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 ADEL SHAHAL on
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I am not a fan of using a bk to stop foreclosure not unless it is the only thing left to do
First of all a Shortsales impact on your credit is the least in comparison to a foreclosure or a bk
Foreclosure in a conventional loan underwriting will haunt you for 7 years
Your only option will be an FHA loan which will cost you a lot more in the long run and of course you have to wait 3 years from the completion date
I will press the issue on starting a Shortsales early on so that you can avoid filing that bk if the only issue on your sellers plate was the mortgage
If they had all kinds if bills , I will advice them to get a hold of a lawyer and call you when the bk is filed
You can still sell the home As a Shortsales even when it's in bankruptcy with the judges ok for you to do so
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Permalink Reply by Susie McLaughlin on
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I have had 2 experiences w/ BK, as opposed to SS & promissory notes on 2nd's. On my first - and this is in response to 2nd lien-holder's asking for promissory - I DID have a seller agree to a promissory note. They agreed to pay $68/month for 2 years + $2k @ close. I think they got a pretty darn good deal, considering their 2nd lien was $150k plus! People used their 2nd's as credit cards in the hay day. If they wouldnt have done the promissory, they would've been foreclosed upon. They got a great 'settlement' deal & were happy with it. Sellers need to own up & step up sometimes to help the short sale close & not have the foreclosure on their record.
On the BK issue - I had a client who filed BK, it postponed the trustees sale A LONG TIME & now the bank, after 9 or 10 months is finally going to foreclose. Of course, after the BK the client still tried to loan mod??? So - once the BK is discharged, the bank comes back for the house, most definitely. It just prolongs the inevitable. BUT - for the homeowner, who already hasn't been making payments for 1-2 years, & have already fried their credit, it makes sense - gives them a chance to live for free for a bit longer.
Susie McLaughlin, Coldwell Banker, Mission Viejo, CA
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Permalink Reply by Teresa Simon on -
What did seem to be vital to protect the "homeowner" was that his attorney showed the seller to have $10K in equity. Non-existent but the bankruptcy judge bought in to it. I have 20 plus homes sold on contract. The judge allowed the "homeowner " to show they could make the payments with some past payment arrangements & three-strikes-your-out.
I didn't want the home back but I also didn't seem to have a choice to participate in the judges rulings. Eventually the "hoarder homeowner" failed - and we decided to lift the stay while still pay ing vendors force place insurance, unpaid utilities, past due property taxes, deferred maintence, unpaid payments and legal fees...
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Permalink Reply by Teresa Simon on
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Call HUD Short Sale Department. Our HUD Office is in Santa Anna.
Jennifer Hart said:I just had one foreclose due to Old Republic. I offered them $6K instead of 10K which is what they were requesting....and this was on a 2nd Lien, one that would GET NOTHING if it foreclosed and they shot back a denial. My client was even a Discharged Chapter 7 Debtor that they could not go after!!
I said some words to the negotiator and then determined.....they were minimum wage earners that do not care! :( My advice to anyone that has Old Republic on a 2nd is be prepared to pay what they ask for and if the balance is more than what a 1st Lienholder will allow, DO NOT WASTE YOUR TIME.
Jennifer Hart
Keller Williams Realty
Thom Colby said: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 Linda Calvert on
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Valerie: I have had several clients who lost their homes through short-sales and a few who had to file BKs. Most of them had little trouble leasing a home. They may be asked for additional deposits but the main thing is to make certain that their employment record is solid and that their income is at least three times the lease agreement. They should be OK.
Valerie Pressley said:My understanding is that a Chapter 7 does NOT wipe out secured debt and the bank is still going to foreclose on the borrower. I've seen it happen, but what I don't know is this: what are the consequences for a borrower of just letting the house be foreclosed on versus doing a short sale? I know that the Debt Relief Act of 2007 prevents the bank from giving a short sale seller a 1099, so they won't get the tax implications. Do the banks actually issue 1099s to people who let the house go to foreclosure? Bankruptcy attorneys tell homeowners not to do a short sale, but to stay in the house til they kick you out. Is this good advice? How the heck is someone supposed to find a place to live after not paying anything for about two years? Anyone else have to contend with this issue? I'm all ears!
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Permalink Reply by Valerie Pressley on
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Hi Linda,
Thanks for the info, but I was referring to the consequences to their credit and their ability to purchase a home down the road. The reason I ask is to have a defense for those clients who have gotten bad advice from bankruptcy attorneys. I'm not going to give them legal advice, but just suggest some questions they may want to ask their bankruptcy attorneys before they make a poor decision. Of course, the right decision depends on the seller's circumstances, but I'm sure you know what I mean.
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Permalink Reply by Kevin Hardin on
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I think what is missing from this discussion is a trend in the courts. Though, it is clear that a mortgage cannot be crammed down in Chapter 7 on a primary nor can a Second be stripped in a Chapter 7 we are getting good decisions here in AZ to do just that.
What is clear from the decisions is that the mortgage (Deed of Trust) has flaws, not technical, but material flaws. The recordation of the Notice of Sale is where it is normally found out. We utilize Bankruptcy in a normal process to, at best, delay the foreclosure. Banks / Lenders / Servicrs (Beneficiaries) are very efficient today with their filing of Motions for Relief from Stay. In AZ, the clerk can act on this quite quickly with no hearing whatsoever. That said, the mere filing of a 13, that can be voluntarily dismissed, in order to delay is effective but, you can only do that so many times without converting to Chapter 7 before possible sanctions against the Attorney can occur. At the end of the day, this tactic might buy 60 days at most in the house before the time out is over and the Trustee Sale, foreclosure, goes forward.
But, a clear review of the Mortgage / Deed of Trust might expose certain material flaws that might give way to good arguments, when ALL else fails. Bankruptcy really should be the last option when working with the lender in good faith has failed i.e. loan modification or short sale has failed. Then we have been effective at least getting the Second Mortgage to an uncollectable position, then filing an adversary action to then get the unenforceable lien removed (stripped) without a 13. Or, upon completion of the 7, filing a 13 in adversary and stripping it then. We call it chapter 20, not a real Chapter.
In rare instances, with flaws discovered, we have bifurcated the 1st mortgage into a secured and unsecured portion. Time will tell if the temper of the court will change on that subject.
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Permalink Reply by Samantha James-Tharp, PA on
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In Chapter 13 you will still have the regular payment and the arrears prorated to pay them off and there are two payment schedules 3 and 5 years. They will also put half of the lawyers cost, minor unsecured creditors into the Bankruptcy as well as the administration fees. They still will have to be able to pay there mortgage if there is a second on the property it can be written off with all the other excess debt.
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Permalink Reply by Marivel Costanza on
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Dear Kevin:
Please make sure your client consults with a Real Estate or Bankrupcy Attorney and I would suggest that you meet their attorney too. There are discrepancies between attorney's advice like I found out recently and sometimes you can help guide your clients to the best options for them. Of course, keep in mind that real estate agents are not alllowed to give legal advice.
I had a recent experience that may help you... My client had selected a general attorney that recommended a Chapter 13 BK. In my opinion, some of the advice raise red flags and I suggested that the client get an opinion form a BK specialist. I found a reliable referral and the new attorney was knowledgeable, kind and explained all of the options and consequences to my client and recommended a Chapter 7 BK instead.
In my client's case, Chapter 13 was not a good option because his payment would've been higher than before the BK, which they couldn't afford in the first place. His income was still low and it would have been only a temporary solution. In Chapter 13, the court would monitors his earnings for 5 years and if the second lien was stripped in the process, the client may have to pay it back if his earnings increase during that time. By filing chapter 7, my client will get rid of all the unsecured debt and will have a chance for a fresh start, not a repayment plan.
Chapter 7 bankrupcy will give you a chance to liquidate you assets to pay off some debts and have other debts forgiven. Chapter 13 bankruptcy will give you a chance to reorganize your debts and create a plan to catch up on payments. Both types of personal bankruptcy will give you a chance to reestablish your credit in the future.
In a short sale case scenario, I learned that you may get a release from the court to complete a short sale. Good news for those clients that need to sell and already filed BK...I hope this helps you out.
Marivel
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Permalink Reply by Mike Horton on
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Just wanted to provide a real life example of the impact of bankruptcy and what can happen.
Chapter 7 does not stop a home foreclosure. It gives you relief from unsecured creditors like credit cards and prevents certain creditors from pursuing collection action against you. It does NOT discharge debts such as taxes, child support, alimony or student loans, nor can it give you relief from secured creditors and specifically your home lender(s). Think of Chapter 7 as a holding action placed on your creditors while the bankruptcy process moves forward. When the discharge is complete, your lender can resume the foreclosure process; this is a stay and is only a temporary fix to the situation. I have a client who owned 4 houses; we were successful in short selling 2 of his homes. The home he lived in was foreclosed on before his bankruptcy when his bankruptcy lawyer said he needed the foreclosure to situate himself for the bankruptcy requirements (I did not understand that logic). When the bankruptcy was discharged, he moved into the 4th house that was included in the bankruptcy and thought he was living there free since he was told that all of debts including the mortgage loan was discharged. At the time, I let him know that they would foreclose. 6 months later he was moving after the trustee sale.
Just a note also on federal taxes, a seller will receive a 1099C for each and every house where there was a debt paid off at less than full value, that’s the law. When the seller receives a 1099C they will need to file the proper form (IRS form 982) or be responsible for the taxes. The 2007 law does not relieve the lender of supplying a 1099C, it allows the home owner a chance to file for a credit against the taxes that would be owed on the difference in mortgage owed and expenses to the net received from sale.
A Chapter 13 debt reorganization plan can cure the default and save your home. Under Chapter 13 you are allowed to sit down with your creditors and arrange a payment plan to pay back what you owe them over a given length of time and usually on a lower payment schedule. Once accepted, the creditors, like your lender, must abide by the terms of the plan. This would seem to me no different than a mortgage workout that you could achieve through a short sale.
In my opinion, a bankruptcy can be a major part of a person’s financial reorganization when there is a lot of unsecured debt. As a strategy to sell a house it only makes sense to bankruptcy lawyer.
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Permalink Reply by Josh M. Boggs on
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Bankruptcy laws certainly can differ from state to state, however we have had numerous reputable bankruptcy attorneys actually refer us clients to do the short sales on their already trustee approved 13's. It helps them rid the debt in the agreement w/out a foreclosure on their credit, but the caveat is that the trustee will certainly have to approve the short sale and the final proceeds before closing.
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Josh,
I not sure what you mean by reputable referrals vs referrals from not so reputable attorneys or how that bears but, to your point, Trustees here in AZ are not so inclined and not sure what you mean by non having a foreclosure on your credit as the inclusion of the home in the Bankruptcy and the subsequent relief of that debt precludes the lender reporting it at all. At the end of the day, the mortgages will simply be reported as included in BK. Now, if that homeowner reports in their schedules that they will retain the home and subsequently lose the home to foreclosure then they have a double whammy.
It is why most BK Attorneys advise their clients to just let it go.
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