After years of representing clients in bankruptcy, I have assembled a short list of things to do and not do in the 90 (or so) days leading up to a bankruptcy filing.  This list is not exhaustive, nor are these set in stone.  Just some good ideas for avoiding problems, pitfalls and other traps for the unwary.

DO:  Close deposit accounts at institutions where you have loans.  Banks and (especially) credit unions aren’t allowed to engage in “self help” by freezing checking accounts or offsetting claims just because your car loan is with them.  But that doesn’t stop them.  Getting checking accounts unfrozen is an unnecessary distraction for your lawyer.

DO:  Keep current on your student loans.  They are not dischargeable except under the most dire circumstances.

DO:  File any delinquent tax returns.  You will have to provide your last filed return to the trustee, and if it’s not done, you may  have to get it done before you can get a discharge.  Just do it now.

DO:  Get the credit counseling requirement out of the way.  It MUST be done within 180 days of filing and there are no exceptions. Don’t fight this. It’s “Debtor Traffic School.”  Get it out of the way but make sure it’s not outside of 180 days pre-filing limit or you’re going to have to do it again.

DO: Pay very close attention to getting the information required by the Bankruptcy Schedules CORRECT.  Don’t screw around with this stuff.  It’s really important, and if you’re found to have omitted information, or worse, outright lied, you will not get a discharge and you will have jeopardized your ability to get a discharge later.

DO: Keep your ordinary expenses current and paid.  Things like your utilities, water, phone, garbage, kid’s school expenses, child support, tax payments, etc.  Life continues after bankruptcy; don’t jeopardize your ability to get that coveted “fresh start” by starting out behind the 8 ball on things that you need every day. This is not to suggest that you pay a year’s worth of the cable bill, but if you have outstanding bills that will have to be paid anyhow, using that excess cash may be a good idea.  Discuss with your attorney before you go hog wild on this however.

DO:  If you have “excess cash” and are self employed, pay your estimated taxes.  If you are not able to exempt excess cash in bankruptcy, the trustee may be able to take it, and will leave you without the means to pay the IRS. Discuss with your attorney before you do this however.

Do:  If you own a business, consider incorporating. There are lots of reasons—some having to do with bankruptcy, some not—but ask your lawyer if this would be a good idea.

DON’T:  Use your credit cards. Period. Just don’t.  If you have unsecured debt that you’re hoping to discharge in bankruptcy, then it’s probably true that at least part of your obstacle is due to using credit cards. Get a debit card and learn to live on cash.

DON’T: Make any payments to family members to whom you may owe money.  The trustee can—and will!—recover that money.  It’s called either a preferential transfer or a fraudulent conveyance, and it will only cause trouble later on. Word.


DON’T:  Transfer ANY property to a family member at all.  This actually applies for a ONE YEAR PERIOD prior to filing.

DON’T: Incur any new debt without first asking your attorney.  It MAY be a good idea to get a secured car loan before the bankruptcy filing hits your credit profile, but it is definitely NOT a good idea to max out a credit card in unsecured cash advances. If any person (or attorney) advises you to do this, RUN, do not walk, in the other direction.

DON’T: Buy any expensive new assets.  Expensive means anything that you don’t want to lose.  It’s really that simple.

DON’T: Give away any assets to anyone.

DON’T: Borrow money from your IRA or 401k.  That money is EXEMPT but may not be (probably WON’T be) if you take a distribution and put that cash in your checking account.



In my January, 2011 blogpost with the catchy title “California anti-deficiency rules redux: California’s new anti-deficiency component, CCP §580e, protects short sellers on first mortgages” and my March, 2010 post on tax issues in foreclosure, I raised the the concept of a “statute of limitations,” pertaining mostly to when actions for breach of contract become too stale to pursue.  I recently received an email from a reader wanting to know just when a statute starts to tick.  This post will answer that question.

First, what is a statute of limitations?  A statute of limitations (ironically referred to as an “SOL”…only coincidentally related to that other meaning of SOL…) is a law–a statute–which prescribes the timelines for the filing of a lawsuit to pursue a claim.  Simply stated, once a party becomes aware of a possible claim, it must brought before the timeline set forth in the SOL runs.  The policy behind these statutes is two fold:  1.)  People should be able to get on with their lives without having to look over their shoulder for old grudges and mistakes to show up, and 2.)  After too long, evidence disappears and memories get too fuzzy to be reliable.  With the notable exceptions of murder and espionage (and maybe one or two other things) virtually every claim in American law is subject to a limitations period, though what those periods are vary from claim to claim and from one jurisdiction to the next.  

In California, a claim for breach of a written contract must be brought within four years or it is barred.  (CCP §337)  Promissory notes, which are the “IOU’s” behind mortgages and home loans, are written contracts. Thus a claim for non-payment of a loan memorialized by a written promissory note must be brought without four years or it is forever barred.  Simple enough, but the question posed is:  When does the four year time period start to tick?  The answer–like the answer to nearly all legal questions–is that it depends.

Initially, the statute starts to tick on breach. That is, on the first day that a payment which is due is not made, the clock starts ticking.  Example: If your mortgage payment is due on January 1, 2013 and you don’t pay it–and nothing else occurs to restart the clock–then the claim will be barred on January 1, 2017 if not filed before then. But, as noted, certain events can intervene to restart the clock, and it is these niggling little things that can cause so much trouble.  What are they?  Good question.  Glad you asked.

1.  Any payment resets the clock.  If you make a payment, any payment–partial, full, pennies, nickels, dimes, quarters–the clock restarts the next day.  So if your ordinary mortgage payment is $1,200, and is due on 1/1/13, if you send the bank $50 on December 31, 2017, you have reset the clock to Day One.

2.  Any admission resets the clock.  If you acknowledge the debt, orally or in writing, you have reset the clock.  So if you default on January 1, 2013 and on December 31, 2017 the bank calls you and asks when you intend to pay it off, if you say something like “I know I owe it but I’ve been having financial trouble for the past four years,”  you have reset the clock to Day One.

3.  Absence from the jurisdiction tolls the statute. If you are out of the country and not subject to service of process, the SOL is “tolled” during that time time and that span is added to the overall time line.  So if you move to Italy for three years and then come back, the timeline may actually be seven years.

4.  Any temporary legal obstacle tolls the statute.  If the bank is prevented from filing an action by some form of legal obstacle, like the automatic stay of bankruptcy or some other form of delay, the time during which its remedies are unavailable is also added to the timeline.

There are quite a few others which either toll or extend the time period, but these are the big four mostly common in the mortgage setting.

So, in sum, if you’re trying to outrun a SOL, don’t make any payments and don’t admit to the bank that you owe the money. Capiche?

Hyper Smash


I was recently introduced to a concept which is being loosely described as a “Dodd-Frank Certification,” by which homeowners can apparently get juniors liens (seconds, thirds, etc.) reduced or fully extinguished if they meet certain criteria.  I heard about it in the context of someone who had gotten a letter in the mail from their lender informing them, that if they returned the signed “Dodd-Frank Certification,” their second lien would be fully extinguished. Huh? This was news to me. (But then again, I don’t really do loan mods, so a lot of this stuff is murky to me.) Anyhow, so I started researching it, and this is what I found: 1.  If your FIRST has been modified through the HAMP Program, then you MAY be eligible for a modification of the second under the 2MP Program, whether or not that lender wants to cooperate. 2.  If the 2MP Program kicks in, then the lender either gets a lump sum payment from the US Treasury in exchange for fully extinguishing the loan (i.e., discharging, forgiving, writing off) or it may be compelled to modify the second along similar lines as the first was modified under HAMP. 3.  The Dodd-Frank Certification is merely the piece of paper that the lender gets from the borrower which it, in turn, must provide to Uncle Sam to show that it dotted its I’s and cross its T’s and is entitled to the payment.  And all the Dodd-Frank Certification says is that:

  • Your first mortgage was modified under HAMP.
  • You have not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.
  • You have not missed three consecutive monthly payments on your HAMP modification.

So why would a lender do this?  Easy:

1.  The first is under water, so the second is completely unsecured.

2.  If the borrower defaults on the HAMP modification–which happens frequently–then the most likely outcome is a bankruptcy, in which the holder of the second won’t get anything anyhow.

3.  If the borrower defaults on the HAMP modification–which happens frequently–then the next most likely scenario is a short sale,  in which the holder of the second won’t get anything anyhow.

So if you have modified under HAMP and you get a Dodd-Frank Certification in the mail?  Sign it and return it.  Unless you’ve bee convicted of something in the past 10 years…In which case you’d now be adding perjury to the list of problems.


I have blogged several times in the past on the “the wisdom of short sales,” starting with complete opposition to the notion in “Are Short Sales Worth the Hassle”  and softening my position a bit in my post last December called “Rethinking Short Sales…”   Then effective in January of this year, the California State Legislature passed some new anti-deficiency legislation prohibiting first mortgage lenders who have approved a short sale from pursuing any deficiency on the balance.  I wasn’t impressed with that, as it didn’t seem do actually do much to help people in the final analysis.  Who cares about the first if you get sued on the second? Remind me what the point of that exercise was again?

For a variety of reasons, first mortgage lenders pursuing deficiencies is rare in California, but since I’ve already gone in exhaustive detail on how California anti-deficiency statutes work in these posts: “California anti-deficiency rules and statutes: When can a mortgage lender in California recover a deficiency after foreclosure?”;  “Second Mortgages in California: Deficiencies Not Usually an Issue” and “California Mortgage Deficiencies: What is a Purchase Money Security Interest?” I won’t reprise that here. But these posts remain the most visited pages on this website, so if you think you have a deficiency problem, these links may help you.

But I digress.

Earlier this year, the California legislature–one of the few that still seems consumer friendly–extended those short-sale anti-deficiency restrictions to all lienholders who approve short sales. What does this mean? It means any lender that approves a short sale is statutorily prohibited from coming after the borrower later for a deficiency.  Refis, seconds, thirds, HELOCs, so-called 80/20 seconds, home improvement loans, etc.  Bring ’em on.  If the lien-holder approves the short sale, no deficiency.  It’s the law!  It’s codified in CCP 580e.  But beware:  The lender must approve the short sale or the statute won’t apply.  (Of course, if you think about it, that’s sort a non-issue:  The essence of a short sale is such that it’s impossible if any lien holder withholds approval.)

Also, this only applies to California property. Lenders are still playing games in other states–here in the Western States–most notoriously Arizona.  I call this the game of “Bankers Keeping their Fingers Crossed Behind their Backs,” [see clever illustration above] as they give you an approval with one paragraph and stick it right back at you with the other. To put it nicely, it’s unscrupulous. Is it legal? Well, in places like Arizona it is. But not in California any more.

Read your short sale approval letter very carefully. What  you’re looking for is language that states either that the bank is “waiving” any deficiency, or that you are expressly “released” from further liability on the loan. If you think you might be seeing that language, but are not sure, call a lawyer for pete’s sake.  It’s worth a few hundred dollars to sleep peacefully at night.  (And don’t complain about your lawyer wanting to get paid for that opinion: She’s putting her reputation, personal fortune and insurance coverage on the line in giving you that comfort.)

I still don’t like short sales.  For a lot of reasons. But at least this eliminates one of the nastier and unexpected side-effects here in the Golden State.


I rarely advocate That clients file Chapter 13’s because they take too long and keep them under the thumb of the bankruptcy court for (usually) five years.  So when does it make sense?

It makes sense when you want to keep your house but have junior unsecured liens stacked on top of the main mortgage.  In Chapter 7, if you want to keep your house, you have to keep the lenders current.  Not necessarily so in Chapter 13 when you have stacked loans secured by your home. Since 2006, the Heavy Question [see clever illustration below] has been:  Can you dump a mortgage loan in Chapter 13?  The short easy answer if you’ve ever read anything at all on my blog is that “it depends.”

First:  Is it “secured” solely by your primary residential real estate?  And by that I do not mean investment property or personal property.  (Pay attention here because the terms and definitions matter.)  That is, is the security agreement only applicable to your primary residence?  If so, you have passed the first test.

Second:  Is it WHOLLY unsecured?  By this is meant that there is no security for the loan at all after consideration of all senior debt.  Example:  House valued at $750,000 With a first deed of trust (“DOT”) for $690,000, a second DOT for $170,000, and  third DOT $75,000.  Now what?

Well, the first is wholly secured because the value exceeds the loan balance by $60,000 ($750,000 minus $690,000.)  Our hypothetical borrower can’t strip this lien because it is wholly secured.

The second is partially secured.  It is secured to the extent of the $60,00 left after accounting for the first DOT right?  $750,000 minus $690,00 leaves $60,000. Capiche?  So  because it is partially secured, you can’t strip it and the debtors will have to keep that lender current In order to keep the home.

But the third…Here’s where it gets interesting.  After accounting for the first and the second, there is no security value left for the third at all.  $690,000 plus $170,000 equals $860,000.  But the house is only worth $750,000.  Because the third is wholly unsecured, the borrower can “strip” this lien and shove the debt over to the unsecured column…Payable over the time of the Chapter 13 plan.

Why do we care? Because you can’t do this in Chapter 7.  It only works in Chapter 13.

This concept as described also only works in parts of the country, so don’t go charging into your bankruptcy lawyer’s office telling him or her all about how you read on the web that you can dump your HELOC. There’s a bit more to it than the above, but this sort of scenario and fact pattern is a good example of when a Chapter 13 might make sense.


On March 21, 2011, a Columbus, Georgia jury sent a very loud message to loan servicers in the form of a $21 million verdict and punitive damage award against PHH Mortgage, an affiliate of Coldwell Banker Mortgage.

David Brash, a sergeant in the United States Army, bought a home in 2007, and obtained a $161,000 mortgage loan from Coldwell Banker Mortgage.  The loan was serviced by PHH Mortgage.  Sergeant Brash had his monthly payments set on autopay out of his US Army paycheck.  (In fact, Sgt. Brash overpaid each month.) Things went along swimmingly for about a year and a half, until PHH began losing track of the payments, which then triggered the phone calls and letters telling him that he was delinquent.  A mortgage lender losing track of payments and blaming the consumer?  Say it ain’t so.  (The Complaint filed by Sgt. Brash’s lawyers in the case, David Brash v. PHH Mortgage (U.S.D.C., M.D. Georgia) case no. 4-09-CV-146 (CDL) is available for viewing here.)

Anyhow, that started a series of very patient efforts by Sgt. Brash to resolve the issue, all of which are thoroughly described in the Complaint. The servicer’s call center was outsourced to India. (No comment on that. I very seriously doubt that Sgt. Brash would have received better treatment from his fellow countrymen.)  But in an amusing instance of what’s-good-for-the-goose-is-good-for-the-gander, Sgt. Brash actually recorded the phone calls with the servicer (for quality assurance purposes right?), and the tapes of the phone calls were played to the jury. Transcripts of the calls were also admitted into evidence. I pulled the actual transcript of the phone calls from the Court’s docket, and you can review it for a good example of how to handle your own such calls. Very good evidentiary material that.

The upshot of the story? After multiple attempts to sort things out, PHH assured Sgt. Brash that things were resolved, and that the erroneously designated “late” payments had been properly credited. But then what did they do? You guessed it. They reported the false delinquencies to the Credit Cops, Equifax, TransUnion and Experian. This, in turn, caused Sgt. Brash to be denied credit. As stated in the Complaint, “Coldwell Banker Mortgage has refused to answer Plaintiff’s legitimate inquiries, and has refused to correct and straighten out Plaintiff’s account.”  (See Complaint, ¶48.)

If you’ve never seen what a $21 million judgment looks like, I’ve downloaded it from the Court’s docket, and have attached it here.  Also, check out the actual written jury verdict here.

Other than the obvious appeal of David taking on and beating up on Goliath–the sheer joy of seeing an abusive loan servicer get hit–the other appeal of this case is how meticulously Sgt. Brash documents his odyssey through this experience.  If you’re having trouble with your bank or loan servicer, read the Complaint that Charles Gower (Sgt. Brash’s lawyer) drafted, and review the list of trial exhibits. They are a roadmap for how to build and maintain a paper trail and document abusive loan servicer practices. This is the kind of evidence that wins lawsuits.

For lawyers who are keeping track, it appears that the gravamen of the legal theory was a violation of §2605 of RESPA.  (12 USC §2605.)

Yet more on IRS Form 1099-A: FAQ

On March 31, 2011, in Real Estate Law, by David C. Winton

As tax time approaches, I have been receiving a blizzard of emails about IRS Form 1099-A from readers trying to figure out what to do on their tax returns.  Here are some Frequently Asked Questions (FAQ’s) that may help.  But first, I can’t emphasize this enough:  I am not a tax expert!!!! This is not tax advice. It’s just information that I have picked up from my wanderings in this field of law. In order to determine whether you have a real COD tax problem, you must seek competent advice from a good tax accountant. Why? Because if you get it wrong, you need to have cover.

I received a Form 1099-A.  What is and what should I do?: If you have received a Form 1099-A in the mail, chances are it’s because you lost a piece of real estate to a foreclosure in 2010. As you have probably learned by now, the cancellation of debt MAY be a taxable event. The Form 1099-A DOES NOT mean you have cancellation of debt (“COD”) tax. All it means is that the lender that foreclosed on the property has taken property back in partial satisfaction of the debt that was owed. It also DOES NOT mean that the debt has been canceled.  Again, all it means is that the part of the debt has been satisfied with the foreclosure of real property.

If I received a Form 1099-A does that mean that my debt is cancelled? NO!  It’s just a routine tax form. 

If I received a Form 1099-A, does that mean that I will receive a Form 1099-C at some time in the future? Probably not. The Form 1099-C is an acknowledgement by the lender that the debt has actually been cancelled. Banks are not likely to tell you that, because they want to preserve their ability to come after you later.

If I received a Form 1099-A, should I report the cancellation of debt on my 2010 tax return? Maybe. This is probably the trickiest issue. The tax accountants I have talked to about this issue (Spoiler Alert: There aren’t many who understand it) have told me that they advise the taxpayer to prepare and submit a Form 982 with a possible “estimate” if there is a potential COD problem lurking in the weeds. In fact, it appears that if there has been any COD at all, then Form 982 is apparently required to be filed with the tax return, but I have no opinion on that and honestly don’t have a clue as to possible consequences for failure to file the Form 982 if there is no COD tax owed.

What if I got a 1099-C? The issuance of a Form 1099-C means that the debt has been cancelled. If you live in California, this may be triggered by the fact that your loan was a “non-recourse loan,” i.e., protected from the risk of deficiency by one or more of the Big 3 California anti-deficiency statutes, CCP §580b, CCP§580d or CCP§580e. It may have been becaue you filed bankruptcy, and your debt was discharged in that proceeding. (COD which occurs in bankruptcy is not taxable.)

So what do you do? Well, IRS Regulations (specifically, 26 C.F.R. 1.6050p-1) require you to report the cancellation of debt, whether or not it is ultimately taxable. You do this by means of the IRS Form 982.

And will you owe tax?  Well, here are the categories in which you will categorically NOT owe COD tax:

1.  If the debt was discharged in bankruptcy.

2.  If the cancelled debt was incurred to purchase, construct or substantially improve your principal residence. This is the result of the Mortgage Debt Relief Act of 2007.

3.  If you were “balance sheet insolvent” at the time of the cancelation of the debt. Balance sheet insolvent is very simple: If the value of your obligations is greater then the value of your assets (including IRAs) you are “balance sheet insolvent.”  The trick here is to create a paper trail so that when the IRS comes a-knocking on an audit a couple of years from now, you will be able to demonstrate that insolvency.

The real issue seems to be: Has the debt been cancelled? Form 1099-A doesn’t answer that particular question, and unless the debt was specifically non-recourse, the lender is not likely to send you a 1099-C.



This topic never dies. In fact, it just keeps getting more interesting. On January 1, 2011, new California Code of Civil Procedure (“CCP”) §580e went into effect. Here is the actual text of the statute:

(a) No judgment shall be rendered for any deficiency under a note secured by a first deed of trust or first mortgage for a dwelling of not more than four units, in any case in which the trustor or mortgagor sells the dwelling for less than the remaining amount of the indebtedness due at the time of sale with the written consent of the holder of the first deed of trust or first mortgage. Written consent of the holder of the first deed of trust or first mortgage to that sale shall obligate that holder to accept the sale proceeds as full payment and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage.

(b) If the trustor or mortgagor commits either fraud with respect to the sale of, or waste with respect to, the real property that secures the first deed of trust or first mortgage, this section shall not limit the ability of the holder of the first deed of trust or first mortgage to seek damages and use existing rights and remedies against the trustor or mortgagor or any third party for fraud or waste.

(c) This section shall not apply if the trustor or mortgagor is a corporation or political subdivision of the state.

As statutes go, this is a model of clarity: There is nothing ambiguous about it at all. It means this:

First, if the lender on a first mortgage approves a short sale, then it CANNOT proceed against you later for a deficiency between the value of the property and the loan balance. Ever. This is not instead of CCP §580b (purchase money deficiency prohibition), or CCP §580d (non-judicial foreclosure deficiency prohibition), it is just another mechanism for accomplishing the same result, albeit under different circumstances. Because §580b already applies to purchase money loans, this new statute will apply only to refinance loans. So if your first is still the same loan you obtained when you bought your home, this statute doesn’t apply because you don’t need it. You’re already protected by §580b.

Second, it does NOT apply to junior liens. So just because the first is barred, the second isn’t. In which case you MUST make sure you get a complete release. (See below.)

This came about because some lenders were keeping their fingers cross behind their backs when they approved shorts sales, saying they’d accept less than 100% of the outstanding loan balance, but then coming after the borrower after close of escrow for the deficiency. Thus, you always, always, always have to make sure that you read your approval letter carefully and thoroughly, and that if there is anything in there that you don’t understand or that makes you nervous, get advice!

My mantra for all short sales is not to agree to anything until you get a full and complete release from all lenders. What is a release? It’s a contract, or a provision in a contract, that provides that the parties completely release each other from all claims under any theory, specifically that the bank is relinquishing any and all rights to further repayment of the subject loan (i.e., the deficiency) upon receipt of the agreed amount. This isn’t a complex concept, but if you are not completely comfortable, then you need to spend the time, energy and yes, maybe a few dollars, to make sure you’re getting what you think you’re getting. So what if you pay a qualified real estate lawyer $300 for an hour of their time to read your docs? It’s a form of insurance policy against the risk that you’re going to spend years and perhaps thousands of dollars fighting for what you incorrectly thought you’d gotten in the first place. Most intelligent legal protection and lawyering is of the “ounce of prevention” model, but the most lucrative lawyering is the “pound of cure” model.  You can pay $300 to $500 avoiding this problem altogether…or $5,000 to $10,000 fixing it later when the bank that you mistook for bunny rabbit morphs back into the viper you thought you’d left miles back in your rear view mirror. Banks are patient and they have no conscience. Remember the statute of limitations ion a written contract in California is four years.

Last, make sure that you don’t buy into the myth that just because something is law, your lender understands it or can be counted on to apply it properly. I am hearing tales of banks approving short sales but still attempting to reserve their right to pursue a deficiency after close of escrow. Even with the new §580e in place. Read your docs. If you don’t, you’re courting disaster. In addition to lacking conscience, and being patients, banks as entities aren’t very intelligent. Bankers as individuals may struggle against that type, but only a fool counts on that. As a lawyer I worked with a long time ago used to quip, the only requirements for becoming a banker are a clean white shirt and a full head of hair. I think the standards are more relaxed than that now.

For prior posts on short sales, check out my post Are Short Sales Worth the Hassle? For more on the basics of California anti Deficiency rules, check out  California anti-deficiency rules and statutes: When can a mortgage lender in California recover a deficiency after foreclosure?


In October, 2008 I wrote a blog post called “Are ‘Short Sales’ they worth the hassle?” My answer was a resounding and unequivocal “No!”  (In fact my view was so lopsided that I think it could be said that it was really “Hell No!)  Have things changed?  Well, I have received some boots-on-the-ground intel that suggests that there may be some circumstances where the effort may pay off. I’m not ready to do a 180, but there may be circumstances where it’s worth a look. (The italics and bold of all those “mays” and “suggests” is intentional.)

First, let’s go back to the basis premise, which is that most people who bother with short sales do so out of a desire to “do the right thing.”  An admirable motive in nearly any business endeavor. But it may not always be in one’s best interests. My objections to short sales is that they (1)  Trigger too much effort and frustration, (2) Are prone to falling apart at the last minute, (3) Don’t do much to really salvage one’s credit rating and (4) Require the homeowner to do all the work for the bank.  But the part that concerns me most is that in order to get a short sale approved, the homeowner has to open his financial books and records to the bank which may then turn around and use that very same information against the homeowner in a later lawsuit to recover a deficiency.  Importantly, in California, a litigant cannot get financial information about the other party during the litigation. This protects litigants from allowing their financial condition to be the tail that wags the dog of the lawsuit: If someone can find out that the defendant is wealthy, they may press a frivolous lawsuit harder in the hopes that the wealthy target will cough up some money to make the problem go away.  By giving a bank this information in the process of trying to get a short sales approved, you have now given them a possible road map to an easier recovery. For example, letting a property go in foreclosure forces the lender to consider a bankruptcy risk in their negotiating strategy; if you’ve told them that you have $100k in the bank or a stock portfolio, you have now minimized at least some part of that risk to the bank, and they’ll feel emboldened by knowing that you actually have something to lose.   (For a related post on deficiencies after short sales, see my recent blog post about the new California statute CCP §580e which precludes a lender on a first deed of trust from pursuing a deficiency after approving and getting paid off in a short sale.  This is a helpful development, but it doesn’t cover all situations.)  Of course, the borrower’s ultimate financial exposure is never any greater than what the bank could get in a Chapter 7 or Chapter 13 payout, but making that determination is part of the analysis.

So what has changed? Well, I have been told that, anecdotally, letting a home go by short sale may enable a borrower to re-qualify to buy a new home sooner than would likely be the case in the event of a bankruptcy or foreclosure. In other words, a short seller takes a smaller hit on their credit profile than one who lets the property go by straight foreclosure. Again, this is only anecdotal and I have no proof or verification from any lenders or credit agency that this is true. But I have been told this by enough reputable real estate and loan brokers to believe that there might be something to it.

But don’t make this decision on your own: You need to know your risk of being sued before you make the decision. Get legal help. You should do a complete financial analysis so you know just how tempting a target you make to a bank.  A $500 legal check-up may save you tens thousands of dollars–tens of thousands in some places–in later exposure.

Of course, you should never let a short sale go to close of escrow unless the bank gives you a complete waiver of a deficiency, but in the fog of war and after months of exhausting haggling with a bank, these things sometimes go unnoticed.

Call a lawyer before you close a short sale. Seriously.  Do it.

This is a question I’m frequently asked, usually in the context of a prospective client seeking a way to save fees and costs in a bankruptcy filing.

First, it is not a requirement that a debtor in bankruptcy be represented by a licensed attorney. A debtor may represents him or herself, or may be represented by counsel.  However, in between those two alternatives is a third.  A debtor may retain the services of a “Bankruptcy Petition Preparer” pursuant to the provisions of Local Rule 9029-1.

A Bankruptcy Petition Preparer (which we’ll abbreviate to “BPP”) is a non-lawyer who is allowed to assist a debtor with the preparation of the documents necessary to the filing of a bankruptcy case.  Fees are limited to $150, and BPP are severely limited in what they can and cannot do.  Most specifically, the cannot give legal advice.  Below is an excerpt from the Northern California’s Local Guidelines listing very specifically what they are not allowed to do:

The bankruptcy petition preparer is not an attorney and is not authorized to practice law. Specifically, the bankruptcy petition preparer may not instruct or advise the debtor(s):

• Whether to file a bankruptcy petition

• Under which chapter of the Bankruptcy Code to file the voluntary petition;

• How to respond to the bankruptcy forms required in connection with the filing of the bankruptcy case;

• What exemptions should be claimed;

• Whether any particular debts are dischargeable or nondischargeable;

• The effect of a bankruptcy filing upon a foreclosure and whether the debtor(s) may keep a home.

• Whether the debtor(s) may avoid or eliminate any liens or recover any assets in connection with the bankruptcy case;

• Whether the debtor(s) may redeem property;

• Whether the debtor(s) may or should reaffirm any debts;

• Whether the debtor(s) is entitled to a discharge under the Bankruptcy Code, and what defenses the debtor may have to an objection to discharge; and

• Concerning the tax consequences of any aspect of the bankruptcy case.

So what can they really do? Type. That’s it. Do not make the mistake of thinking that just because a BPP knows which papers to prepare and file, that they know anything about bankruptcy, provide legal advice, or protect you. They cannot appear for you in Court or at the 341 Meeting of Creditors. They cannot respond to requests for information from trustees, or draft motions.

I advise against using these folks, mostly because they promote a false sense of comfort.They’re not lawyers and they really can’t do much for you. In other words, for $150, you get what you pay for.

But if you are going to use a BPP, make sure that that you avoid unrealistic expectations and realize that they are not lawyers.  The best way to educate yourself is to make sure they give you–and that you read–the Notice to Debtors About Bankruptcy Petition Preparers, and that you have reviewed the Northern California Bankruptcy Petition Preparer Guidelines.