Published Tuesday, February 2, 2010 @ 2:30 pm

Many of our clients automatically assume they will lose their rental property if they file for bankruptcy. Isn’t that the whole idea of bankruptcy? That you give up everything you have, with a few exceptions, in exchange for getting the debt collectors off your back?

Well, no. Many factors come in to play in determining whether or not you will be forced to sell your rental property, including whether you file chapter 7 or chapter 13, how much money you owe on the property and how much income you receive from it.

Let’s start with chapter 7. If you file chapter 7, you get an exemption for the equity in your primary residence – how much depends on the state you live in – but rental property doesn’t qualify for the standard residence exemption. Therefore, you will only be able to protect the property from sale if you can cover it under your available wildcard exemption. The North Carolina wildcard exemption is $5,000.00 per filer- not much. However, your state may have additional protections if you own the property jointly with your spouse. In North Carolina, if you own the property jointly with your spouse, the property is only subject to claims of joint creditors. If all of your debt is in the name of one spouse or the other, the property may be protected- regardless of the amount of equity. Talk to a experienced bankruptcy attorney, who can examine how you hold title and if you have any joint debt.

But what if you don’t have any equity in the house, or minimal equity? What if, for example, the house is worth $100,000 and you owe $120,000, or even $99,000? The trustee’s job is to determine whether or not there is money for your creditors, not to take away everything that belongs to you. He will determine the property’s worth, then subtract the projected sales costs, selling it and paying taxes on the proceeds. If it’s not worth the trustee’s time and effort, it’s unlikely that he will try to sell it.

With Chapter 13, there are additional caveats and concerns. In general, you should be able to keep your rental property in a Chapter 13 filing. In fact, since the rental property is not your primary residence, you might be eligible for cramdown under chapter 13 – meaning that if you owe more than the property is worth, the bankruptcy judge is able to alter the terms of the mortgage to reflect the property’s current value rather than the amount you originally agreed to pay for it. This could lower your monthly mortgage payments, as well as the long term amount you have to pay to the bank for the property. Cramdown isn’t allowed on primary residences, but it is allowed on other secured debts, including rental property.

Do note, however, that rental property can, under certain circumstances, cost you money. The trustee in a Chapter 13 case will look at all the costs associated with the property – your mortgage payments, plus taxes, insurance, upkeep and repairs. If these costs outweigh the income the property brings in, the trustee may object to your plan on the basis that the money you’re spending on the property should be distributed to your unsecured creditors. In such a case, surrendering the property may be your best option. However, this is a very fact-sensitive issue and depends on how your jurisdiction interprets very complex provisions of the bankruptcy code. Only an experienced bankruptcy attorney can advise you on your specific situation. Bottom line- if you’re deeply in debt, talk to a bankruptcy attorney and get the real facts. In North Carolina, call the Law Offices of John T. Orcutt. Convenient office locations in Raleigh, Durham, Wilson and Fayetteville. Call today: 1-800-899-1414 or visit www.billsbills.com for more information.

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Published Monday, January 25, 2010 @ 5:50 am

Is Mortgage Cramdown Back on the Table?

Last week, amidst the hectic flurry of the election in Massachusetts and Obama’s announcement of new regulations on banks, another announcement didn’t get quite as much attention: the Obama administration will revamp the Home Affordable Modification Program (HAMP). The program will be streamlined, making it easier to file the necessary documents; for example, borrowers will be able to use pay stubs as proof of income rather than having to provide tax forms.

One of the most egregious policies is already in the process of changing – right now, the fine print of most mortgage modification contracts allows the lender to deny your application and resume foreclosing proceedings, without even informing you of the decision. It seems likely that the reason for this fine print is the hope that homeowners who don’t know their home is headed to foreclosure won’t file bankruptcy and access all the protections it affords them, including the ability to stave off foreclosure. Starting this months, lenders will have to provide written notification to anyone whose mortgage modification application is denied.

However, economists, mortgage experts, state regulators – basically anyone who knows anything about the subject – all say the same thing: the foreclosure crisis is not going to get any better until some form of principal modification, reducing the total amount a borrower owes on his or her house, is implemented. Nationwide, more than 25% of homeowners are ‘underwater’ on their homes – they owe more than the house is worth. And the government programs to help them have been woefully inadequate. The banks have modified a bare fraction of eligible mortgages – only 750,000 of an estimated 3-4 million eligible mortgage holders have received temporary modified mortgages. And that obscures the real number: only 31,000 have received permanent modifications. Some banks have been particularly reluctant to do modifications. Bank of America, for example, has modified a total of 98 mortgages.

Perhaps most ominously, rather than reducing the mortgage principal, more than 70% of loan modifications have actually increased the principal, by adding fees and past due amounts to it.

However, last week, Treasury officials quietly acknowledged that something needs to be done about underwater mortgages. The fact is, mortgage companies pretend to be willing to work with the administration to help homeowners with underwater mortgages but they drag their feet every step of the way. As has been discussed many times, the mortgage companies make more money on foreclosures than they do on mortgage modifications. What’s the incentive for them to change their policies and modify more mortgages? Most experts agree that the only viable plan is cramdown, the process that will allow bankruptcy judges to modify primary mortgage loans in bankruptcy court. Mark Zandi, an economist with Moody’s, says that will save 1.7 million homes from foreclosure. That’s not because 1.7 million homeowners will file for bankruptcy but, under the threat of someone else modifying the loans, mortgage companies will finally move to actually do something about the problem.

Cramdown was resoundingly defeated last year: the Senate voted it down; the House voted for it once but defeated it in a second bill; the Obama administration made no effort to fight for it. But economic realities may force a reconsideration. A new wave of foreclosures could destroy the ‘green shoots’ that suggest the economy may be about to recover. It’s nice to see that the Obama administration might finally be willing to help solve the foreclosure crisis in one place well-equipped to deal with it: the bankruptcy courts.

SOURCES:

http://wonkroom.thinkprogress.org/2010/01/22/can-obama-cut-principal/

my/22modify.html?hp=&adxnnl=1&adxnnlx=1264172466-xNYFHGehA+iIfcrPiTGHNA

http://www.calculatedriskblog.com/2010/01/hamp-changes-coming.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+(Calculated+Risk)

http://wonkroom.thinkprogress.org/2009/12/18/bofas-sorry-defense/

http://www.mcclatchydc.com/227/story/80867.html

http://www.huffingtonpost.com/2010/01/20/state-regulators-foreclos_n_429720.html

http://washingtonindependent.com/42220/white-house-silence-paved-way-for-cramdown-crash

http://www.nytimes.com/2009/05/04/opinion/04mon2.html?_r=3&ref=todayspaper

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Published Thursday, January 21, 2010 @ 11:50 am

The latest chapter in the Obama administration’s attempts to make lenders modify mortgages is to send SWAT teams – no, I’m not kidding, really, SWAT teams – into the call centers of major lenders to try to ensure that they follow the proper procedures and actually modify loans. Seriously, wouldn’t it be a whole lot easier just to pass cramdown and allow bankruptcy judges to modify mortgages than to try to sweet talk, bribe or otherwise convince bankers to do it on their own?

Because they’re not. Making Homes Affordable, the program implemented by the government last May, is designed to encourage banks to modify the loans of homeowners who are having trouble making mortgage payments. Mortgage companies are reluctant to do that, however: they make more money in interest and fees when a mortgage goes into foreclosure, than they make from the government when they successfully modify it. The government had hoped to have 3-4 million mortgages modified by the end of last year. As of mid December, the count was at 750,000 – the vast majority of those were still in the trial stages.

The news reports of lenders dragging their feet are backed up with anecdotal evidence from homeowners, who report that they call the lenders over and over, file and refile the same documents, and then call back, only to be told that no one knows anything about their case. Lenders counter that people don’t send them the requested documents. Really? Desperate homeowner, one last shot at keeping their home, and they can’t be bothered to fax some papers? The lender argument is a little hard to believe.

Hence, the SWAT teams. These are teams of three people, sent into the call centers of the seven largest loan servicers to make sure that the bank representatives are giving accurate information, filing forms properly, etc. Experts are not impressed – many say the initiative is unlikely to work. Some have called for putting permanent government observers in the call centers. They note that private insurers already have their people inside the call center, to help prevent the loans they’ve insured from going into foreclosure.

Unfortunately, neither temporary nor permanent government observers in the call centers seems likely to work. This is another initiative – like the ‘foreclosure hall of shame’ that was supposed to embarrass the lenders into modifying loans – that the banks will evade and ignore until the administration acknowledges it isn’t working and moves on to something else. The fact is, lenders aren’t going to modify substantial numbers of mortgages until they are forced to. Unless an initiative like cramdown is passed, which takes the decision to modify or not and how much out of the bank’s hands and gives it to a neutral party, foreclosures will continue to rise.

Fortunately, homeowners finding it difficult to pay their mortgage may have another option to save their home: bankruptcy. Your bankruptcy attorney will return your phone calls, keep your files organized, and not make you fax documents four or five times. In addition, he or she will help you map out a plan that will lead you to financial freedom. The Obama administration may sincerely want to help homeowners. But as long as they expect bankers to do it out of the kindness of their hearts, you’re probable better off filing for bankruptcy.

Brought to you by the Law Offices of John T. Orcutt. Providing North Carolina homeowners real foreclosure relief since 1995. Is your lender not working with you? Call today and find out how a bankruptcy can save your home. 1-800-899-1414. Convenient offices in Raleigh, Durham, Fayetteville, and Wilson.

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Published Monday, January 18, 2010 @ 6:43 pm

Is there any way to lower your car payments in bankruptcy? The answer, which may surprise you, is maybe. While Congress recently rejected attempts to pass a law that would allow bankruptcy judges to ‘cramdown’ mortgages, there do exist some limited possibilities for revising auto loans.

Basically, debtors who owe more than their car is worth – and who doesn’t, especially if you bought it new? – may be eligible to eliminate the portion of the debt that exceeds the value. In a Chapter 13 bankruptcy, the debt would be divided into ‘secured’ debt (the value of the car) and ‘unsecured’ debt (the excess money on the loan), and the car loan would be revised to repay only the secured portion.

However, this option is generally only available for people whose car loans originated more than 910 days before they declared bankruptcy. Some courts have allowed, in limited form, for the portion of a car loan that was ‘rolled over’ from a previous car loan, to be treated as unsecured debt even in a more recently originated loan. However, note that a recent decision by the US Court of Appeals for the Fourth Circuit – whose jurisdiction includes North Carolina – has determined that this portion of a car loan is included as secured.

On the other hand, some attorneys report that some lenders are willing to renegotiate the loan, even if it originated in the last 910 days. While the law doesn’t require them to renegotiate, it doesn’t prevent them from doing so either. It’s at least worth asking, before you take up your other options.

If your loan originated less than 910 days ago, and your lender refuses to renegotiate, what are your other options as you go through bankruptcy? You can simply surrender the car. Lenders don’t like this option, but if you’re filing bankruptcy, they have no choice. They will take back the car and then sell it at auction. The difference between what you owe and what they sell it for will be entered against you as a deficiency balance. However, even in a Chapter 13, there is little chance the creditor will receive any return on its deficiency balance.

You can also reaffirm the loan. In this case, you agree to continue making the payments on the car even after you file for bankruptcy. Note carefully, though, if you choose this option and then default on the loan, you will be responsible for the deficiency balance, and the lender can sue you for it. Reaffirming your car loan has some advantages though: you get to keep your car, which means you don’t have to look for a new car loan with a recent bankruptcy on your record. Making these payments on time is also a good way to rebuild your credit – just make sure the lender is reporting them to the credit agencies.

As always, remember that the best way to negotiate this maze is with the help of a good bankruptcy attorney.

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Published Friday, December 18, 2009 @ 7:21 pm

Last Friday, the House of Representatives passed a wide-reaching swath of financial reforms, designed to reign in the worse excesses of the banking industry. Democratic lawmakers are hailing the bill as a huge victory for consumers. However, one important provision failed to pass: cramdown.

‘Cramdown’ would allow bankruptcy judges to reduce the principle balance of the mortgage on a primary residence in a Chapter 13 bankruptcy, resulting in lower monthly payments for the filer. It’s important to note that bankruptcy judges are already allowed to practice cramdown for a variety of debt, including boats, cars, vacation homes and family farms. In fact, prior to changes in the bankruptcy laws in 1978, they were able to cramdown residential mortgages as well.

Support for cramdown began gaining strength last spring, when the drop in housing prices caused a rise in foreclosures and a spike of people ‘under water’ in their homes. As the recession got worse, more people became vulnerable. Many Democratic lawmakers argued that cramdown was a necessary provision that would allow more people to stay in their homes. The banking industry countered that it would raise costs for everyone and divert capital from the mortgage market at a time when it desperately needed more, not less funds. Observers pointed out that banker’s fears were unrealistic; banks already eat the loss in a foreclosure, so how would this law upset the whole system?

Meanwhile, the Obama industry introduced housing reforms, notably the Making Houses Affordable, a program designed to encourage mortgage companies to voluntarily modify loans and keep people in their homes. While the program does offer some financial incentives, industry observers note that mortgage companies make far more money from the fees involved when a homeowner goes foreclosure.

In April, the House passed cramdown, but it stalled – badly – in the Senate. Twelve Democrats joined with every Republican to defeat it.

This fall, nearly everyone agrees that the MHA program has been a failure. Far fewer loans have been modified than the administration hoped; foreclosure rates continue to rise across the country. It’s hard not to see the lack of cramdown as a pertinent factor. Cramdown would offer the homeowner some leverage. If mortgage companies refused to modify loans, the homeowner could have filed bankruptcy and the decision to modify or not would have rested with an independent party, the judge. As it is, judges are unable to modify the loans, which leaves the entire decision in the hands of the mortgage company.

That’s why Democrats in the House included cramdown again, in the package of regulatory reforms they voted on last Friday. However, this time – under some pressure from small banks and credit unions – the measure failed to pass even the House.

What’s the future for cramdown? It doesn’t look good. Without some radical change somewhere, it doesn’t look like cramdown will even come up for a vote again. This is too bad; this provision would not only be very helpful to many individual homeowners, it has the potential to send ripples through the housing market as well.

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Published Friday, May 1, 2009 @ 9:10 pm

On the eve of success for a very valuable piece of legislation that will instill a new set of guidelines for credit card companies’ communication of interest rate hikes, fees and other monetary stipulations to consumers, a banking bill provision aimed to do similar justice for Americans struggling with mortgage debt and bankruptcy was shot down in the Senate on the last day of April.

The provision was part of a larger and much hyped bankruptcy and housing industry reform bill, the Helping Families Save Their Homes Act, that recently passed the House and was considered another major component of the Obama administration’s effort to help alleviate America’s collective debtload.

Called a “cramdown,” the language would give homeowners facing severe mortgage concerns more flexibility, through bankruptcy judges, to negotiate their payment terms with lenders after filing. Specifically, it would modify a mortgage to reflect a home’s current market value, as opposed to the price it garnered or value gained during the heart of the real estate bubble of the last several years.

However, the measure only received 45 votes in the Senate, helping the lending industry dodge another bureaucratic bullet in the face of so many banking reforms and bailout controversies. In March of this year, the cramdown passed the House rather comfortably at 234 votes to 191.

The proposal itself was a rather quiet train rolling through Capitol Hill engineered by Illinois Senator Dick Durbin, where its increasing momentum was beginning to startle banking and other lending trade organizations and lobbyists, which used the threat of additional “economic meltdown” if the provision was approved. The groups argued that it would simply result in banks charging higher fees to all mortgage holders to mitigate the risk of losing money should a borrower default.

The mortgage relief measure was designed to accommodate homeowners with sub-prime and non-traditional loans and would have only been in place until 2012.

A similar banking bill made its way around the house that did include the mortgage and bankruptcy addendum. However, the action in the Senate had a significant effect on the provision’s lifespan in the House version. In other words, it didn’t stand much of chance. Despite that, the cramdown was considered the heart of the legislation for some of its backers and when eradicated in the Senate, many politicians believed the overall bill lost a good portion of its teeth.

Since this is the United States congress, deliberations were inevitable. On April 29, a negotiated proposal included simply putting restrictions on what mortgages could be cramdowned by judges. It called for only allowing mortgages that were entered into prior to January 1, 2009, that were delinquent for at least 60 days and were not for more than $729,000. The modified version was all for naught, however. In fact, per an agreement in the Senate on April 30, no other cramdown legislation can be entered into the bill.

The rejection of the mortgage cramdown is thought to be representative of a larger statement being made by the business community and many Republicans about the federal government’s ever-increasing involvement in private business. The fact that the measure had traction in March and is now completely absent is a strong testament to the power of the banking lobby, which had additional time to woo Senate leaders.

For now, those looking to rebuild after bankruptcy can take solace in the recent credit card industry reform. For now, the mortgage industry appears in control.

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