Articles Posted in Mortgages and Bankruptcy

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The primary purpose for filing a bankruptcy is to obtain a “fresh start”. That is, to be in a position to move forward without the weight of old unsecured debt dragging down ones ability to move forward.

Often, the question is asked, How long do I have to wait to qualify for a new mortgage after filing bankruptcy? The general rule of thumb is as follows:

FOR CHAPTER 7

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When the real estate market crashed, starting in 2007, we had many homeowners stuck in a situation where their homes plummeted in value so much that there was no equity at all. Thousands of homeowners walked from their homes, allowing the properties to be foreclosed upon.

A lien strip is where the lien of a lienholder, other than the first mortgage, is stripped and ultimately changes the status of the obligation owed to the lienholder from “secured” to “unsecured”.

The legal authority for lien stripping in Chapter 13 is 11 U.S.C. § 1322(b)(2). and 11 U.S.C. § 1328(a). § 1322(b)(2) allows a wholly unsecured lien on a debtor’s principal residence to be modified. § 1328(a) allows any unpaid portion of the claim to be discharged as an unsecured debt.

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Here is more information on the historic National Mortgage Settlement with ALLY/GMAC, BANK OF AMERICA, CITI, JP MORGAN CHASE AND WELLS FARGO:

The settlement provides assistance for:

Homeowners needing loan modifications now, including first and second lien principal reduction. The servicers are required to work off up to $17 billion in principal reduction and other forms of loan modification relief nationwide.
State attorneys general anticipate the settlement’s requirement for principal reduction will show other lenders that principal reduction is one effective tool in combating foreclosure and that it will not lead to widespread defaults by borrowers who really can afford to pay.

Borrowers who are current, but underwater. Borrowers will be able to refinance at today’s historically low interest rates. Servicers will have to provide up to $3 billion in refinancing relief nationwide.

Borrowers who lost their homes to foreclosure with no requirement to prove financial harm and without having to release private claims against the servicers or the right to participate in the OCC review process. $1.5 billion will be distributed nationwide to some 750,000 borrowers.

Where can you go for help?

For loan modifications and refinance options, borrowers may be contacted directly by one of the five participating mortgage servicers.

Ally/GMAC: 800-766-4622
Bank of America: 877-488-7814 (Available M-F 7am-9pm CT and Saturdays 8am CT – 5pm CT)

Citi: 866-272-4749
JPMorgan Chase: 866-372-6901
Wells Fargo: 800-288-3212 (Available M-F 7 a.m. to 7 p.m. CST)
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According to ABC News/Money, JP Morgan has stopped 50,000 foreclosures while it reviews documents for errors.

http://abcnews.go.com/Business/wireStory?id=11759376

This decision appears to be the result of JP Morgan’s concern that many of their loan documents are “faulty”. Courts across the country have begun to take notice of faulty affidavit procedures and other document problems that call into question the legality of the foreclosure process in those cases.

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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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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.

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The following are two lists. The first is a list of the most common reasons I encounter in representing clients with debt that force them to use a chapter 13 bankruptcy instead of chapter 7 bankruptcy. The second list are the most common reasons I see people choose to file chapter 13 bankruptcy as opposed to chapter 7.

Must File Chapter 13 Bankruptcy – Most Common Reasons

1. Filed a recent bankruptcy case. (8 years for from chapter 7 to chapter 7)