October 5, 2009

Arizona Short Sale - If bankruptcy is in your future, be careful

Selling your home “short”… What does this mean and why would you want to consider it?

When homeowners sell a home “short”, they are asking the lender to agree to the sale even though they will not be paid the total amount of the mortgage.

The common Scenario:

Home purchased in 2006 for $480,000.00. The first mortgage amount is $370,000 and a second for $85,000.00. The house is now worth $320,000.00. A buyer exists who wants to purchase the home for about $320,000.00. If the lenders that hold the first and second mortgages agree to the sale, they will be paid less than they are owed.

In theory, this sounds great for the homeowner. He or she can avoid the foreclosure stigma and all its hassles and move on with life more quickly.

The question is then, why would the seller who is considering a bankruptcy, want to be careful about doing it?

1. From a debt liability standpoint, it may be unnecessary.

In the scenario above, both the first and second mortgage holders will lose money. Normally, they could sue the homeowner for the deficiency balance either after a foreclosure sale or after a short sale anyway.

However, Arizona state law prohibits the collection of the deficiency balance on a residence in most instances, especially where the loans are “purchase money” and a foreclosure would be “non judicial”. Further, the lenders may agree in writing, not to sue on the deficiency.
If they don’t waive that right, or if it is otherwise collectible, then bankruptcy may be the best way to deal with it. Especially, if bankruptcy was going to be used anyway, to deal with all issues at once.

So, if the sole purpose of the short sale is to avoid a deficiency based collection action, be careful.

2. It may damage credit.

If you don’t pay or breach the contract, the lender will report it to the credit bureaus. Some say that the effect on the report is as bad as or worse than foreclosure or bankruptcy.

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Posted by Michael S. Anderson | | Email This Post

Posted In: Chapter 7 Bankruptcy , Mortgages and Bankruptcy

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February 6, 2009

Will Arizonans Be Able to "Cram" Down a First Mortgage in Chapter 13 Bankruptcy?

Congress continues to ponder a change to the bankruptcy code that would allow bankruptcy Judges to treat mortgages the way that car loans (older than 2.5 years) are currently treated in a chapter 13 bankruptcy.

If you have read some other entries on this blog, you understand that in Chapter 13, a plan is proposed that allows you to make a payment toward your unsecured debt that you theoretically can afford on a monthly basis.

The remainder of the debt is then discharged or wiped away. Many chapter 13 filers end up paying a small fraction of the overall unsecured debt as a result.

In that same chapter 13 proposal, 2.5. year old automobile secured claims are "stripped down" or "bifurcated" into two debts, one secured, one unsecured. The secured loan is crammed down to the value of the collateral, and the rest is transformed into an unsecured debt and treated as stated above.

First Mortgages are not treated this way. Second mortgages if wholly unsecured may stripped away and treated as an unsecured debt.

Now, if a home is worth $250,000.00 and the first mortgage amount is $350,000.00, the bankruptcy filer must continue to service the full $350,000.00 mortgage in installments just as they were prior to the bankruptcy in order to keep the property.

The change to the bankruptcy code that Congress is considering. would possibly treat this first mortgage somewhat like the 2.5 year old car loan.

Of course nothing is as simple as it seems.

It is likely that the change will contain roadblocks that will prevent many chapter 13 bankruptcy filers with upside down homes, to take advantage of it.

The bill may have unintended consequences as well. It could cause the cost of mortgage loans to rise for everyone else. This is an ongoing and interesting debate.

A fairly recent article about the amendment can be found here.

For Arizonans, who are upside down in their primary residence and who are also otherwise bankruptcy candidates, you can't do it now, but you may be able to in the near future. Keep an eye on the legislation.

If you are in Arizona and want to speak to me about your debt situation, please call 480 507 5985, and I will talk to you for free over the phone.

Posted by Michael S. Anderson | | Email This Post

Posted In: Chapter 13 Bankruptcy , Mortgages and Bankruptcy

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