Using Bankruptcy to avoid foreclosure
I have had to sellers that I have been going back and forth about short sales finally decide to go into bankruptcy. There is a couple of points they threw at me that I was not confident in there validity. I wanted to throw this out to the group so I can get a better understanding.
- Can you restructure mortgage debt in bankruptcy? My understanding is that when you put your house in bankruptcy, you still need to make the mortgage payments and you have up to five years to catch up on the balance in arrears.
- Can you make second mortgages go away? Again, my understanding has always been that there is not to much you can do with secured debt in a bankruptcy.
I would definitely love to hear what people have to say about bankruptcy and how it affects a potential foreclosure and a homeowners ability to keep their home.
Replies to This Discussion
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Permalink Reply by ALLAN ARTHUR on
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The attorney is right it will be resolved in BK. However your your client needs to know that their decission, no matter what it is has a slight edge to it back in the market in 3 yrs or 7 3yrs they can buy at post melt down prices. most attornys understand this.If your client cancels the listing The attorney has a another agent to sell it for them.
Barbara McCormack said:I could you some advice on this issue as well. I have a short sale that is going no where with Bank of America. So the seller has decided to file bankruptcy and has pulled the house off the market, thinking her debt and obligation to her mortgage (AND large second mortgage) will be dissolved in the bankruptcy. She has actually been to a lawyer who told her not to agree to any terms of the short sale, her problems "will be solved" in the bankruptcy. Anybody know how that really works?
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Permalink Reply by John Treadwell on
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Ok I have one week before closing the sellers file BK ,so buyer waits thinking after the Discharge we can finish the short sale ,which I have done several times ,now the lawyers and trustee don"t want to release the property ,and told the seller not to talk to me anymore ,one more hitch is they have a 3 seller who is on loan and title who didn't file BK ,and wants to finish the short sale? Any advise? Oh Yeah house is in Nevada ,sellers in Calif.
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Permalink Reply by Thom Colby CA Brkr 888-391-5245 on
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The 3rd borrower on the loan who did not file BK is equally responsible for the entire loan amount. Was #3's financials included in all of the Short Sale documentation? It sounds like the lawyers and the Trustee may be sticking that person with the loan. I also suspect there are probably some "issues" between #1, #2 and #3 which the court will have to sort out.
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You probably not getting the whole story. Did your client file a chapter 7 or a chapter 13? Have you you talked to the trustee? If they filed a chapter 13, then they will need to go to court to get permission from the judge (45-60 days). If they filed a chapter 7, then the trustee releases the property.
Assuming your client filed a chapter 7, then there is no reason why the trustee would not release the property unless there is equity in the property. The trustee is supposed to represent the creditors and only has access to property which is not exempt or protected under the bankrutpcy code (while the bankruptcy code is federal, property exemptions vary from state to state).
If you have not already done so, call the trustee tomorrow and find out what is going on.
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Here's a thought - Who pays the MI? the borrower or did the bank take this insurance themselves at no cost to the borrower. I suspect if the borrower is paying / paid for the MI, a case could be made that the relationship is between the borrower and the MI company because of who pays the premium.
Lawyer-up, you'll need it !
Thom Colby
Broker
Newport Beach, CA
Barbara McCormack said:I like and agree with your suggestion. However, B of A will not allow me to talk or negotiate with Old Republic directly. They said I have no authority (NOR does my client) because the relationship is with Bank of America and Old Republic...we are "out of that loop." And they have not been helpful at all. It has been a month and we have heard nothing. BOA just says Old republic is difficult to work with and never accepts less than what they ask for. So my hands seem tied. I guess I can tell BOA she is going to foreclosure (or Bankruptcy) and ask them to convey that to Old Republic?
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Permalink Reply by Brian Del Terzo on
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We have not seen the Foreclosure appear on the credit record of homeowners who have filed BK and not reaffirmed their mortgage debt. Has anyone seen someone file a Bankruptcy and end up with both a foreclosure and a bankruptcy on their file. I don't know that it is possible, because once the mortgage note has been included in a BK the lender stops reporting activity to the homeowners credit. If you file BK post foreclosure, then you would have both on your record.
The Negotiator said:If anyone says BK avoids foreclosure (and yes attorney's will say so) then they are gravely mistaken. Imagine the foreclosure process as a movie. BK simply pauses the movie until it is discharged. Once the BK is discharged the bank will still need to get their house back and so they will finish the foreclosure and take it back at auction (or let it sell to someone at auction). All the BK does for a homeowner is remove themselves from the debt of the mortgage(s). Therefore, the bank(s) cannot legally hound the the homeowner for any of the remaining balance once the foreclosure is complete and the house sells to someone. Basically, BK guarantees full satisfaction for the homeowner, but, at a very costly price. The homeowner will have (1) a foreclosure on their record and (2) a BK on their record. How awesome is that? If a homeowner is doing BK ONLY because they cannot pay their mortgage, advise them NOT TO until after the short sale. If you can get full satisfaction on the short sale then there would be no reason to file BK. Even if you cannot get full satisfaction, the banks are not suing for the deficiency (yet).
Moral of the story is not to file BK if the only reason is the house issue. However, BK might be the way to go if the house problem is only a small problem of the debt issue and the homeowner is drowning all over the place.
Now, its important to be honest with the homeowner and tell them everything. Unlike BK lawyers who lie all day to homeowners (at least down here in SW Florida) and tell them the BK will solve all their problems. I actually had a BK lawyer tell the homeowner to just let the bank take the house. I wanted to END that lawyer in a bad way. Anyway, back to the point. If the homeowner does do a BK and the lawyer does the right thing and let the house be sold via a short sale, then the BK makes the short sale easier because a letter of approval with full satisfaction or not, it doesn't matter.
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The FTC Staff Commentary requires that in reporting a debt discharged in bankruptcy, the balance should be reported as "0", although the report can indicate that the debt was not paid for at that time and then was discharged in bankruptcy.[1] Similarly, a consumer reporting agency may include delinquencies on debts discharged in bankruptcy consumer reports, but must accurately note the status of the debt (e.g. discharged).[2] In summary, the bank may report the foreclosure after the individual filed bankruptcy so long as it also reflects a "0" balance due or that the debt was "discharged."
[1] FTC Official Staff Commentary §607 item 6 "a consumer report may include an account that was discharged in bankruptcy (as well as the bankruptcy itself), as long as it reports a zero balance due to reflect the fact that the consumer is no longer liable for the discharged debt."; See also Learn v. Credit Bureau of Lancaster County, 664 F. Supp. 962 (E.D. P.A. 1987)
[2] FTC Official Staff Commentary §607 item 3F(2)
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Yes,
Seller filed BK and was discharged. Subsequently, (after the BK was discharged) the property was foreclosed by lender. Both appear on Credit Report. If it happened in reverse, the BK would have superceded the Foreclosure.
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Permalink Reply by Trina Gonzales on
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Hi Kevin;
I'm in California so I'm not sure if this applies in your state. We have a Risk mgmt, Real Estate attorney as a resource for our homeowners facing these issues. He says that when a seller files a BK (7 or 13) you basically give the decision on all matters to the discretion of the court. A lot of people rush to file a BK to "stop foreclosure" when in actuality, it only slows the process on the front end of things. The bank will usually hire a lawyer to go and request a "relief from stay" from the court. Our attorney says 95% of the time banks get these in short order. What that means is... they can choose to escalate the foreclosure, modify, sit and wait out the courts decision. Now, in respect to 2nd leins, it's even trickier. A BK may wipe out a 2nd depending on what type it is. Also, just because the debt may be wiped out does not mean lien release. If the homeowners attempt to sell the house a lien will still be on the property and still have to be satisfied and/or negotiated. I say consult a trusted lawyer that allows you to ask questions for free. Best wishes!
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Permalink Reply by Kevin Hardin on
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Trina, one issue not discussed in this post is the analysis of whether the homeowner would still be eligible for Chapter 7 post short sale or foreclosure. A BK attorney needs a good Motion for Abandonment strategy in place so that you can file the BK and get the property back out and short sale creating a win win scenario.
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Barbara,I don't Believe the B of A can stop your client or you if you have permission to talk to OR if they are 2 different lenders.Iis B of A the Loan Servicer for OR? is their an attorney who is following this who could chim in on the borrowers rights to talk to their 2nd TD Holder?
Barbara McCormack said:I like and agree with your suggestion. However, B of A will not allow me to talk or negotiate with Old Republic directly. They said I have no authority (NOR does my client) because the relationship is with Bank of America and Old Republic...we are "out of that loop." And they have not been helpful at all. It has been a month and we have heard nothing. BOA just says Old republic is difficult to work with and never accepts less than what they ask for. So my hands seem tied. I guess I can tell BOA she is going to foreclosure (or Bankruptcy) and ask them to convey that to Old Republic?
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Permalink Reply by Karen Walls on
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This is a site worth bookmarking! If I hear one more time that a client is told a BK will solve all of the client's problems and don't go forward with a short sale, I want to scream. I am working with a wonderful BK attorney but she is having the trustee's approve the short sales while they are going through the bankruptcy. I truly wish more were like her! You can't argue and dispute the conversation as it is NOT our job. But it burns me, because there is such an ignorance to what Bankruptcy is, resolves, etc. Everyone is just NOT granted a BK on their cushy terms and come out ahead with a bankruptcy as opposed to a short sale (both can be done). But again, my mantra is always a caveat to speak to an attorney. For some reason that always winds up being a bankruptcy and not real estate attorney. I don't begrudge bk attorney's but I surely don't like when they begrudge realtors.Both professionals (those who know what they are doing) are trying to work in the best interest of the client. Telling a client to walk away and some of the things I have heard in lieu of a short sale and promises of debt forgiveness (which for some of my clients did not happen as they were told) are mind boggling.
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