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25

Mar 2010

After bankruptcy what if I don’t pay my second mortgage?

Posted by / in Chapter 7 Bankruptcy / 624 comments

After chapter 7 bankruptcy, I often advise my clients, just don’t pay the second mortgage.

Now, if you don’t file bankruptcy and stop paying the second mortgage, two things would happen.  They will call you day and night; and eventually they would sue you and garnish you.  Bankruptcy keeps them from doing either of those.

Will they foreclose you?  That’s the big question.    The second mortgage can sell your house to a new homeowner only if they pay off the first mortgage.  If the value of your house has dropped below what you owe on the first, that’s just a way for them to lose more money.  They are not going to do that.

Virginia Bankruptcy Lawyer Robert Weed

I often advise my clients, just don’t pay the second mortgage. This is a strategy that takes nerves of steel.

To put it another way, the second mortgage won’t kick you out of your house just to be mean.  They will only do it to make money.  If they can’t make money, they won’t do it.

So, what are they going to do?  They will wait patiently for you to keep paying the first, and hope the value comes back up (and the balance on the first drops) that at some point you have equity that they can grab.

So, if you follow this just-don’t-pay-the-second strategy, you know you will never have any equity in your house.  If you go to sell five years or twenty years down the road, the second will still be sitting there.   (With five or twenty years of interest and late fees.)

So when does this just-don’t-pay make sense?  Suppose you have five more years before your youngest is out of high school.  Once that’s done, you might want to move to a smaller place anyway.  Then you can stop paying the first mortgage too, and move out.  The bankruptcy still protects you from both of the mortgages.  (You’d have to keep paying the HOA until the first mortgage forecloses.)

Does this strategy hurt your credit?  It does and it doesn’t.  It doesn’t hurt your credit score, because that second mortgage will  just show bankruptcy and can’t show any late payments after that.  (For my clients, we check to be sure.)  But it does hurt your being able to buy again.

For loans like car loans–or interest rates on your credit cards–your credit score pretty much controls, so you’ll be able to get a care loan at a good rate.  Your score will be good, if you’ve built up new, good credit.

But to get a mortgage, a different rule applies.  The March 2, 2010 manual released by Fannie Mae, (link here https://www.efanniemae.com/sf/guides/ssg/sgpdf.jsp) says what you have to do to get an insured mortgage. You have to be two years after the bankruptcy (with extenuating circumstances), but you have to be three years after a foreclosure.   Even though there will not be a foreclosure on your credit report, there will be one on the land records, and a mortgage lender will check there, too.

So if you follow this just-don’t-pay-the-second strategy, you keep the house for three or five or seven years; then you have to plan to rent for three years or so.  Then you’d be able to buy again.

If real estate goes up a lot over the next ten years, you’d be better financially to move out of the house right after the bankruptcy, rent for three years right away, and then buy again.  (If real estate stays flat, then not being able to buy for ten years doesn’t lose you anything.)

But if you want to keep your children in the same school and the same house, just-don’t-pay-the-second is a good plan.

What if you want to keep this house long term?  One way to do that would be with a second mortgage relief Chapter 13.  See my website on that.  http://virginiasecondmortgagerelief.com/

Or, you can not pay the second for a couple years, save some money, and then offer them a cash settlement.  Say you owe $75,000 on the second mortgage, file chapter 7 bankruptcy, and pay them nothing for three years.   If the value of your house is still less than you owe on the first, and you offer them $7000 to call it even, they might agree.   If you move out, they get nothing.

That strategy takes nerves of steel.  And it works best if you go for several years of not paying them–you want them to get used to getting nothing, so your offer of 10 cents on the dollar looks good.  I’ve seen it work.

Here’s an example where Chase, after getting nothing for four years, offers to settle at $20,000 second mortgage for $2000.  And here’s an example of HSBC offering to settle as $126,000 second mortgage for $12,600.

Here’s an offer to settle at $28,500 for $4250.  My client filed bankruptcy in 2010–this offer came in 2014.

 

PS  In January 2015, Bank of America forgives the whole amount.

Ahmad filed bankruptcy with me in 2011.  He got the best possible deal–Bank of America offered to forgive the whole amount of his seocnd mortgage.

 We had a BOA home equity line of credit for around $33K that was included in our BK back in 2011. I received a letter today from BOA that they have agreed to forgive this amount and we don’t owe them a penny on that. I had a question will that show up in our credit and will it hurt our credit in any way? It took us few years to build our credit and get back up and we don’t want this to damage our credit but we are grateful that is being forgiven…..

Don’t worry, Ahmad, this will nto hit your credit.  and not have any tax consequences either.  And I’ll straighten it out if it does.

This nerves of steel strategy does not always work; but it works a lot.

 

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18

Feb 2010

Can bankruptcy help with my student loans?

Posted by / in Chapter 7 Bankruptcy / 17 comments

If you read the law, it says we can get rid of the student loans in bankruptcy if we can show “undue hardship.”

“Undue hardship” doesn’t sound so bad. It is. What most bankruptcy judges take that to mean is there is absolutely no hope that you will ever make enough money to pay anything toward the student loans.  “Certainty of hopelessness” is what they want to see.

As long as you are young and in good health, you can’t prove undue hardship. Meaning you can’t get rid of student loans.

Can bankruptcy help with my student loans?  Only if you have certainty of hopelessness

In most bankruptcy courts, you can only get rid of student loans, if there is “certainty of hopelessness.” No chance that you will ever work again.

My recommendation, which I don’t like, is to put people into a Chapter 13 payment plan where you make a small to the bankruptcy court for five years.   The court sends that payment to the student loans. At the end of the five years the student loans are still there–bigger than ever–and you do it again.  

Maybe do that three or four or five times until we can get to the point where we can tell the judge there’s no hope of you making enough to pay much of anything and you have been paying under court supervision for fifteen or twenty years.  

At that point you should win, although plan B is another five year Chapter 13. Have I said I don’t like this? I don’t like it.   But especially for people with large “private” student loans, it can be your only hope of having a normal life.  (I like this a lot better for a married couple where only one has the student loan, so the other can do things like finance a car.)

(Michelle Singletary, consumer finance advisor, had a good article about this problem in the April 20, 2010 Washington Post.  She didn’t have any solution though.)

Before October 2005, the only government guaranteed and charitable student loans survived a bankruptcy.  Private student loans were like any other debt. I can see no good reason why Congress changed the law, but I do see a political reason: Rep. John Boehner, Republican Leader in the House of Representatives, always raises a lot of money from the student loan lenders–and passes it around to other Republicans.

These private student loans have a much higher interest rate than the government guaranteed student loans; and they do not offer the income sensitive payment plans that the government guaranteed loans do. If you get behind with them, they can wreck your life.  Thanks, Congressman Boehner.

PS A few bankruptcy judges have lightened up on the undue hardship requirement. That requirement goes back to a Ms Brunner, who tried to get rid of her student loans just one year after she finished grad school.  You can imagine the courts were not real sympathetic to her.

Especially because back in 1985, bankruptcy could get rid of your student loans like any other debt, if you had been in payment status for five years.  So you only needed to show that “certainty of hopelessness” is you wanted to use bankruptcy to get out of student loans in the first five years.

The five year rule is long gone, student loans are NEVER like a regular debt. But for most judges the “certainty of hopelessness” is still what you have to show.

Some judges are looking at that again, and saying an easier rule should apply now. The New York Times wrote about those judges, here. 

PPS  President Obama tried to change the Department of Education policy on student loans.  The Department to Education uses “loan servicers” to collect the student loans.  (Navient and Fedloan Servicing are the one I see the most.) Those servicers are the people who come to the bankruptcy court and argue, when people try to prove “undue hardship” to the Judge.  If nobody’s there arguing, then undue hardship should be easier to prove.  

The Obama White House asked The Department of Education to come up with a new policy.  Didn’t work.  

Department of Education came back with new instructions.  Same as the old instructions. They told the loan servicers to keep fighting the undue hardship cases.  The exact opposite of what the White House–and the bankruptcy lawyers–and you, probably–wanted.  

 

UPDATE  The Washington Post had a good article in August 2015, on the government’s income-driven repayment plans.  

MORE  If bankruptcy can’t get you out of student loans, can the student loans at least get you approved for bankruptcy on your other debts?  This case shows the few courts that have decided that, either way.  IRM 5.15.1.10 lists student loans as a necessary expense–if Federal and being paid.  (Before 11/17/2014 it referred to student loans “secured” by the Federal government.  Now it says, guaranteed by the federal government.  Since the bankrutpcy law is supposed to follow the IRS, that change should means something, but it’s not clear what.  The problem is in 707(b)(2)(A)(ii) “Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts.”

UPDATE  The Washington Post has a good article about how the student loans collection agencies are allowed to garnish you, without first going to court.  

UPDATE  The Consumer Finance Protection Bureau has a lot of good info on student loans.  Their page on the Obama Public Service student loan forgiveness program is the best I’ve seen anywhere.  You can see it here.  They estimate that 25% of Americans work in occupations eligible for that program; and they think most don’t know it.  I’ve talked to a lot of people who don’t know they are eligible.  

UPDATE: This morning, heard a talk by Hon. Stephen St John, Chief Judge of the Bankruptcy Court here. He said, until the Supreme Court does something about it, the door to getting your student loans discharged in bankruptcy is “nailed shut.” You might consider moving to another part of the country, but here in the 4th Circuit it is impossible to win on a student loan case.

UPDATE: The College Republican Federation of Virginia (I was state chairman of that group, more than 40 years ago) posted this “Valentine.” Apparently it was first published February 2016 by the College Republican National Committee.

Can bankruptcy help with my student loans?

This “Valentine” was first published by the College Republican National Committee, in February 2016.

UPDATE:  Eugene Wedoff, a retired bankruptcy judge, took over the appeal, pro bono, of a Ms Conniff on a student loan in bankruptcy.  Ms Conniff is a school teacher in a poor county in Alabama; she has advanced degrees but has not been able to move into a position where the advanced degrees would mean more money; she has two children at home, and gets $500 a month in child support.

The bankruptcy court allowed her to get rid of the student loans in her bankruptcy, saying it was obvious she couldn’t pay them.  EMC appealed and the US District Court applied the “certainty of hopelessness” rule, and overruled the bankruptcy court.  Judge Wedoff, who is now Ms Conniff’s lawyer, was one of the best known bankruptcy judges in the country.  He has taken it to the 11th Circuit Court of Appeals. We’re hoping the Court of Appeals listens to him, and other judges start to lighten up on this, a little.  

You can read what Judge Wedoff said, hereappellants-brief-alexandra-elizabeth-conniff-wedoff

UPDATE:  May 2017, Congressman John Delaney (D-MD) and Congressman John Katco (R-NY) introduced a bill to allow student loans to be eliminated in bankruptcy, just like any other debts.  Their bill is H.R. 2366.  This is an important first step.

UPDATE:  June 2017. Bankruptcy Judge in Pennsylvania opens the door a little. He says it’s not necessary to show you can NEVER afford to pay the student loans—forever is a long time. Just that you can’t afford to pay for a “significant portion” of the repayment period on the loan. The student borrower in this case, Ms Price, was divorced with three small children.  The judge said it didn’t matter that maybe when the kids were grown she’d make enough money to start to pay.  Can’t pay now, can’t pay any time soon, and that’s all she needed to prove.  Bad News:  January 2018, the US District Court overturned this bankruptcy court decision.  Ms Price still has to pay her student loans.  What does this mean?  Even if you can persuade the bankruptcy judge, who has to listen to what you say and look you in the eye, the next judge, on appeal, just reads the papers and decides you lose. 

UPDATE: After November 2018, Can Bankruptcy Help with my Student Loans?

The results of the recent election give us some hope that Congress may change the law on student loans in the next couple years.  The top two Democrats on the key committee in the House of Representatives should be friendly.   I remember hearing each of them speak at past national meetings of the National Association of Consumer Bankruptcy Attorneys.  

UPDATE: For people in public service–meaning government or a hospital, mainly–the Consumer Finance Protection Bureau has published improved instructions on the Public Service Student Debt Relief.  Here.   Several December 2018 news articles talked about how poorly understood and badly run this program is.  Over 40,000 people have tried to qualify, and only 206 have been approved.  Here’s a great article from USA Today.

 I see four or five people a month I think are qualified who have never heard of it.

UPDATE: Can bankruptcy help with my student loans? February 2019.  I went to Capitol Hill with about two dozen bankruptcy lawyers from around the country, to support H.R. 770, by Congressman John Katco (R-NY) to allow student loans to be eliminated in bankruptcy, just like any other debts.  There’s some chance it passes the House of Representatives this year, although action in the Senate is doubtful.  Now that the Democrats control the House, our chances in committee are much better. And Rep. Katco is one of only five Republicans who got re-elected in a district Donald Trump lost in 2016.  I hope that means other Republicans will pay some attention to what he has to say.  Long term success likley depends on election a Democratic President in 2020.

UPDATE: American Bankruptcy Institute Calls for a Change.

Consumers picked up a key ally in the battle to restore the bankrutpcy discharge for student loans. A commission of the American Bankruptcy Institute issued strong recommendations on the side of people struggling with student loans they can’t pay. This is big news, because the ABI is dominated by “tall building lawyers” and bankruptcy judges, and is not usually friendly to consumers. You can read more here. 

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