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Virginia is NOT one of the states with a lot of legal steps for your mortgage company to take before they sell your house. There are hardly any steps at all. Usually here's all they have to do: 1. Send you a certified letter that you are behind. 2. Send you a certified letter that your loan is accelerated. (Accelerated means you now owe the whole amount.) 3. Send you a certified letter and put an ad in the paper telling the world the day they are going to sell your house. 4. Sell your house. These certified letters work whether you sign for them or not. And Virginia is NOT one of the states where you have any rights at all, once your house has been sold. You're out. That's it. IS FORECLOSURE ALL THAT BAD? Some people think that once they lose the house, that's as bad as it gets. That's true in some states, but not Virginia. When the house is sold at foreclosure, there's a deficiency. The deficiency is the amount the mortgage company came up short when the house was sold. In this market that can be a hundred thousand dollar or more. You still owe that deficiency. It its on your credit report, telling the world that you are behind on your payments one hundred thousand dollars--you can imagine how that looks. And they do come after you for it, too. Not fast, like they do on a credit card or a car repo, but when they get around to it. Usually after about two years you figure they have lost track of you, and then here come the calls and letters and eventually court papers telling you that you have to come up with that $100,000 deficiency. So, the foreclosure itself is not the end of your problem. It's only the beginning. WHEN DO THEY FORECLOSE? Usually mortgage companies will let you sit two months behind. If you keep sending in a payment so that you never get three months behind, they will usually leave you alone. (Other than call a lot.) When you get three months behind, that changes. Once you get three months behind, they send your money back if you only pay one or two months. Once your three months behind, you will have about 30 days to get completely caught up. When you are four months behind, they will start foreclosure proceedings. (Remember if you are three months behind, they will start sending your payments back to you. So it usually only takes one month to go from three behind to four behind.) It doesn't take long for them to foreclose once they start--usually about six weeks, but there's no guarantee you have that long. WHAT SHOULD I DO? When that ad shows up in the paper, you will start to get all sorts of offers of "help." "Consultants" will advise you what do do to stop the foreclosure. Some of these guys are ok; many are just scams. There's no sure way to tell them apart. If you are tempted to trust one of these "homesavers" or "pre-foreclosure specialists" please read this article from the August 26, 2007 Washington Post If you still have equity after the market collapse, "investors" will offer to buy your house. They will pay you a lot less than what it's worth. If you don't have any equity, real estate agents will urge you to do a "short sale." A short sale means you sell it for less than you owe and the mortgage company agrees to settle for that. (Assuming somebody in the mortgage company can be found to agree.) The real estate agent likes that because he gets a commission, which can be $10,000 or more. Whether that helps you is a question. The general rule of tax law is that you are taxed on debt forgiveness. If the mortgage company accepts $75,000 less than they are owed, they send you a debt forgiveness 1099 and you pay taxes on that $75,000. Ouch, that can hurt. You can avoid the tax if you can show that the mortgage company had no chance of getting the money form you anyway--which is probably true, but may be harder to show. And the new law signed by President Bush in December 2007, expands that for people who got their mortgage, for their own house not an investment, during a certain time period. I'm not a tax lawyer--neither is your real estate agent. Neither one of us can tell you whether you fit into the rules that would avoid the tax on a short sale. If the short sale will solve your financial problems, and you fully understand the tax consequences, and you can get the mortgage company to agree, then it is your best deal. Sadly, the time people are thinking short sale, a lot of them have dug themselves further into debt with their credit cards, while trying to make the mortgage payments. That means it's time to see a bankruptcy lawyer. CAN BANKRUPTCY HELP? For people who still have equity, stopping foreclosure is one of the best uses of a Chapter 13 personal reorganization. The advantage of Chapter 13 over the consultants and investors is that Chapter 13--by law--stops the foreclosure. And Chapter 13 leaves you in charge. In Chapter 13 you file a plan to pay your debts with the court. There are two main plans: 1. You can stop the foreclosure and get six months to sell you house. If you have equity this means you walk away with maybe twenty five or fifty thousand dollars in your pocket that would go to an "investor" if you sold to that investor. That's a lot of money. 2. You can ask the court to give you three years to catch the house up. Getting three years depends on your proving that you can catch up it. For example if you got behind when you were out of work but you are now working again, the court will usually give you three years to catch up. 3. Chapter 13 can sometimes "strip" the second mortgage off of your house. If you can prove the house is worth less than you owe to the first mortgage, then you can use a Chapter 13 to make a (small, we hope) monthly payment plan over five years on all your debts, and then the second mortgage is gone. This can be a really good deal if the Chapter 13 monthly payment is a lot less than the payment to the second mortgage--and if you can afford the house if the first mortgage is all you have to pay. The thing that most people need that bankruptcy cannot do, is to reduce the amount of the mortgage down to the value of the house. That's allowed almost everywhere in bankruptcy law for businesses, but not for people trying to keep their homes. Congress says their policy of NOT allowing that on homes "promotes home ownership." What that means is the big companies who lost all that money during the mortgage crisis can still afford better lobbyists than you can. Some of the Democrats in Congress are trying to change that, but with a Republican in the White House, there's no chance. WHAT ABOUT CHAPTER 7 BANKRUPTCY As the real estate crisis continues to build, I am beginning to see people use Chapter 7 bankruptcy to try to hang on to their house. Chapter 7 says, "sorry I can't pay," and it wipes out the credit card and medical debt. (And if you have a foreclosure deficiency, it wipes that out, too.) For people behind on the house, Chapter 7 would stop a scheduled foreclosure temporarily, and give you about three more months to stay in the house and find a place to live. (And save money for the move, since they are temporarily in the house for free.) I'm now starting to see people use Chapter 7 to keep the house. Why? In current market conditions, the mortgage companies really don't want the house back if you can offer them some kind of reasonable payment. But they are set up to just mindlessly foreclose, because that's what they know how to do. So when a Chapter 7 bankruptcy stops the foreclosure process, at least sometimes, it lands on the desk of somebody who has authority to work out a deal. And it can be better for the bank and better for you to work something out that keeps you in the house. Chapter 7 also gets their attention. If you negotiate with them while you are still current (which is what the Bush Administration thinks you should do) the mortgage company will always wonder if you can keep paying if they refuse to bargain. Once you have filed a Chapter 7, they know you have taken the big step and told the world you are broke. If you say to them, you get the house back unless you cut me a new deal, they know you mean it. ONE OTHER REASON TO USE CHAPTER 7 TO STOP FORECLOSURE If you have decided you can't afford the house, it can be even more important to use Chapter 7 to temporarily stop the foreclosure. Just moving out before the foreclosure and planning to file bankruptcy later can cost you big money--maybe $25,000 or $50,000--and hurt our chances of ever becoming a home owner again. How can that be? This gets into the details of the new bankruptcy law. I'll try to keep it simple, without over-simplifying. Under the new bankruptcy law--now two and a half years old--Congress set up a formula to determine whether you are eligible to file a Chapter 7 bankruptcy or have to do a Chapter 13 payment plan to pay on your credit cards and other debts for five years. Under than formula, if you have a house payment, you can deduct that house payment, in determining whether the law thinks you can "afford" to keep paying for five more years. If you have rent, you get to deduct a formula rent, and that formula rent is usually less than the actual rents in Northern Virginia--especially for families with several kids. So if you file Chapter 7 bankruptcy while you still have the house payment, the formula will show that you can't afford to pay the credit cards, so your Chapter 7 is usually approved. (The government can still argue that you can afford to pay under the "totality of circumstances" test; but when we argue with the government on the "totality of circumstances" you get to claim your real rent, rather than the formula rent, which is usually lower. And you get to claim your real commuting costs, rather than the formula commuting costs, which for most people are ridiculously low.) Back to my point. If you file Chapter 7 after the house is foreclosed, you are stuck with the formula rent, which will show that you can afford to pay. So, lots of people who think at least they will have relief after moving out of the house, find themselves in a five year payment plan paying back the credit cards AND the mortgage company, based on a government formula that tells you how much you are allowed to spend on food and clothes for the kids. Does this happen a lot? I heard in court just the other day the Chapter 13 Trustee tell the judge that about 40 people per month move out of the house and then end up in a five year Chapter 13 payment plan--paying the credit cards and the mortgage deficiency. I am guessing, that at least half of those people could have filed Chapter 7 and wiped out the debts if they had done it when they were still in the house. Does that make a big difference? The Chapter 7 people can be back to good credit in three years and can try again to qualify for a mortgage (shopping more carefully this time) and buy a house again. The people in Chapter 13 will need seven years to get back to good credit--two years after the Chapter 13 is over. And the Chapter 7 people can save for a down payment during those three years--while the Chapter 13 people are spending five years sending their disposable income to the bankruptcy court every month to pay the credit cards and the mortgage deficiency. NEED TO KNOW MORE? You can call my office and schedule a free appointment. For Sterling, 703-421-7111. Manassas, 703-335-7793. Alexandria, 703-519-1215. You can email me questions at robertweed@robertweed.com. You can find out more about me on my bankruptcy website www.robertweed.com. As soon as you see yourself going two months behind on your mortgage, that would be a good time to come see me. You'll like our friendly service with a smile.
Robert Weed
January 2008 |
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