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On The Bankruptcy Soapbox

The Soap Box

Before You List Your Home For Sale: The Essential First Task

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Selling your home?  Before you interview a realtor, before you lift a paint brush, or clean a closet, you need to write a letter.

A letter to the servicer of your mortgage.

You want full disclosure of what charges, fees, expenses and other “stuff” they want to collect from you when your sale closes.

For all you know, they’ve stuffed your loan full of fees, not authorized by law or agreement,  that pad their bottom line, and suck money out of your pocket.

Or, they’ve misapplied your payments or failed to note a mortgage modification.

So, your first step in selling your home is to get a handle on the loan payoff, while there’s still time to strip the mistakes and the junk fees from the payoff demand.

Why tackle your loan first?

Start with your loan because, while federal law requires them to make full disclosure if you ask, they get 30 business days to do so.

So it may be a month and a half before you have their first response.  And if you don’t agree with the figures they produce, it takes longer still to resolve the dispute.

All too often, the inflated payoff demand doesn’t surface until your sale is about to close.  Maybe the payoff demand from the servicer bears little relation to the mortgage statement you’ve been receiving monthly.

And with a sales contract in place, a deadline for closing, and a buyer’s loan commitment about to expire, too many sellers are forced to accept the servicer’s numbers or lose the sale.

They end up paying too much because there’s no time.

Since good information takes time, start here first.

How to make a Request For Information

The Dodd Frank Act beefed up your rights as a home loan borrower to get information from the servicer of your loan.  Time lines were shortened;  broader inquiries were permitted.  And some consequences created for failure to respond.

Here are the essentials of a Request for Information under Reg. X 1024.36

An enforceable request must

  • Be in writing
  • Identify the borrower, the loan and the property address
  • Indicate that the property is your principal residence
  • Set out the information you seek
  • Be sent to the specially designated address of the servicer for RIF’s

The last requirement, delivery to the servicer’s designated address, that trips people up.  The magic address is often found on the back of the monthly mortgage statement.

Sometimes the address designated uses the previous name for the kind of request we’re talking about: Qualified Written Request.  Servicers usually have the address on their website, tho it may require digging to find it.

Don’t send an RFI with your payment.  Don’t ask for it over the phone.  You have a right to good answers only if you follow the procedures in the regulation.

What to ask the servicer

If you are selling your home, you want a payoff figure, itemized.

RFI example

Chances are you know what the principal balance is.  It’s the other stuff that doesn’t necessarily appear on your statement that you want to flush out.

Are there late fees, escrow deficiencies, non-interest bearing balances, inspection fees, appraisal fees, processing fees.

You get the picture.  Fees, fees, fees.  For too many servicers, the money is all in the fees.  Find out ahead of time what you are facing.

Heading to sale

With your RFI in the mail, you can turn to the myriad of other things to do to get your house on the market.

Mark your calendar for 30 business days so you know when to expect good information.

If you get a response and you don’t agree with it, call the servicer.  Complain to the CFPB.  Ask a HUD certified housing counselor for help.  Get an attorney.

Consumer rights are only meaningful if they are used.

No House, No Discharge When Chapter 13 Goes Off Script

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Chapter 13 alarm

Sound the alarm.

What began as a trickle of Chapter 13 cases ending badly has become a torrent.

More and more, bankruptcy judges are strictly enforcing the direct pay term of Chapter 13 plans:

If your plan says you will pay your on-going mortgage payments directly, and you don’t pay as promised, the judge may dismiss your case without a discharge.

How discharge differs from dismissal

After three to five years in bankruptcy, you end up with neither house nor a discharge of your debts.

Bummer!

Chapter 13 plans have teeth

Here’s why failing to follow through on your plan can be fatal.

The Chapter 13 plan becomes a court order when it’s confirmed by the court.  It requires the creditors to wait for their money, sets out the payments to be made, and binds all parties to its terms.

In many districts, the trustee pays any arrearages on home mortgages, but the debtor pays the mortgage payments directly that come due during the plan.

But all too often, the debtor stops making the on-going payments to the mortgage lender, without telling any of the other interested parties, like their attorney, the trustee, and the court.

The lack of payments goes unremarked. 

Checklist for keeping your house and your discharge

But with the advent of Rule 3002.1, there’s a reckoning at the end of the plan.  The trustee files with the court a notice of final cure payment, alleging that all is well with the mortgage.

When the lender responds that the debtor isn’t current on the post filing payments, all hell breaks loose.

Too often, the court finds that the debtor’s failure to pay the ongoing mortgage payments is a material breach of the plan.  Because the plan hasn’t been fully performed, the case gets closed without a discharge.

Presumably, foreclosure follows, or another Chapter 13 filing.

Why Chapter 13’s are dismissed

In the debtor’s mind, it’s easy to see the on going payments as something just between the borrower and the lender.  If the lender isn’t happy, it can ask for relief from stay.

But the bankruptcy system sees it differently.

Since the debtor proposed the terms of the Chapter 13 plan, there’s a logic in sanctioning the debtor if he doesn’t do as he proposed to do.

The court would certainly sanction creditors if they didn’t honor the plan.

Consequences of dismissal

Dismissal without a discharge means that none of your debts is wiped out at the end of the plan.

Sometimes, that’s OK, if you’ve managed through the plan to pay taxes or your car loan.

But more often, it means that your personal obligation on the home loan lives on, along with any of the unsecured debt like credit cards, pay day loans, and medical bills survive as legally enforceable debts.

If you stripped off an underwater mortgage or avoided a judgment lien in the Chapter 13, you lose those benefits.

Preserving your bankruptcy discharge

The trick to getting your discharge is simple:  speak up.

Talk to your attorney when you begin having trouble making the on-going mortgage payment.

Talk through whether the problem is temporary or the inevitable consequence of too little income or intervening circumstances.

There are fixes.

  • You can modify your plan to terms you can live with as long as you are within the five year duration of a plan.
  • Maybe you surrender the house.
  • Maybe you reduce the plan payment til you catch up on the mortgage.
  • Maybe you dismiss this case and refile again to include the new arrears in a new plan.
  • Maybe converting to Chapter 7 works for you now.

But know that failing to address the issue puts the discharge at risk.  Chances are, you have too much at stake to keep quiet.

More

When a Chapter 13 falters

Why Chapter 13 plans fail

Can you change lawyers mid case?

Bankruptcy terms simplified

Is Home Equity A Substitute For Retirement Savings

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My house is my retirement plan.

If I had a dollar for every time a client said that, I could retire today.

But that approach to funding your old age only works if….

Sell your house to retire

The value in your house makes your balance sheet strong, but doesn’t put food on the table or gas in the car.

That home equity is illiquid.  You can’t write a check against it for the other necessities of life.

To get at that equity, you need to sell the house, or  borrow against it.

A traditional loan requires that you have cash to cover the monthly loan payments.  But hey, you’re not working.  Where does that money come from?

Reverse mortgage

The reverse mortgage was invented to allow seniors who can’t make monthly payments on a conventional loan to access the equity in their home.

But the fact that a reverse mortgage has no monthly payments does not mean that it’s cost free.

No, the interest on the money borrowed accumulates over the life of the borrower.  And the unpaid interest itself earns interest.  The cost is steep.

Dangers in reverse mortgages

Reverse mortgages top list of older consumer complaints

And a condition of a reverse mortgage is that you keep up insurance and property taxes.

Real property has carrying costs

Whether encumbered or owned free and clear, real property has its own set of expenses.

  • Hazard insurance,
  • property taxes,
  • repair and upkeep.

Gotta have cash for those things.  The average Social Security check is about $1300.

Where do you live if you sell

If you’ve benefited from rising home values over your lifetime as a homeowner, the cost to replace the house you’re selling has risen as well.

And buying less house in your community still has the carrying costs we talked about above.

Or you rent.  So housing still has a cost.

Or you move out of the community you live in to somewhere where your sale proceeds go further.

You move away from friends and support systems.  Or maybe you move back to somewhere where you have a support system.  It can work both ways.

Taxes shrink your equity

Capital gain taxes are triggered if you sell your home.  Current tax law excludes from taxable income $250,000 in gain for a single person and $500,000 for a married couple. (Watch for changes, here).

So taxation will deplete your sales proceeds only if you have experienced a lot of appreciation over your lifetime.

But if you’re sitting on lots and lots of equity, count on it shrinking if you sell.

Don’t hide behind your house

There are no easy or universal answers here.  Our lives are longer and our preparation for old age is woefully incomplete.

For too many people I meet, the “home is my retirement account” is an excuse for overpaying for housing at the expense of retirement savings.  It provides cover for failure to set aside any money now.

Diversification of your retirement assets is clearly best.  Have cash and home equity as you age.

But however you are situated, give some clear thought as to how you fund those decades of life when you aren’t working.

More

Do California seniors need bankruptcy

What it costs to retire here

California homestead and senior debt

Image © Fotolia

Bankruptcy Debtors Entitled To Monthly Mortgage Statements

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monthly mortgage statement

Years of uncertainty and indifference, rooted in the automatic stay and a homeowner’s ongoing obligation on their mortgage after bankruptcy, has ended with a new rule.

Mortgage servicers must now send monthly statements to borrowers in bankruptcy under a new CFPB rule effective April, 2018.   

The earlier version of the rule, adopted in 2014, allowed servicers to send no statements to consumers who had discharged their personal liability in bankruptcy or who had a pending bankruptcy case.

Now the rule creates a duty to render a monthly statement unless

  • the consumer requests the servicer stop sending statements
  • the consumer’s Chapter 13 plan provides for surrender, avoidance of the lien, or doesn’t provide for ongoing payments
  • a court order avoids the mortgage lien
  • a Chapter 7 statement of intentions indicates surrender AND no payment has been made since bankruptcy was filed

Even if an exemption to the duty applies, the consumer can opt in to receiving monthly statements by making a written request.  The request can be made by any borrower on the loan or by their agent, such as their bankruptcy attorney.

And just like RESPA Requests for Information, the servicer can designate an exclusive address to which the request must be made.

Statements tailored for Chapter 13

When a borrower is in Chapter 13, the servicer must modify the monthly statement to show the amount due as only the post petition amount.

The monthly statement must also account for the pre bankruptcy arrearages in a new category on the statement.  Required information on the arrears includes

  • amount received on the prepetition arrearage since the last statement
  • the total of all payments received since the bankruptcy was filed
  • the current balance of the prepetition arrearage

Boon to borrowers

This rule is a huge step forward for borrowers in bankruptcy.  Until this rule, there was a terrible disconnect between the borrower’s intention to continue paying on the mortgage and the servicer’s ability to avoid providing information about what is due.

FRBP 3002.1 spoke to part of the problem when it required servicers to file and serve notices of changes.  But that still left the homeowner without the monthly cue on where and how much to pay on the home loan. 

When mortgage lender changes their tune, it’s war.

The new rule goes a step further in that it requires the monthly statement to show both the state of the loan payments since bankruptcy, but also the progress toward curing any pre bankruptcy default.

Challenge to servicers

For the last 25 years of my bankruptcy practice, servicers have routinely botched the problem of accounting for payments made on mortgage loans in Chapter 13.  They have struggled to impliment a system that properly credits and accounts for payments received after filing on the continuing mortgage along side payments received on the pre bankruptcy arrears.

Even before this rule, servicers can seldom file papers with the bankruptcy court with numbers that are consistent as to the amount the debtor owes.  I’ve seen cases where a proof of claim, an objection to confirmation, and a motion for relief from stay from a lender each states a different number.

The chances for the servicer to screw up have just increased with the implementation of this rule.

I recognize that Chapter 13 presents a challenge, but servicers are in the business of accounting for money.  They need to get it right.  And if compliance makes their job more expensive, they can negotiate an increase in price for their services.

It can no longer be OK to keep borrowers who want to pay in the dark.

Thank you, CFPB.

More for borrowers

The new, improved Request for Information

Decoding your mortgage statement

Home Remedies For Foreclosure Breed Bankruptcy Tragedies

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Warning: virulent outbreak of do-it-yourself bankruptcies all around.

Symptoms:  panic over prospect of foreclosure

Supposed remedy:  file your own skeleton Chapter 13 bankruptcy

Prognosis: enjoy the stay for about 2 weeks, followed by foreclosure relapse

Homeowners facing foreclosure

Three different would-be clients called in a 10 day period this month, facing foreclosure.  And all three had the same tragic, but avoidable story.

I was on the trail of an epidemic.

Each had filed an emergency bankruptcy petition to address a looming foreclosure.  They then did nothing to file the balance of the schedules necessary in their cases.

How dismissal differs from discharge

Without schedules,  the case was dismissed, automatically. No court hearing, just tossed out for failure to follow the order that says “you’ve got two weeks to file the rest of the papers”.

And they did the same thing all over again a little bit later, again filing only the bare minimum of paperwork, before the second case is dismissed.

With two cases dismissed in the past 12 months, there will be no automatic stay in a third case.  The  bankruptcy won’t prevent the lender from foreclosing.

As a bankruptcy attorney, my bag of remedies was essentially empty.

Why homeowners sucked in

I understand the appeal of the automatic stay: it’s a lynch-pin of bankruptcy relief.

The automatic stay is powerful:  it applies to all creditors, it makes actions in violation of the stay void, and it becomes effective instantly upon filing bankruptcy.

The necessary paperwork to initiate a case is minimal, and the filing fee is just over $300.

Pretty seductive if you are panicked about losing your home.

Multiple filings labeled abuse

The pattern of debtors filing, getting dismissed, and filing again irked lawmakers back when the last round of bankruptcy amendments passed Congress in 2005.

After “reform”, every debtor gets a stay in their case.

File a second case within 12 months after the first was dismissed, and the stay lasts only 30 days.  The court will consider extending the stay if the debtor applies and gets an order within that 30 days.

File a third case, after two dismissals within 12 months, and there simply is no stay.

Chapter 13 can save your home

The tragedy in all of this is that Chapter 13 works, if you want more than just a two week stay.  Few problems that threaten foreclosure can be solved in two weeks.

How 13 can save your home

Understand that letting your case be dismissed cripples your  ability  to use bankruptcy in another case.

More

What should bankruptcy cost

How to interview a bankruptcy lawyer

Don’t wait til the day before foreclosure

Image courtesy of torange.biz.

Getting Rid Of Junior Home Liens In Bankruptcy

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One of Chapter 13’s superpowers is its ability to strip off otherwise valid, voluntary liens on a home.

Ordinarily, liens survive a bankruptcy discharge as a charge on the collateral;  it’s the borrower’s personal liability that is wiped out.

But Chapter 13 allows the elimination of liens when the lien isn’t really secured by any value in the collateral.

Rules of lien stripping

This is law, so you knew there’d be rules:

  1. A voluntary lien, like a deed of trust securing a second loan, line of credit, or HELOC, can be voided only in Chapter 13 or Chapter 11.
  2. It can be stripped only if there is no equity in the property after deducting the payoff balances of the liens senior to the lien from the fair market value of the property.
  3. The lien is permanently voided only upon the successful completion of the reorganization plan.

Thanks to lobbying by the mortgage lenders more than twenty years ago, bankruptcy courts are prohibited from compelling any changes to mortgages liens secured only by the debtor’s home.

So, the work-around, if you like, is a finding by the bankruptcy court that the junior lien isn’t really “secured” by any value in the home.  If it’s not secured, the prohibitions don’t apply.

If there is a dollar’s worth of equity in the property, the lien must remain. A dollar out of the money, and the whole lien is gone.

Limits on bankruptcy relief

As a result of the limitations imposed by Congress, the help for homeowners that bankruptcy reorganization provides is limited to voiding totally unsecured liens and to eliminating other debts of the homeowners.

Limitations don’t apply to real property not acquired to be the borrower’s principal residence

Neither can the bankruptcy court  require the senior lender to modify a mortgage or to defend its decision to reject a modification.

Legislation passed by the House of Representatives in 2009 would have overturned the prohibition on modifying home loans and allowed judges to reduce mortgage balances to the present value of the home and alter other terms of the loan if the borrower was willing to file bankruptcy and successfully made the plan payments. The Senate defeated the bill, so bankruptcy judges remain powerless to weigh in on the tug of war between the mortgage bankers and the homeowners.

As always, you need to determine whether you should keep the house. and what the viability of a modified mortgage is.

You’ve got choices for a house even after you file bankruptcy.

Stripping off judgment liens

Eliminating tax liens

Cancel by Nick Youngson CC BY-SA 3.0 Alpha Stock Images

 

The Worrisome Truth About Silent Second Mortgages

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silent mortgagesLike a sleeping bear, long-silent second mortgages hibernate in people’s houses these days.  They are quiet, a snoozing predator, just waiting for spring.

And it can be bloody when those sleeping mortgages awaken hungry and look around for something to fill its pocket.

Here in California the coming slaughter is particularly noticeable because the value of real estate has rebounded to 2006 levels and beyond in many areas of the state.

Waves of foreclosures have now started lapping on the financial beach just as the federal government declares that everything is coming up roses for the economy.

These foreclosures are kin to the FIRST WAVE that devastated the nation. Both were triggered the largest financial fraud in US history. (A massive systemic fraud the US taxpayer was obliged to finance while being victimized.)

The current wave of foreclosures involves the “Sleeping Giant Second Mortgages” on millions of homes across the country.

“I Thought It Went Away”

For more than half a decade, the gigantic financial fraud carried out by Wall Street and the lending industry jack-hammered real estate prices to such low levels that second mortgages had no chance of receiving a penny if they foreclosed.

Worse still, if they foreclosed, they would be saddled with paying a first mortgage that was no longer fully secured by the value of the real estate. In the icy financial winter that followed, many second mortgages holders took the “long nap”.

Second lenders stopped calling the homeowner. They stopped sending the homeowner ANY notices relative to their second mortgage(s). They hibernated.

Here in California many second mortgage holders went even further.

They told homeowners typically over the phone that the lender had “charged the loan off their books”. Then the lenders coupled this a form 1099-C. (Sometimes a 1099-A, or my personal favorite, the form 1099-MISC which is an absolute outrage. We’ll talk about form 1099(s) issues by the lending industry in another article soon.)

What was a homeowner to think? “They didn’t call”…”They didn’t write”…”They charged it off”…”They sent out a form 1099 for debt cancellation.”

Homeowners by the millions concluded “It went away.” But it didn’t.

A Second Mortgage isn’t a Puppy that Follows You Home

You aren’t getting a “free” loan that you don’t have to repay because the lender needs to show you the note or because MERS is illegal.

Don’t waste your time on this nonsense.

In California the horrible truth is that EVEN the issuance of a form 1099 for debt relief in the situation described above, DOES NOT, in and of itself, mean the debt has been cancelled within the meaning of Section 108 of the Internal Revenue Code.

It can simply mean a particular lender has written the debt of their books. In all probability it means the debt was sold to someone else to collect. (They virtually always end up in the hands of another creditor.)

If there is a recorded deed of trust or mortgage instrument, and there virtually always is, the loan is a secured loan.

A loan secured by real estate is just about the best form of long term debt anyone can hold DEPENDING ON THE VALUE OF THE REAL ESTATE.

So when the value of real estate began to go up decisively, these secured second mortgages begin to “bloom” like California Poppies in spring.

When the Second Mortgage Wakes Up, You Need To

mortgage lender awakenedWhen a second mortgage holder comes out of hibernation, they are typically ravenous.

Like a grizzly bear with an empty stomach, they will initiate foreclosure and eat your home with little ado. It is a very good bet the lender is well versed as to the current value of the real estate and will feel quite confident that they can obtain the yield necessary to make the process worth their while.

Actually it’s much better if you “wake up” before the second mortgage holder does.  You almost always have better options if you face this problem as early as you can.

There are still rare cases in which the value of the property currently is less than the first mortgage.  If so, a Chapter 13 bankruptcy can be used to strip off the second and discharge it for virtually pennies-on-the-dollar while the homeowner retains the house.

If the house still has a very depressed value the homeowners may be able to  negotiate a reduced settlement figure and permanently cancel the debt. (In which case a form 1099 should be expected for the tax year in which the note is cancelled in exchange for the reduced payoff.)

There may be other moves a homeowner can make, like using a bankruptcy to catch up all the missed payments on a sleeping second. I hate this one but in the case of folks who can afford the payments, and who want to keep the home, this may be viable.

Sometimes it’s time to sell the house. I like my homeowners to sell their homes at premium prices long before some “snarling second” files a Notice of Default (N.O.D.) artificially depressing the value of the real estate.

Avoid a Notice of Default if You Can

If at all possible, don’t let a second mortgage holder get to the point where they have filed a Notice of Default before you take action.

You are then on the defensive and your options dwindle with each passing day. Worse yet, lenders will deliberately engage you in fruitless dialogue to try to draw out the time until they can sell your property.

I’ve seen this type of violation of the duty of good faith and fair dealing by lenders over and over again. Almost none of the dialogue will be in writing and it’s hard to prove in court.

Especially don’t wait until a date has been set to sell your property.

In California the non-judicial foreclosure train has left the station once an N.O.D has been filed. There are only three general methods to “stop or slow” this train.

Each method has its benefits and burdens. Often one or more of the methods are practically impossible for the homeowner to utilize.

You need to start early. There are no EASY ANSWERS.

But there are more options and better answers the sooner you shake off your winter slumber and sneak up on the sleeping giant in its lair.

Guest author Bill Purdy is a tax and real estate lawyer with Simmons and Purdy in Soquel, California.  He and his partner Pam Simmons are my go-to resource for all matters of tax and mortgage law.  I’m tickled to share Bill’s pointed perspective on California mortgage law.

Know What You Really Owe: Your Mortgage Loan Rights

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house check stockmonkeys dot com_optYou’ve got a lot to keep an eye on.

You probably regularly check

Your blood pressure.

Your credit report.

Your stock portfolio.

Your bank balance.

Your team’s standings.

Yet chances are, your home is your biggest investment and perhaps even the cornerstone of your retirement plan.

But you have no idea what lurks in the file of your mortgage lender or its servicer.

Questions to ask the servicer

Where is the lender applying your payments?  To principal and interest?  To fees? Or is the money held in suspense?

Does the monthly mortgage statement you see match the records on the servicer’s computer?  You would assume so, but assume at your peril.

Got a mortgage modification?  Who knows what the lender’s records look like.  A client recently asked for a loan payoff and the response was off by $127,000! The full story.

You need to know what the servicer is doing with your payments soon enough to fix it.

  • While you still have records, and recollection.
  • While the loan is still serviced by the current folks.
  • While you have time to fix errors.

How lenders get away with theft

Nasty questions about your mortgage balance usually come up when time is short:  sale or refinance.

The payoff demand isn’t requested from the mortgage lender til the deal is about to close.  The rate lock on the enabling loan is set to expire.  The lender’s payoff demand comes in laden with unexplained fees and charges.

And you have no time to find out what’s in the demand without imperiling the deal.

While you can always pay the demand and dispute it later, that seldom seems to happen. Borrowers roll over and assume either the lender is right or it’s too difficult to get the real analysis of the payoff demand.

CFPB to the rescue

As part of the Dodd-Frank financial reforms, the Consumer Financial Protection Bureau has given homeowners a spanking new tool to keep track of their mortgage:  the Request for Information.

The Request for Information improves on the long-standing Qualified Written Request.  The QWR took too long, could only be sent to a single, designated address, and often required the borrower to know what was wrong with the accounting before writing.

A RFI allows you to simply ask questions:

  • what is the payoff balance of my loan
  • what is the principal balance of my loan
  • what fees, expenses or charges have been added to the loan
  • is any money held in suspense
  • how have you applied my payments

The servicer can set up a special address for such requests.  You can get that address from your mortgage statement; the servicer’s website; or by calling the servicer.  But you can’t make a Request for Information over the phone.

Your request has to be on paper separate from your payment coupon or mortgage statement.  Your letter should provide

  • address of your property
  • names of the borrowers on the loan
  • account number

The servicer must acknowledge receipt of your request within 5 business days, and provide responses within 30 business days.

The CFPB has a RFI fact sheet including a sample letter.

Ask annually

Make a mortgage checkup a yearly thing.  Pick a holiday or an event that you can associate with making a request for information.  Perhaps every year on the summer solstice, you make a request for information about your home mortgage.

Save the responses you get so you can compare this year to last year.  Are they consistent?  Any unexpected change?

After all, information is power.

More

How to claim a tax deduction for mortgage interest in your Chapter 13

Is your home equity an adequate retirement plan?

Understanding your mortgage statement

The one thing you must do before listing your home for sale

Image courtesy of  www.stockmonkeys.com

 

Find The Lost Tax Deduction When Lender Misreports Mortgage Interest Paid

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How can you pay thousands of dollars in mortgage payments in a year, and get a  tax Form 1098 for a fraction of actual mortgage interest paid?

That’s what my client wanted to know.

His monthly mortgage payment is $2715.  The loan is currently interest only.  All the payments were made.

And yet, the Form 1098 from PNC says the year’s mortgage interest paid is only $1800.

So what happened to the other $30,780?  That’s a lot of money to go missing.

Welcome to the further screwed up world of mortgage loan servicing.

The short answer right now to the question I posed at the top is I don’t know yet.

But here’s what I suspect.

What servicer does with your payment

I’ll bet that PNC, the servicer I love to hate, has put the monthly payments in suspense, and has not posted them to the loan.

Federal law requires mortgage payments be posted the day of receipt

By holding them in suspense, they don’t show up as interest paid on the mortgage.

Why the payments were put in the suspense account I don’t know.

What it takes to get them out of suspense, we’ll have to see.

Getting your taxes right

My advice to the client and his tax preparer is to claim a deduction for all of the year’s mortgage payments.  It may conflict with the information provided by the servicer, but the servicer’s information doesn’t necessarily control.

If you don’t claim as large a deduction as you think you are entitled to, the IRS isn’t going to come back and urge you to correct an error that’s in their favor.

You may have to later convince the IRS that your calculation of the amount of interest you paid is correct and the servicer’s statement is wrong.  A copy of the monthly mortgage statement and a escrow analysis statement are a starting point.

Consider as well whether the same problem exists in prior years and if an amended tax return is worthwhile.

Lupe_MännchenTax sleuthing

In the meantime, I’m going to read the note and deed of trust that governs how the lender is supposed to credit payments.  Most security instruments set out the order in which payments are applied to amounts the borrower owes.

I’m hitting the RESPA regulations on suspense accounts and their use and misuse.

And then we’ll spring a Request for Information and a Notice of Error on the servicer.

I wonder how many other servicers will be outed when they produce palpably erroneous tax documents.

Related

Cancellation of debt and taxes

Tax deductions hidden in Chapter 13

Image of boxed money courtesy of Locomomo and Flickr

Get Tax Credit For Mortgage Interest Paid In Bankruptcy

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MORTAGE INTEREST DEDUCTION

Is your Chapter 13 plan  paying back mortgage payments that were delinquent when you filed bankruptcy?

If so, a tax deduction lurks, unclaimed, in the trustee’s records.

Track down that tax deduction, add it to your tax return, and you reduce your federal income tax burden.

But it’s difficult because, for reasons I have not been able to figure out, the lenders don’t send IRS form 1098’s to either you or the trustee for mortgage interest paid through the plan.

So you don’t have proof that mortgage interest was paid, and neither does the IRS.

But, we can fix that.  I recently had occasion to walk a client through the process of figuring out the mortgage interest paid by the trustee.

I’ll retrace my steps and you can see how I figured out that he’d paid some $50,000 in mortgage interest  over the years of his plan that he hadn’t yet claimed on his taxes.

1.  Find the interest element in the lender’s proof of claim.

To be paid through a Chapter 13 plan, the lender must file a proof of claim on official form B410.  The mortgage attachment to that form, B410A has a line in Part 2 for “interest due”.

That line shows us what part of the missed payments, as of the filing of the bankruptcy case, was made up of mortgage interest.

2.  Calculate what percentage of the arrears is mortgage interest.

Part 3 of the mortgage attachment form breaks out the elements in the lender’s claim in the bankruptcy.  We need to know what fraction of the total claim the trustee will be paying is interest.

Take the “interest due” amount you located in Step 1 and divide it by the total at the foot of Part 3.

That’s the percentage of the total claim of the lender that’s interest.

3.  Access the Chapter 13 trustee’s site for payments to mortgage creditor

Chapter 13 trustees use different software to account for their operations.  You should have received information at the beginning of your case on accessing information about your payments and the trustee’s disbursements.

If you need help with the trustee’s web site, call the trustee’s office for help.

On the trustee’s site for your case, find the claim filed by the mortgage lender.  There should be a list of the date and amount of each payment made to the creditor on account of your mortgage arrears.

Total the payments for the last calendar year and multiple that total by the percentage of the claim that is interest, from Step 2 above.

Bingo! you have the number that represents what the trustee paid your creditor in mortgage interest for that calendar year.

Tax accounting rough and dirty

Your figure for mortgage interest paid in a year is an approximation.  By the end of the plan, the amount of interest paid will equal the amounts you’ve calculated this way.

The creditor may have applied it to your account differently.  Mortgage loan servicing is so erratic and inaccurate these days that it’s hard to tell.

If this calculation is off, it probably underestimates the amount of interest in the early payments from the trustee.  Most mortgages require the lender to apply payments first to interest, then to principal, then to expenses.  My experience is that they seldom follow the rules.

If anyone objects to your calculation, make them propose a better one.  Or make the recipient of the mortgage interest account for it in the usual way.

Save your work

Outside of bankruptcy, the lender would send you and the IRS a copy of their report on Form 1098 for mortgage interest you paid during the tax year.

We’ve done this sleuthing because they didn’t tell either the IRS or you what you paid in mortgage interest.

So, you may have to show the IRS how you got to a deduction that doesn’t appear in their records.

Print or save to pdf each of the documents you used to make your calculation.  You want to be able to support the deduction if challenged.

Another path to tax deduction

Alternatively, you could use the Request for Information process found in RESPA to ask the servicer of your loan how much interest you paid in a calendar year.

Servicers are required to provide answers about loan servicing within 30 business days of your request.  Requests must be in writing and contain identifying information.  More on how to make a Request for Information.

When tax professionals aren’t busy, see about amending prior returns.

Amend earlier returns

Federal tax law allows you to amend tax returns for three years from filing.  There’s an IRS publication for amending returns.

You can calculate what you paid through the Chapter 13 plan for prior tax years and amend those returns to claim this deduction.

Gather your calculator and get on the trail of these illusive, but valuable, mortgage interest deductions.

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