A while back I wrote about the perils of waiting too long to file a bankruptcy case (see http://bklaw.com/bankruptcy-blog/2010/06/waiting-too-long-to-file-bankruptcy/).    One common theme that is becoming ridiculously frequent is people waiting for loan modification approval to save their homes from foreclosure and then contacting a bankruptcy attorney on the eve of foreclosure to try to stop the foreclosure sale.

I cannot emphasize this enough:  This is not a sound strategy.

Prayer and Wishful Thinking Don’t Stop Foreclosures

Folks,  the loan modification process does not automatically stop or postpone a foreclosure sale.   Even where the sale date is postponed, it will be postponed at the discretion of the lender, and your loan modification could be denied today, and the foreclosure sale take place tomorrow.   I JUST received a phone call (it is 10:30 p.m. on a Thursday) from a lady frantic because she just found out her loan modification was denied and the sale is tomorrow at 10:00 a.m.    She has known about the possible foreclosure for a bare minimum of four (4) months. When I asked why she waited until now to look into bankruptcy, she commented that she thought the loan modification would be approved.  Wishful thinking and prayer are nice, but not a sound strategy for saving one’s home.

Don’t Expect to File Bankruptcy Over Night

While it is possible to file an emergency bankruptcy case to stop a foreclosure, it is a HORRIBLE way to go about it that is fraught with problems.  First of all, many bankruptcy attorneys (myself included) will not take an emergency case, for a number of reasons.   Period.   Do you really want to be scrambling around at 10:30 p.m. the night before a foreclosure sale hoping you can find a bankruptcy attorney that can process a case for filing?   Do you even have sufficient funds to retain the attorney?   Second, by doing an emergency case, there is absolutely no way for the attorney to properly assess the risks and potential problems of filing a bankruptcy case.   This means that major problems can develop after the case is filed which not only will cost much more in additional attorneys’ fees to address, but could likely cause your plan to fail and your case to be dismissed (in which case the foreclosure sale will proceed anyway, plus you’ll be out the fees you paid to the attorney).    You will also be immediately behind in submitting to the court all the things required to make the case work, which usually takes several weeks to prepare.

It is simply a bad, bad way to deal with the problem.

Planning:  A Better Way To Stop the Foreclosure

Instead of using the prayer/hoping/wishing method of saving your home, I suggest that the moment you receive a Notice of Default on your home¹ (which in California commences the foreclosure process), you contact a bankruptcy attorney for a consultation.   At that point, there is a minimum of 3-4 months before any foreclosure sale.   The attorney may advise you to go ahead and try a loan modification, but be ready to file a bankruptcy in the event it doesn’t get approved.

Another, even better method in many cases, is to go ahead and file a Chapter 13 (or Chapter 11) case and then seek a loan modification during the bankruptcy.   If it works out, you may be able to dismiss the case, or simply continue it for a much lower monthly payment and get a discharge of debts.

The bottom line is that you shouldn’t risk losing your home by wishing on a star.

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¹ Foreclosure procedures differ from state to state, so contact an attorney in your area regarding the procedures and timing.

Image Courtesy of  TheAlieness Gisela Giardino

In case you missed the television show “60 Minutes’” presentation on the current foreclosure crisis, click on the link below to view from the CBS website.

60 Minutes Foreclosure Crisis

This is a good presentation of just some of the fraudulent activities currently surrounding mortgage loan modifications and foreclosures.

Bankruptcy can in many cases allow a fresh start to homeowners to help get rid of or restructure their debts.   In Chapter 13 and Chapter 11 cases it is possible to eliminate junior mortgages and/or to catch up on past due mortgage payments.

The following is just in from the American Bankruptcy Institute:

MORTGAGE MODIFICATION, EXECUTIVE COMPENSATION LIKELY TO BE DROPPED FROM SENATE AGENDA
Senate Democratic leaders appear likely to drop several high-profile legislative issues from their agenda, including efforts to tax bonuses paid to corporate executives and giving bankruptcy judges the ability reduce mortgage payments on the primary mortgages of chapter 13 debtors, according to a CongressDaily report today. Senate aides said that the legislative agenda this year might increasingly focus on revamping financial regulations — which could reach the Senate floor in late summer — and on health care reform. The chamber will reconvene April 20 by taking up a fraud-enforcement bill that authorizes increasing Justice Department funding and authority to crack down on mortgage fraud and other crimes related to federal assistance programs. Those efforts come as more high-profile legislation sits on the back burner in the face of opposition from Republicans and moderate Democrats. Senate Majority Leader Harry Reid (D-Nev.) and Senate Finance Chairman Max Baucus (D-Mont.) have said that they have not dropped efforts to craft a bill slapping heavy taxes on bonuses for firms such as American International Group that received bailout money, but Democrats have no immediate plans to move an AIG bill in the face of White House concerns and strong opposition from the banking industry. Also faltering is mortgage cramdown legislation that lobbyists and some senators say lacks the votes to pass. Reid has said previously that he is prepared to drop the cramdown language provision from a broader housing bill if the votes are not there.

On January 6, 2009, Senator Dick Durbin (D, IL) introduced Senate Bill 61 called the “Helping Families Save Their Homes in Bankruptcy Act of 2009.”   The bill has several provisions, which can be analyzed by following the above link, but the main purpose of the bill is to allow homeowners in a Chapter 13 bankruptcy case to reduce the amount of liens (mortgages) against their home down to the value of the home and modify the payments.  This is known as lien stripping in bankruptcy.

For example, if your home is worth $400,000 and you owe $350,000 to the First Mortgage and $100,000 to the second, you would theoretically be able to reduce the lien of the second mortgage down to $50,000, and then reamortize (modify) the payments based on that amount.  (The remaining $50,000 that was taken off would be treated as an unsecured claim and paid whatever percentage the other unsecured creditors were to receive in the case).

This is a potentially significant development and one can reasonably expect President Obama to sign this law if it passes both houses of Congress.  Check back often for the progress on this new legislation.

There is an epidemic of people defaulting on their mortgage payments, as everyone knows. Real estate brokers are pushing hard to have people do “short sales” on their properties, instead of allowing them to go to foreclosure. In most circumstances, this is a very bad idea.

What is a short sale? A short sale occurs when you want to sell your property, but owe more to the lienholders (mortgages) on your property than a buyer is willing to pay to purchase the property. As a result, one (or more) of the lienholders secured by your property must agree to accept less than 100% of what is owed to them, in order to allow the sale to proceed. But who does this benefit? Certainly the mortgage broker, because he/she gets their commission.

Historically, a short sale was used in these circumstances in return for an elimination of any obligation that the seller has and an agreement that no negative marks will appear on their credit report as a result. NEITHER of these is true today. I am seeing increasing numbers of people who do these short sales, and then the lienholder who didn’t get paid in full seeks to collect from the seller for the deficiency amount. On top of that, the short sale appears on the credit report in the form of a negative defaulted loan mark.

Furthermore, doing a short sale can sometimes affect the ability to relieve the seller of certain tax burdens if they subsequently file a bankruptcy case.

Compare this with the foreclosure process. You end up with the same liabilities and negative credit marks, but you can usually live rent-free in your home for months, if not years, while the lenders go through the foreclosure process. Most lenders will wait as long as possible to foreclose in today’s market.

This is an extremely complicated area of law involving both tax and bankruptcy law, but suffice it to say that the optimal strategy is that if you are going to file a bankruptcy, it is usually best to allow your property to go to foreclosure, and file your case before the foreclosure sale takes place (and, even better, have the foreclosure sale occur DURING the bankruptcy, but this is difficult to achieve).