Posts Categorized: Foreclosure

Foreclosure tax relief extended through 2013

We’ve written before about the tax consequences of foreclosure. In some cases, foreclosure can result in the homeowner being charged with tax liability for the amount of debt forgiven by the mortgage company. If the debt is $275,000, and the house sells at a sheriff sale for $250,000, the remaining $25,000 forgiven may be charged as income to the homeowner. The Mortgage Forgiveness Debt Relief Act allows taxpayers to exclude this tax liability if it’s for a mortgage on their principal residence.

The original law was scheduled to expire at the end of 2012, making it much harder for homeowners facing foreclosure. If the foreclosure happened in 2013, the homeowner could get slammed with tax liability for the foreclosure, adding insult to injury.

As part of last week’s fiscal cliff deal, the Act was extended through 2013. So this time you can credit Congress for doing something right, and the extension was even passed (almost) on time.

So if you’re going to get foreclosed on, it might be smart to do this before the end of 2013.

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Is a short sale better than foreclosure?

Short sale vs. foreclosureThe short sale industry has been a huge windfall for real estate agents. Some of them scare people into short sales on their home, even though a short sale usually has no advantages over letting your house go into foreclosure. Why do they do this? Simple, it’s the fees. Realtors stand to make up to 6 percent from the short sale of your home. On a $200,000 house, that’s a tidy $12,000 for the realtors ($6,000 for the seller’s agent, $6,000 for the buyer’s agent) . Turns out, that’s just about enough incentive to pressure you into a short sale, even when there’s no benefit to you.

1. Most short sales are no better for your credit score than foreclosure. Both short sales and foreclosures are major credit events that can have a big impact on your score. But there’s no support for the myth that a short sale is easier on your credit than a foreclosure. In fact, FICO, the leading credit-scoring company, says the opposite. If you compare a borrower who goes into foreclosure with a borrower who does a short sale where there is a deficiency balance, the credit impact is the same. If the second mortgage company will agree to wipe out your balance, then yes, the credit hit from a short sale may be softer. But this isn’t what usually happens.

2. Your realtor probably can’t wipe out your second mortgage, despite what he/she tells you. For people who have second mortgages, short sales can be tricky. Remember, in Minnesota, a second mortgage company can sue you after foreclosure for any remaining balance left on their loan. A lot of times, the second lender will release their lien if they can get a few thousand bucks from the closing of the sale, but won’t release your liability on the loan. This benefits the buyer, because they can buy the house without the lien, but it doesn’t do anything for you, since the second mortgage company can still ask you for the remaining balance. So there’s no benefit for you–you’re on the hook for practically the same amount of money as if you had gone into foreclosure.

3. Foreclosure may suck, but it has its advantages, too. Short sale has a big disadvantage over foreclosure that your realtor will probably forget to tell you. If you sell your house, you’ll probably have to leave within a month or two. If you just let your house go into foreclosure, you may have between six months and a year to live in your house mortgage-free and rent-free, while the foreclosure runs its course. That’s a lot of time to save up some money for whatever comes next–such as a security deposit and moving expenses. If you short sell your home, you’ll be giving up this right.

4. Don’t get caught by the details. I know, I know. Most realtors are honest. But when it comes to short sales, there are a lot of sleazy operators out there who’ll tell you anything to get you to sell. We’ve heard lots of cases of realtors telling the client one thing, and when they get to closing, the deal is totally different than they were led to believe. If you’re thinking of a short sale, you probably need an advocate who’s working for you, not for the commission. We represent homeowners in trouble with their mortgages. We also review short sale documents to make sure you’re getting the deal you think you are. Give us a call to talk about your situation.

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The foreclosure process in Minnesota

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Foreclosure on the American Dream – by Kevin Dooley

The foreclosure process is a mystery to a lot of homeowners. So here’s a timeline that explains how foreclosure by advertisement works (as opposed to foreclosure by lawsuit, which is rare, and has a completely different timeline). Keep in mind that your timeline may vary, sometimes by a lot.

Month 0: You miss a payment. The whole process kicks into motion when you can’t make payments on your mortgage anymore, or decide not to make payments. At first the mortgage lender might start calling you or writing you letters. The lender might also reach out to see if you need assistance or if you’re eligible for a loan modification. At some point you’ll receive a default, or “intent to foreclose” letter. But remember that from this point, you still have a lot of time before the foreclosure actually happens.

Month 3: Your case is sent to an attorney. It’s usually about three months of missed payments before your file is sent to a foreclosing attorney. It could be less, it could be more. The attorney might take a couple of tries to get you to start making payments again, usually by calling you or writing threatening letters.

Month 4: Service and publication. In foreclosure by advertisement, the lender must serve you with foreclosure papers. The papers will tell you the date of the sheriff sale, which must be at least six weeks in the future. Then the lender has to publish a foreclosure notice in the newspaper for six consecutive weeks. If the lender skips any of these steps, or doesn’t complete them correctly, the foreclosure may later be attacked in court.

Month 6: The sheriff’s sale. The sheriff’s sale is a really important date, for two reasons. First, it is the last date you can bring your mortgage current in order to stop the foreclosure. After the sale, it might not be enough just to pay the lender the amount you’re behind.

Second, after the sheriff sale is completed, we can no longer use bankruptcy to help you catch up on your mortgage. If your sheriff’s sale is scheduled for 10 a.m. on Monday, and we file your bankruptcy at 9:59, the sale is void. If it’s filed at 10:01, we’ve missed our chance.

Under Minnesota law, a homeowner can also delay a sheriff sale one time for five months, in exchange for a shortened redemption period to five weeks (see below). This must be done between the date the sale is first published and 15 days prior to the sale. The process isn’t all that easy, so don’t wait until the last minute if you want to postpone your sale.

Month 12: The end of the redemption period. The redemption period is a six month period starting from the date of the sheriff’s sale. During the redemption period, you can continue living in your home. By this time, it’s too late to get the mortgage current by paying past-due payments, but you can “redeem” the property by paying the entire sheriff’s sale amount plus interest and fees anytime before the redemption period expires.

Month 13: Eviction. Eviction is the final step in a foreclosure. After the redemption period has ended, if the lender wants get you out of the house, it must file for an eviction in court. This usually takes about a month to complete. People don’t usually like to be evicted, so most people move out of the house on their own sometime after the redemption period ends.

No matter where you are in this process, we can help you determine your options, including litigation and bankruptcy. If you want to talk more about how to prevent foreclosure, call us at (612) 564-4025 or email us.

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Our most popular blog posts of 2011

As consumer lawyers we like to know what kinds of issues are on our clients’ minds. So we took a look at our blog to see which posts got the most action. Below we run down the top five of 2011.

Can a second mortgage company sue after foreclosure? This was (by far) our most visited post of 2011. In the post we describe how second mortgage companies often wait a couple of years after foreclosure before they go after the homeowner for a deficiency judgment. They probably figure that there’s no point in trying to collect money from people who are in such dire straits. So it was no surprise, since the foreclosure crisis peaked around 2008-2009, that people were dealing with second mortgage companies two years later.

Can I run up my credit cards before filing bankruptcy? This was a popular question on the blog and in the office. And I know people don’t really mean that they want to go on spending sprees and then wipe the debt out in bankruptcy. The questions were more from people who had been living off their credit cards before coming to see us, and wanted to know whether they’d be cut off from credit right away. We advised clients to wean themselves off plastic, and to definitely avoid buying luxury goods and services before filing bankruptcy.

A debt collector is taking my paycheck–what do I do? Garnishment was a killer in 2011. You wanted to know how to get your money back from debt collectors who had taken money out of your paycheck or bank account. We told you about the garnishment exemptions. We told you about the new rule that protects federal benefits. And then we reminded you that if you file bankruptcy, any funds taken from you within the 90 days before filing had to be returned.

How much will my Chapter 13 payments be? One of our biggest trends in 2011 was a big uptick in Chapter 13 filers. A lot were people wh0 had used up every other option, and wanted to use Chapter 13 to catch up on mortgage payments. Others had heard about the magic of lien stripping and wanted to know if we could wipe out their second mortgage (for the most part, we could). But a big part of deciding whether to file Chapter 13 is to know whether the payments would be affordable. We spoke. You clicked.

The payday loan scam Finally, we told you about debt collectors who use nasty practices to collect payday loans that you probably don’t owe. We reminded you never to pay a debt collector without having the deal in writing. We also reminded you that debt collectors (even the ones collecting fake debts) need to follow the Fair Debt Collection Practices Act, and gave you some tips for stopping debt harassment.

The best part was when clients told us that they used our blog to figure out how to get out of a jam. What other topics should we be writing about in 2012? Leave your ideas in the comments.

How do I stop foreclosure?

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Photo by Kevin Dooley

The most common problem people come to see about is foreclosure. Knowing you might lose your home in foreclosure is scary, but there are a lot of ways we can help you get back into good standing on your mortgage so we can keep you in your house. In this post I run down some of the options out there:

1. Try for a loan modification. In our opinion, most of the loan mod programs out there are nearly worthless. HAMP can be a good fix for a homeowner behind on payments, since it reduces monthly payments AND puts your loan back into good standing. But since there’s no way to force lenders to comply with HAMP, most people are left out in the cold (and pushed into foreclosure). It’s been very rare to see a homeowner get a HAMP modification, but that doesn’t mean you shouldn’t try it, hoping to catch the right person on the right day and catch a lucky break.

As for the lenders’ “internal” modification programs, your guess is as good as ours whether you’ll qualify.  Since the criteria and terms of these mod programs are usually secret, you’re at the lender’s mercy. So if you go this route, negotiate and negotiate hard. Even though the customer service rep on the phone might not realize it, the bank is probably going to lose a lot of money if they foreclose on you. Show them why. It might be helpful to order an appraisal–if the lender knew your house was $100,000 underwater, they might not think it’s such a good idea to kick you out of it.

2. Don’t hire loan modification sleazeballs. If foreclosure is the number one problem we see in our office, 1A is people who have paid sleazy loan modification outfits to help them stay out of foreclosure. These programs are expensive, and most of the time they just don’t work. In particular, stay away from: 1) out-of-state companies (it’s harder to get your money back), 2) companies that tell you to stop making your mortgage payments; and 3) for-profits that ask for a large up-front fee without telling you what they can do for you or how they can do it. So many people get caught up in these scams, and it only creates a bigger mess to clean up once the scammer runs away with the money and leaves you right where you started or worse.

3. Consider Chapter 13 reorganization. Chapter 13 is a way to force a lender to accept repayment of your arrears over time. It’s ideal for the person who missed a bunch of payments, but now has the income not only to make the payments, but also to catch up and stop foreclosure. Chapter 13 allows you to pay your mortgage arrears in equal installments over a three- to five-year period. It can be surprising when a lender refuses to let you catch up on your mortgage, even when it knows you have the income for it. This way you can call the shots and force them to accept your money.

4. Strip off your second mortgage. If you didn’t have to pay your second mortgage, could you afford to catch up on your mortgage? As of earlier this year, in a Chapter 13 reorganization we can strip second mortgages (and third mortgages, and fourth…) where the value of the house is less than the balance of the first mortgage. It’s called lien stripping. To do this, we need an appraisal to prove the value of your home. Once we can prove that your second mortgage is fully unsecured, we can strip the lien in Chapter 13.

5. More people have just been moving on. If you can’t afford your mortgage payment, can’t qualify for a modification, and bankruptcy won’t help your situation, it’s time to make some hard choices. If you have an underwater house, meaning you have no equity, what do you really own? And if you have to pay $10,000 just to get back into good standing, is it really worth it? If you decide to abandon a home to foreclosure, you can usually live in the house mortgage-free for at least six months while the foreclosure runs its course. For many of our clients, this is just enough time to save up some money to make the transition to a new place to live comfortably. And if you have a second mortgage that won’t go away in the bankruptcy, well we can usually wipe that out in Chapter 7.

Have questions about what to do with a mortgage about to go into foreclosure? Call (612) 564-4025 or email for a free consultation.

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Stop foreclosure with Chapter 13

stop foreclosureOften people come to see us after they’ve done everything they can to stop foreclosure. Many try to get loan modifications from their lenders, but after lots of runaround, most are denied. For some strange reason, the lender just won’t allow the borrower to get out of default and get back to making payments. With a foreclosure sale (often called a sheriff’s sale) on the horizon, many people are looking for a way to stop foreclosure and force their lender to accept payments. Chapter 13 reorganization can be a fix in this situation. Here are some of the advantages:

1. The automatic stay will stop foreclosure. The automatic stay protects you from creditors and prevents foreclosure from taking place, even if the bankruptcy case is filed just minutes before the sheriff’s sale. If the clock is ticking on your foreclosure sale and you’re out of options to stop foreclosure, filing bankruptcy may give you the time you need.

2. You can force a lender to accept overdue payments over time. Chapter 13 involves repaying a portion of your debt over time to stop foreclosure. In a Chapter 13 case, you pay your mortgage arrears back over the life of the plan. To figure out if this is feasible, we do some simple math. We take the overdue amount on the loan (arrears), and divide it over the length of your Chapter 13 plan (three to five years). Let’s say your mortgage payment is $1000/mo and you are overdue $10,000 on your mortgage. In a five-year Chapter 13 plan, we would divide the $1,000 arrears by 60 ($166.67). If you can pay your regular mortgage payment plus an extra $166.67 per month (for a total of $1166.67/mo), the lender will have to accept your repayment plan.

3. In some cases, we can “strip” your second mortgage. We can “strip” a second mortgage that is fully underwater. Here’s how lien stripping works–if you have two mortgages, and the balance of your first mortgage is more than the current value of your house, then your second mortgage is “unsecured” because there’s no equity in the home to back it up. When that’s the case, the lien can be removed and the value of the second mortgage is paid pro rata with the rest of your unsecured creditors (medical bills, credit cards, etc.) Because you only pay the unsecured debt you can afford in a Chapter 13, and the remaining debt is wiped out after the plan has ended, this can save you truckloads of money.

Lien stripping be a huge benefit to borrowers over-stressed by two mortgages. If you’re facing a sheriff sale and feel like you’re out of options to stop foreclosure, give us a call.

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Can a second mortgage company sue after foreclosure?

In the wild heyday of mortgage lending, many people were offered two mortgages when buying a house. The first mortgage was a traditional mortgage for 80 percent of the value of the home. But for borrowers who wanted to buy without a down payment, lenders also offered a second mortgage to cover the down payment and help the borrower avoid having to pay private mortgage insurance (PMI). These were called piggyback loans. Man, did this backfire.

When housing prices started to take a dive, the traditional 20 percent of equity borrowers used to have as security in their house wasn’t there, since it had been leveraged by the second mortgage. Without this cushion, when a borrower needs to sell his house or can’t make the monthly payment, the selling price won’t cover the mortgages and so the borrower can’t pay them off.

In most Minnesota foreclosures, the first mortgage company can only collect whatever it can get from the sale of the house. If the selling price doesn’t cover the mortgage and there’s still debt owed, it’s wiped out by the foreclosure. It’s a different story for second mortgages. Under Minnesota law, a second mortgage company can collect a deficiency (the amount owed beyond the balance that’s paid off by the foreclosure.) This means many people after foreclosure are still being chased by second mortgage companies for balances somewhere in the tens to hundreds of thousands.

So what do people do when they are in danger of being sued for a deficiency judgment? Here are some ideas:

1. Do short sales work? Sometimes. A short sale is where the lender agrees to sign off on the sale of a house and take a reduced amount on their loan so that they don’t have to go through the foreclosure process. We’ve heard of some short sales where the second mortgage lender accepts some modest amount of cash and agrees not to pursue the borrower for any remaining debt. But these are becoming more infrequent. In other cases, second mortgage lenders are taking the cash and signing off on the sale, but reserving the right to go after the borrower for the difference. Short sales can be risky, and there are lots of sharks in the real estate industry, so we recommend doing this only if you have an attorney you trust looking over the deal.

2. Can I negotiate with the second mortgage lender after the foreclosure? Sure. Considering the huge amount of money some mortgage lenders are collecting on a deficiency, many times they know they don’t have a prayer of collecting their money. That’s why they might be willing to take a fraction of the amount owed just to get something from you. When mortgage companies are willing to settle, we’ve seen the best deals when borrowers are willing to pay a settlement in one lump sum rather than lots of smaller payments.

3. Can bankruptcy wipe out a second mortgage? Definitely. Many clients come to us facing tens of thousands of dollars in deficiency judgments, and we’re able to discharge these debts in bankruptcy. This is one of the biggest reasons our clients file bankruptcy. A defaulted second mortgage is treated as unsecured, nonpriority debt in bankruptcy, which is pretty much the same as credit card debt. This means we don’t generally have any trouble making it go away.

Whether you’re facing foreclosure and want to figure out your best option, or if you have already been through foreclosure and you’re worried that your second mortgage is going to rise from the dead and come back to haunt you, call us at (612) 564-4025 or email for a free consultation.

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The Trouble With HAMP

HAMP, The Home Affordable Modification Program, was implemented during the darkest hours of the economic crisis. The program’s intent was to standardize the criteria under which lenders consider granting mortgage modifications to homeowners. These modifications would reduce monthly mortgage payments and allow folks to avoid foreclosure and stay in their homes.

This may have been well-intentioned, but in practice, it has proven to be a mess. The first issue is that the criteria weren’t made clear to homeowners. For example, in order to qualify for a HAMP modification, the homeowner’s current principal, interest, property taxes and homeowner’s insurance payments must be more than 31% of their gross monthly household income. Many people applied for the program without realizing that their payments were below the 31% threshold. By the time they were notified that they didn’t qualify, they were thousands of dollars in arrears to their lenders.

Perhaps the biggest downfall of the program is that lenders would not consider granting modifications on loans that were current. Homeowners who had been struggling to make their payments would call their lender and be told that the only way to qualify for a modification was to fall behind on their mortgages.

The typical HAMP story we hear from clients goes something like this: The homeowner is struggling (a family member has lost a job or an Adjustable Rate Mortgage (ARM) has reset and the mortgage payment has increased dramatically). She contacts her lender who tells her that she must miss a payment in order to qualify for HAMP. She doesn’t make a mortgage payment for a month and then calls the lender back. The lender offers her a three-month “trial modification” and asks her to send in a large packet of documents including a hardship letter, bank statements, and other proof that she’s having financial trouble. Under the trial modification, her mortgage payment goes from $1900 a month to $1200. The homeowner starts to breathe a little easier and uses the $700 to pay down some other debt. After a few months, the lender says it cannot yet make a decision on the modification and offers another 3 month trial modification. Oh, and it has lost the homeowner’s paperwork, so she needs to send it again. This goes on until the lender makes a decision one way or another (usually the other).

We’ve heard of people being offered as many as four trial modifications, before being told that they don’t qualify for HAMP. In that instance, the homeowner has now missed one mortgage payment and made twelve payments that were “short.”  Using the numbers above, the homeowner is now $10,300 (plus fees) behind on their mortgage. The lender is threatening foreclosure and the homeowner is in a worse spot than they were before they’d ever heard of HAMP.

Some people do qualify for HAMP and receive permanent modifications. The trouble is that many more do not. If you are going to attempt to qualify for a modification, we recommend doing as much research as you can to determine if you meet the criteria BEFORE you contact your lender. If you make the decision to skip a payment, put the money in the bank. Same goes for the difference between your regular monthly payment and your trial payment. We understand that you could really use the money for something else, but having the cash on hand to get caught up on your mortgage if you’re rejected for a modification could be the difference between remaining in your home and being foreclosed upon.

Everyone’s situation is different. If you’re having trouble making your mortgage payment, call us anytime. We’ll give you a free consultation and let you know what your options are.

Consumer encyclopedia: What is a deficiency judgment?

A deficiency judgment is a legal judgment that can result after a foreclosure. A deficiency is the amount of the mortgage that isn’t satisfied by the sale price of the home in foreclosure. Here’s an example:

First Mortgage = $100,000

Second Mortgage = $50,000

Property sells at Sheriff’s Sale for $90,000.

In a typical foreclosure by advertisement, even though the holder of the First Mortgage lost $10,000, it can’t go after the homeowner any of the money it lost.

The holder of the Second Mortgage can go after the homeowner for the full $50,000 as a deficiency judgment.

Dealing with secured debts in bankruptcy

One of the really great features of bankruptcy is that you can use it to get rid of the financial anchors that have been weighing you down. These often include houses that are worth significantly less than you owe on them (very, very common in the current housing market) or cars (also common as cars often depreciate ahead of the payoff schedule). These types of debts are called “Secured,” because the property that is the subject of the loan is used as collateral.

When you file bankruptcy, you will have some choices with regard to to secured debts. You’ll generally have three options:

1) Surrender the property

This, quite literally, involves handing the keys over to the bank. You are then freed from any liability relating to that debt.

2) Reaffirm the debt

After you file bankruptcy, the party that holds your mortgage or car loan may reach out to you through your attorney. They may propose that you sign a Reaffirmation Agreement. This means that you would agree to repay a debt that would otherwise be discharged in the bankruptcy. As a general rule, we discourage our clients from signing these agreements, because they aren’t always in the client’s best interest. There are some instances where a reaffirmation makes sense. Sometimes lenders will agree to reduce the interest, the principal or the term of the loan. Of course every situation is different.

3) Retain and pay

Retain and pay is the most common solution. Essentially, this occurs when you do not sign a reaffirmation agreement, but keep using the collateral and making your scheduled payment to the lender. The lender has the right to foreclose/repossess, but they don’t have any incentive to do so, because they are getting paid. The advantage to retain and pay is you can use the collateral as long as it suits you (even through payoff), and still decide to surrender it with no consequence if it ceases to meet your needs (if your car blows a transmission you may not want to keep paying for it).

Want to know more? Call us for a free consultation.

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