harbor protection against bankruptcy discrimination in employment appears to be working for the government.  Since we can’t all work for the government, a decision to file bankruptcy needs to be made very carefully if you are seeking employment or are currently employed by an employer who routinely runs credit checks on employees or who makes loans to employees.  

If you work for an employer where you have a loan, it may be better to file bankruptcy prior to a default since the Bankruptcy Code provides protection from termination solely because of a bankruptcy filing.  On the other hand, if you know a prospective employer will be asking about your financial situation and any prior bankruptcy filing, it may be better to delay the filing and explain the reason for the financial problems.  This is a complicated area of the law and any decision to file bankruptcy or delay the filing, should not be made without legal advice.  I see people every day for a free 30 minute consultation at my 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.   GRIMESBK.AW.COM           

© 2011 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

Thinking About a Short Sale or Foreclosure?

The Law you Should Know

Before you consider a short sale or foreclosure, here is the law you should know.

First, there are two types of debts. They are unsecured and secured. Unsecured debt is the bare promise to pay. The most common form is credit card debt. Secured debt, on the other hand, has two parts. The first part is the bare promise to pay which on a car loan or real estate loan is the Promissory Note. What makes secured debt different than unsecured debt is the security given by the borrower to ensure the promise is kept. This security on real property is called a Deed of Trust.

Second, on real estate loans, there are two different types of promises to pay. Non-Recourse or Recourse. A Non-recourse loans is (1) the loan or loans obtained to purchase a 1-4 unit property in which the borrower occupies at least one unit or (2) seller carry back. Everything else is recourse debt i.e. the refinance of the real property, lines of credit, the loan or loans used to purchase a rental property.

Third, personal liability depends on whether you do a short sale or foreclosure and whether you have a non-recourse or recourse debt.  If you do a short sale, you can have personal liability unless it is waived by the lender.   Effective January 1, 2011, on a first deed of trust on a 1-4 unit property, the lender should be agreeing to waive any deficiency in a short sale in accordance with SB 931, but you will need to make sure the correct language is in the settlement letter.   If a property is foreclosed in a non-judicial trustee sale, you will not have any personal liability as to the loan that is foreclosed on because California is an anti-deficiency state i.e. the lender waives its right to come after you on the loan that they foreclosed on.  However, if there are junior liens to the foreclosing lien, they will have the right to sue you after the foreclosure if the junior lien(s) are recourse loans.  These loans are called “sold out” junior i.e. they lost their lien, but they still have the promise to pay and thus have the right to sue you on the promissory note.

Fourth, in every short sale or foreclosure, there are tax implications. The IRS wants to know two things. (1) Did you make any money on the deal and (2) Did you borrow any money which was not repaid.  If you made money on the deal including taking out cash to buy another house, buy a car, pay off credit card, you may have gain. If you borrowed money which is not repaid either through a short sale or foreclosure, you may Cancellation of Debt Income (“CODI”). There are exceptions to the CODI, but you should “know” not “think” the tax implications before a short sale or foreclosure.

In conclusion, a short sale or foreclosure without legal advice is like jumping into the middle of the ocean with no life vest. Don’t do it.  A short sale or foreclosure can stay on a credit up to 7 years. Do not take on liability which could have been eliminated or reduced with first obtaining legal advice. 

Help is available to you.  I see people every day for consultations on short sales and foreclosures for a flat fee of $300.  If you end up needing to filing bankruptcy, the fee is a credit against the bankruptcy fees.

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. 

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.

I Can Handle This On My Own

 Foreclosure Sales and Short Sales

When a person is behind on a home loan, it is very common to think a foreclosure or short sale will allow them to focus on other debts and thereby avoid a bankruptcy filing.   However, all too often, a foreclosure or short sale is still followed by a bankruptcy because there is either another loan on the property which starts collecting on its loan or there are taxes as a result of the foreclosure sale which the borrower was unaware. 

In many cases, a bankruptcy filing prior to the foreclosure or short 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 or short 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 or short sale, (1) determine the affect of the foreclosure or short sale on your credit, (2) is there any personal liability after the foreclosure or short 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 or short 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 and a bankruptcy filing prior to a foreclosure sale will allow a person to file a Chapter 7 instead of being required to enter into a Chapter 13 repayment plan.  In addition, a bankruptcy filing will allow a person to remain in the property additional time.

In conclusion, a foreclosure or short sale of real property without a bankruptcy filing may be the right decision.  However, a foreclosure or short sale will have serious 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 do free 30 minute consultation in my offices located in Walnut Creek, Antioch and Brentwood.  There is no reason to make a wrong decision about a foreclosure or short sale when legal assistance is available. 

THIS OFFICE IS 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.  GRIMESBKLAW.COM              

 © 2011 Joan Grimes

Can’t Afford Your Real Property Taxes?

As the mortgage crisis enters its third year and unemployment rises above 10% in many areas of California, more and more people are unable to pay their property taxes.  If you are in default on your property taxes or considering a default, here is the law you should know.

First, property taxes are a secured claim against the real property.  They are not a personal debt and there is no criminal penalty if you cannot pay your property taxes.   If your home forecloses and there are delinquent property taxes at the time of the sale, it will not follow you.  Therefore, if you do not have the money to pay the taxes, do not borrow the money from a credit card or 401k account/ 401k loan to make the payment.  In the event the home is lost in a foreclosure and you borrowed the money, you will still be required to repay the credit card debt (even potentially in bankruptcy because taxes paid with a credit card may be  non-dischargeable) or through the 401k loan. 

Second, if you cannot pay your property taxes when due, the County cannot immediately foreclose on your property.  In fact, it is very rare for a county to foreclose on real property for non-payment.  In most places in California, real property must  remains in tax defaulted status for five or more years before it will become subject to the Tax Collector’s power of sale.

Third, if you cannot afford to pay your property taxes, you have several options.  A good option is to enter into an Installment Plan of Redemption which is a 5 year plan that allows a taxpayer to pay defaulted taxes in five installments.  However, prior to applying for an Installment Plan you should contact your mortgage lender to make sure they will allow the payment plan to pay taxes in default.  Sometimes, mortgage lender will automatically advance for the past due taxes and establish an impound account for past due taxes and as well as establishing an impound account for future taxes and insurance.  The negative consequence of a lender paying the taxes is that they usually require the past due taxes to be repaid over 1 year versus the 5 years allowed by the County.  However, the positive consequence is that the accrual of interest by the County is stopped and if you qualify for a loan modification, the past due taxes are in most instances paid through the modification.  Another option is to see if you qualify for tax payer assistance.  The common form of assistance is through the Property Tax Postponement for Senior, blind and disabled persons which allows qualified homeowners to postpone payment of all or a portion of the property tax due on their home.

Fourth, make sure your property is being taxed at the it’s current fair market value.  If you feel that your current assessed value is not the current market value, you may request a review by the County.  This process is commonly referred to as a Proposition 8 review.

In conclusion, there is no free lunch if you are late on your property taxes.  However, there are options available to you.   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 every day 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. 

Thinking About a Short Sale or Foreclosure?

The Law you Should Know

Before you consider a short sale or foreclosure, here is the law you should know.

First, there are two types of debts.  They are unsecured and secured.  Unsecured debt is the bare promise to pay.  The most common form is credit card debt.  Secured debt, on the other hand, has two parts.  The first part is the bare promise to pay which on a car loan or real estate loan is the Promissory Note.  What makes secured debt different than unsecured debt is the security given by the borrower to ensure the promise is kept.  This security on real property is called a Deed of Trust and on a car loan it is the lienholder on the Certificate of Title.

Second, on real estate loan, there are two different types of promises to pay.   Non-Recourse or Recourse.  A Non-recourse loan is (1) the loan or loans obtained to purchase a 1-4 unit property in which the borrower occupies at least one unit or (2) seller carry back.  Everything else is recourse debt i.e. the refinance of the real property, lines of credit, the loan or loans used to purchase a rental property.

Third, under California law, a short sale or foreclosure can stay on a credit report for up to 7 years.

Fourth, personal liability depends on whether you do a short sale or foreclosure.  If you do a short sale, you can have personal liability unless it is waived by the lender.  Remember, a short sale is just like any other sale and if you don’t pay the full amount, the lender can request payment.   If you allow your property to be foreclosed in a non-judicial foreclosure sale, you will not have any personal liability as to the loan that is foreclosed on because California is an anti-deficiency state i.e. the lender waives its right to come after you on the loan that they foreclosed on.    However, if there are junior liens to the foreclosing lien, they will have the right to sue you after the foreclose.  They are called “sold out” junior i.e. they lost their lien, but they still have the promise to pay and thus have the right to sue you on the promissory note.

Fifth, in every short sale or foreclosure, there are tax implications.  The IRS wants to know two things.  They are (1) did you make any money on the deal and (2) did you borrow any money which was not repaid.  If you made money on the deal including taking out cash to buy another house, buy another car, pay off credit card, you may have gain.  If you borrowed money which is not repaid either through a short sale or foreclosure, you may Cancellation of Debt Income (“CODI”).  There are exceptions to the CODI, but be very cautious of tax implications because it is a very complicated area of the law.
In conclusion, a short sale or foreclosure without tax and legal advice is like jumping into the middle of the ocean with no life vest.  Don’t do it.  The California Association of Realtor is so concerned about this issue that the Short Sale Addendum specifically tells sellers to obtain tax and legal advice prior to proceeding with a short sale.  Help is available to you.  Do not take on personal liability or tax liability which could have been eliminated through a bankruptcy or reduced with first obtaining tax and legal advice. 

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.