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forkinroad.bmpOur Florida clients sometimes ask me why they cannot strip off a second mortgage in a Chapter 7 like often done in a Chapter 13 bankruptcy nowadays. The limitation can be found in the United States Supreme Court’s decision in Dewsnup v. Timm, 502 U.S. 410, 417 (1992). The Court noted a distinction between the in rem and in personam claims created by a lien on a debtor’s property. The Court held that a Chapter 7 discharge of personal obligation leaves the in rem obligation intact against the property.

Even though a client might qualify to file a Chapter 7, sometimes the extra remedies available in a Chapter 13 make the more lengthy plan worthwhile. Under 11 U.S.C. 1322 a wholly unsecured second mortgage or HELOC can be stripped off a homestead. However, one other key difference exists between a Chapter 7 and 13. If a debtor retains a home in a Chapter 13, they are still personally liable for the first mortgage even if the second mortgage is stripped. Therefore, a Chapter 7 may still be best if the home is worth much less than the amount owed on a first mortgage and the debtor is uncertain about keeping the home long term.

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nacba.jpgNACBA (National Association of Consumer Bankruptcy Attorneys) responded this weekend to the government’s latest approach to the foreclosure crisis with what I call the Principal Paydown Plan.

Rather than turn us into a nation of renters under the recent suggestion that Freddie and Fannie rent their foreclosed properties or sell them as rentals, NACBA suggests again that a Chapter 13 bankruptcy can be modified to help families avoid foreclosure on massively underwater property. Without more focus on prevention, our housing market is certainly facing additional downturns.

The Principal Paydown Plan would require the reduction of interest on a primary mortgage to 0% during a Chapter 13 Plan thereby relegating the entire payment to principal (plus escrow). At the end of the bankruptcy, the debtor would have paid down their mortgage in many cases to the approximate fair market value of the property helping to slow the foreclosure numbers for those homeowners who would otherwise strategically default believing that their home value will take 10 or more years to recover.

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short sale.jpgWhen listing and selling a home in a short sale, homeowners should consider including language to limit recovery of any unpaid amounts by the mortgage company (known as the deficiency balance). In Florida, we recommend this limitation be placed in the Purchase and Sale Contract. This way when the lender/bank agrees to the short sale, they are in essence agreeing to the terms of the contract between the buyer and seller. It is no different than if you wrote in “as-is” to limit your liability as to the condition of the property. I’d recommend something like the following be inserted into the contract:

The sale of this property is contingent upon the lender’s acceptance of all sale/purchase contract terms including a complete discharge/forgiveness of debt of any remaining deficiency amounts on the loan. Accordingly, the bank’s acceptance of this short sale agreement will constitute payment in full of both the first and second mortgage notes on this property and represent a waiver of any future lender right to pursue an action and/or judgment against the owners/borrowers to recover any deficiency amounts arising from this short sale transaction.

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closed.bmpThe special foreclosure courts in HIllsborough county are shutting down the end of this week. Does this mean the foreclosure crisis is finally at an end? Not exactly.

In 2010, the Florida legislature approved legislative funding to the Florida court system to help eliminate the backlog in foreclosure cases. Filing fees shot up from approximately $300 to $900 – $1900 for foreclosure plaintiffs. A budget surplus of $100 million in the court trust fund existed. In Hillsborough County alone, this money was used to hire and assign six judges solely to foreclosure cases. Their goal was to eliminate 62% of the backlog which existed last year. I’m not positive, but this goal may have been met, I know it was on target a few months ago. However, the legal challenges to the cases have increased dramatically, and foreclosures are slowing. Due in large part to the defective affidavit backlash, foreclosure filings dropped off a cliff early last fall and have remained low to date. The $100 million surplus has turned into a $72.3 million deficit. In May, Governor Scott had to approve last minute funding to keep our courts open.

Today, I found out that In three days time, these six judges are going to have to find other work as the foreclosure special divisions in Hillsborough County are shutting down because funding was pulled.

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HOA.jpgIt has been my practice to advise clients to remain current on their Homeowners Association dues (HOA) even though they are behind or in foreclosure on their first mortgage. Today, an article appeared in the St. Pete Times describing a local company Prop. Inc. and its purchase of 71 properties in Hillborough County, Florida in the past eight months. The company appears to be run by several ex-cons although what they are doing is perfectly legal.

Homeowners Associations have become much more aggressive in the past few months. We have seen HOAs file motions to intervene in some of our pending foreclosure defense cases in the Tampa Bay area and then move to set the action for trial even when the homeowner and the bank do not want to go to trial. Perhaps a trial modification or forbearance agreement is even in place. Attorney

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I have discussed the many second mortgages that can be removed or stripped off clients’ property in a Chapter 13 bankruptcy due to the low home values in Florida. Today, I’d like to discuss other possibilities to remove a second mortgage that we are seeing. Today for instance, I received a call from a client who filed a Chapter 7 with us awhile back. She now has received approval for a HAMP waiver of her second mortgage or home equity line of credit. A complete waiver, paid in full. She also has completed a modification under HAMP for her first mortgage. Now the home is affordable and it makes sense for her to keep it. Chase was the servicer this client was working with so it may be worth the time to continue to deal with large servicers to obtain these results.

We also are seeing clients being approached with offers to satisfy their second mortgages in full for about 10 cents on the dollar (i.e. $6,000 lump sum payment to satisfy a $60,000 2nd mortgage). Usually this happens after we file a Chapter 13 threatening to strip the second mortgage, but sometimes it may come out of the blue. For a client who qualifies for a Chapter 7, they then have the option of converting to a Chapter 7 to discharge other unsecured debt and not remaining in a lengthy 3-5 year Chapter 13 Plan. Another option is that the client could simply dismiss the Chapter 13 voluntarily if they have no other debt and are current in their first mortgage or able to obtain a modification.

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exempt-full.jpgBankruptcy clients who are new to Florida come to our office complaining about what I call the Exemptions Calculus Problem. Learning calculus seems simpler. Below are some useful sites and a brief explanation as to how exemptions work.

First, exemptions in bankruptcy are important because they decide what you get to keep in a bankruptcy. In Florida, we have very strong homestead exemptions and retirement asset exemptions for an IRA, 401k, 403(b) or annuities. Not so much for personal property unless you are surrendering your home and can claim a $4,000 wildcard exemption in addition to a $1,000 exemption. Vehicles are allotted a $1,000 equity exemption. Anything more, you have to pay to keep or give up.

However, the rules vary dramatically when you have lived in Florida for less than two years. Then we either use the state’s exemption where you moved from or the federal exemptions. Ironically, you cannot use the federal exemptions when you have lived here for two years or more, because Florida has opted out of the federal exemptions. Federal exemptions provide a very generous personal property exemption.

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underwater mortgage.jpgHave you been considering walking away from your house payments and mortgage? According to a recent CNN article, many homeowners are getting ruthless and voluntarily choosing to walk away. We are seeing this more and more among our foreclosure defense and short sale clients. Sometimes it is better to take the credit hit and save money on huge mortgage payments on an underwater asset. Home values have continued to slide another 11% in Florida in February when compared to the same month in 2010. CBS MoneyWatch reports that 47% of Florida homeowners are underwater.

Fannie Mae reports in a recent survey that the number of homeowners who would even consider walking away has increased from 15% to 27% this year. This is despite Fannie Mae’s threat to withhold Fannie Mae backed financing for strategic defaulters that it made over a year ago.

So what should you consider before you make such a decision? Well, first of all, if you have a good job, assets and a strong credit report, you can be a target for a deficiency lawsuit later down the road as Florida is a “recourse” state. Banks and other owners of mortgage debt have up to five years to pursue you to collect the unpaid balance. The question is will they? If you look good to them on paper, it is more likely you will be sued for a deficiency. If this is the case, or you think your finances will pick up over the next few years, you may want to consider a short sale to at least try to open negotiations for a full or partial deficiency waiver. Alternatively, many clients elect to file bankruptcy now while they qualify to order to obtain closure and gain the certain knowledge that they cannot be sued later.
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In an article recently about shedding second mortgages, I am reminded that many people still do not realize that they can often strip their second mortgage forever in a Chapter 13 Bankruptcy. Although this article addresses homeowners in California, the same is true for our Florida clients.

The key is that your bankruptcy attorney has to show that your home is worth less in today’s market than the balance of your first mortgage. You do not have to be behind in your payments. You do not need the permission of the second mortgage company. Your attorney simply files a motion with the court to determine secured status, attaches exhibits of valuation (which can vary from the most recent tax assessment, a BPO, an appraisal or even comps), and waits to see if the mortgage company objects. Often, they do not bother or they consent. If they do fight it, the court will set an evidentiary hearing to determine the value if the bank brings evidence that the value is higher. Then you get into the dueling appraisal war. None of our cases have gotten that far and we’ve probably stripped off 50 2nd mortgages in the last couple years.

This is one way to drop your principal balance if the banks won’t agree. It may be the only way to save an underwater home and get back to paying its real value. It doesn’t matter what the second mortgage was used for, whether it was an 80/20 loan, or used to fund start up costs for a business, or payoff credit card debt or cars.

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The Eleventh Circuit Court of Appeals which governs the State of Florida, recently ruled on May 17, 2011 in the case of Myers v. TooJay’s Management Corp. that private employers can legally deny employment to applicants if they filed for bankruptcy. In doing so, our Circuit is now consistent with similar rulings in the 3rd and 5th Circuits.

However, anyone who is trying to decide whether to file bankruptcy when they are job hunting should keep in mind that prospective employers will pull credit reports. Many employers will rescind offers of employment or refuse to hire a person merely because of a bad payment history. Any delinquent payments could equally affect an employment decision. Refusal to hire someone due to his or her credit history is not by itself unlawful (there may be a limitation as to whether or not a credit report may be pulled if the prospect has not signed an authorization to do so).

In fact, some employers would prefer that a prospective employee has discharged their debts. Many employers would rather not deal with creditors calling its employees during work hours on the job and don’t want the administrative headaches associated with processing wage garnishments. These employers would rather hire someone who is debt-free, instead of someone who has debt problems.

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