Tampa Bankruptcy Lawyer Blog

Here in Florida, our foreclosure defense clients have seen two more excellent principal reduction offers in the past month - both from Ocwen. Both reductions were to the fair market value, maybe even below, and both were reduced over $100,000. Additionally, the interest rates were reduced to 4% for the remaining balance.

As I've reported in the past, Ocwen is buying the servicing rights for many mortgage loans, including Litton and Saxon, so when you open your mail and find your loan has been transferred once again, don't fret if its Ocwen, as it may be a blessing in disguise.

Both of the above cases were involved in litigation with our law firm so that may also have been a relevant fact, but we really don't know. All I can say on behalf of my clients is: Thank you Ocwen. Kudos.

Both of these modifications were obtained with minimal paperwork from us and our clients. The principal reduction modifications are permanent with no balloons or equity sharing elements.

Now these two clients are back to performing on their mortgages and extremely happy with the results. The foreclosure cases should be dismissed shortly. And Ocwen has helped its clients as well in these seriously delinquent mortgages by making them performing loans once again at a reasonable rate of interest. In the both cases, the loans are reportedly owned by a securitized trust.

If you believe that you can benefit from defending your foreclosure and seeking similar modifications such as this, please consider contacting our firm, Christie D. Arkovich, P.A.

The recent AG settlement among the states' Attorneys General and the five largest mortgage servicers is expected to be filed any day now. Hopefully then more light will be shed on what exactly the terms are and how they will help Florida homeowners.

The Wall Street Journal reported today that Bank of America also made a side deal to avoid penalties and will be doing more principal reductions. Under the terms of the settlement, the five servicers are required to make more than $10 billion in principal reductions. There is a lot more info in the article at the link above.

Creditors are busily sending out more 1099C's then ever before according to a story by Jeremy Campbell of Channel 13 in Tampa, Florida this week. The news story "How the IRS taxes debt" explains that debt settlements while good, come with a penalty. Consumers are taxed on the forgiven debt sometimes months or years after the settlement. More than 6 million consumers are expected to receive 1099C's this year, double last year.

One important point that the story did not address. Cancelled debt is not taxed in a bankruptcy. Just saying.

USF and Occupy Tampa is holding a Foreclosure Teach-In this Saturday March 10, 2012 1:30-4:30. There is no charge and you can also attend via the Internet live feed.

Senior Staff Attorney from Jacksonville Area Legal Aid April Charney will be speaking. April has been traveling around the State of Florida for the past several years educating attorneys on the nuances of foreclosure defense. I have personally attended two of her all day seminars and she is a very spirited and knowledgeable fighter of foreclosures! It was time well spent.

Do not miss this opportunity. This seminar is designed to help participants become familiar with the foreclosure process and what they can do when faced with foreclosure. If your schedule does not permit you to attend, the seminar will be archived on the site as well.

I often sit with my clients in Tampa, Florida and perform a simple test: I make two columns on a piece of paper and list the pros and cons of filing bankruptcy versus trying to settle their debt.

More often than not, the bankruptcy column has many more pros, while the debt settlement column has more cons. For instance, in a Chapter 13, the monthly payment is usually much less. In a Chapter 7, the monthly payment is zero if there is no disposable income.

Debt settlement on the other hand usually requires the client have lump sum amounts available to offer to get any kind of substantial reduction. So they have to save up. The client has to reach satisfactory agreements with each creditor, or they still have leftover debt. Finally, in debt settlements the cancelled debt is taxable by the IRS. Not so in bankruptcy.

Debt settlements can take years - usually five or more unless you have a big chunk of money available right now. A Chapter 7 bankruptcy lasts 3 months start to finish. Faster than traffic court I'm told. Even a Chapter 13 bankruptcy is only three years if your income is below the median for your state and family size. On the other hand if you have non-exempt assets (such as a second home with equity, a paid off boat) or a $100,000 annual income, bankruptcy may not be the recommended choice.

Creditors do not view debt settlement any differently than bankruptcy for the most part. They both hurt your credit score obviously. However, since a bankruptcy clears your debt, clients can recover faster for the most part.

One other big advantage of bankruptcy versus debt settlement, the endless phone calls stop. Threats of or actual lawsuits stop. Make a consultation with a bankruptcy lawyer in your area today and do your own pros and cons comparison.

The Federal Housing Finance Agency (FHFA) that recently approved of HAMP principal reduction for Freddie and Fannie loans has rejected a proposal by the National Association of Consumer Bankruptcy Attorneys (NACBA). The Principal Paydown Plan is designed to amend the bankruptcy code to allow for payments during a Chapter 13 to go towards principal to substantially reduce the balance owed on an underwater home.

According to an email update by NACBA, many members of Congress have endorsed the Principal Payback Plan. However, despite FHFA Director DeMarco's initial positive comments about the Principal Paydown Plan, which he said struck him as "being responsible," and a "credible way to address the crisis while recognizing various interests mortgaged properties," he recently wrote to Congress informing them that the agency would not be implementing the Principal Paydown Plan. FHFA concluded that few GSE borrowers have filed for chapter 13 bankruptcy and are underwater and therefore the proposal would not be all that helpful. They did, however, commit to doing what they can to help eligible borrowers in bankruptcy get the HAMP modifications they qualify for.

Personally, I see a lot of homeowners that would qualify for the Principal Paydown Plan. Moreover, until something is done about the conflict of interest of servicers, we are not going to see any widespread adoption of principal reduction for Fannie and Freddie loans.

The Home Affordable Modification Program (HAMP) is being extended and expanded to reach more borrowers- will it be enough to help or an example of "too little too late"?

On January 27, 2012, the Treasury department announced the revisions.

First, to encourage principal reduction, the Treasury is tripling incentives and paying 18 to 63 cents on the dollar depending upon the change in the loan-to-value ratio. In the past, the Federal Housing Finance Agency (FHFA) prohibited Freddie and Fannie from using HAMP to reduce principal. Treasury now allows the incentives for Freddie and Fannie if they allow servicers to forgive principal in a HAMP modification. So if your servicer previously denied your HAMP modification, check to see if your loans are owned by Freddie or Fannie because the rules may be different now. Here's how to do that.

Second, a more flexible debt-to-income ratio can be used in an alternative program evaluation for second mortgages and other debt such as medical bills.

HAMP itself is being extended for an additional year through December 31, 2013. And now the program is open for non-homestead properties.

Freddie Mac and Fannie Mae hold an estimated 3 million first mortgage liens that are underwater. FHFA has stated that 80 percent of these underwater borrowers are current as of June 30, 2011.

Will this be enough to revive HAMP from the dead? Probably not says some experts mainly because there are no incentives to servicers and frankly they are the problem.

Nation Mortgage News reports today that Ocwen is on the verge of closing on two large MSR purchases: a $15 billion package of nonprime product from JPMorgan Chase, and a $26 billion deal from Saxon Mortgage.

Both could close this month. The $300 billion figure, the company says, excludes the JPM and Saxon transactions. Investment banking officials told National Mortgage News that Ocwen and JPM are discussing additional purchases. Once these two transactions are completed Ocwen will control roughly $140 billion of MSRs, most of it tied to nonprime loans.

The relevance is that we and other attorneys see Ocwen doing principal reductions. Sometimes outright and sometimes in an equity share participation arrangement. Some may only appear to be a principal reduction, but are actually a balloon. We also have been able to have a rapport with Ocwen unlike some other big players.

But the point is if you have been denied a modification, keep opening the mail. Maybe your loan servicer will soon be Ocwen.

By Christie Arkovich

Quotation of the Day:

"The fundamental issue is that law schools are producing people who are not capable of being counselors. They are lawyers in the sense that they have law degrees, but they aren't ready to be a provider of services." Jeffrey W. Carr, General Counsel.

At my Tampa, Florida law firm we pride ourselves in our abilities to counsel clients as to their options and help make decisions that may impact the rest of their lives. We don't take that responsibility lightly. We don't just file bankruptcy for everyone who contacts us. It is not one size fits all. We don't mandate that our bankruptcy clients file according to our schedule when simple timing and planning achieves a much better result. We don't suggest every client defend their foreclosure or maintain a scorched earth policy. We are able to advise our clients regarding both bankruptcy and foreclosure or civil defense. I have 20 years legal experience in areas of bankruptcy and civil litigation (including foreclosure defense).

Most bankruptcy attorneys are not litigators and don't know a whole lot about foreclosure defense and civil litigation. Which means the advice they give is limited. Most foreclosure defense attorneys don't practice bankruptcy. Sometimes an attorney's advice in one area contradicts the advice of an attorney in the other area. Kinda like a plumbing repair. The electrician may say one thing is needed, the plumber may say another, and the tile or cabinet person may have a third opinion.

For a kitchen remodel this could be a disaster. I once had a contractor client who was in fact doing a kitchen remodel. He was a very skilled carpenter, carved beautiful teak tables and the like. But he wasn't a plumber. When the client wasn't happy the project was unfinished before Thanksgiving week, the carpenter made the water work temporarily until the licensed plumber could come out on Monday. Monday came and the client turned away the plumber saying everything was fine. The client didn't know the "fix" was designed to last only a short time. Both contractors knew what was needed but they weren't dealing directly with one another to ensure it was done. Fast forward three weeks and the neighbor sees water flooding out of the garage. Damage estimate was over $100,000.

Nowadays though price sometimes wins out. Our prices for a Chapter 7 are probably $200-$300 higher than a mill (a high volume practice) and although our total is identical in a Chapter 13 as a mill, we often require $200-$300 more before filing. But we believe the old adage still applies: you get what you pay for. And it doesn't always pay to cut corners.

By Christie D. Arkovich

If you are like most Florida consumers overloaded with debt, by not considering bankruptcy, you are continuing to just throw money away on debt servicing. Once you get behind, it can be nearly impossible to catch up especially now with the costs of living rising higher than wage increases. You have options rather than see your money continue to go down the drain: speak with a bankruptcy attorney. Quit delaying. Make a decision now. Bankruptcy may or may not be the answer. But you owe it to your family and yourself to find out if it is.
Nationwide bankruptcies by consumers declined approximately 10% last year. Is this a sign the economy is improving? In part perhaps. But mostly, it may be from indecision, and the inability to pay up to $2,000 to file bankruptcy. The debt is still there and getting bigger in most cases.

The general need for bankruptcy is still present, but the financial ability of clients to pay the fees has decreased. The availability for credit is diminished. In the past, as long as you were breathing, you were able to secure a car loan and probably even a home loan. Not anymore. Costs of food and other essentials have skyrocketed leaving less disposable income. The availability of funds to pay one-time fees for a bankruptcy attorney or other unexpected expenses is non-existent for some clients.

So what can be done NOW other than just avoidance of the issue and a lifetime of debt payments? Our suggestions are to at least consult with a bankruptcy attorney. We like most bankruptcy attorneys offer a free half hour consultation. Often there are avenues you never even knew about. We offer payment plans. We offer discounts for referrals. If a creditor has violated the law in trying to collect its debt (which happens frequently by the way), we can make them pay $1,000 to $2,000 which our client can then use to file bankruptcy.

At this time of year, take your tax refund and file bankruptcy to get a fresh start right away. If your tax refund is not enough to make a meaningful dent in your debt then use it to solve the problem once and for all by filing bankruptcy.

Tonight at 10:00 p.m. the lead story on Channel 13 inTampa is about the National Association of Consumer Bankruptcy Attorneys' survey that came out today warning of an emerging student loan debt bomb. News Reporter Jeremy Campbell interviewed me about this study and the future impact of student loan debt.

It is very difficult to discharge a student loan in bankruptcy. A debtor has to show an undue hardship that will likely persist for the majority of the repayment period (which runs from 10 to 25 years). They have to show they have minimized their expenses and maximized their income. They also have to prove they have made a good faith effort to repay. Partial discharges of debt are possible and often a favored result for both parties.

The NACBA study shows that four out of five bankruptcy attorneys say that potential clients with student loan debt have increased significantly or somewhat over the last three-four years. Approximately 95 percent determine that few student loan debtors have any chance of obtaining a discharge as a result of an undue hardship.

It never used to be so difficult to discharge student loans. Prior to 1978, student loans were not excepted from discharge at all. Then Congress began limiting discharge to loans that were more than five years old, then seven years old and now there is no limit. Student loans are not subject to any statute of limitations. By comparison, even IRS debt can be discharged after three years. In addition to my debtors' practice, I have also represented Sallie Mae and other lenders for many years. Over the past 6-7 years debtors have rarely sought a discharge of their student loan debt because of the difficulty and expense of doing so. However, this changed in the past year. The magnitude and permanency of the debt leaves student loan debtors with no choice.

I am a believer of paying back your student loans. After all I would not be a lawyer today if it weren't for my student loans. On the other hand, when I graduated from Stetson law school, I had $45,000 of loans and my first attorney job paid $40,000. So roughly a one to one ratio. The ratios I am seeing today go as high as 8 to 1 and that's even if the debtor can find a a job. The cost of tuition has skyrocketed 498% since 1986 while the overall inflation rate has advanced only 115%. Working a $10.00 an hour job is not going to pay your pay way through school anymore.

With the lack of jobs, more students are staying in school and getting advanced degrees. Jobs are scarce and earnings are projected to decline further. Unemployed graduates are getting deferments and forbearances but the interest keeps creeping up. It doesn't take much for $35,000 in loans to grow to $75,000 or much more. Recent clients of ours, a married couple with two children, had roughly $40,000 in debt when they graduated in the mid 90s with professional level degrees. Following periods of unemployment and childbirth, they amassed a combined $170,000 in loans. They had the unfortunate luck to consolidate their loans when the interest rate was 8%. They were not allowed to re-consolidate later when the rates declined. The sheer magnitude of debt and impossibility of ever paying it off is why discharge (even a partial discharge) in bankruptcy should exist.

Just like the housing bust did not just affect the homeowner who lost their home, but it also affected the value of their neighbor's house, the interest income of the fixed income folks, and the future taxpayers due to the bailouts of banks and Freddie and Fannie, this student loan debt bomb will also impact others besides the students. Parents co-sign these debts. Loans to parents for their college bound children jumped 75 percent since the 2005-2006 academic year. Students strapped with this debt will not be able to afford home ownership at a time when we have years of vacant houses in inventory. Their disposable income to keep our economy flowing will be next to nill for an incredibily long time.

This is the first year that student loan debt exceeds credit card debt. The NACBA study reports also that debt collectors for student loans are getting more aggressive.

Restoring bankruptcy protections would help let the air out of this bubble before it becomes unmanageable like our housing bubble. Easy credit and low interest was the primary cause of the housing bubble. Easy federal money through non-dischargeable and guaranteed student loans causes the same kind of irrational lender behavior. It is also the primary factor behind the crazy tuition prices today.

Bloomberg today reports that banks are offering as much as $35,000 to delinquent homeowners to sell their home in a short sale. In doing so, the banks avoid the costly foreclosure process especially when their loan documents are questionable and perhaps fraudulently prepared. I imagine we will be seeing a few of these in Florida, a judicial foreclosure state with particularly well trained and knowledgeable foreclosure defense attorneys.

JP Morgan Chase reportedly is sending out letters to borrowers offering up to $35,000. They are also offering deficiency waivers for the balance.

So open the mail - and ask your lender what move out incentives they are offering for a short sale. Perhaps you have more negotiation strength than you think. But don't let the mortgage company get a default against you - it will both weaken your position and will allow the foreclosure to proceed against you at a faster pace eliminating your short sale opportunities.

Due to the particularly bad housing market in Florida, more of our bankruptcy debtors are finding themselves exceeding the debt caps in a Chapter 13 when they have severely underwater homes. When this happens, a debtor becomes ineligible for Chapter 13 relief and is required to file a more expensive and cumbersome Chapter 11 in order to keep their home. Thus, those clients who most need the relief of a Chapter 13 reorganization plan, including stripping their second mortgage and having up to 60 months to catch up on their first mortgage, are denied the relief because they exceed the amount of debt allowed in a Chapter 13. Presently, the maximum amount of secured debt allowed is $1,081,400 and $360,475 for unsecured debt. It is the unsecured debt cap that becomes a problem with large underwater second mortgages, undersecured first mortgages, combined with credit card or medical debt.

This hurdle was likely not even considered by Congress when it established the debt caps in the first place. With the enactment of the Bankruptcy Code in 1978, Chapter 13s became much more widely used as sole proprietors became eligible for the first time. Prior to the 1978 revisions only wage earners qualified. While opening up Chapter 13 relief to any with regular income (including business owners and social security recipients), Congress saw the potential for abuse and established debt caps so that sole proprietors of large businesses could not evade the more stringent and creditor-friendly requirements of a Chapter 11.

So what was intended as an expansion of the scope of Chapter 13 eligibility has inadvertently turned out to be a hindrance. The courts and trustees have taken different views of eligibility, and until the U.S. Supreme Court or Congress weighs in, uncertainty will rule. Some courts consider it jurisdictional, some consider it discretionary, and the time periods for determining the total debt varies from when the case is filed to after the creditors bar date to see what debt remains after creditors file their proofs of claim and any objections are ruled upon.

The Eleventh Circuit in Atlanta which presides over Florida federal districts has recently clarified one issue at least. In in re J.H. Inv. Services, Inc. 10-15627, 2011 WL 5903523 (11th Cir. Nov. 22, 2011), our local Judge May's ruling was upheld when it denied a claim by the IRS. The IRS tried to argue that its claim (filed as secured only) should be allowed as both an unsecured claim and a priority claim despite its failure to identify the claim as such. The 11th Circuit ruled that claims filed as secured, but turn out to be undersecured do not automatically transform into a deficiency claim.

We see this all the time. Mortgage companies file secured proofs of claim for second mortgages which are later stripped in a Chapter 13. They don't amend their proof of claim. Or they fail to file a proof of claim of any kind and the bar date passes. Pursuant to In re J.H. Inv. Services, Inc., a creditor must take affirmative steps to pursue and preserve an unsecured deficiency claim. It is not up to the debtor's attorney to file a claim for them. Nor is it up to the Chapter 13 Trustee.

Even if an unsecured proof of claim is filed, it typically fails to attach required documentation of standing and verification of amounts owed. We object if we see grounds to do so. Creditors must file these proofs of claims under the penalty of perjury. Nowadays, that is risky. Perhaps they won't or can't come to court with the proper documentation. Getting the unsecured debt below $360,475 equals a successful Chapter 13 until the debt cap issue is resolved.

Why aren't we seeing any legislation or rules addressing servicers' inability and unwillingness to modify loans even when the modification is clearly in the best interest of the investor-owner of the mortgage? Florida foreclosure defense and bankruptcy attorneys see the conflict of interest daily between mortgage servicers and their own clients, why doesn't the government?

Servicers say they are doing their utmost to help homeowners in need. I say Pinocchio. Uncle Sam has proposed HAMP, HARP and a few other programs. However, the servicers just shrug and pretend to comply, while pocketing trial payments and huge servicing fees. It is a well known fact that servicers get paid much more when a loan is in default and eventually forecloses. Until we address the conflict of interest and incentivize servicers to modify loans, nothing will change. Pinocchio is running this show.

In an interview on January 28, 2012, by CNN Your Bottom Line host Christine Romans, Chip Parker, a foreclosure defense attorney in Jacksonville, Florida states it's definitely systematic. He describes how it's a daily occurrence that a mortgage servicer such as Citi Mortgage or Wells Fargo will absolutely refuse to work with someone, even though a VA guideline requires it when the VA guarantees those loans.

The CNN interviewer Ms. Romans naively points out wouldn't it be cheaper for the servicers to work it out early and ensure a successful modification:

ROMANS: Would it be cheaper for them to work it out early instead of let it go as far as - I don't understand why the banks wouldn't be working very, very hard to make sure that this doesn't happen so that they're getting paid for a loan. They don't have empty houses where, you know, guys knocking on the door to make sure someone is there, there aren't people living in the garage.

PARKER: Well, the explanation is very simple, actually. The servicer, the Citi Mortgages, the Wells Fargos, those guys don't own these loans. They're owned by investors. The servicers merely act in a self- -- with their own self interest in mind.

Again, why aren't we focused on eliminating this conflict of interest?

I speak with many clients in the Tampa Bay, Florida area who have heard of cancelled debt and 1099-C forms but they do not really understand the impact of the taxable events that occur in a short sale. An understanding of how a 1099C works in a short sale is especially important at this time of the year.

Whenever a creditor cancels or forgives debt following a debt settlment, short sale or even a foreclosure, the creditor must report the amount of the cancelled debt to the IRS on a Form 1099-C. Under Section 108 of the IRS Code, the IRS imputes the cancelled debt as additional income to you. So if you make $50,000 in annual salary, but your house was sold at a short sale where the loss to the lender was $100,000 (not an uncommon fact pattern in Florida), you will be deemed to have earned $150,000 that year or the next - depending upon whatever year the lender files the 1099-C.

There are three exceptions to this rule. First, you file bankruptcy prior to the issuance of the 1099-C. If debt is discharged in bankruptcy, it is not attributable to you as income. Even if you receive a 1099-C, you can respond by filing your own Form 982 to remove its taxability because of the bankruptcy.

Second, if the cancelled debt occurs while you are insolvent, you can reduce the amount of the cancelled debt from your income. See U.S.C. Section 108(a)(1)(B). However unlike a bankruptcy, a solvency determination includes all of your assets, including your IRAs and 401ks. In a bankruptcy, your 401k and IRAs are generally exempt from creditors including the IRS. Not so in an insolvency determination.

Third, President Bush provided a major exclusion in the Mortgage Debt Relief Forgiveness Act of 2007 - in effect until December 31, 2012, whereby if you have cancelled debt stemming from a qualified principal residence, then the cancelled debt is not counted as income. It is uncertain if that Act will be extended past December 31, 2012. This would not work for second mortgages incurred to pay credit card debt, nor would it work for investment or second homes.

While bankruptcy is not always the best option, it is important to understand the law before negotiating with your creditors. Otherwise you may avoid one minefield, only to step into another.