Lien Stripping

If your primary residence has a first and second mortgage, or a first mortgage with a home equity line of credit, it may be possible to “strip off” the second mortgage and/or home equity loan from your home. In a declining real estate market, lien stripping may make it possible for you to avoid foreclosure and keep your home.

To understand how lien stripping works, it’s important to know a bit about the difference between secured and unsecured debt. A secured loan is backed by an asset—in the case of a mortgage loan, usually the property you’re borrowing to pay for. (Unsecured debt, by contrast, is not backed by collateral; the creditor simply loans you money and expects you to pay it back according to the terms of the loan agreement. Most credit card debt is unsecured debt.) Whereas unsecured creditors frequently do not receive the full amount of their claim in a bankruptcy case, the law usually entitles a secured creditor to receive full compensation up to at least the value of the collateral, or it may seize the collateral itself. For example, if you owe your lender $600,000 on your house and your house is worth at least that much, your bankruptcy plan must either provide for the lender to receive the full $600,000, or it must surrender your house to the lender. Usually, payment may be made over the original loan repayment schedule (which may be longer than the plan) so long as any arrearage is made up during the plan.

In a declining real estate market, however, lien stripping becomes a viable option for pursuing relief from some secured debt. For example, suppose the house in the previous example was purchased for $600,000 in late 2007, at the top of the market in Seattle. The debtor purchased the house with a $500,000 first deed of trust from one lender and a $100,000 second deed of trust from another lender. Since being purchased, the house has lost value and is now worth only $490,000. This is less than the value of the first deed of trust, so there’s no value left over to serve as collateral for the second deed of trust—it is considered “wholly undersecured.” In a Chapter 13 bankruptcy, you can move to have a wholly undersecured lien stripped from the property, meaning that it will be treated like an ordinary unsecured debt. If you and your attorney can develop a bankruptcy plan that provides for payment of the arrears on your first mortgage, eliminates your credit card debt, reduces your car payments, and entirely removes the second mortgage on your home, you may find that your whole financial picture looks very different, making it possible to keep your home.

Lien stripping is an example of debt avoidance, a legal term that basically means having a debt legally cancelled or reduced. A lien can also be stripped if it is a judgment lien that is undersecured and impeding a debtor’s homestead. Other common examles of avoidance on other property and houses other than the debtor’s primary residence include the ability to cram down the lien or mortgage to the value of the property, bifurcating the lien obligation into secured and unsecured elements.

Before making the decision to surrender your real estate to the bank, contact us and find out if we can help you stay in your home.

Choosing the Right Strategy for Saving Your Home through Bankruptcy

Both Chapter 7 and Chapter 13 stop a foreclosure of your home. One or the other COULD be better for you, but which one is it?

Many considerations come into play in deciding whether a Chapter 7 or 13 is better medicine for you.  I could list literally dozens of possible ones. Focusing here just on factors involved in saving your house, there are still lots of advantages and disadvantages to each one. The answer turns on your unique circumstances. Lawyers are sometimes given a bad time for seemingly answering every question with “it depends.” But when it comes to your home and your financial well-being, the fact is that what you want and deserve are what is best for you in your unique circumstances. You don’t want a cookie-cutter answer but rather one that does in fact “depend” on your individual facts and on your personal financial goals.

Let’s assume that after looking at all the other aspects of your financial life, the choice between the two Chapters comes down to how that choice impacts on your house. And let’s also assume that this is a house in distress, where a foreclosure is already scheduled or is just around the corner.

In one sentence, the key difference between Chapter 7 and Chapter 13 is that the first one generally buys you a relatively short time while the second one buys you a much longer time.

So that leaves as the main question whether—in your unique situation—a Chapter 7 would buy you enough time, or if you instead need the much stronger medicine of Chapter 13.

Chapter 13 deservedly has the reputation of being the home-saving chapter of bankruptcy. But every day of the week Chapter 7 bankruptcies are filed which save people’s homes. If you have a sale pending on your house but you’ve run out of time with a scheduled foreclosure; if you have some money coming to cure the arrearage but again have run out of time; if you are very close to getting a mortgage modification approved or are more likely get it approved after discharging you debts in bankruptcy; or if you’ve decided to surrender the house but need a little more time to get into another home—these are possible circumstances where Chapter 7 could well buy you enough time to do what you need to do for your home.

Admittedly, these are relatively rare situations. The much more common one is that you had lost some income or had emergency expenses, making it impossible to keep up the home mortgage payments. And then you regained that income, but maybe not all of it, and now you owe a whole lot in missed payments, late charges and other fees. No way can you catch up all that in just a few months. Chapter 13 can give you as much as five years to do so. Chapter 13 can also buy you much more time to sell your home, such as to get to a better selling season, or even maybe to allow a kid to finish high school. Chapter 13 can also be much better at dealing with other house-related debts, such as property taxes, second mortgages, and income tax liens. As I said, these choices depend on your unique set of circumstances.

You can build a nice gingerbread house out of cookie-cutters. But when it comes to your home, and you and your family’s well being, get the advice of an experienced attorney. Nothing gives me more satisfaction than helping save a family home. Let me help you make the very best choices about yours.

More Reasons to Get Legal Advice Before Deciding to Sell Your Home

Bankruptcy gives you a wide range of tools that can help you keep your home or sell it on your own schedule. Many of these tools provide surprising advantages for you. Especially when it comes to your home, know your options before you make decisions.

This is the last of a series of three blogs covering ten reasons why you should get advice from a bankruptcy attorney before selling your home. Here are the final four of those reasons.

1.  Want to Pay off Ex-Spouse: After going through a divorce, you are often required to sell the marital home to pay off your ex-spouse. In most circumstances, debts that you owe from a divorce are not written off by a bankruptcy. But sometimes they are. And even with debts that are not written off, bankruptcy can affect the timing of payment or favor you in other ways. Divorce is often such a traumatic process. Even if during the divorce you received advice about how a possible future bankruptcy filing would affect the terms of your divorce, understandably you may not remember that advice. And frankly, many divorce attorneys do not understand bankruptcy enough to give thorough advice about it. You do not want to base decisions about your home without advice about your options, or, often worse, with incomplete advice. So now, before you sell your home to pay off your ex-spouse, get that advice, from a competent bankruptcy attorney.

2.  Need to Pay off Property Taxes, Homeowners’ Association Dues: Creditors with the strongest rights against you and your home include your county or similar governmental entity which collects your property taxes, and your homeowners’ association. So you may feel powerless in dealing with them if you fall behind on paying them, especially if they are threatening to foreclose on your home. Bankruptcy can give you a leg up on fighting them, and so find out about this before you are pushed into selling your home to pay them off.

3.  Selling to Avoid a Foreclosure: You’ve likely heard that the filing of a bankruptcy stops a foreclosure. And you probably know that Chapter 7 and Chapter 13 each deal with foreclosures differently. The truth is that every homeowner who is facing a foreclosure has a unique set of circumstances, and requires and deserves an individual analysis. Bankruptcy gives you many different combinations for addressing the issues you’re facing. Only by being informed about and thoroughly understanding those options can you make the right choices about whether and when to sell your home, and how all these fit into your whole financial picture.

4.  Can’t Afford an Attorney: If you’re selling your home because you believe it’s the best way to deal with your debts, and you can’t afford to pay an attorney to get legal advice about that decision, consider the following. A decision about your home is likely about your biggest asset and your biggest debts. I assume you agree that if you could get solid, practical advice about that, you would do so. Since I do not charge for my initial consultation, I can give you that advice. Let me help you create the best possible game plan for dealing with your home.

10 Big Reasons to Get Legal Advice about Bankruptcy Before Selling Your Home

The SINGLE overarching reason to get advice from a bankruptcy attorney before selling your home is to save money, possibly a great deal of money.  I’ll tell you ten ways to do so—three today and then the rest in my next couple blogs.

1.  Avoiding judgment liens:  If some creditor has sued you in the past, that creditor likely has a judgment against you. You might not even realize or remember if this has happened to you. Or, a creditor may sue you in the near future, and get a judgment against you before the sale of your home closes. If a judgment has been entered against you, this usually means the creditor has a lien against your home. That lien amount is almost always substantially larger than the amount you owed the creditor. Most of the time, that judgment lien has to be paid in full before the house can sell. If the judgment is paid out of the proceeds of the house sale, this reduces the amount you receive. Or the lien could reduce the money you thought would go to more important debts, such as taxes, child support, or an ex-spouse. If there aren’t enough sale proceeds to cover the judgment, you will either have to pay the full judgment amount out of your pocket, or at least some discounted amount to get the creditor to release the lien. If you don’t pay it in full, you would likely continue owing the balance. And if the creditor won’t settle, you may not be able to go through with the sale. In contrast, either a Chapter 7 or 13 case often can get rid of that judgment lien and write off the underlying debt, allowing you to sell the home without paying anything on that debt.

2.  Stripping second and other junior mortgages:  Chapter 13 often allows you to “strip” your second (or third) mortgage from the title of your home. The law changes that debt from a secured debt to an unsecured one. It can do this when your home is worth no more than the first mortgage (plus any property taxes or other “senior” liens) by acknowledging that all of the home’s value is exhausted by liens that legally come ahead of that junior mortgage. As a result, these junior mortgage balances are thrown into the same pot as the rest of your other regular unsecured debts—all your other debts that have no collateral attached to them. When this happens, depending on your situation, you often don’t pay anything more into your Chapter 13 Plan. And even if you do have to pay something more because of that stripped “junior” mortgage, almost always you only have to pay pennies on the dollar. And you end up with your home completely free and clear of that mortgage.

3.  Buying time for a better offer:  A home sold in a hurry is seldom going to get you the best price. A basic rule of home sales is that the maximum price is gotten through maximum exposure. If you feel under serious time pressure to sell because of creditor problems, the extra time provided by filing either a Chapter 7 or 13 case could get you just the additional market exposure you need. No question–filing a bankruptcy can in some respects complicate the sale of your house, and there many situations when a bankruptcy filing will not likely help you reach your goals. But in the right situations the advantage of getting more time on the market far outweighs any potential disadvantage.

In my next blog I’ll give you more ways that bankruptcy can give you huge advantages involving your home. If some of these apply to your situation, they can totally change whether or not you should sell your home, and if so, when you should do so.

Know This Before Deciding to Sell Your Home

If you’re a homeowner who is selling his or her home for any of the following three reasons, think again: 1) you can’t afford the house payments, 2) you owe income taxes with a tax lien on your house, and/or 3) your mortgage modification application was rejected.

In my last blog I told you the first three of ten reasons why you should get advice from a bankruptcy attorney before selling your home. Here are the next three. All of these are about saving you money, and helping you make much better decisions about your home.

1.  Can’t Afford the House Payments:   It’s sensible to sell your home if it’s more house than you need, or you’re not able to make the payments. But you may really need to hang onto the house, and are selling it because you think you have no choice. If so, you may instead be able to keep your home either by reducing the debt attached to the house or by reducing the rest of your debt so that you can afford the house debt. I gave you some ways to reduce the debts on the house in my last blog, and will give some more in the next one. As for reducing or getting rid of the rest of your debt, even if you are resisting the idea of filing bankruptcy “just so I can afford my house,” you still owe it to yourself to know your options. We live in truly extraordinary times in terms of home values and economic uncertainty. So especially now, it’s wise to be open to creative ways of meeting your financial needs.

2.  Have Income Tax Debt:   If you owe back income taxes, these taxes may have already attached to your home’s title with the recording of a tax lien. Or that may happen in the near future. You may feel extra pressure to sell your home to pay those taxes. But Chapter 7 and 13 bankruptcy options can often help you deal with your tax debts, sometimes in ways better than you expect. Some income taxes can be legally written off altogether. Others would likely be able to be paid much less than outside bankruptcy, through huge savings in interest and penalties, and other possible advantages. The details are beyond what I can cover in this blog. But if income tax debts or tax liens are part of why you are selling your home, first find out how bankruptcy would deal with them.

3.  Your Mortgage Modification Application Was Rejected:   Mortgage modification programs—both governmental ones like HAMP as well as private ones—have been tremendously controversial and of questionable benefit to homeowners.  They are almost always terribly frustrating to go through. Without getting into all that here, there are definitely times when mortgage modification requests are rejected because the homeowner did not fully complete the application or the mortgage lender did not process it accurately. Often it is not really clear why the modification was not approved. After going through this challenging process without a reduction in your mortgage payments, understandably you may well feel like you have no choice but to sell your home. But sometimes a bankruptcy filing—either Chapter 7 or 13, depending on the circumstances—can help get a mortgage modification approved, either the first time or in a renewed application. Reducing your debts through bankruptcy provides you more resources to put into your house, generally making you a better candidate for mortgage modification.

Deciding whether to sell your home involves a whole lot of factors–personal, financial, and legal. Virtually every time I meet with new clients who are thinking about selling their home, they learn a bunch of things which puts that decision in a whole different light.  Often, my clients are pleasantly surprised by options and advantages they did not know were available. Let me help you, too, make an informed and wise choice about most important asset.

 

Stopping the Foreclosure of Your Home Temporarily and Permanently through Bankruptcy

Both Chapter 7 and Chapter 13 can help you save your home. Which one is better for YOU?

You have almost for sure heard that the filing of a bankruptcy stops a foreclosure. You may have also heard that Chapter 13—the repayment version of bankruptcy—can be a good tool for saving your home in the long run. Both of these are true, but are only the beginning of the story. This blog today tells you more about stopping a foreclosure. My next blog will get into longer term solutions.

The “automatic stay” is the part of the federal bankruptcy law which immediately blocks a foreclosure from happening. The very act of filing your bankruptcy case “operates as a stay,” as a court order stopping “any act to… enforce [any lien] against any property of the debtor…  .”

But what if your bankruptcy case is filed and the mortgage lender or its agent can’t be reached in time so that the foreclosure sale still occurs? Or if there’s some miscommunication between the lender and its agent or attorney, with the same result? Or if the lender just goes ahead and forecloses anyway? Continue reading

Washington Foreclosure Fairness Act Homeowners Mediation Program

The Washington State Legislature passed a new law this year requiring all lenders to offer borrowers mediation before foreclosure. The goal of the law, which takes effect starting July 22, 2011, is to allow more Washington State homeowners to modify the loans to avoid foreclosure.

Under the current system, many homeowners are losing their homes unnecessarily simply because they are unable to navigate the Making Home Affordable Modification Program (aka “HAMP”). Many of these homeowners would be able to stay in their homes with a little help. At Seattle Debt Law, our attorneys have already attended training on the new law and we are prepared to assist clients through the process.

There are numerous reasons why you may need an attorney consultation even if you are following all the guidelines of the state sponsored program. The new law gives important deadlines and notices that you must comply with to take advantage of the mediation, but even if you miss those deadlines, you can still get help all the way up to the day before foreclosure. Don’t let the predatory lenders take your house—fight back and stay informed!

For more information, visit the Foreclosure Mediation Program website or read the Department of Commerce’s handout on the program.

Phantom Mortgages and Fraudulent Foreclosures

Christopher Marconi was in the shower when he heard a loud banging on his door. By the time he grabbed a towel and hustled to his front step, a U.S. marshal’s sedan was peeling out of his driveway. Nailed to Marconi’s front door was a foreclosure summons from Wells Fargo, naming him as a defendant. But the notice was for a house Marconi had never seen — on a mortgage he never had.

A long, important Associated Press story this morning about the wrongful foreclosures caused by the banks’ high-speed foreclosure procedures and inadequate record keeping practices. As the story reminds us, these procedures have included fraud as a routine practice:

Depositions from employees working for the banks or their law firms depict a foreclosure process in which it was standard practice for employees with virtually no training to masquerade as vice presidents, sometimes signing documents on behalf of as many as 15 different banks. Together, the banks and their law firms created a quick-and-dirty foreclosure machine that was designed to rush through foreclosures as fast as possible.

Former employees at banks and foreclosure law firms have testified that they also knowingly pushed through foreclosures on the wrong people.

If you receive a notice of foreclosure, contact an attorney immediately so you can take advantage of all your options!

HAMP and Chapter 13 Bankruptcy

Yet more proof that HAMP alone may not be enough to save your home from foreclosure:

Some struggling homeowners say they’re being unfairly foreclosed on despite making all their payments under trial mortgage modification programs.They equate that to mistreatment by banks who agreed to help borrowers when they took part in the government’s $700 billion Wall Street rescue.

If you’re lucky enough to have gotten through the HAMP application process and have been given a trial modification program, as this article makes clear, it doesn’t mean you’re out of the woods.

Your HAMP trial modification is based on a formula that requires you to make a payment based on your income and suggests that your mortgage debt-to-income ratio should be 31% of your gross (pre-tax) monthly income.  The trial modification will give you a reduction if you qualify for a modification. (See the calculator at http://www.makinghomeaffordable.gov/payment_reduction_estimator.html).

However, if your trial payment is less than what your current payoff of the loan would be at a 3.0% fixed interest rate over 30 years, it is unlikely you will be approved for a permanent loan modification and you could be headed for foreclosure.

Don’t take that risk!  If you have received a foreclosure notice from your bank, regardless of your process in the loan modification you should consider filing a Chapter 13 bankruptcy.  A Chapter 13 cannot change the terms of the loan you already have–it can only cure existing arrears over time and strip off wholly unsecured second mortgages. But a HAMP loan mod combined with bankruptcy may be the ticket to solve your problems. You have the security to know that the bank cannot foreclose on you because you have filed a bankruptcy, which gives you that assurance and protection, and you can still pursue the HAMP loan modification process while in BK.

Also, Seattle Debt Law, LLC has just recently agreed to assist in the HAMP loan modification process through the use of a special computer portal that cuts through the hassle of spending hours on the phone with the bank counselors, better known as the “Burger King Kids,” and you will have the piece of mind that your situation is being taken care of.

For more info on the “Burger King Kids” issue, see this October 13 New York Times article.