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.
Well, you know by now that the answer is: It depends.
If you file Chapter 7, and either are current or get current with your mortgage(s), then you can most likely keep your home. (Assuming you don’t have an equity interest that exceeds the homestead exemption. As to which, see this blog post: California Homestead Exemptions Increased as of January 1, 2010. Other California Bankruptcy Exemptions will increase on April 1, 2010.)
If however, you are in arrears, and are not able to bring the loan current, then–unless you can complete a mortgage modification that allows you to stay–you are likely lose the home.
On the other hand, if you file Chapter 13, and are able to successfully get a payment plan approved by the Court, then you may be able to stay. This is because in a Chapter 13, you can take the outstanding mortgage arrearages, and pay them back through the Chapter 13 plan over the 3 to 5 year commitment.
But don’t try to do this analysis yourself. Talk to a bankruptcy lawyer before you get too excited. There are lots of nit-picky little rules that can torpedo an otherwise possible successful Chapter 13. You need to do the analysis up front.
Most of my clients know that I am not a fan of Chapter 13. This is mostly because I think that it keeps people in the bankruptcy process far too long (3 to 5 years), and that as a result, makes that “fresh start” promised by Congress so elusive. Nonetheless, there are times when it is either advisable or flatly unavoidable.
So here, without fanfare or editorial, is what the federal government would like you to know about Chapter 13. Like my prior post on Chapter 7, it is simply a reprint of the information found on the United States Bankruptcy Court’s website.
The California Homestead exemption (found in CCP §704.730 for those keeping track) was increased as of January 1, 2010.
The Homestead Exemption is the amount of equity in excess of existing liens that the homeowner can protect from levy by creditors. So if your home has a value of $500,000, your existing mortgage balance is $400,000 and you fall into the $75,000 homestead category, then $75,000 of the $100,000 equity cushion in your home is protected from creditors. This works in bankruptcy and out.
Here are the new limits:
- $75,000: Basic homestead for single person
- $100,000: Head of household
- $175,000: Over 65 or physically disabled or under 55 with less than $15,000 in annual income ($20,000 if married).
The full text of the statute appears below.
The exact numbers of the California Bankruptcy Exemptions will be released by the Judicial Council on or about April 1, 2010, and published by the Administrative office of the Courts. The actual published limits are harder than hens’ teeth to find on line, even if you know what you’re looking for. But here is the current published list of California “Current Dollar Amounts of Exemptions from the Enforcement of Judgments.” You can check back here on my site for an update when they release the new numbers on April 1, 2010.
I get a lot of questions about bankruptcy basics: What’s the difference between Chapters 7, 11 and 13: What is a discharge? What can I keep? What will I lose?
Here, without fanfare or embellishment, is how the federal government describes the process. All in all, I think it’s a pretty good presentation, though of course, it lacks the “inside baseball” reality from the trenches that you can get from an attorney who spends a lot of time in the Bankruptcy Court. For that, you’ll have to pick up a phone.
I do not claim authorship of the following: It is extracted verbatim from the Federal Court’s website, and the link to the original is here. I have omitted sections relating to Chapters 9 and 12 as they don’t apply to the vast majority of people. If you have been told that they might apply to you, then check the link above.
Over the coming weeks I will also reprint some of the specific information on Chapters 7 and 13.
Article I, Section 8, of the United States Constitution authorizes Congress to enact “uniform Laws on the subject of Bankruptcies.” Under this grant of authority, Congress enacted the “Bankruptcy Code” in 1978. The Bankruptcy Code, which is codified as title 11 of the United States Code, has been amended several times since its enactment. It is the uniform federal law that governs all bankruptcy cases.
The procedural aspects of the bankruptcy process are governed by the Federal Rules of Bankruptcy Procedure (often called the “Bankruptcy Rules”) and local rules of each bankruptcy court. The Bankruptcy Rules contain a set of official forms for use in bankruptcy cases. The Bankruptcy Code and Bankruptcy Rules (and local rules) set forth the formal legal procedures for dealing with the debt problems of individuals and businesses.
There is a bankruptcy court for each judicial district in the country. Each state has one or more districts. There are 90 bankruptcy districts across the country. The bankruptcy courts generally have their own clerk’s offices.
The court official with decision-making power over federal bankruptcy cases is the United States bankruptcy judge, a judicial officer of the United States district court. The bankruptcy judge may decide any matter connected with a bankruptcy case, such as eligibility to file or whether a debtor should receive a discharge of debts. Much of the bankruptcy process is administrative, however, and is conducted away from the courthouse. In cases under chapters 7, 12, or 13, and sometimes in chapter 11 cases, this administrative process is carried out by a trustee who is appointed to oversee the case.
A debtor’s involvement with the bankruptcy judge is usually very limited. A typical chapter 7 debtor will not appear in court and will not see the bankruptcy judge unless an objection is raised in the case. A chapter 13 debtor may only have to appear before the bankruptcy judge at a plan confirmation hearing. Usually, the only formal proceeding at which a debtor must appear is the meeting of creditors, which is usually held at the offices of the U.S. trustee. This meeting is informally called a “341 meeting” because section 341 of the Bankruptcy Code requires that the debtor attend this meeting so that creditors can question the debtor about debts and property.
A fundamental goal of the federal bankruptcy laws enacted by Congress is to give debtors a financial “fresh start” from burdensome debts. The Supreme Court made this point about the purpose of the bankruptcy law in a 1934 decision:
[I]t gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.
Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). This goal is accomplished through the bankruptcy discharge, which releases debtors from personal liability from specific debts and prohibits creditors from ever taking any action against the debtor to collect those debts. This publication describes the bankruptcy discharge in a question and answer format, discussing the timing of the discharge, the scope of the discharge (what debts are discharged and what debts are not discharged), objections to discharge, and revocation of the discharge. It also describes what a debtor can do if a creditor attempts to collect a discharged debt after the bankruptcy case is concluded.
Six basic types of bankruptcy cases are provided for under the Bankruptcy Code, each of which is discussed in this publication. The cases are traditionally given the names of the chapters that describe them.
Chapter 7, entitled Liquidation, contemplates an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor’s estate, reduces them to cash, and makes distributions to creditors, subject to the debtor’s right to retain certain exempt property and the rights of secured creditors. Because there is usually little or no nonexempt property in most chapter 7 cases, there may not be an actual liquidation of the debtor’s assets. These cases are called “no-asset cases.” A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court. In most chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts. The debtor normally receives a discharge just a few months after the petition is filed. Amendments to the Bankruptcy Code enacted in to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a “means test” to determine whether individual consumer debtors qualify for relief under chapter 7. If such a debtor’s income is in excess of certain thresholds, the debtor may not be eligible for chapter 7 relief.
Chapter 13, entitled Adjustment of Debts of an Individual With Regular Income, is designed for an individual debtor who has a regular source of income. Chapter 13 is often preferable to chapter 7 because it enables the debtor to keep a valuable asset, such as a house, and because it allows the debtor to propose a “plan” to repay creditors over time – usually three to five years. Chapter 13 is also used by consumer debtors who do not qualify for chapter 7 relief under the means test. At a confirmation hearing, the court either approves or disapproves the debtor’s repayment plan, depending on whether it meets the Bankruptcy Code’s requirements for confirmation. Chapter 13 is very different from chapter 7 since the chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the life of the plan. Unlike chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The discharge is also somewhat broader (i.e., more debts are eliminated) under chapter 13 than the discharge under chapter 7.
Chapter 11, entitled Reorganization, ordinarily is used by commercial enterprises that desire to continue operating a business and repay creditors concurrently through a court-approved plan of reorganization. The chapter 11 debtor usually has the exclusive right to file a plan of reorganization for the first 120 days after it files the case and must provide creditors with a disclosure statement containing information adequate to enable creditors to evaluate the plan. The court ultimately approves (confirms) or disapproves the plan of reorganization. Under the confirmed plan, the debtor can reduce its debts by repaying a portion of its obligations and discharging others. The debtor can also terminate burdensome contracts and leases, recover assets, and rescale its operations in order to return to profitability. Under chapter 11, the debtor normally goes through a period of consolidation and emerges with a reduced debt load and a reorganized business.
The bankruptcy process is complex and relies on legal concepts like the “automatic stay,” “discharge,” “exemptions,” and “assume.” Therefore, the final chapter of this publication is a glossary of Bankruptcy Terminology which explains, in layman’s terms, most of the legal concepts that apply in cases filed under the Bankruptcy Code.
May 11, 2010 UPDATE since original post: 60 Minutes with Morley Safer did a piece on Strategic Defaults on May 9, 2010 that you may want to check out.
Following on the heels of my post the other day on the Option ARM perfect storm that’s brewing in the San Francisco Bay Area, the LA Times recently ran a piece on the growing phenomenon of“strategic defaults”, by which is meant the intentional defaulting on a mortgage loan by a borrower despite an ability and the wherewithal to make the payments. In other words, just walking away.
Why would someone do this? Simple: The debt far exceeds the value of the collateral by such a margin that continuing to make the payments can no longer be justified by sound economics or abstract moralizing, guilt, sense of duty or any other non-economic reasoning. In other words, the numbers just don’t crunch any more.
The Wall Street Journal Economic Insight Blog also recently ran a piece on the subject in June, called “When is it cheaper to walk away?” The answer, according to the writers of that piece is 10%. When the balance of the loan is more than 10 greater than the value of the property, economically, it makes more sense to just walk away rather than keep making the payments.
The WSJ articles was, in turn, based on a very thorough paper prepared jointly by the University of Chicago School of Business and Northwestern’s Kellogg School (under the auspices of the Financial Trust Index). The paper, called “WHEN HOMEOWNERS WALK AWAY: NEW RESEARCH REVEALS MORE THAN 25 PERCENT OF MORTGAGE LOAN DEFAULTS ARE STRATEGIC” concludes about 25 percent of foreclosures are “strategic,” meaning intentional and driven by larger economic considerations than merely the borrowers’ ability to make the payments, and that…
Homeowners start to default at an increasing pace, and walk away massively after decreases of 15 percent and more. In fact, 17 percent of households would default, even if they can afford to pay their mortgage, when the equity shortfall reaches 50 percent of the value of the house.
As for “strategic bankruptcy,” this is just the next step after the “strategic default.” (I wrote about this last year in an only-partially tongue-in-cheek “Top 10” list for why bankruptcy is the “ultimate mortgage modification tool.” I won’t repeat myself here.)
What does all this mean? Well, for one thing, it means that what we’ve known all along is now starting to attract the attention of economists and journalists.
As for what it might mean for an individual or family? Probably not much frankly. It seems to be giving an academic gloss to what people tend to know at a gut level anyhow: That we’re not out of the woods yet, there are lots more foreclosures and bankruptcies to come, and the housing market probably has a few more bumps in the road awaiting it before things smooth out.
As to whether this data or these reports can help you or anyone you know as you wrestle with difficult decisions: whether to default, whether to file bankruptcy, what other options you have, it probably can’t. Everyone’s situation is unique. Just like everyone else’s as the old saying goes. But before you decide that you’re going to “strategically default,” or file a “strategic bankruptcy,” you should consult bankruptcy counsel. There are lots of moving parts, and the amount of your home loan and the value of your house are just two pieces or a much larger puzzle.
One of the most common questions that people considering filing for bankruptcy ask is whether they’ll be able to keep their car. The Ninth Circuit has recently–as in this week–changed the rules on that issue. The case is Dumont v. Ford Motor Company (In re Dumont), 9th Cir, 2009, No. 08-60002).
The answer now is: It depends.
(For those unsure of what the Ninth Circuit is, it’s the United States Court of Appeal that has jurisdiction over Federal Courts in Alaska, Arizona, California, Washington, Oregon, Hawaii, Montana, Nevada and Idaho. Short of the US Supreme Court, it is the final judicial arbiter for legal issues and appeals in those jurisdictions. In other words, it has a lot of clout and if you live in one of those states, its decisions can affect you.)
The issue is whether a debtor in bankruptcy can keep a car which is subject to a loan agreement without expressly reaffirming the underlying debt. It used to be that the obligation would “ride thru” the bankruptcy case and stay in place–thus allowing the debtor to keep their car–as long as the debtor stayed current with the periodic payments. Dumont changes that. Or at least appears to.
Now, it seems that if you want to keep your car, the lender CAN compel you to expressly reaffirm the underlying debt. The key to that statement is that it CAN; it doesn’t have to and, frankly, it seems that in most cases, the lender wouldn’t want to force that because it might cause a debtor who is paying regularly, to have to give up their car. The lender doesn’t want your car; it wants your money.
In the Dumont case, the borrower continued making her payments on the car loan, but after the bankruptcy case was completed, and the debtor had obtained her discharge, Ford repossessed the car, even though she was current on the payments. (Why Ford would do something like that is beyond me, but there it is.)
In order to avoid this outcome, it would seem that the most prudent measure would be to reaffirm the debt in the bankruptcy case. I won’t get into the complexities of that process in this post, but suffice to say that reaffirmation is no guaranty of anything either.
(I have avoided the more technical discussion of the legal issues behind this holding, opting instead to provide the net-net outcome. Michael Doan, one of the lawyers involved in the Dumont case has written thoroughly and articulately on the topic here and for those interested in the nitty-gritty legal discussion, I would suggest going there.)
Now, I don’t mean to be overly flippant or anything, nor to be accused of promoting “irresponsible behavior” by advocating that people walk away from valid and legitimate debts, but I have to say that the single most effective “mortgage modification” tool for most borrowers these days is found the United States Bankruptcy Code.
So here–with a nod to Letterman for borrowed style points–counting backwards from 10 to 1, are the Top 10 Reasons why, more often than not, I advocate filing a bankruptcy petition instead of incurring the brain damage of trying to deal with banks.
(Lawyerly or, the obligatory “all things being equal” caveat: This is true in many, but not all cases, and I’m assuming that the borrower has a fair and real choice between these two options. Like with ANY legal remedy, it has to make sense for your particular circumstances, and, of course, the numbers have to crunch. Bankruptcy is a technical and specialized area of law, so the decision should be made neither lightly, nor without expert guidance. Things may also change over the coming months when–or more accurately, if–the lending industry gets its “mortgage modification” act together and actually raises their success ratio to something more respectable. As it is now, in some areas, the default rate is as high (around 5%) as the “mortgage modification” success rate is low. That’s a disgrace.
Anyhow, on with the Top 10 List.
10. Bankruptcy doesn’t require you to bare your soul to some faceless, nameless banker only to have them tell you you’re not “qualified” for their mortgage modification program. Of course, this is inane to start with: If a borrower was “qualified” for the unaffordable, predatory loan that got them into the dilemma in the first place, how could they not be “qualified” for something more affordable now? This is “bank logic” talking. And it’s “bank logic” that caused this mess to begin with. Arguing YOUR personal finance with a banker is like arguing about Halloween candy with an 8-year old. Generally, you can’t win this argument so why have it? (For an absolutely classic example of this absurd paradigm in action, check out this story on MSNBC.)
Recent reports suggest that only about 5% of attempted mortgage modifications are actually succeeding. Success being defined as a negotiation that concludes with a new, supposedly more affordable mortgage. What about the other 95%?
First of all, the bank has probably squeezed another few months of interest payments out of the borrower as they strung them along leading you to believe that your “application” for a modification was being seriously considered. And second, all the information you worked so hard to assemble for your banker will now to go into your “file,” to be used for who-knows-what-purpose. Since I’m a lawyer, I’m paranoid by habit and profession. I assume it goes into storage to be be puled out and used against you later when when the bank decides to sue you for a deficiency.
9. The lender doesn’t get a vote. Generally, if you file a bankruptcy petition with a goal being to jettison a burdensome and onerous mortgage, barring something going seriously awry, you’re going to achieve that goal. No matter what the bank has to say about it. In the vast majority of cases, they don’t get to vote.
8. Bankruptcy is faster and will get you back on the road to financial recovery much faster than a bank sponsored “mortgage modification.” Chapter 7 can be over and done with in as little as 3 to 4 months. Chapter 13 can have you in an affordable payment plan even sooner. In order to even qualify for a “mortgage modification” program right now, in most instances, you need to be at least 60 to 90 days delinquent before they’ll even talk to you.
Then, after you’ve prostrated yourself on the altar of some Loan Modification Committee of Third National Bank of Timbuktu trying to get a modification approved, or worse, had to deal with some newly minted “loss mitigation specialist,” you are likely to wait for another 3 to 6 months for any word. Why? Because they are up to their eyeballs in “loan modification requests” and they are noteager to make those painful modifications. Banks are not modifying loans because they think it’s a good idea; they’re doing it because they have no choice. But if they can suck a few more months of interest out of you then, in the bankers’ logic, they’re making lemonade out of lemons. It’s a get-what-we-can-while-we-can mentality. If your financial statement leads them to believe that you’re a likely Chapter 7 candidate anyhow, it’s in their best interests to recover as much as they can before that happens.
7. It’s (probably) cheaper. This is a hard one to be sure of, but if you hire an attorney (or worse, one of these new “loan modification companies” that are popping up like weeds these days) to try to assist you with a mortgage modification application, and then pay him or her to run all that interference for you, your final bill is likely to be significant. (And don’t shop for a mortgage banking/loan workout lawyer based on the low bidder. You get what you pay for in the legal profession and there aren’t a whole lot of low cost lawyers who understand the law of mortgage and real estate finance. (Mortgage, bankruptcy and insolvency law is not a first offense DUI or uncontested divorce where pretty much anyone with a bar card can get you through the process. In banking law you get what you will get what pay for.)
In bankruptcy, most attorneys charge a fixed fee for taking the client all the way through the process, and those fees are subject to the approval (and possible adjustment) by the Bankruptcy Court. Filing fees are relatively cheap, at present, $299 for a Chapter 7 and $234 for a Chapter 13.
Paying an attorney to try to get a home loan modification approved is tantamount to handing over a blank check. As much as I love my profession and trust in the utmost integrity of my fellow members of the bar, only a fool gives a lawyer a blank check.
6. You don’t have to talk to any bankers. Nothing personal to any of my banker readers (as if) but dealing with bankers is only slightly less painful and irritating than a root canal. Contrary to what you may have heard, bankers don’t care about you. Their job is to lend money and maximize their company’s return on investment, or, in this economy, minimize loss. Converting an asset that is returning 8.5% interest into one that only returns 6.5% is going backwards. Bankers created this mess. I don’t believe it’s realistic to believe that they’re going to be the ones to fix it.
5. When bankruptcy is over, it’s over, and it feels very good. Mortgage modifications are forever. Or until you default again.
There is no doubt but that, in addition to the day they graduated from college, the day they were married, and the day their first child was born, other Red Letter Days in the lives of people who have endured financial stresses severe enough to make them consider bankruptcy, include the day they got their discharge and emerged from bankruptcy. It’s like the relief one might expect to feel when you stop banging your head against a brick wall. In my experience, I’ve never heard anyone who relieved themselves of mountains of unmanageable debt say they wish they hadn’t filed. What I hear is that they wish they hadn’t waited so long.
4. You can’t get scammed by a bankruptcy court that’s giving you relief from the guy who scammed you in the first place. LoanSafe.org is reporting that “loan modification scams” are one of the hottest new consumer ripoff industries. I suppose they take a lot of different forms, but be careful. At least lawyers have to be licensed, bankruptcy fees are subject to the supervision of the court, and loan modification scam artists generally don’t hang around in Federal court rooms wearing black robes.
3. The Bankruptcy discharge is forever. More than half of mortgage modifications are headed for another default. What do I mean by this? Well, first of all, a little background, and if you don’t want the background, skip the next paragraph and race to the “payoff.”
One of the Federal government’s official keeper of mortgage statistics is the Office of Thrift Supervision, known–as with any self-respecting government bureaucracy–by its acronym OTS. (OTS is a wholly owned subsidiary of the US Department of Treasury for those keeping track.) Every quarter, OTS releases its “Mortgage Metrics” report, which is a 25 to 30 page impenetrable tome of economic gobbledy gook. If you don’t believe me, here’s Q1 2008 and here’s Q2 2008.
Now the payoff: The Mortgage Metrics Q3 2008 report will, when it is released, report that 53% of all mortgages that are modified wind up back in default. This is what is being reported by sources that have seen it, or at least talked to people who have seen it. My source? MortgageDaily.com.
2. Bankruptcy is less stressful. Financial fear and worry is one of the worst sources of stress that we can suffer from. It’s only exacerbated when the cause of that stress is also the very roof over our heads.
1. When it’s over, you get a REAL fresh start. Bankruptcy is a financial reboot. A whole new day. Yes, if you are successful in completing a loan workout with your lender, there will be relief. Probably substantial relief. But you also don’t get to start a rebuild, or get rid of other debts and liabilities that may threaten to drag you down again later. If your oppressive mortgage is your only financial woe, then you may get some real relief from a mortgage modification attempt. But those sorts of problems are not usually so isolated.
Again, I don’t mean to sound flip, nor to minimize the impact of having to file bankruptcy. But if you are able to do so, and if your mortgage is only one part of a larger scheme of financial woes, what better way to “modify a mortgage” than to get rid of it? Of course, this means that you will also lose the property, but in most of the cases that I’m reviewing these days, that isn’t a priority anymore. When the loan is $750,000 and the house is worth $600,000, what’s left to save? (Those are Northern California numbers; your examples may vary if you live in other parts of the country.)
Upshot: Know your options before you dive into a process that may not do as much for you as you hope it will.