Blog
Law Offices of Chance M. McGhee

Call Today for a FREE Consultation

210-342-3400

Archive for the ‘Home Mortgages’ Category

Catching up on Your Mortgage on Your Terms

August 9th, 2017 at 7:00 am

If you’ve fallen behind on your mortgage, it’s very hard to catch up. It may even seem impossible. Chapter 13 makes it possible.

 

The Problem

Let’s say you can’t pay your monthly mortgage because of a job loss or some other major financial hit. The missed payments can pile up fast. The amount you’re behind gets huge fast. It usually takes quite a few months before your home would be foreclosed. That gives time for the missed monthly payments to pile up. For example, if your mortgage payment is $1,700, six missed payments put you $10,200 behind. And that doesn’t count late fees and other likely charges assessed to your account.

If you then find a new job or otherwise fix your financial situation, you’ve got a mountain of mortgage payments to catch up on.

You may qualify for a mortgage modification or refinancing, restructuring that piled up debt, not having to catch up. Or mortgage forbearance may work, in which you must catch up over a relatively short period of time, usually within a year.

But there’s a good chance you can’t qualify for a modification or refinancing. And when money is tight it may be impossible to come up with the substantial extra amount needed each  month—in addition to your current mortgage payment—for catch-up payments. Using the example above, if you had 12 months to catch up on the $10,200 arrearage that would require you to pay an extra $850 per month, on top of your regular monthly mortgage payment. Even after filing a Chapter 7 “straight bankruptcy” to get rid of all or most of your debts, you may simply not have the cash flow to catch up as required.

The Solution: Get Years to Catch Up

If you’re behind on your mortgage, filing a Chapter 13 case usually gives you up to 5 years to catch up.

In a Chapter 7 case you’re largely stuck with however much time your mortgage holder is willing to give you. In Chapter 13 you are much more in the driver’s seat. You and your bankruptcy lawyer put together a payment plan. That plan shows how and when the mortgage will be caught –up during the following 3 to 5 years. That plan works around your budget, giving you enough money for your reasonable living expenses. It takes into account other even more urgent and just as important other debts. So you don’t lose your house because you also owe other debts like income taxes or child support. You can often save both your home and your necessary vehicle(s).

For example, the above $10,200 stretched out over 5 years is about $170 per month. That’s likely much more doable than the $850 per month to catch up within one year.

Does My Mortgage Lender Have to Agree?

The length of time you have and the terms for catching up do depend on your circumstances. Generally, the more equity you have in your home (value beyond its debt) the more flexibility you will have. When there is little or no equity cushion your lender’s debt is not fully protected by the collateral. Then you’ll have to make faster progress on catching up on the mortgage arrearage.

But generally your mortgage lender must give you a number of years—to get current.

However, especially if you have little or no equity in the home and/or you have gotten far behind on the mortgage payments, the mortgage lender could likely impose conditions on the Chapter 13 catch-up payments. These conditions could limit your rights if you didn’t timely pay either the catch-up or regular monthly payment. Such future non-payments could automatically trigger the bankruptcy court’s permission for the lender to start (or re-start) foreclosure proceedings.

So, Chapter 13 gives you a relatively long time to catch up on your missed mortgage payments. But then it’s crucial to comply with the payment plan. Chapter 13 gives you a big second chance, but not necessarily a third or fourth chance.

 

Catching up on Your Home Mortgage through Chapter 13

July 6th, 2016 at 7:00 am

You have much, much more time to catch up on unpaid mortgage payments, as well as any unpaid property taxes.

 

 

Last week we wrote a blog post that listed 10 ways Chapter 13 helps you keep your home. Here’s the first of those ways it can help:

1. Gives You More Time to Catch up on Unpaid Mortgage Payments

Chapter 7 usually gives you a very limited amount of time, usually a year at the most, to catch up on your mortgage loan. In contrast Chapter 13 often gives you years to catch up. This can greatly reduce how much you have to pay each month to eventually get current. The much lower catch-up payments per month can be crucial. That’s especially true if you are many thousands of dollars behind on your mortgage(s). Having so much more time to cure the arrearage often makes the difference between losing your home and keeping it.

We recognize that this explanation might be a little dry. So today let’s see if we can bring it to life and have you can see how this Chapter 13 benefit could really help you.

An Example

Assume that your monthly mortgage payment, including the property tax “escrow” portion, is $1,200. Because of losing your job 2 years ago, you fell behind by 10 payments, or $12,000. You’ve gotten a new job but it does not pay as well as your earlier one. So cash flow is very tight.

You want to keep you home but the mortgage lender has threatened foreclosure for being so far behind. Your bankruptcy lawyer has advised you that if you filed a Chapter 7 “straight bankruptcy” case this lender would likely give you about 12 months to catch up on your missed payments. This means having to pay $1,000 per month on top of your regular $1,200 mortgage payment. Even after legally writing off your debts in a Chapter 7 bankruptcy, you could absolutely not come up with that extra $1,000. So you would not be able to satisfy your mortgage lender and would lose your home.

Chapter 13 Solution

A Chapter 13 “adjustment of debts” would likely solve this dilemma. You’d have as much as 5 years to catch up on the $12,000 back payments. This would bring that impossible extra $1,000 per month down to a much more manageable $200 or so per month.

Why is it that you have that much more time in a Chapter 13 case? It’s because your mortgage lender is stopped from starting or continuing a foreclosure throughout the case’s 3 to 5 year lifetime. A lender can ask the bankruptcy court for an exception to this protection. But if your payment plan is feasible based on the information you present through the help of your lawyer, and if you make the payments required by your plan to catch up on the mortgage, then the court will likely continue the protection of your home.

A Property Tax Twist

Let’s now also assume $200 of that monthly $1,200 payment was for property taxes. So your 10 unpaid payments result in you being $2,000 behind on property taxes.

With most mortgage contracts falling behind on property taxes is a separate breach of the contract. It gives your mortgage lender an independent reason to foreclose (beyond being behind on your mortgage payments).

There’s a sensible reason for that. Eventually the county or other property tax creditor could itself foreclose on your home. The county or property tax creditor is usually legally ahead of your mortgage holder on the home’s title. So at least in theory your mortgage lender could be foreclosed off the property as well. This could leave the lender with absolutely nothing, something it absolutely won’t let happen.

That’s one of the reasons mortgage lenders are so aggressive in insisting that you catch up on the missed mortgage payments—including the property tax portion—so quickly.

Chapter 13 to the Rescue Again

This dilemma is solved by Chapter 13 neatly as well.

When you’re behind on property taxes, the county/property tax creditor is also stopped from foreclosing the home. Your home is protected from that creditor the same as from the mortgage lender. The county/property tax creditor inability to take action against the home protects the mortgage lender as well. Now the mortgage lender no longer needs to be afraid of a foreclosure by the county/property tax creditor. So the lender no longer has this separate justification for its own foreclosure.

Your Chapter 13 payment plan just needs to detail how you are feasibly going to catch up on the property taxes. Of course the plan needs to show that along with how you’re catching up on the mortgage arrearage itself.  And then you need to actually make the payments into that plan to demonstrate that you are actually going to catch up on both sets of arrearages as laid out in your plan.

Back to the Example

So let’s go back to our hypothetical example. You’re behind 10 payments of $200 in property taxes, or $2,000.  You are behind 10 payments of $1,000 in mortgage payments, or $10,000.

Your Chapter 13 plan could state that you would be paying $50 per month towards the $2,000 property tax arrearage. And you would be paying $170 per month towards the $10,000 mortgage arrearage. Let’s assume that you and your lawyer could demonstrate that you can afford to make these payments. If everything else was in order the bankruptcy court would then presumably approve the payment plan.

You’d be well on your way to getting current on your home and saving it permanently from foreclosure.

 

Ten Ways to Keep Your Home through Chapter 13

July 1st, 2016 at 7:00 am

These 10 tools, especially used in combination, can defeat your mortgage debt and other home-based challenges.

   

A few blog posts ago we said that while Chapter 7 “straight bankruptcy” strengthens your hand with your secured debts, Chapter 13 can be much stronger. One way that Chapter 13 is stronger is in enabling you to keep things you own which have a secured creditor’s lien on them. Indeed, that’s probably the most common reason for filing a Chapter 13 case—to keep your home, vehicle, and/or other possessions at risk of repossession.

Because Chapter 13 can help you in so many ways keep assets with liens on them, we’ll focus today on just one of those assets, your home. Here are 10 ways that this tool helps you stay in your home.

1. More Time to Catch up on Unpaid Mortgage Payments

Chapter 7 usually gives you a very limited amount of time, usually a year at the most, to catch up. Chapter 13 often gives you years, which greatly reduces how much you have to pay each month to eventually get current. If you are many thousands of dollars behind on your mortgage(s) having so much more time to cure the arrearage often makes the difference between losing your home and keeping it.

2. Stripping Second or Third Mortgage

Under Chapter 7 you simply have to pay any second (and third) mortgages on your home or lose the home. Chapter 13 gives you the possibility of “stripping” a second or third mortgage lien off your home title, potentially saving you hundreds of dollars monthly, and thousands or even tens of thousands of dollars in the long run. To do so the home value must be no more than the total of the liens legally superior to, or ahead on the title to, the junior mortgage you want to “strip.” In other words, there can be no home equity being encumbered by the mortgage at issue because that equity is fully absorbed by the other earlier liens. “Stripping” a mortgage can save you many hundreds of dollars every month and many thousands of dollars during the life of your home ownership.

3. Much Greater Flexibility in Selling Home

Chapter 7 gives you at most only about three or four months while your mortgage holder can’t foreclose and your other creditors can’t take action against you or your home. In contrast, under Chapter 13 you could potentially be protected for years. You may need to move and sell your home, but not until you are ready to do so. You may need to wait until a kid finishes high school or you reach an anticipated retirement date. Chapter 13 may allow you to delay selling and curing part of your mortgage arrearage until then, so that you can live in your home in the meantime.

4. Get Current on Past Due Property Taxes

Filing a Chapter 7 case doesn’t protect you from property tax foreclosure—beyond the three, four months that the case lasts. Chapter 13 protects you and your home while you gradually catch up on those taxes, in a court-approved plan that also incorporates your mortgage(s) and all other debts.

5. Protection from Both Previously Recorded and Future Income Tax Liens

Chapter 7 usually does nothing to address tax liens that have already been recorded on the home, or to stop future tax liens on income taxes that you continue to owe after the bankruptcy case is completed. In contrast Chapter 13 provides an efficient and effective procedure for valuing, paying off, and getting the release of tax liens. And the IRS/state cannot record a tax lien on income taxes while the Chapter 13 case is active.

6. The Chapter 13 “Super-Discharge”

You can “discharge” (permanently write off) in a Chapter 13 case obligations arising out of a divorce decree dealing with the division of property and the division of debt (but NOT the provisions about child/spousal support). You cannot discharge these non-support divorce debts under Chapter 7.

So if you owe a significant amount of this kind of debt, and there isn’t already a lien on your home securing it, Chapter 13 could stop a lien from being imposed. The debt would be discharged at the end of your Chapter 13 case as a “general unsecured” debt.

7. Debts Which Cannot Be Discharged Such as Income Taxes & Back Child/Spousal Support

If you owe any of those special debts which cannot be discharged in bankruptcy, as soon as you finish a Chapter 7 case (usually only about three or four months after you start it) the creditors on those debts can start collecting on them from you. Those particular creditors—such as the IRS, the state taxing authority, the state or local support enforcement agencies, and your ex-spouse—often have extraordinary collection powers. They can put a tax lien or support lien on your home, and under some circumstances can even seize and sell your home to pay those liens.

In great contrast, a Chapter 13 case protects you while you pay off those special debts in a payment plan that you propose and is reviewed and approved by the bankruptcy judge assigned to your case. During the 3-to-5-year plan, all of your creditors—including the ones just mentioned above—are prevented from putting liens on your home. By the completion of your Chapter 13 case those special debts are paid in full or paid current, so that they can’t threaten you or your home any more.

8. “Statutory Liens”: Utility, Contractors, Municipal/Local and Other Involuntary Liens

If you had an involuntary liens imposed by law against your home before you file bankruptcy, those liens would very likely survive a Chapter 7 bankruptcy.

These are called “statutory liens” because they are set up through state statutes, or laws. Examples include a utility lien is for an unpaid utility bill, a contractor’s lien (sometimes called a “mechanic’s” or “materialman’s” lien) is for an unpaid, and usually disputed, home remodeling or repair debt, and local government liens for unpaid fees against your property.

These liens against your home generally survive a Chapter 7 case, and so these creditors would be able either to threaten foreclosure of your home to force payment, or at least would force payment whenever you’d sell or refinance your home. Under Chapter 13, in contrast, the protection for your home would generally continue throughout the three-to-five year case, keeping it safe while you satisfy the lien.

9. Judgment Lien “Avoidance”

A judgment lien is one that is placed on your home after someone (usually a creditor) sues you, gets a judgment against you, and records that judgment in the county where your home is located (or uses whatever the appropriate procedure is in your state).

In bankruptcy a judgment lien can be removed from your home under certain circumstances. Although judgment lien avoidances are available under Chapter 7 as well as Chapter 13, it can often be put to better use in Chapter 13 when used in combination with advantages available only under Chapter 13.

10.  Protect Equity in Your Home NOT Covered by the Homestead Exemption

If you have too much equity in your home—value beyond the homestead exemption’s protection—in a Chapter 7 case you run the risk of a Chapter 7 trustee seizing it to sell and pay the unprotected portion of the proceeds to your creditors. Under Chapter 13, in contrast, you can keep and protect the home by paying those creditors gradually over the course of the up-to-five-year Chapter 13 case.

 

Escape Your Underwater Second Mortgage

May 20th, 2016 at 7:00 am

If your second (or third) mortgage is not backed by any equity in your home, you can “strip” that mortgage off your home’s title.

 

Our last two blog posts were about using Chapter 13 “adjustment of debts” as a practical way to catch up on late mortgage payments and property taxes. You always have to get current on property taxes and virtually always have to with your primary mortgage obligation. Chapter 13 gives you the time and protection to do this.

But if you have a second or third mortgage, you might not have to catch up at all. You may be able to “strip” that mortgage from your home. If so, you also won’t have to make the monthly payments going forward. And you would likely not have to pay any more into your 3 to 5-year Chapter 13 plan than if you didn’t have that second or third mortgage. Then at the end of the plan whatever is still owed on that mortgage would be forever written off.

IF No Equity Backing Up the Second (or Third) Mortgage

A mortgage “strip” only works if ALL of your home’s value is taken up by a lien or liens legally superior to the junior mortgage at issue. Liens legally superior usually (but not always) mean liens backing up debts which were recorded on your home earlier.

The mortgage attempting to be “stripped” can have no home value securing it at all.

Here are two examples.

First a very straightforward one: a home worth $200,000 with only two liens, a first mortgage with a balance of $205,000 and a second mortgage with a balance of $15,000. All of the home’s $200,000 of value is taken up by the $205,000 first mortgage, leaving none of that home value to secure the $15,000 second mortgage. That second mortgage could thus be “stripped” from the home in a Chapter 13 case. ($200,000 minus $205,000 = no equity.)

Second, a less straightforward example: a home worth $200,000, with an overdue property tax debt and lien of $4,000, a past due homeowners’ association fee and lien of $3,000, a first mortgage of $195,000, and a second mortgage of $15,000, with the liens legally arranged in that priority order. Without the property tax and homeowners’ association liens, not all of the home’s $200,000 of value would have been taken up by the $195,000 mortgage. So the $15,000 second mortgage would have been partially secured by the home’s value, and thus unable to be “stripped.” ($200,000 minus $195,000 = $5,000.)

But with the $4,000 owed in property taxes and $3,000 in homeowners’ association dues, and both secured by superior liens, all of the home’s $200,000 is taken up by the combined liens ($4,000 + $3,000 + $195,000 = $202,000), leaving none of that home value to secure the $15,000 second mortgage. That second mortgage could thus be “stripped” from the home in a Chapter 13 case. ($200,000 minus $202,000 = no equity.)

Effect of a Mortgage “Strip”

In a Chapter 13 case—but NOT in a Chapter 7 “straight bankruptcy” one—“stripping” the second mortgage in effect legally acknowledges that the debt owed in that second mortgage is completely unsecured. So it is treated just like your other “general unsecured” debts—medical bills, credit cards, unsecured loans, etc.

The pool of all your “general unsecured” debts in a Chapter 13 case are usually paid only to the extent that you have money left over in your budget to pay them. 

Sometimes all of the available money during the term of your court-approved payment plan is used for catching up on your first mortgage, property taxes, and other essential “priority” debts (such as recent income taxes and/or back child support), so that there is nothing available for the “general unsecured” debts, including your second mortgage balance. So you’d pay your second mortgage nothing.

But even in the more common situations in which you did have some money available for the “general unsecured” debts, you would usually not have to pay any more towards those debts because of the second mortgage. That’s because usually you are obligated to pay a set amount towards that entire pool of “general unsecured” debts—based on what you can afford to pay after paying the more important debts. Almost always that set amount that you can afford to pay over the life of your payment plan only pays a portion—and often only a small portion—of the debts in that pool. The existence of the second mortgage debt just shifts around the same amount of money paid into the pool of “general unsecured” debts among those debts.

For example, assume you have a $15,000 second mortgage debt and $25,000 in other “general unsecured” debts, so a total of $40,000 of all your “general unsecured” debts. Your Chapter 13 plan has you paying a total of $5,000 towards this pool of “general unsecured” debts, each of which gets paid pro rata.

If you didn’t have the second mortgage debt, that $5,000 would be divided among the $25,000 of debts, with each receiving 20% of its debt. After “stripping” the second mortgage and turning it also into a “general unsecured” debt, now the $5,000 being paid into that pool would be divided among the $40,000 of debts, now with each receiving 12.5% of its debt.

Again, the $5,000 paid to that pool didn’t change. Most of the time how much you pay to the “general unsecured” debts doesn’t change with an increase in the amount in the pool.

Conclusion

So for practical purposes, “stripping” your second mortgage means you can immediately stop making payments on it, you don’t have to catch up on any missed payments, and you don’t effectively pay any more on it going forward.

Then at the end of your successful Chapter 13 case whatever balance you owe at the end is legally “discharged”—written off forever, and the lien taken off your home’s title.

If you have a second or third mortgage with no equity supporting it, that may be reason enough to choose Chapter 13. Because again this “stripping” cannot be done in a Chapter 7 case. 

 

A Fresh Start by “Stripping” Your Second Mortgage

January 25th, 2016 at 8:00 am

Stripping your second mortgage could give your home the very best fresh start by saving you a tremendous amount of money.

 

If You Can’t Afford the Monthly Payments on Your Home

Last week we compared three ways to save a home in which you’re behind on your mortgage payments: mortgage modification, a forbearance agreement, and Chapter 13.

Mortgage modification is the only one of these three which lowers the monthly payment on your first mortgage. A forbearance agreement just gives you a number of months to catch up on missed mortgage payments, during the same time that you are also required to make the usual monthly mortgage payments. Chapter 13 is similar except giving you much longer to catch up, up to 5 years. Stretching out the catch-up time greatly reduces the amount you have to pay per month compared to a forbearance agreement.

The problem is that mortgage modification is difficult to qualify for. Whether using a governmental program or one provided directly by your mortgage lender, there is a quite narrow window that your income must fit into in order to qualify. So what do you do if you don’t qualify for mortgage modification but still can’t afford what you have to pay each month towards your home?

Chapter 13 “Strip” Can Make a Dramatic Difference

One possibility If you have a second or third mortgage is to “strip” that mortgage off your home’s title through a Chapter 13 “adjustment of debts.” If you qualify you could immediately stop paying that mortgage’s monthly payments. So even though you’d have to pay your full first mortgage payment, not having to pay your second (or third) mortgage payment may make it affordable to keep your home.

Mortgage “Strip” May Make Chapter 13 by Far the Best Option

Such a mortgage “strip” could even be much better than a mortgage modification, both short-term and long-term.

A mortgage “strip” could be better short-term by making it cost less to keep your home. Not having to pay the second mortgage monthly payment could reduce what you have to pay more than a first mortgage modification would save you each month.

Consider this example. If the monthly payment on a first mortgage would be $1,250 and on a second mortgage $375, or a total of $1,625, “stripping” that second mortgage would result in the homeowner paying only the first mortgage payment each month, or $1,250. Even if a first mortgage modification would have brought the payment down significantly, say to $1,050 per month, that plus the regular second mortgage payment of $375 would still leave the homeowner paying $1,425 per month. That’s more than the $1,250 per month with the second mortgage “strip.”

A second mortgage “strip” can also be better long-term because it very likely reduces the total you’d pay on your home compared to a mortgage modification. That’s because mortgage modification seldom includes a reduction in the principal to be paid on the debt. Instead the reduced monthly payment often comes with a steep long-term price tag—much more interest has to be paid because the payments on the same principle is usually stretched out over a longer period of time.

In contrast the second mortgage “strip” effectively reduces the principal owed on that mortgage to nothing or very little, lowering the amount owed on the home by that amount. That’s especially saves money in the long-run because second mortgages tend to have higher interest rates than first mortgages.

Consider the example of a home with a first mortgage of $200,000 at a 5% interest rate and a second of $35,000 at a 9% interest rate. Depending on how long the homeowner stays in the home paying the mortgages, the amount of interest paid often greatly exceeds the amount of principal paid. By not having to ever pay all or much of that $35,000 higher-rate second mortgage, the homeowner can hugely reduce the amount of combined interest and principle paid in subsequent years.

Qualifying for a Mortgage “Strip”

To strip a second mortgage from your home’s title, the value of the home must be less than the combined amount owed on the first mortgage plus any other liens—such as for property taxes—that are legally ahead of that second mortgage. In other words, there can’t be any equity in the home that secures the second mortgage. All the equity must be eaten up by the amount of the second mortgage, unpaid property taxes, homeowner’s association arrearage and such.

To strip a third mortgage from your home’s title, the value of the home must be less than the combined amount owed on the first and second mortgages plus any other liens—such as for property taxes—that are ahead of that third mortgage.

Chapter 13 Only, and Only Successful Ones

There is no ability to “strip” a mortgage in a Chapter 7 “straight bankruptcy.” You have to file a Chapter 13 “adjustment of debts,” which usually takes 3 to 5 years to finish.

And you have to successfully get to the end of your Chapter 13 case by making your court-approved plan payments and meeting other requirements. After you’ve done so, your second (or third) mortgage lien is stripped off your title. Whatever portion of that mortgage that has not been paid through the Chapter 13 payment plan is then discharged—legally written off. Your home no longer has that mortgage on its title or has any of that debt against its equity.

 

A Fresh Start with a Mortgage Modification

January 18th, 2016 at 2:00 am

Mortgage modification may reduce your monthly payments but not likely reduce your balance owed. So it costs less short-term, not long-term.

Quick Definition

A mortgage modification is a permanent restructuring of one or more of the terms of the mortgage intended to make it more affordable on a monthly basis.

Compared to Forbearance Agreement

A mortgage modification is intended to deal with the permanent unaffordability of the mortgage payment, while a forbearance agreement deals with a short-term unaffordability.

With a forbearance agreement the monthly mortgage payments don’t change. The lender simply gives you a limited time to catch up on missed mortgage payments, while you must make your full regular mortgage payment as well. If you simply don’t have the cash flow to do that—even after writing off most or all of your other debts in a Chapter 7 “straight bankruptcy”—than you should look closely at mortgage modification.

Compared to Chapter 13

In a Chapter 13 payment plan you are specifically NOT allowed to modify the terms of a first mortgage, but are given much more time than in a forbearance agreement to catch up any missed payments. In this respect it’s better than a forbearance agreement, but perhaps not as good as a mortgage modification that reduces the monthly payment amount.

However, if there’s a second mortgage, and if the home is worth no more than the balance of the first mortgage, Chapter 13 may be able to altogether do away with the second mortgage’s monthly payment. And you may only need to pay a small part of that second mortgage debt, or even none of it, before the remaining balance is discharged (written off). That could potentially save you tens of thousands of dollars. If so, Chapter 13 could be much better on both a monthly and long-term basis.

Furthermore, there are many other possible benefits to Chapter 13 if there are other liens on the home (such as for unpaid property taxes, income taxes, or judgments). And Chapter 13 can greatly help with other special debts even if they are not liens on the home, such as income taxes, support obligations, other marital debts, and student loans. Taken all together these may make Chapter 13 the best way to go.

Caution

Keep the following in mind:

  • The qualification standards for a mortgage modification can very rigid. Whether done through a governmental program or with the lender directly, the new modified monthly payment is usually defined as a targeted percentage of your monthly gross income, usually a particular percentage between 31 and 41 percent. That new payment must be enough to pay off the loan within some extended period of time, say 40 years. Or sometimes some of the principal is deferred until the house is sold or refinanced. But if the numbers don’t pencil out, the modification is not approved.
  • Going through a mortgage modification can be arduous. Generally, to be eligible for a loan modification, you must:
    • provide a great deal of required documentation to the lender for evaluation, including:
      • a financial statement
      • proof of income
      • most recent tax returns
      • bank statements
      • a hardship letter
      • show that you cannot make your current mortgage payment due to a financial hardship
      • complete a trial period to demonstrate you can afford the new monthly amount
  • Don’t expect a write-down of the mortgage debt. Mortgage lenders have fought tooth and nail to resist “principal reduction.” Why not forgive some of the debt to make the debt more affordable? First, as simplistic as this sounds, lenders want to avoid opening the door to reducing their balances. They simply hate to voluntarily let go of money legally owed to them. Second, lenders may believe that they are contractually bound to those who invested in the mortgage-backed securities to not write down the debts.  

Conclusion

Mortgage modification is not easy to pull off because you must fit within a narrow window of having enough income but not too much. And even if you and your home do qualify, jumping through all the hoops takes great persistence and attention to detail. Furthermore, a successful modification on the short term can still mean paying more for your home in the long run.

So find out as quickly as possible if you can realistically qualify, and be assertive in providing the required paperwork and following through. Most importantly, get advice about the various ways that Chapter 13 could help and potentially be better than a modification. Or you may find out that a mortgage modification may only work when done TOGETHER with a Chapter 13 case to reduce your other debts.   

 

A Fresh Start on Your Home If You’re Behind on Your Mortgage

January 15th, 2016 at 2:00 am

If you are behind on your home mortgage & want to keep your home, do a mortgage modification, a forbearance agreement, or a Chapter 13 plan.

 

The Three Options

Here’s a summary of 3 ways to get a fresh start on your mortgage:

  • A mortgage modification is a permanent restructuring of one or more of the terms of the mortgage to make it more affordable. This usually involves a reduced interest rate, the conversion of a variable interest rate to a fixed one, an extended payback period (often to 40 years), or a deferral of paying part of the principal. An actual write-off of any of the principal is very rare. A number of governmental and in-house lender programs may be available.  The process can be complicated and eligibility requirements are quite rigid. The reason is that they are intended for homeowners who neither make too much nor too little—who definitely need the help but also stand a decent chance of successfully meeting the terms of the modification.
  • With a forbearance agreement the terms of the mortgage don’t change but the lender agrees not to foreclose as long as you catch up the mortgage through a schedule of extra payments. Payment of the arrearage—the amount you are behind—is spread out over a certain number of months. The number of months you are given to catch up varies with each lender and with your circumstances, and tends to range from 3 to 12 months.  
  • A Chapter 13 payment plan also doesn’t change the terms of your first mortgage but gives you much more time to catch up—usually as much as 3 to 5 years. You also are given some flexibility about paying certain other important creditors ahead of or along with the mortgage arrearage. You may be able to “strip” a second (or third) mortgage from your home’s title so that you don’t have to pay any or most of that mortgage. That can get you closer to building equity in your home. You also have certain advantages in dealing with other liens on your home, such as those from property and income taxes, child or spousal support, a home repair contractor, or a homeowner’s association.  

When to Use Each Option

  • A mortgage modification is appropriate if you currently can’t afford your mortgage payment and don’t expect to be able to in the near future. Your income and other circumstances must show that you can’t afford the current mortgage but could afford the modified one, based on criteria that may or may not be realist in your circumstances.  
  • A forbearance agreement is appropriate if you’ve missed some of your mortgage payments, and can now afford to make both the regular monthly payment and a temporary catch up one to bring the debt current quite quickly. This is often used in conjunction with a Chapter 7 “straight bankruptcy” case, using the “discharge” (write-off) of other debts as the means to free up monthly cash flow for the catch-up payments.  
  • Chapter 13 is the appropriate option in two main circumstances. First, if you don’t qualify for a mortgage modification but also can’t catch up the mortgage arrearage fast enough to satisfy your lender, Chapter 13 can be the best fallback alternative since it gives you much more time to catch up. Second, Chapter 13 may be the best choice because of the other advantages it provides, either with other liens against the home (such as stripping a second mortgage) or with debts unrelated to the home, such as income taxes or marital obligations.

We’ll look more closely at these three ways of getting a fresh financial start on your home mortgage in our next three blog posts.

 

Chapter 7 and Chapter 13–Surrendering Your Home

October 14th, 2015 at 7:00 am

If you are leaving your mortgage(s) behind, what are the advantages and disadvantages of doing so within the two main bankruptcy options?

 

Do You Need a Bankruptcy to Surrender the Home?

If you’re thinking about surrendering your home to your mortgage holder, most likely you are struggling to pay other debts besides the mortgage. You may have other voluntary obligations that are on the title of your home, such as a home equity line of creditor or some other kind of second mortgage. Or the home’s title may be burdened by debts which had resulted in involuntary liens such as income tax or construction liens. And you probably have debts that are unrelated to your home and do not attach to the home’s title.

However, you may have no debts, or at least no unmanageable ones, other than the home mortgage. Then you likely don’t need to file bankruptcy. Under many state’s laws you would not owe anything to the mortgage holder after surrendering the home, regardless of the amount of the mortgage debt compared to the value of the home. But that may depend on seemingly obscure factors such as what procedure the mortgage lender is using to foreclose (say, judicially or non-judicially—with a lawsuit or without). So it’s critical that you check with a local attorney whether you’ll owe anything on the mortgage.

If You Have a Second Mortgage

In many situations if you owe a second (as well as a third) mortgage, you would end up owing the full balance on that second (and third) mortgage, even if you owe nothing to the first mortgage holder after its foreclosure. That’s because usually the first mortgage holder’s foreclosure also wipes the “junior” mortgage(s) off the home’s title without paying anything on the debt(s), leaving you owing the entire balance.

In rare circumstances the junior mortgage holder bids in at the foreclosure sale and buys out the rights of the first mortgage holder. Then you may have a chance that the junior mortgage debt will be satisfied out of the proceeds of the sale of the home.

But you never know. The junior mortgage holder is taking a chance, so its debt may not be paid after all, or may only be paid in part, leaving you liable for the rest. And so you may need bankruptcy relief from that debt, and from the rest of your debts.

Other Liens on the Home

Almost all debts that are secured by liens on your home will still be debts that you are legally liable to pay after surrendering the home, and will not likely get paid by the mortgage lender or a purchasing bidder at the foreclosure sale.

The main exceptions are property taxes and sometimes homeowner association dues or assessments. That’s because the liens related to these debts often come ahead of even the first mortgage holder’s lien, and tend to attach to the property no matter what. So the first mortgage holder may well have to pay those special debts, often out of the proceeds of the sale of the home. That would leave you without any personal liability on those debts and with no reason to file bankruptcy as to those debts.

As to other debts secured by liens on the home, when the foreclosure sale happens these liens will likely be wiped out but the debts related to those liens will survive. They would be unsecured but valid debts against you nonetheless. You may well need to protect yourself from such debts with a bankruptcy.

Chapter 7 “Straight Bankruptcy”

Simply put, file a Chapter 7 case when the debts related to the surrendered house, as well as your other debts, can be “discharged” (written off) in bankruptcy.

For example, if you owe a bunch of medical bills and credit cards, some of which turned into lawsuits and then judgements against you, resulting in a couple judgment liens on the home, most likely a Chapter 7 case would result in the discharge of all those debts, and the fresh start that you need.

Chapter 13 “Adjustment of Debts”

Similarly, file a Chapter 13 case when enough of the debts—those related to the house and others—cannot be discharged in a Chapter 7 case and so you need the extra protections of Chapter 13.

For example, if you are behind on child support payments and income taxes, resulting in liens on your home, after a mortgage holder’s foreclosure of the home you would still owe those debts and have to pay them. Under Chapter 13 you are protected from those often-aggressive creditors while catching up on the child support and income taxes with flexible payments that fit within your budget, and that adjust around other important debts that you have to pay—such as  your vehicle loan.

 

Making Sense of Bankruptcy: 5 More Powerful Ways Chapter 13 Saves Your Home

August 17th, 2015 at 7:00 am

Here are 5 additional tools that come with Chapter 13, each one neatly solving a different challenge to your home.

 

Here’s a summary of today’s blog post:

Adding to the 5 tools in our last blog post, today’s 5 include: 6) protecting your home equity if it’s greater than the homestead exemption, 7) giving you much more time to live in your home before selling it, 8) dealing effectively with child/spousal support liens against your home, 9) resolving an income tax lien on dischargeable income taxes, and 10) preventing foreclosure from overdue property taxes.

6. Avoid a Chapter 7 Trustee from Taking Your Home for Having Too Much Equity

If you have more equity in your home than the homestead exemption allows, you risk losing your home if you file a Chapter 7 “straight bankruptcy” case. The homestead exemption amount can differ state to state. Chapter 7 trustees have a lot of discretion about pursuing assets, and so it’s difficult to predict how aggressive yours will be about your home. If the amount of your equity is anywhere close to the homestead exemption maximum, you take a risk in filing a Chapter 7 case.

In contrast, Chapter 13 “adjustment of debts” provides a much more predictable procedure for determining the value of a home, one which relies less on the whim of a trustee. And more importantly Chapter 13 provides a mechanism to protect the value of the home if it is in excess of the homestead exemption. That mechanism often involves paying extra to your creditors over the course of your overall payment plan in return for being able to keep your home and its too-much equity. But in some cases you don’t have to pay anything extra—overall the creditors just need to get paid no less than what they would have received in a hypothetical Chapter 7 “liquidation” case.

7. Get Lots More Time to Sell Your Home

If you have decided to sell your home but are now or expect soon to be under threat of foreclosure, Chapter 13 usually gives you much more time to sell than would a Chapter 7 filing. That means you’d have more market exposure, which gives you a better chance at selling at a better price. That’s especially true if you are being forced to sell during a traditionally slower time of the year, or are trying to sell on a short sale (in which the house is worth less than the amount of the mortgage(s) against it).

If you are behind on your mortgage payments and have a foreclosure scheduled, filing a Chapter 7 case will usually only buy you an extra three months or so. It may even get you less time if the creditor decides it wants to put pressure on you. Instead, in a Chapter 13 case you can usually stay in the home by making your regular monthly mortgage payments plus some progress towards paying the arrearage as you wait to sell your home. Or if there is enough equity in the property you likely wouldn’t have to pay any of the arrearage until the house sold and the entire balance owed to the mortgage lender would be paid from the proceeds of the sale.

8. Deal Effectively with a Child/Spousal Support Lien against Your Home

Filing a Chapter 7 case does nothing to stop collection efforts against you if you are behind on your child or spousal support obligations. This could be a problem for your home in two ways, both of which are solved by instead filing a Chapter 13 case.

First, support obligations usually turn into liens against the real estate you own, including your home. This gives your ex-spouse the ability to force the sale of your home to pay the support arrearage.

So assuming that a lien for unpaid support was already attached to your home before your bankruptcy is filed, Chapter 13 would stop the execution of that lien as long as you comply with your court-approved payment plan. Your plan must show how you are going to pay that support arrearage before your case is completed, and you must stay current on those payment obligations (plus any ongoing support payments). But as long as you do all this, the support lien cannot be executed against your home. Instead after the underlying support debt is paid off through your Chapter 13 payment plan, the lien would be released, with no further risk to your home.

Second, if no support lien has been placed yet on your home, Chapter 13 would prevent that from happening. Instead you’d have the opportunity to pay off the support arrearage while under bankruptcy protection, avoiding the need for a lien to be placed on your home.

9. Deal with a Recorded Tax Lien on a Dischargeable Income Tax

You may owe an income tax for which a tax lien has been recorded against your home. If the underlying tax is old enough and meets other conditions to be discharged (legally written off in bankruptcy), then dealing with the lien is likely much better under Chapter 13 than 7. Depending on the amount of equity you have in your home, under Chapter 7 the IRS or other tax authorities may well not release the tax lien even after the underlying tax debt is discharged. You may need to pay the tax anyway, or a substantial amount of it, to get the lien released.

In a Chapter 13 case, in contrast, there is an efficient court procedure for determining the value of that lien, and for paying it. As a result, at the completion of your case the tax debt is discharged and its lien is released.

10. Past Due Property Taxes Also Handled Well under Chapter 13.

If you are paying your home’s property taxes as part of your mortgage payment, and you’ve fallen well behind on those mortgage payments, your lender may have paid some of your past due property taxes with its own money. It does that to avoid a property tax foreclosure by the county or other tax authority, through which it would lose its own rights to your home (as would you).

If the lender did pay the past-due taxes, it would have added the amount of taxes paid to the total amount that you are behind to it. Your contract with your lender almost certainly allows it to do that. Then you would have the length of your Chapter 13 plan to pay your lender that tax amount, in the same way that you would catch up on the back mortgage payments.

If your mortgage lender hasn’t yet paid an overdue property tax, you would pay that tax directly to the county or other tax authority over time in your Chapter 13 payment plan. Your home would be protected from tax foreclosure in the meantime. So your lender would not be able to use the overdue property tax as justification to do its own foreclosure, as long as you make consistent progress on catching up, as well as keep current on new property taxes as they come due during your case (as well as kept up on the mortgage itself).

In the same way, if you pay your property taxes paid directly to the county or other tax authority (not through your mortgage lender), and you’ve fallen behind, your Chapter 13 plan would include payments to that tax authority until you were caught up.

 

Call today for a FREE Consultation

210-342-3400

Facebook Blog
Back to Top Back to Top