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14

Feb 2011

To get a HAMP modification, does bankruptcy help?

Posted by / in After Bankruptcy / 19 comments

To get a HAMP loan modification, some people need to file bankruptcy first.

I’m a Virginia bankruptcy lawyer.

Usually, I urge people to try to get a HAMP modification before we file their bankruptcy.  We hold the bankruptcy in reserve to stop a foreclosure if we need to.   But sometimes, there’s no way a HAMP modification can be approved without filing bankruptcy first.

Why?  One of the requirements for a modification is that your “back-end debt-to-income ratio” be less than 55%.

What does that mean?  Suppose you make $4000 per month before taxes.  If your mortgage payment now is $1500, you could ask for a modification to come down to $1240.   That $1240 is 31% of your before tax income.  HAMP requires lenders to consider–not always agree to but consider–dropping your payment down to 31% of your gross income.

So you could save $260 a month if your modification is approved.   But, you will be turned down if your other debt is too high.

Suppose there’s a $500 per month car payment–and $600 total minimum on credit card payments.  Your total debt payments are 58.5% of your gross income.  Too high to get the modification.  Because there is “No Affordable Solution.”

Now, you file a Chapter 7 bankruptcy and the $600 credit card payments are gone.  Even with bankruptcy, you still are paying the car loan.

Now, after bankruptcy, your back-end debt-to-income ratio is only 43.5%  Now your modification can be approved.

Here’s a short cut.  If your credit card minimums plus car payments plus student loan payments total more than 25% of your before tax income, you can’t get a HAMP without filing bankruptcy.  You can’t get because there is no affordable solution, because the total debt payment would be more than 55% of your gross income.

If filing bankruptcy gets the credit cards (none, now, we hope) plus car payments plus student loan payments below 25% of that before tax income, then you’ve fixed the “no affordable solution” problem.  If you meet all the other requirements, then you can get your loan modification approved.

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13

Dec 2010

Right after filing bankruptcy: A Motion for relief from stay.

Posted by / in Virginia Bankruptcy / 15 comments

Before the housing crisis, I warned all my Chapter 7 bankruptcy clients, “make sure you are current on your house the day we file your case.”  If you went into Chapter 7 bankruptcy even one payment behind, the mortgage company would get relief from the automatic stay, and they’d start to foreclose.  Once that train left the station, it was hard to stop.

That’s still a good plan if you can do it; but not everybody can.  If you file Chapter 7 bankruptcy while the house is behind, the motion for relief from stay is important, but it’s not time to panic.

What to do when you get a motion for relief from the automatic stay?

Robert Weed

1.  If you can afford the house payment, and you want to be certain you will keep the house, then you need to get caught up.  In fact, you really should be caught up when the bankruptcy is filed.  Everybody knows, if you really want to keep your house, you need to get current and stay current.  That applies before bankruptcy, during, and after.

2.  If you don’t want to, or can’t afford to keep the house, make plans to move out.  See my blog on how long do I have.    (Remember to pay the home owners association!)   I suggest to many people that they file bankruptcy right before a foreclosure, to stop the foreclosure and get a little more time to live for free (except for the association) and save money for movers and the rent deposit.

3.  What if you need a loan modification?  Then it’s more complicated.  If you catch up (assuming you can), then you won’t get the mod.  You’ll never get a loan modification if you keep catching up.  At the same time, you don’t want to get foreclosed.  Trying to stay at least two, but no more than three payments behind is the safest place to get a loan modification.

Filing a motion for relief does not mean they have decided to foreclose you.   It may simply be their lawyers generating legal fees.  (Those fees will get put at the end of the mortgage if you get the mod.  If you don’t get it, the bankruptcy will wipe out what you owe so it doesn’t matter to you.)

The old rule was once they got relief from the stay, they went straight to foreclosure: that doesn’t apply any more.  Sometimes they do; sometimes they come with a mod offer much better than before; sometimes they wait for you to request a mod (again).  Really there’s no telling.

Once they get relief from stay, is there anything else I can do to stop them?

First, like I say, keep trying to apply for a loan modification.

Second, if your income has improved in a big way, you can file a Chapter 13 bankruptcy.  Under Chapter 13 , you would make your current payment, and make a monthly payment to the court to catch the house up.  Before the crisis, we did that a lot.  Now usually, if your income shows you can catch up, they will agree to that voluntarily.  So we don’t do that much any more.

Third, you can file against them in circuit court in your county, and make them prove they have the right to foreclose.  This is the Virginia approach to these foreclosure challenges in the news.  (In some states, they have to go to court against you to foreclose; in Virginia you have to go to court against them.)

There is one law firm I know of in Northern Virginia that does this.  Compliance Counsel. As far as I know, they have not gotten anyone a paid for house.  But they have, at least some of the time, gotten the mortgage companies to make a new mod offer, rather than fight it out.

Now, I got through all that strategy without explaining what a motion for relief from the automatic stay is.   If you are interested, that’s next.

Two bankruptcy protections.

People file bankruptcy to get protection from their creditors.   You get two kinds of protection.  You get long term protection from your debts.  That’s the bankruptcy discharge.   The discharge is your “new opportunity in life and clear field for future effort.”

Shorthand that’s your “fresh start.”   The Supreme Court said that your “fresh start” is the principal purpose of the bankruptcy code.

The bankruptcy discharge, about three months and two weeks after we file your Chapter 7 bankruptcy case, gets you your fresh start.  The discharge forbids anyone from taking any action to collect your discharged debts from you.

You get that discharge when your bankruptcy is approved.

The second protection, right when you file your chapter 7 bankruptcy case, is the automatic stay.  The automatic stay prevents your creditors from taking action against you–and it also prevents them from taking action against your property.  The automatic stay is sometimes called your “breathing spell.”

The automatic stay is temporary.  Why?  Because, when your bankruptcy is discharged–in about three months and two weeks–if you haven’t made your car payment, they are going to repossess your car.  And if you are not making your house payment, the mortgage company–at least the first mortgage company (maybe not the second)–will eventually foreclose on your house.

Unlike the automatic stay, the discharge does not stop people who are on the title or deed to your property from claiming the property, if you don’t pay.

Relief from the stay. Sometimes the creditors don’t want to wait that three months and two weeks, for the automatic stay to be replaced by the discharge.   They want it sooner.  The car creditors don’t want the car wrecked.  The mortgage companies–well who knows what they are thinking these days.

Anyway, they file a motion for relief from the automatic stay.  The judge will give them relief from the stay unless you are completely current.

As I said before, staying completely current, if you can afford the house, and want to keep it, is your best plan.  As I also said, if you need or want a mod, getting completely current means you won’t get the mod.  You need to go back to your strategy.

(One more thing to keep in mind.  Cash is king.  If you have the ability to catch up but want the mod, hang on to the money and see what happens.  You can always catch up later in the foreclosure process–you will need to cover the late fees.  Draining all your cash now, and then not being able to pay later, may not be smart.)

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25

Jun 2010

After bankruptcy, how soon can I get approved for a new mortgage?

Posted by / in After Bankruptcy / 3 comments

Yesterday the mortgage giant Fannie Mae, now owned the the federal taxpayers, announced a new policy on qualifying for a new mortage, after you lose your house in bankruptcy, foreclosure, or short sale.

They say they want to discourage people who “just walk away” from their mortgages, particularly in states, like California, where the mortgage company cannot come after you for the money.  (Under Virginia law, they can.)

So Fannie Mae now won’t back a mortgage for someone who gave up a house in foreclosure until seven years have passed from the foreclosure date.   They call this a “Seven-Year Lockout Policy for Strategic Defaulters”

Now, there is an exception that I’m calling the loan mod/extenuating circumstances exception.  The seven year lockout does not apply to people who can show the foreclosure was caused by “extenuating circumstances.”  That’s not defined, but I think it would certainly include unemployment, divorce, and probably reduced hours or loss of bonus or commission during the recession.  If you are giving up your house, and want to buy again soon, keeping proof of that would be important.

The seven year lock out also does not apply  to people who tried to get a loan mod.   “We’re taking these steps to highlight the importance of working with your servicer,” said Terence Edwards, executive vice president.

Only a three year waiting period applies to people who tried to get a loan mod and to people who had extenuating circumstances.  (I’m not totally clear whether that means you have to do both, or if either one is enough.)

If you shortsale the house, or do a deed in lieu, the waiting period is only two years.  (This is one of the very few benefits I see in doing a shortsale. September 7, 2012 Washington Post had a good article on the big damage a shortsale does to your credit score.  You can read that here.)

Lots of people think bankruptcy is the worst thing you can do–those people are wrong.  Fannie Mae regulations require only a two year waiting period after the bankruptcy–again if the bankruptcy was caused by extenuating circumstances.   (Again, it’s important to keep a file documenting loss of income or whatever caused the problem.)

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21

Jan 2010

The bankruptcy cram-down and the Massachusetts election

Posted by / in Weekly Posts / No comments yet

Today’s New York Times blames the Democratic defeat in the Massachusetts Senate election, in part on the failure of the Obama administration to help people reduce their mortgages to save their homes.  Copy this link:  http://www.nytimes.com/2010/01/21/opinion/21thur1.html

That’s the bankruptcy cram-down that candidate Barack Obama promised to support, but President Obama orphaned.  Without Presidential support, it passed the House of Representatives, but died in the Senate.  Before the election, based on his promise, I personally told a hundred people that they had a chance to save their homes if Obama was elected.  (That was my advice as their lawyer; personally, I voted for the other guy.)  Well, Obama got elected but he didn’t help and they lost their homes.

(The Washington Post January 9, 2010, had an excellent article by Kevin Huffman explaining why action is still needed, or foreclosures will continue and housing values will continue to fall.   Otherwise,  “this crisis could go on for years, dragging down the chance of real economic recovery.”  http://www.washingtonpost.com/wp-dyn/content/article/2010/01/08/AR2010010803377.html)

Obama’s failure to push the bankruptcy cram-down had at least  small impact in Massachusetts, and maybe a big one.   The small impact was that probably ten thousand homes went to foreclosure there that could have been saved.  Now, that by itself does not reverse a hundred thousand vote defeat.

The big impact would have been evidence that Obama’s recovery plan had something in it for the ordinary family.

Businesses have always been allowed to use bankruptcy to reduce what’s owed on an apartment or warehouse or office building.  Allowing people to do the same to save their homes would show that Obama’s recovery plan included something for the middle class.  Voters might would have been more willing to trust him on health care and the other issues, if he had fought for them on something they could see and understand.

So far, the only thing people can see that Obama has done is to throw money at the banks.  And that wasn’t change;  Republicans would have, and did, do the same thing.    Think it was Harry Truman who said, if there’s a choice between a Republican and a Republican, the Republican will win most every time.   That’s what happened in Massachusetts.

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NORTHERN VIRGINIA BANKRUPTCY LAW OFFICES