(Some people use bankruptcy only to postpone a foreclosure–long enough they hope to get the mod approved.  With these people, it easily would have saved the house.)

These people, I’ll call them Allan and Joan,  got put into a trial modification last summer.   They made all their payments, but Bank of America would not approve them for a final.  ”Your are not eligible for this program, let’s try something else.”

Making the trial mod payment every month did not save this family home from foreclosure.

They kept getting the run around–and they kept sending in the modification payment.  (They also kept paying the second mortgage!   In full; on time.  They were current on every one of their debts, as well as current on the trial modification payments.)  Every month or so, a foreclosure sale would get set; and then postponed; and they were routed into a different modification program.

So, they figured the March foreclosure date would get postponed, too.   But it wasn’t.  On Friday, they got a “cash for keys” letter.  ”Your house has been foreclosed.  Please make arrangements to vacate.”

On Monday, they came to see me.

In some states, you still have rights for several months after a foreclosure sale. Not here.  This is Virginia.   I sent them on to a lawyer who will try to help them, but it is a very long shot.   Probably they have lost the house–and they will come away still owing the $98,000 second mortgage.

The loan modification process is full of stops and starts.  One branch of the bank can be talking to you about getting you approved, while somebody else in the bank sends your house to the foreclosure lawyer.

Even if you hope to work everything out, you need a bankruptcy lawyer lined up–in case the foreclosure moves faster than the modification.   Bankruptcy is your last resort; but only if you use it in time.

Most people want to stop the foreclosure without filing bankruptcy, of course.  But if you have to make a choice, do you want foreclosure and no house, or bankruptcy and save the house?  Don’t wait too late.

Like many people, Karen (not her real name) was trying to short sale her house to get out of her problems.  The short sale was going down one track–and foreclosure running down the other.

It looked like the shortsale would work, but at the last minute, the second mortgage wouldn’t agree.  Not knowing what to do, she let the house foreclose.

Karen should have filed bankruptcy, rather than let her house foreclose.

She should have filed bankruptcy.

So far, the first mortgage has left her alone–they usually do.  But the second mortgage sued her.  They almost always do.

That’s when she came to see me–I wrestled with it for hours, but could not find a way to help her.  There was  just too much income to qualify her for a Chapter 7 bankruptcy.

And getting garnished for a Chapter 13 wasn’t really any better than getting garnished for the second mortgage.   (I told her I hoped she could work out a payment agreement with the lawyer.  I think she’ll be able to.)

Here’s the problem.  When figuring your income  and budget eligibility for a Chapter 7 bankruptcy, the bankruptcy court looks at your house payment.  When she had the house, the payment was a doosey.   The court would have said, we know why she can’t afford to pay.  Approved.

But now that she rents.  And she got a low rent at that–she was careful not to repeat her same mistake.  Low enough that the bankruptcy court would tell her she could afford to pay the second mortgage off over five years.

And that’s what she’s going to end up doing.  (It was “only” a $35,000 second mortgage. )

Do you want to stop foreclosure without filing bankruptcy?    That’s great if you can do it.  But it can be a disaster, if you can’t.

Talk to a bankruptcy lawyer BEFORE you let your house foreclose.

It’s really hard.  On Christmas eve, the Washington Post wrote about how Virginia puts home owners on a “fast track to foreclosure.” Like in most of its laws, Virginia foreclosure law favours the banks, not the consumers.

Still there are a handful of real lawyers–beware of scammers!–who try to fight foreclosure under the very unfavourable  law we have here.

Dena Roudybush, of Compliance Counsel, is the one I know best.  I talked her quite a bit when she first switched over from representing mortgage companies and went to the consumer side.  I had a long talk with her again during the holiday.  Here’s what I found out.

Virginia stop foreclosure lawyer Dena Roudybush

1.  You have no chance if the same mortgage company has owned your loan all along.  The more times it’s been sold, the better chance you have.

2.  You also have no chance if they recorded their paperwork at the county courthouse.  Many states require that the county land records be updated every time your mortgage is sold.  Virginia allows it.  If they did, Dena thinks she can’t beat them.  If they didn’t, you have some chance.

3.  A lot depends on the deed of trust trustee.  In theory, the trustee on the mortgage is supposed to be an independent party.  an indepedent party in charge of turning over your house to the proper owner.  Which you say is you.

In practice, most of them are just foreclosure lawyers.  Dena says Samuel White is something of an exception.  If the challenges a foreclosure sale, Samuel White will put the sale on hold until he has re-checked the paperwork.  Most of the others just go right ahead.

4.  You may have to fight an eviction.  While you are battling with the mortgage company in court, the Virginia court will allow the foreclosure sale to go through.  Then, while you are still in court, the mortgage company will be trying to evict you.

5.  It’s expensive–depending on how you look at it.  Dena has a monthly fee of half whatever your mortgage was.  That’s a lot.  Since you are otherwise living for free, it’s also bargain, of course.  Probably less than what you’d be paying in rent.  (If you do end up getting a loan mod, those months you didn’t pay will probably be added to the end of your loan.  If you hope to have equity in the house some day, you’ve made yourself further upside down.)

6.  Sometimes they offer to settle with a loan mod.  If their paperwork is really a mess, the mortgage company will compromise and give you a loan mod.

7.  Sometimes they won’t.  If they can prove they are the owners of your mortgage, then you lose.  Foreclosed and evicted.  We have very conservative judges in Virginia, but even here they read the newspapers.  Your chances are a lot better than they were a year ago.

What’s my recommendation as a bankruptcy lawyer?  If the first mortgage on your house is your only problem, then go for it. If there’s a second mortgage, or if the credit cards got out of control while you struggled to save the house, you should think seriously about filing bankruptcy first.

Why?  If you are over the median income–$85,000 for a family of four–you have a good chance of being eligible to file Chapter 7 bankruptcy if you have a big house payment.  If you are renting, then you probably don’t.  (Specific factors, like high medical bills or child care expenses could affect that.)

If you fight the foreclosure (without bankruptcy) and lose, you now don’t have a house payment.  But you would still owe the second mortgage.  and in most cases, the bankruptcy court would make you keep paying for five more years before you can get rid of that debt.

If you file bankruptcy while you are still in the house, and then try to fight the foreclosure in court, if you lose the bankruptcy still protects you.  You can start over fresh, not owing anybody any money.  (Keeping in mind that under either plan you have to pay the home owners association.)

If you fight the foreclosure in court without a bankruptcy, and you lose, your debts are still out there.  You still owe the deficiency on the mortgage–although they often never bother.  You still owe the second mortgage–and you can count on them suing you.  And you still owe the credit cards, if you have any.  And there’s a good chance you have wrecked your eligibility to file bankruptcy.  You’ll be carrying that debt load for a long time.

One more thing.  Del Bob Marshall, Republican of Manassas, has put in a bill in this year’s Virginia General Assembly, to give home owners a few more protections.  He deserves thanks for standing up to the big boys.

The temporary foreclosure freeze, after some banks were found to be using bogus paperwork, is considered the reason for the slight drop.

Statewide, notices of foreclosure sale were sent to 3,939 Virginia homes last month.  That’s one out of every 577 houses in Virginia.  At that rate, one out of every fifty home owners in Virginia will get a foreclosure notice this year.

The total for September was 102,134.  The previous record, set in August, was 95,364.  The worst is probably still ahead.   Pre-foreclosure notices were sent on 347,420 houses.

At this rate, one out of every thirty houses in America will receive a pre-forclosure notice next year.

The crisis began in 2005.  At the beginning of that year, foreclosures averaged 62,000 per month.   By the end of 2005, there were 78,000 per month.

An article in today’s New York Times suggests foreclosures would be much higher, but the banks simply don’t have enough staff to handle the paperwork.  (Sloppy and false paperwork has some banks for now in a moratorium.)

If you have received a pre-foreclosure notice, you are not alone.   Please read on for information about your options.

Virginia lawyer Robert Weed

The loan modification process is very frustrating.  You’ll feel like you never talk to the same person twice; and everybody you talk to tells you something different.  The banks don’t want to give a discount to every homeowner in America.  They only want to help people who really can’t afford to pay the loan, but he can afford to pay something close to it.  The people who are doing this for the mortgage companies have no experience–two years ago the banks NEVER thought of doing something like this.

There ought to be people out there who could help you through this process for a reasonable fee. There are a lot of scams out there on the internet.  If you decide to spend money, spend it on someone who would get prosecuted if they just plan stole your money.  Somebody local–here are two names–who you can meet in person and look in the eye. And someone who admits they cannot guarantee results; because someone who says they can guarantee results is lying.

Based on all that, I urge most people to try on your own to get a loan modification.  It will sometimes get you an extra couple months to stay in the house; and it will sometimes get you a payment you can live with so you can keep the house.

While you have your loan modification request pending, your file may just sit, or it may get sent to foreclosure anyway.  You’ll know its in foreclosure when the ad announcing the sale of your house shows up in the newspaper.

When that ad shows up in the paper, you will start to get all sorts of offers of “help.”

“Consultants” will advise you what do do to stop the foreclosure.  Some of these guys are ok; many are just scams.  There’s no sure way to tell them apart.  If you are tempted to trust one of these “homesavers” or “pre-foreclosure specialists” please read this article from the August 26, 2007 Washington Post

If you still have equity after the market collapse, “investors” will offer to buy your house.  They will pay you a lot less than what it’s worth.

If you don’t have any equity, real estate agents will urge you to do a “short sale.”  A short sale means you sell it for less than you owe and the mortgage company agrees to settle for that. (Assuming somebody in the mortgage company can be found to agree.)  The real estate agent likes that because he gets a commission, which can be $10,000 or more.  Whether that helps you is a question.

The general rule of tax law is that you are taxed on debt forgiveness.  If the mortgage company accepts $75,000 less than they are owed, they send you a debt forgiveness 1099 and you pay taxes on that $75,000.  Ouch, that can hurt.   You can avoid the tax if you can show that the mortgage company had no chance of getting the money from you anyway–which is probably true, but may be harder to show.  And the new law signed by President Bush in December 2007, expands that for people who got their mortgage, for their own house not an investment, during a certain time period.  I’m not a tax lawyer–neither is your real estate agent. Neither one of us can tell you whether you fit into the rules that would avoid the tax on a short sale.

Another problem with short sales is the second mortgage.  Often the second mortgage will agree to let the sale go through, for a small cut of the money, but they do NOT agree to forgive the rest of the debt.  It’s hard to ever think how that benefits you to agree to that, but people do.

If the short sale will solve your financial problems, and you fully understand the tax consequences, and you can get the mortgage company to agree, then it is your best deal.

Sadly, the time people are thinking short sale, a lot of them have dug themselves further into debt with their credit cards, while trying to make the mortgage payments.  That means it’s time to see a bankruptcy lawyer.

P.S. I’d encourage you to read through my posts so you have a complete understanding of the foreclosure process in Virginia. I’d also like to invite you to call me (or email) if you have any questions. My office has helped more than 12,000 people and we might be able to help you but if we never talk then …. who knows? Stop the stress and call me today.

Usually mortgage companies will let you sit two months behind.  If you keep sending in a payment so that you never get three months behind, they will usually leave you alone.  (Other than call a lot.)

When you get three months behind, all that changes.  Once you get three months behind, they send your money back if you only pay one or two months.

When you are four months behind, two things happen that pull you in different directions.  First, they will start foreclosure proceedings.  (Remember if you are three months behind, they will start sending your payments back to you.  So it usually only takes one month to go from three behind to four behind.)  Second, they may notify you that their loss mitigation department is willing to talk to you about a loan modification.

For people who still have equity, stopping foreclosure is one of the best uses of a Chapter 13 personal reorganization.  The advantage of Chapter 13 over the consultants and investors is that Chapter 13–by law–stops the foreclosure.  And Chapter 13 leaves you in charge.

In Chapter 13 you file a plan to pay your debts with the court.  There are three main plans:

1.  You can stop the foreclosure and get six months to sell your house.  If you have equity this means you walk away with maybe twenty five or fifty thousand dollars in your pocket that would go to an “investor” if you sold to that investor.  That’s a lot of money.

2.  You can ask the court to give you three years to catch the house up.  Getting three years depends on your proving that you can catch up it.  For example if you got behind when you were out of work but you are now working again, the court will usually give you three years to catch up.

3.  Chapter 13 can sometimes “strip” the second mortgage off the house.  If you can prove the house is worth less than you owe to the first mortgage, then you can use a Chapter 13 to make a (small, we hope) monthly payment plan over five years on all your debts, and then the second mortgage is gone.  This can be a really good deal if the Chapter 13 monthly payment is a lot less than the payment to the second mortgage–and if you can afford the house if the first mortgage is all you have to pay.

The thing that most people need that bankruptcy cannot do, is to reduce the amount of the mortgage down to the value of the house.  That’s allowed almost everywhere in bankruptcy law for businesses, but not for people trying to keep their homes.  Congress says their policy of NOT allowing that on homes “promotes home ownership.”  President Obama promised he would change that, but he didn’t have the votes.

P.S.  I’m just a phone call, email or text message away.  I really do want to help you.  After helping more than 12,000 people I know how the stress can build up.  Get your questions answered today – call me, email me or leave a message at our office so we can get back with you.

As the real estate crisis continues to build, I see people use Chapter 7 bankruptcy to try to hang on to their house.  Chapter 7 says, “sorry I can’t pay,” and it wipes out the credit card and medical debt.  (And if you have a foreclosure deficiency, it wipes that out, too.)

For people behind on the house, Chapter 7 would stop a scheduled foreclosure temporarily, and give you about three more months (if you are very lucky it can be a lot more) to stay in the house and find a place to live.  (And save money for the move, since you are temporarily in the house for free.)

I’m now starting to see people use Chapter 7 to keep the house.

Why?  In current market conditions, the mortgage companies really don’t want the house back if you can offer them some kind of reasonable payment.  But they are set up to just mindlessly foreclose, because that’s what they know how to do.

So when a Chapter 7 bankruptcy stops the foreclosure process, at least sometimes, it lands on the desk of somebody who has authority to do a loan modification.  And it can be better for the bank and better for you to work something out that keeps you in the house.

Chapter 7 sometimes gets their attention.  If you negotiate with them while you are still current, the mortgage company will always wonder if you can keep paying if they refuse to bargain.  Once you have filed a Chapter 7, they know you have taken the big step and told the world you are broke.  If you say to them, you get the house back unless you cut me a new deal, they know you mean it.

So sometimes, after the bankruptcy, they will offer you a loan modification that they wouldn’t offer you before.   So I recommend trying for a loan modification before filing bankruptcy; and trying again after.

How can that be?  This gets into the details of the new bankruptcy law.  I’ll try to keep it simple, without over-simplifying.

Under the 2005 bankruptcy law–now five years old–Congress set up a formula to determine whether you are eligible to file a Chapter 7 bankruptcy or have to do a Chapter 13 payment plan to pay on your credit cards and other debts for five years.

Under than formula, if you have a house payment, you can deduct that house payment, in determining whether the law thinks you can “afford” to keep paying for five more years.

If you have rent, you get to deduct a formula rent, and that formula rent is usually less than the actual rents in Northern Virginia–especially for families with several kids.

So if you file Chapter 7 bankruptcy while you still have the house payment, the formula will show that you can’t afford to pay the credit cards, so your Chapter 7 is usually approved.  (The government can still argue that you can afford to pay under the “totality of circumstances” test; but when we argue with the government on the “totality of circumstances” you get to claim your real rent, rather than the formula rent, which is usually lower.  And you get to claim your real commuting costs, rather than the formula commuting costs, which for most people are ridiculously low.)

Back to my point.  If you file Chapter 7 after the house is foreclosed, you are stuck with the formula rent, which will show that you can afford to pay.  So, lots of people who think at least they will have relief after moving out of the house, find themselves in a five year payment plan  paying back the credit cards AND the mortgage deficiency, based on a government formula that tells you how much you are allowed to spend on food and clothes for the kids.

Does this happen a lot?  I heard in court in 2008 the Chapter 13 Trustee tell the judge that about 40 people per month move out of the house and then end up in a five year Chapter 13 payment plan–paying the credit cards and the mortgage deficiency.  I am guessing, that most of those people could have filed Chapter 7 and wiped out the debts if they had done it when they were still in the house.

Does that make a big difference?  The Chapter 7 people can be back to good credit in three years and can try again to qualify for a mortgage (shopping more carefully this time) and buy a house again.  The people in Chapter 13 will need seven years to get back to good credit–two years after the Chapter 13 is over.  And the Chapter 7 people can save for a down payment during those three years–while the Chapter 13 people are spending five years sending their disposable income to the bankruptcy court every month to pay the credit cards and the mortgage deficiency.