Archive for the ‘Mortgages’ Category

When a person files for bankruptcy they usually ask what happens to their secured debt and the property it secures. Secured debt is any debt what is “secured” by collateral, like a mortgage on a home or a car loan.

First, it is important to understand that bankruptcy will discharge your obligation to repay your unsecured debt (credit cards, personal loans, medical bills, etc.). However, you have options when it comes to your secured debt. Through bankruptcy you have the option to keep the collateral that secures loans such as mortgages or car loans, or return the property to the lender and walk away from the debt. The rules are complicated and what ever you chose when you file bankruptcy can affect your future long after you have received your discharge.

This article is a summary of options that a debtor has when choosing how to deal with secured debt; it is the first in a series of articles where I will discuss in detail a debtor’s options for handing their secured debts.

The Notice of Intention

When filing bankruptcy, a debtor is required to file a document known as a “Notice of Intention.” In this notice, the debtor tells the court how they intend to treat their property that is encumbered by a secured loan.

In Massachusetts, a debtor typically has four options in handling their secured property. They can surrender the property, redeem the property or reaffirm the loan; or in the case of their mortgage, they can retain the property and continue to make monthly payments, something known as “ride through”.

Surrender

“Surrender” is exactly what it sounds like. When a person filed bankruptcy, if they cannot afford, or they do not want the collateral that secures a loan, they may surrender the property and allow the lender to repossess, or foreclose. In this case the debtor can walk away from the loan and the debt is discharged through the bankruptcy.

Redemption

You redeem property by paying the lender either the replacement value of the property, or the amount owed on the debt, whichever it is less. In order to redeem property, the debt must: have been incurred primarily for personal, family, or household use; be tangible property, (property that can be touched, such as furniture, appliances, and cars) and the property must either be exempt, or abandoned by the trustee.

Reaffirming the Debt

A reaffirmation agreement is a new contract signed between a debtor and a lender that reaffirms the debt and personal liability for the obligation. Reaffirmation agreements are permanent, meaning that the debtor is agreeing to be forever bound by the terms of the original secured debt, even if the debtor can no longer afford the debt.

In order to reaffirm a debt, the court must review and approve the agreement. If the agreement would result in an undue hardship to the debtor, then the agreement will not be approved.

If the secured debt is a mortgage, or a car loan, we typically do not recommend that a debtor signs a reaffirmation agreement unless the lender is willing to modify the terms of the original loan that are more beneficial to the debtor. Every situation is different, and an experienced bankruptcy attorney will inform you if it is in your interest to reaffirm these types of loans.

Retain and Pay/Ride Trough

If a debtor owns real estate that has a mortgage, they can choose to retain the property and continue to make payments on the mortgage. This option is known as a “ride through.” Ride through is not available for all secured debts, especially those involving debts that secure personal property. This option allows a debtor to walk away from the property in the future, should the debtor no longer be able to afford the property.

Conclusion

Debtors have options when it comes to keeping property that is secures a loan. The laws involve redemption and reaffirmation are extremely complicated and vary from state to state, so it is important that you consult with a reputable bankruptcy attorney.

I had something interesting happen today. I have a client who is in a Chapter 13 Bankruptcy and had told me that he was only behind on his mortgage payments by 3 months. This was not a big problem. However, when the mortgage company filed a proof of claim (a document that a creditor files with the Bankruptcy Court to inform the court how much is owed on a debt) the mortgage company claimed that my client was 15 months behind on their mortgage payments.

After talking to my client, he disclosed that he fell behind on his mortgage payments he contacted his mortgage company when he fell behind 3 payments and asked for a loan modification. His lender told him not to make any payments, because they would not accept them. This went on for 12 months. So, in our clients mind, he was only 3 months behind on his mortgage payments, although he did not make a payment for 15 months….ouch. So, now it looks like the amount of the arrears is so large that it cannot be repaid through a Chapter 13 Bankruptcy plan. This means that I may not be able to save his house.

So, this leads me to my point. If you are having problems with your mortgage, don’t delay; talk to a bankruptcy attorney as soon as possible. Keep making your mortgage payments, even if you are behind. If your lender returns the payment, deposit it into a savings account…do not spend it. Then, pick up the telephone and call a bankruptcy lawyer. A good lawyer will tell you if you are a good candidate for bankruptcy or if there are other options available to you.

Next, do not think that your mortgage lender will look out for your best interest. Remember, your mortgage company is in business for one purpose; to make money for its shareholders. No matter how bad your situation, (family death, illness, etc.) your creditors are only concerned about making money. Maybe the government will come through and bail you out; but don’t count on it. Ultimately, you are the only person who has to power to control your future. Don’t be afraid to use all the tools you have available.

If you have applied for a loan modification with your Mortgage Company or servicer, you are not alone. In fact, there are published reports of mortgage lenders and servicers receiving hundreds of thousands of requests for loan modification. However, there are few published success stories about homeowners who have actually been granted a loan modification. It is estimated that since early March, a mere 55,000 trial loan modifications have been granted by mortgage lenders following the launch of President Obama’s foreclosure prevention program. This success rate is low considering the number of homeowners who are currently facing default, foreclosure, or even eviction from their home. Due to the high volume of loan modification requests, loan servicers are currently overwhelmed by the influx of applications. President Obama’s administration launched a foreclosure prevention program and guidelines on March 4, 2009, however, it has taken mortgage companies and servicers months to overhaul their internal systems and train their staffs on processing applications. This period where lenders are ramping up for loan modifications has caused delays and frustration for many homeowners who are looking for a lifeline from their mortgage company.

The “Investors First/Customers Last” Approach

Another barrier to loan modification is the pressure placed on mortgage servicers by their investors. In many instances, hundreds of mortgages are “pooled” or packaged together as a securities and sold to a group on investors. Sometimes there are hundreds of investors in these “pooled” securities. Not only is it difficult to get all the investor’s consent for a loan modification; but, there is no incentive for these investors to grant consent to modify any mortgages that are part of their pool. These investors are not required to, and there is nothing to compel them to consent to any loan modification. Many servicing agreements between investors and mortgage servicers restrict and prohibit the mortgage loan servicers from modifying the material parts of any loan, such as the interest rate, repayment terms, or monthly payments. This results in you, the homeowner, waiting months and months for approval your loan modification that is probably never going to come.

Bankruptcy Court Intervention: A Guaranteed Solution

So, what is a homeowner to do? A Chapter 13 Bankruptcy can help homeowners prevent the foreclosure of their home, and provide a plan for the repayment of all past due mortgage and escrow payments. A Chapter 13 Bankruptcy cannot modify the terms of your first mortgage, and, in many instances, the success of a Chapter 13 case depends on the willingness of the mortgage lender to modify a mortgage and reduce monthly payments. In limited cases, a Chapter 13 bankruptcy can avoid and eventually discharge a second mortgage. This action can be taken immediately in a Chapter 13 case, which can reduce your total monthly mortgage payment by the amount of your second mortgage. This relief applies in limited circumstances and it is important that you consult with an experienced Massachusetts bankruptcy attorney at Grantham Cencarik, P.C. to determine whether you qualify.

The First Step: Call Us – (617)497-7140

In the mean time; if you receive a letter from your lender concerning foreclosure; call us immediately; because the longer you wait, the more likely you are to lose your home. Also avoid talking to anyone who claims that they can save your home without filing bankruptcy, chances are, it is one of the many predators out there who try to steal the equity in your home, or who take money from you. If you are approached by one of these people, tell them you want to have your lawyer review their offer first, then call us for a free consultation.