Saturday, March 28, 2009

Removing a Second Mortgage Through Bankruptcy

In recent weeks, I have observed attorneys offering bankruptcy services, loan modifications and debt management plans. It is often difficult to decide what is the best option, but not many attorneys are talking about a powerful tool to help debtors: the ability to use bankruptcy to remove a second mortgage.

Under a 1992 decision by the U.S. Supreme Court called Dewsnup v. Timm, lien stripping can only be accomplished in a Chapter 13 bankruptcy. Chapter 13 is designed for people with regular income to pay back a portion of their debts over time.

In the Southern District of California, which covers San Diego County and Imperial County, the process begins by filing a petition for Chapter 13 bankruptcy. The debtors or their attorney also file a plan with the court to repay creditors all or part of the money that is owed to them using future earnings. A repayment plan can be three years or five years, depending on factors such as your income and must be approved before the plan can take effect.

Prior to filing a Chapter 13, the debtors or their attorney should obtain a professional appraisal of their home. In order to remove an unsecured second mortgage, the fair market value of the home must be less than the balance owed on the first mortgage. After filing the Chapter 13 bankruptcy, the attorney will contact the court and obtain a hearing date to request an order removing the lien from the property.

If the court grants the motion, the court will issue an order directing the holder of the second deed of trust to take the necessary steps the remove to the lien from the home. The type of loan does not matter. The bankruptcy court can order the removal of a HELOC, a purchase money loan or any other type of mortgage or other type of lien on the property if it is fully unsecured.

The lien strip only becomes effective once the debtors have completed the payments under their plan. In addition to the removal of the second mortgage, their debts are generally discharged except for domestic support obligations, most student loans, certain taxes, most criminal fines and restitution obligations, certain debts which are not, properly listed in your bankruptcy papers, certain debts for acts that caused death or personal injury and certain long term secured obligations.

If you are in Southern California and would like to see if you qualify for Chapter 13 bankruptcy to remove an unsecured mortgage or other lien from your home, please contact us for a free consultation.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

Sunday, March 22, 2009

Avoiding Loan Modification Scams

A recent story in the San Diego Union Tribune noted an increase in the number of businesses offering loan modification services, a field that was once dominated by nonprofit organizations. A corresponding increase in complaints to the California Department of Real Estate (“DRE”) and the Better Business Bureau has also taken place.

Homeowners that get behind on their payments will often be contacted by companies offering loan modification services because foreclosures are public record. Consumers should be particularly wary of persons or businesses that ask for payment of services in advance.

California Civil Code § 2945 regulates foreclosure consultants. In most cases, anyone who falls under the definition of a “foreclosure consultant” is prohibited from collecting advance fees if a lender has recorded a Notice of Default to begin foreclosure against a consumer’s property. This prohibition against collecting advanced payments also extends to any real estate licensee. If your lender has recorded a Notice of Default, do not pay an advance fee without fully exploring your options.

If you need loan modification assistance, consider using a non-profit agency that can assist you without charging you a fee or a real estate licensee and an attorney who would be willing to work for a fee paid after their work has been completed. The California Department of Real Estate recommends the following websites for information on non-profit housing counseling services:

Federal Housing Administration

Hope Alliance Web site

Licensed California attorneys are allowed to request a retainer in advance of providing loan modification serves. Licensed real estate brokers may also collect advance fees for loan modification services with special permission from the DRE. However, the broker must have you sign an agreement that tells you what services will be performed, when they will be performed and how much you must pay and the agreement must be submitted to the DRE for review and permission granted to use it. Consumers considering using a real estate broker for loan modification services can call the DRE at (916) 227-0770 for more information.

Many persons offering loan modification services claim to have “inside knowledge” of the lending industry and promise to “cut through the red tape” to convince a lender to change the terms of a loan. The reality is much different. One local attorney I spoke with indicated that many times a lender would only modify a loan after being served with a lawsuit. And while using an attorney may sound expensive, only an attorney can represent a homeowner in court against a lender threatening to foreclose on an unaffordable loan.

If you are in Southern California and require assistance with a loan modification or other debt problems, please contact us for a referral.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

Wednesday, March 18, 2009

Avoiding Foreclosure During a Loan Modification

Mark Twain supposedly said once that "A verbal contract isn't worth the paper it's printed on." A client recently learned that the same can be said of a lender's promises during negotiations for a loan modification.

These homeowners had hired another law firm to represent them during the loan modification process. The lender had delayed a foreclosure sale several times while negotiations were ongoing. Without notice to the homeowners, the lender decided to cease negotiations on a Friday and conducted the foreclosure auction the following Monday. The home they had occupied for 15 years was sold to a third party bidder and now there is little they can do to save their home.

My colleagues that do loan modification work tell me that it is often necessary to advise homeowners to stop paying their mortgage before a lender will even discuss changes to a loan. When considering a loan modification, lenders look at several factors including (1) the nature of the hardship causing the mortgage problems; (2) the borrower's ability to pay; (3)
the amount owed; (4) the equity in the property; and (5) the borrower's future financial situation. Without a delinquency, the lenders or loan servicers often have little incentive to modify a performing loan.

When a borrower defaults on a loan, the risk is that they will get so far behind that the lender will simply choose to foreclose rather than have a bad loan on the books. It is also possible get so far behind that a Chapter 13 bankruptcy repayment plan might not be able to help a borrower save their home. Before starting the loan modification process, consider the following tips:
  • Hire an experienced mortgage attorney to examine your loan documents for potential violations of laws such as the Truth in Lending Act or the Real Estate Settlement Procedures Act. This may give you leverage in the negotiation process.
  • Obtain a complete written life of loan history to see if there any inappropriate charges and fees included in their mortgage balance.
  • Do not spend the money you would have used to make your house payments. Consider setting the money aside in a separate bank account. The lender might require a "good faith" payment at some point in time during the process and you will want to have those funds available if needed.
  • Get all assurances in writing. If the lender does foreclose, written assurances could be used in legal proceedings to set aside the sale.
  • Have a bankruptcy attorney on standby. The automatic stay can stop a foreclosure sale before it happens. A debtor can also use a Chapter 13 repayment plan to get caught up on the past due mortgage payments. We offer a free consultation on new bankruptcy matters.
In this economy, negotiating a loan modification can be very risky yet very beneficial given the right circumstances. If you need assistance with debt relief or a referral to a loan modification specialist in Southern California, please contact us.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

Thursday, March 12, 2009

Support Needed for Bankruptcy Loan Modification Bill

I recently wrote an article urging my fellow Republicans to support a bill giving bankruptcy judges the authority to modify home mortgages to prevent foreclosures. The battleground has now shifted to the Senate, which is gearing up to vote on the legislation . The bill is now known as S. 61, the “Helping Families Save Their Homes Act of 2009".

The premise for the bill is very simple. Experience has shown that lenders and loan servicers are only giving lip service to lofty promises to cooperate with struggling homeowners who need loan modifications. Unaffordable adjustable rate mortgages are still a major cause of bankruptcy and foreclosures in the United States. This bill would change that dynamic.

Under current bankruptcy law, a judge can modify almost any type of loan except the first mortgage on a debtor's home. This bill would allow judges to make changes such as extending payment terms, setting a fixed rate of interest or reducing payments. While this bill might cause a short term spike in bankruptcy filings, the long effect will be to force lenders to negotiate loan modifications in good faith. That is not happening right now. Some lenders are even foreclosing in the middle of negotiations without warning the home owner.

Please help by telling your Senators to support this bill. You can start at this link to learn more about the bill and then sign an online petition to show your support. Then you can click on this link to find contact information for your Senators. It does not matter whether you call, write, email or fax them, but make your voice heard very soon. As aptly stated by my colleague O. Max Gardner III, "This legislation is mandatory to make the voluntary modifications work."

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

Saturday, March 07, 2009

7 Facts That The Average Debt Settlement Company Won’t Tell You

In a recent article, I debunked a blog entry by J. Carlton Ford, owner of a website called Debt Warriors. Mr. Ford is a sales associate for Pre-Paid Legal, Inc. and sells “coaching videos” that purport to teach debtors how to reduce their debts. The cottage industry of “quick fixes” to debt problems is a sign of growing desperation by debtors who are confused about their options. Whether purchasing a video from someone like Mr. Ford or considering the use of a “debt settlement company”, consumers should be wary of quick fixes and empty promises of easy solutions.

Debt settlement companies offer to negotiate directly with your creditors, often for fees from ranging from 9%-16% of the consumer’s total unsecured debt. But debt settlement plans can harm debtors in ways they never imagined.

1. Debt Cancellation/Forgiveness is Presumed to be Taxable Income. Generally, if you owe a debt to someone else and they cancel or forgive that debt, you are treated for income tax purposes as having income and may have to pay tax on this income. If you owe a credit card company $10,000 and settle the account for $5000, the credit card company will send you and the IRS a 1009 form showing $5000 of income for the forgiven debt. You may be trading a debt that is completely dischargeable in bankruptcy for a nondischargeable tax debt. Debt forgiveness achieved in bankruptcy is not taxable.

2. Debt Settlement Plans Are Not Binding On All Creditors. Creditors do not have to deal with the debt settlement companies. Some creditors like American Express usually refuse to do so. If a creditor does not agree to the proposal, the creditor can sue you to obtain a judgment and garnish your wages and take your assets. A chapter 13 repayment plan is binding on all of your creditors and the automatic stay created by the filing of a bankruptcy prohibits any of your creditors from suing you.

3. A Debt Settlement Company Cannot Represent You In Court. Unless the debt settlement company is also a law firm, it cannot legally represent you in court. If you do not hire any attorney or do not have sufficient legal skills to represent yourself, then you risk have a judgment entered against you.

4. Debt Settlement Plans Are Often More Harmful to Your Credit Than Bankruptcy. Unless your debt settlement company skillfully crafts a settlement agreement the correct way, your creditors can still continue to report you as delinquent. While filing for bankruptcy will impact your credit, the automatic stay prevents creditors from reporting further negative information. In the case of a Chapter 7 discharge, creditors must start reporting zero balances within 30 days of your discharge and you can quickly distance yourself from any bad payment history. You can actually have bad credit longer under a debt settlement program than when filing for bankruptcy.

5. Debt Settlement Plans Are Often More Expensive Than Attorney Fees For Bankruptcy. In the Southern District of California where I practice, most consumer Chapter 13 cases cost approximately $3300 in legal fees plus expenses such as the $274 filing fee. Chapter 7 fees are often less than half of what an attorney might charge for a Chapter 13 bankruptcy. A person with $30,000 in debt will often pay a debt settlement company more than they would pay an attorney to file for bankruptcy.

6. Bankruptcy Can Accomplish More Than Debt Settlement Plans. Debt settlement plans typically only deal with unsecured debts such as credit cards and medical bills. Debt settlement plans usually do not deal with taxes or secured debts such as a home or car loan. Using bankruptcy, debtors can discharge certain income taxes, modify certain types of loans and many debtors are even using Chapter 13 bankruptcy to remove second mortgages from their homes. Debt settlement plans cannot accomplish any of those things.

7. Most Debt Settlement Companies Use the Carrot On a Stick Approach. Debtors rarely have the money to offer lump sum settlements to creditors. Debt settlement companies will often take installment payments and collect their fees first. Once they have a sufficient pot of money, they will offer a token settlement to one or two creditors. While this is happening, creditors may sue the debtor and the debtor’s credit rating will continue to drop.

While debt management plans may have their place, I have yet to see a satisfied customer come through my doors. If you are in financial difficulty, a consultation with a qualified bankruptcy attorney is always a good choice and often free.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.