Wow, I haven’t blogged in some time! I wanted to point out, though, this useful article on NYTimes.com today running down the factors to consider when deciding to keep or walk away from your upside-down house. Typically, big banks don’t pursue deficiencies in Texas, so that’s not as much of a factor as you would guess.
Click here to read the article (it’s short).
Leave a Comment » | 
debt, foreclosure, mortgages, unemployed | Tagged: default, foreclosure, mortgage, rent, underwater, upside-down | 
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Posted by Ron
Great article in CNN today. The banks and even the government play down how helpful bankruptcy can be to prevent foreclosure, so I am always thrilled to see articles like this one (click here).
Leave a Comment » | bankruptcy, foreclosure, mortgages | Tagged: bankruptcy, foreclosure | Permalink
Posted by Ron
I just noticed this excellent post from Robert Doggett at Texas Rio Grande Legal Aid on foreclosure buzz:
http://foreclosurebuzz.org/2009/09/21/foreclosure-guides-hide-bankruptcy/
It is not surprising that while a lot of borrowers have received foreclosure notices, they do not know that filing bankruptcy is more often than not a better option than walking away from their home. As this article points out, bankruptcy forces lenders to work with borrowers. The lender must accept a payment plan allowing the borrower to stay in the house instead of foreclosing and kicking them out.
Foreclosure does not always erase your mortgage debt. If you owe more than your house is worth, you may end up owing the bank the difference, which is called a deficiency judgment. Though rare in Texas, a borrower can lose his or her home to foreclosure and still owe the bank the difference between the value of the home and the amount of the loan. This could have been avoided by filing Chapter 13 before the date of the foreclosure sale.
Most borrowers also do not realize that a bankruptcy may be better for your credit than sitting back and doing nothing. Filing bankruptcy allows you to have a fresh financial start, often resulting in your credit score recovering within a couple of years, whereas a foreclosure will result in a poor credit score for many years to come. I have seen some of my clients approved for conventional mortgages less than three years after filing bankruptcy.
Leave a Comment » | bankruptcy, foreclosure, mortgages | Tagged: chapter 13, chapter 7, foreclosure, loan servicing, mortgage, mortgage crisis | Permalink
Posted by Ron
To see my article from the September Texas Bar Journal regarding lawyers and debt, click here (link will download a PDF). The theme of my blog is stress relief, and law is one of the most stressful professions. Several lawyers have come in recently to talk to me about their struggles with debt in the teeth of this economy. I wrote this article to give back to the profession and to thank the many lawyers who’ve helped me in my practice. You wouldn’t believe it from what you read in the media, but most lawyers are good people! I especially want to thank Steve Sather and Dan Roberts, who contributed their thoughts and guidance to the article. Any errors are, of course, mine.
The Texas Bar’s website has helpful resources for lawyers battling depression and other issues related to the recession.
Leave a Comment » | debt | Tagged: attorney, Austin, bankruptcy, credit cards, foreclosure, lawyer, stress relief | Permalink
Posted by Ron
Now this article in today’s New York Times. Being someone who deals with mortgage servicing companies everyday, it does strike me that they act as though their duty is to themselves rather than the investors who own the loans, the homeowners who are desperately trying to stay in their homes, or the government that wants them to work with the homeowners. I had thought they aren’t competent, but it appears from the article that they don’t know what they’re doing.
Leave a Comment » | foreclosure, mortgages | Tagged: foreclosure, late fees, loan servicing, mortgage modifications | Permalink
Posted by Ron
If you have typed those words in as a Google search, you have my sympathy. Here are some general thoughts for how to handle debt if your income has dropped. Remember that this is not legal advice, but just starting points to think about your own situation, so take it with a grain of salt. If you live outside of Texas in a state less friendly to people who owe money, take it with two grains of salt.
1. If I can’t pay all of my bills, then how do I choose which ones to pay?
A hint: the creditors who put the most pressure on you are not necessarily the ones you should prioritize (see #3 below). People worry about their credit and their things, but really the first question is survival. How do you put food on the table? From that point of view, I would say you should prioritize payments in the following order: utilities, car, house, medical debt, credit cards, business debt. You don’t want to wake up one day and have your power turned off or your car repossessed. If your utilities are unreasonably high, you could consider moving. If your car is too expensive, then you might turn it in and buy a cheaper one or start to think about public transportation (though good access to that is rare in Texas). House payments are third because the foreclosure process takes a long time, and it’s becoming somewhat easier to work something out with the mortgage companies. Or once you do get a job, you could file a Chapter 13 case to stop the foreclosure and pay what you owe over 5 years. Besides, many people devote too much of their income to their home, and should think about surrendering (see my post “To 13 or not To 13“). Medical creditors don’t typically take aggressive collection measures, and my understanding is that emergency facilities will treat you without regard to ability to pay. Obviously if you have a serious condition that requires ongoing treatment by a specialist, you may want to talk to the doctor about payment and see what you can negotiate. Credit cards are discussed in #3 below; and if you have a business, you will most likely consult with a lawyer anyway.
2. How do I choose what assets to liquidate to pay debts?
To me, it is always sad when clients have spent their entire retirement savings and then taken out a home equity loan in order to pay down debt and then wind up coming to see me anyway. In that case, they have spent their retirement needlessly and will also now have higher house payments, making the house that much harder to keep. In this situation, it makes sense to file bankruptcy sooner rather than later. These assets are called “exempt assets,” meaning you get to keep them when you file bankruptcy. If you have non-exempt assets, you may have to delay your filing somewhat if you want to liquidate them and use them for your own needs rather than lose them entirely. Stock and rental properties are two examples. My next post, on Chapter 7, will address in more detail what property you are allowed to keep when you file bankruptcy.
3. But if I don’t pay, won’t I get collection calls?
You will. Credit card companies and their debt collectors will harass you if you don’t pay, but as I mentioned above, that doesn’t make them your highest priority. 1. Debt collectors will threaten you with liens and garnishment, but in Texas, they can’t place a lien against your house, and they can’t garnish your wages. Debt collectors are typically calling from out of state and don’t know Texas law. 2. In any case, federal law prevents the worst kind of harassment and misleading statements. It may turn out that you have a cause of action against a debt collector who crosses the line. 3. Often times, the collector’s main threat is that your credit will be hurt if you don’t pay. While your credit is damaged by late or missed payments, it is possible to repair, and it is not always the most important consideration. A future post will address bankruptcy and credit. 4. The collector will try to shame you into prioritizing your creditor over your own survival needs. This is ridiculous – your needs come first, especially if you have a debt with the outrageous interest rates we’re seeing nowadays. 5. The practical response that 9/10 of my clients come up with? Screen your calls. It usually doesn’t change anything if you don’t take the debt collector’s call. Ultimately, if you do decide to file bankruptcy, the creditors won’t be allowed to contact you at all.
4. But if I don’t pay, won’t I get sued?
You will, probably. But that is not necessarily a problem. In fact, it can often be beneficial because rather than trying to negotiate with a front line employee with no training in or authority to negotiate, you’re (probably your attorney is – this starts to get specialized) negotiating with a lawyer who can settle the matter on often reasonable terms. If the lawyer is suing on behalf of the original creditor, he or she may accept information about your hardship and let the debt go cheaply or for nothing. If the lawyer has purchased the debt or suing for a debt collector, he or she may be more hard-headed, but a federal debt collection suit or a motion to compel arbitration may cause him to moderate his position. Credit cards and business debts can often be settled pretty cheaply and in some cases, throwing up a little resistance may get the creditor to give up and dismiss the suit.
5. Should I file bankruptcy?
I am planning to write many many posts on this topic. I have already some detailed posts on Chapter 13 debt repayment plans and on Chapter 7. In short, if can’t pay for your house for a while due to unemployment, Chapter 13 gives you an opportunity – once you have a regular income again – to stop a foreclosure and save your house by spreading out what you’re behind over 5 years. It also allows you to discharge whatever unsecured debt you can’t pay. Chapter 7 discharges all of your debt (with some limitations for fraud, child support, some taxes, etc.), and will actually put your credit on a path to quicker recovery (more on that later).
5 Comments | pre-bankruptcy | Tagged: attorney, Austin, bankruptcy, chapter 7, credit cards, foreclosure, laid off, lawyer, mortgage crisis, stress relief, unemployed | Permalink
Posted by Ron
As you can imagine given the mortgage crisis we’re in, almost all the clients coming in to see me nowadays are fretting about their homes. A typical scenario is when the client has been set for foreclosure. In Texas, the mortgage company has to give you 21 days’ notice before foreclosing, and the foreclosure can only take place on the first Tuesday of the month. Given the mailing time, a property owner will typically get about two weeks’ notice – IF they pick up their certified mail (and yes, the foreclosure is still valid if you don’t pick up the certified letter!). So I normally see clients who have about a week to go. Their instinct is always to file an emergency chapter 13 case, stop the foreclosure, and propose a repayment plan to catch up on their payments and stay in the house.
Depending on their circumstances, this may be a good idea, or it may be a very bad idea. The expenses and challenges of a Chapter 13 may set the client back further than a foreclosure. I always ask the following questions to best advise a client whether to file a chapter 13 and keep the house or, alternatively, file a chapter 7, which would stop the foreclosure and give them a couple of months to move out while also discharging the mortgage and other debts. In the Chapter 7 scenario, you don’t have to pay back what you’re behind, and you quite often get to stay in the house for three to six months (I’ve seen as long as two years) without making any payments. Sometimes, though, even a Chapter 7 might not be possible or desirable, and I then advise them to explore other options: try to get time to sell the house, try to get the mortgage company to help them by modifying the loan or taking a deed in lieu of foreclosure, or even, rarely, to do nothing at all and let the foreclosure take place.
Here are the 3 kinds of questions I ask to determine whether someone should file a Chapter 13 case when they’re behind on their mortgage:
1. Can you afford this house? If the reason that you’re behind on the mortgage is something extraordinary like job loss, illness, legal fees, a death in the family, etc.. and that circumstance has ended & you can now afford the house, you are or expect to be employed and have the ability to pay the current monthly payments on the house and a little extra to catch up on what you’re behind, then I would ask the following questions about your home.
2. Is there any equity in the home? For me, this question means if you were to sell the house without putting any additional work in it, would you actually get any money? If you are behind on payments and taxes, remember that these will be paid out of your share as well as closing costs, commissions, etc.
3.Is the house perfect for you? Do you have young children who have grown up there and would be leaving school and friends? Is it close to work? Is it a safe neighborhood? Do you have family nearby? If the answers to any or all of these questions is yes, then staying might benefit you. On the flip side, there may be reasons that you have to leave anyway. Are you being transferred or laid off? Do you have family you’d like to move to be closer to? Does the house have any serious problems that need addressing – plumbing, foundation, roof, etc.? Is it too small for your growing family? If any or all of the answers to this second group of questions, then you might be better off letting the house go and filing a Chapter 7 instead of a Chapter 13.
The basic rule of Chapter 13 is “make your payments.” First, you will have to re-start monthly payments to the mortgage company with the next payment due after you file bankruptcy (and the mortgage company is obligated to take it) and make every payment from there on in. There is no negotiation – you pay your normal payment (though this may change with a provision Congress is seeking to add to the Bailout Plan – see my post on Mortgage Relief). Second, your attorney will propose a plan to repay the mortgage arrearage with interest over three to five years. The plan will also pay most of your attorney’s fees, any property taxes, recent income taxes, some portion of your credit card or other unsecured debt, etc. etc. Additionally, there is an administrative fee of 10% per payment.
Take the scenario in which your house payment is $1500 a month, that your property taxes are about $5,000 per year and are not escrowed in your mortgage payment. That gives you an effective payment of $1917 per month. A month or a day after filing your Chapter 13 case (depending on whether you file at the beginning or the end of the month), you will need to pay a house payment and save towards your taxes (or your mortgage company may demand an escrow payment, particularly if they paid the last year’s taxes). Let’s say that you were behind 6 months, which would be $9,000. Add in the mortgage company’s attorneys’ and other fees and the last year’s taxes, that would be over $15,000. Given your Chapter 13 attorney’s fees and the administrative fees, you would pay about $400 additional per month, giving you a $2,317 per month payment for your house alone for the next 5 years. That means that over the next 5 years, you would pay $139,020 towards your home.
Now look again at the 3 questions above and ask yourself, is this amount worth it? Think about what else you could do with that $139,020 over the next five years, particularly assuming you have filed a successful Chapter 7 and have no debt payments. You would have to pay some rent for a few years, but that amount could be half or less than the $2,317. You could save or invest the difference of almost $70,000. If the answer to question 2 above is that there is no equity, then you have to ask whether your investment will create any equity and if so, how much. Calculate that rate of return versus renting & investing the difference. If in response to questions 1 and 3, you neither can afford the house and you don’t really need to or intend to stay there, then it doesn’t amount to much reason to keep the house despite an emotional attachment to it or fear of what happens once you give it up. From that perspective, a Chapter 13 will often make no sense. However, if you had a temporary hiccup in your finances, you and your spouse are now working and earning enough to easily pay for the house, and you have a decent amount of equity or plan to stay in the home for a long, long time, then Chapter 13 makes sense.
Remember that this is not meant to offer legal advice, but just to provide a jumping-off point for your decisionmaking process and your discussions with your attorney.
3 Comments | foreclosure | Tagged: attorney, Austin, bankruptcy, chapter 13, chapter 7, foreclosure, lawyer, mortgage | Permalink
Posted by Ron
