Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Loan Modification: The $100,000 Mistake

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loan payoff

 

The job of a mortgage servicer is to collect loan payments and keep track of what’s owed on the mortgage.  That shouldn’t be too hard.

But the evidence is that they don’t do that basic job very well.

Throw a loan modification into the mix, and who knows what you’ll get.

Accounting for modification

I got a glimpse of what we face when my client requested a loan payoff in connection with a sale.

The loan had been modified some five years ago, with the result that a sizable hunk of the amount due when the loan was modified was due only upon sale.

Asked for a payoff, the servicer returned a payoff that failed to include some $127,000 of non interest bearing principal.

Granted, this particular mistake cut in favor of my client.  Who are we to complain?

But it is just as easy to image that the blunder works the other way:  the requested payoff doesn’t take into account the changes made to the debt when the loan was modified downward.  The payoff demand could just as easily have been calculated at the old, higher rates in effect before modification.

Multiply this instance by a fraction of the modified loans out there, and we need to tell Houston we have a problem.

Mortgage modifications to the rescue

Mortgage modifications were supposed to save both individual homeowners and the economy as a whole.

They promised to keep homeowners in their homes despite the housing crash of the Great Recession.

To some extent that has worked.

Or at least mortgage modifications spread the failures out over time so that the market wasn’t glutted with foreclosed properties.

But anyone who has attempted a mortgage modification knows first hand the frustration of submitting an application to the servicer.

Over and over, the servicer claims that you haven’t sent the documents, or the documents are stale or incomplete.

That inability to account for the modificiation application documents is, I’m afraid, just a sneak-peak at the next mortgage horror:

Servicers have no records about the loans they did modify.

Or, more precisely, the records they have are not to be trusted.

Rotten record keeping

The casualness with which servicers approached modifications has scared me for sometime.

  • modification agreements were poorly drafted
  • borrowers never got copies signed by the lender
  • changes in terms not part of public record

Mortgage accounting departmentThe quality of the customer interface at the servicer was laughable, if it wasn’t frightening.

The problems are compounded when the servicing on loans changes hands.

The new servicer starts with the ending balances from the prior servicer.  Few records other than an electronic data base change hands.  Any mistakes made by the prior servicer are now impenetrable.

The terms, or maybe even the enforceability of the modification itself, are lost in the mists of time.

Practice self defense

Who knew that homeownership was going to be a contact sport?

But you have to assume, if you got a loan modification, it will be up to you to defend the modification when the time comes to pay it off.

Here’s the homeowner’s two step:

  1. Keep good records– find and preserve the loan modification agreement.  Treat it as being just as important as the deed to your home.
  2. Request mortgage accounting each year –  make an annual request for the state of your loan, and preserve the response

Your goal is to have your own records supporting the terms of the loan modification and to catch any problems in accounting early.

May all the lender’s mistakes cut in your favor, and may the Force be with you.

You’ll need all the help you can get.

Nightmare image: 

Monkey at typewriter:  Oliver Hammond

How Their Telephone Can Ruin Elders

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red-telephone-mimooh-01_optThe elderly couple was suddenly in financial trouble.

The two mortgages on their home were a couple of months delinquent.

Their bank account had just been levied by the state taxing authority.

They hadn’t filed tax returns since 2009.

From the outside, it didn’t seem like anything had changed.  Yet their financial world was imploding.

What had happened?

Their phone is to blame

Turns out, they had entered into a debt repayment plan over the phone.

The caller got their attention while they were comfortable at home, over the phone.  They signed up, over the phone.

They couldn’t tell me even who the caller represented, But, the voice on the other end of the phone promised to keep creditors from calling them anymore.

With the clients’ permission, this creditor was automatically taking money out of their account monthly.

And when the tax levy hit, there wasn’t enough money to keep a roof over their heads.

These elders were victims of their telephone and their good intentions.

Only the powerless call

It’s a nearly universal truth that the only creditors who call you about your debts are the least important creditors among those you owe.

Credit card companies can’t force you to pay their debt without suing you, getting a judge to agree you owe the money and giving you a chance to defend.  It’s cheaper and more effective to frighten or shame you into paying.

And even better if they can get you to give them regular access to your bank account.  What could be better?

What seemed to have happened here was a debt collector called up and offered a solution, one that would stop harassing phone calls and pay the credit card debt automatically.

But, the “solution” would only pay the credit card debt.

That is, the only debt that would be paid is the debt that could be discharged in bankruptcy.  The mortgage debt that kept a roof over their head became second to the debt management program.  No attention was paid to the back income taxes.

Who to pay when money is tight

It was exactly the wrong order of payment.  The least had become the first among creditors.

Elders more vulnerable

The tactics of debt collectors aren’t confined to the elderly, but they sure work better if the person who owes the money is frail, alone, or unsophisticated.  That described the couple in my office.

The good news for my couple was that their children had somehow gotten wind of the trouble and came with their parents to see if bankruptcy could help.  And bankruptcy will help.

In the bigger picture,  adult children need to be sensitive to how well elderly parents are managing their money.

The telephone is the instrument by which legitimate but self interested creditors can get to the elderly and convince them to warp their financial priorities.

Whether the pitch uses annoyance, fear or shame, the result is the same:  the elder pays the wrong creditor.

If these could be your parents, screw up your courage and find out what is happening, on the phone and at the bank.

It can be a difficult conversation for elders clinging to independence.  But you have to  have that conversation if you’re to help them, before their roof falls in.

Image courtesy of notKlaatu and openclipart.

 

Is There Life After Bankruptcy?

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multiple questions-grisel d'an flicker_opt

Is bankruptcy worth it?

Those who see the decision to file bankruptcy to get a fresh start as painful or less than honorable wonder what life is like, on the other side of bankruptcy.

I got a report from the other side this week from a Chapter 7 client from 3 years ago.

Single, well past middle age, a renter, and dead broke when she’d filed, she’d retired, moved, and bought a house!

Her email was entitled:  “A Happy Ending”. [Read more…]

Who Files Bankruptcy In The Face Of Booming Bay Area Economy?

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who files bankruptcy

Silicon Valley is booming; our highways are so full of people getting to work that we can’t get to work.

Employment is approaching the level of the dot.com bubble.  Property values soar.

So who needs bankruptcy in this pocket of prosperity?

All kinds of people, it turns out.

Let’s look at the people who sought me out last month to explore what bankruptcy could do about their crisis.

I’ve smudged the stories just enough to preserve privacy but still tell their stories.  See if any story resonates with you.

Foreclosure threatens elder

The mortgage mess lingers on around the Bay Area:  this single elder had been advised to miss mortgage payments in order to qualify for a loan modification.

Then, you guessed it, he didn’t get the loan modification and was stuck with a defaulted mortgage.

Chapter 13 will allow another attempt at modification, out from under the foreclosure threat, and a payment plan to get current if no modification is forthcoming.

Lawsuit cripples contractor

A lawsuit by a customer threatened to ruin the business this corporation owned.  Even if the legal defense was successful, the legal fees and the time away from work would sink the business.

While usually a bankruptcy doesn’t do much for a corporation, in this case a Chapter 7 stopped the litigation and freed up the owner of the business to start a new operation in the same field.

Chapter 13 saves businessman from crippling lawsuit

There are contractor licensing issues and cash flow challenges when the existing receivables belong to the entity and the individual needs to start over, but, with planning, it can be done.

Old taxes cloud retirement

Several clients brought tax troubles.  For one couple, it was taxes that one spouse brought to the marriage from a previous life.  The age of the taxes will permit an immediate discharge of the tax in Chapter 7 and only one spouse needs to file.

Another couple came with hundreds of thousands in taxes, some dischargeable and some that will survive Chapter 7.  Wiping out the old taxes makes sure that their payments going forward get applied to the most recent taxes that won’t go away in bankruptcy.

A third couple will be paying the non dischargeable taxes through a Chapter 13, paying off the tax liens that actually attach to value, and eliminating the older taxes at the end of the payment plan.

More on how bankruptcy can deal with taxes

Underemployment and credit cards

Failed self employment efforts and continuing underemployment lead to credit card debt that my last client couldn’t manage.

She hopes for a fresh start next year, free from the collectors that are now hounding her.

Not all are equally lucky

Silicon Valley is world renowned for start ups and technical innovation. The successes are widely heralded.

But for every success, there are far more ideas and efforts that didn’t make it big or failed spectacularly.  The ability to try, fail and start over is one of the strengths of our approach to financial distress.

For individuals, illness, divorce and job loss magnify the economic challenges of living in the Bay Area.

The chance to put the debts of the past behind us fuels creativity, productivity and a good home life.

Bankruptcy can set the stage for good things.

More

What causes bankruptcy

Myths about bankruptcy

Alternatives to bankruptcy

Old Tax Liability Discharged In Bankruptcy, If….

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metal-keyDischarging tax debt in bankruptcy gets lots of families out of a horrible hole.

The tax debt is large, swelled by interest and penalties.  Collection often compromised their ability to stay current on more recent years.

Bankruptcy can save their bacon because taxes found on returns due three years ago or more are generally dischargeable in bankruptcy.

But there is a key that opens the door to discharging taxes in bankruptcy.

When old taxes live on

The man in my office expected to wipe out his liability for  several years of taxes that were now four and five years old in a  Chapter 13 case.  Chapter 13 would allow him five years to pay the more recent, non dischargeable taxes through his reorganization plan.

Only the rule for discharging taxes in bankruptcy has three prongs:

  • the three year rule,
  • the two year rule, and
  • the 240 day rule.

Turns out that the returns for those four and five year old taxes were never filed.  He prepared the returns, but didn’t file them because he couldn’t pay the tax due.

So those old taxes failed the two year rule:  

 Exclamation-icons-2taxes for years where the return wasn’t filed on time are only dischargeable when the return has been on file for two years.

The story gets worse:  because the taxes are not priority claims under the bankruptcy code, they don’t get the same special treatment that the more recent tax debts get as priority claims.

The non dischargeable but non priority taxes will get the same fractional payment in Chapter 13 that the medical bills will get, but the tax will survive the bankruptcy and be collectible later because these taxes are non dischargeable.

So, even if you can’t pay the tax now, not filing the return is not a meaningful long term strategy.

File the return and get the two year clock ticking for bankruptcy relief.

Four reasons to file even if you can’t pay

Outside of bankruptcy, the 10 year statute of limitations on collection of federal taxes doesn’t start running until the taxes are assessed by filing a return.

Filing returns without any records

Got no records for the unfiled tax year?  That’s often why a tax return goes unfiled.  Without records, it’s hard to calculate what you owe, or what’s owed to you.

The IRS can help.

You can request a Wage & Income transcript from the IRS for free.  It will tell you what items of income have been reported to the IRS from your employer, bank, or mortgage lender.

Under certain circumstances, that may be as good as you can do.  If you get better information after you’ve filed the return, you can amend the return for three years from filing.

The key is to get a return on file and get those assorted time periods running.

Image: Erulisseuiin

Drive-in bankruptcy?

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time to file bankruptcy

We got a call about three o’clock the other afternoon from someone who wanted to come in that afternoon and file bankruptcy that day.

When my partner hesitated, the caller responded, “Well , you are open now aren’t you?”

I had a mental image of one of those parking lot, drive up coffee vendors, selling “bankruptcy” instead of java.  Would that the information gathering for bankruptcy was that easy.

When Congress “reformed” bankruptcy, they added pointless additional hoops to jump through.  They hoped that it would seem too daunting for people to use bankruptcy.

All Congress succeeded in doing was making attention to detail and a good bankruptcy lawyer more important.  It didn’t extinguish the need for bankruptcy.

Nor did “reform” make bankruptcy any less effective.

What bankruptcy requires

The general “bankruptcy bargain” is that the debtor provides full financial disclosure and the system provides a discharge of debts.  (It’s somewhat more complicated than that, but that describes the overview).

The bankruptcy papers include

  • Assets
  • Debts
  • Future budget
  • Financial history
  • Means test information
  • Intentions about secured debts

None of this is particularly difficult.  It’s just required.  And paper-heavy.  More about your bankruptcy papers.

What client has to do

We’ve experienced a spate of clients who think that because they’ve signed a representation agreement and provided us with some information, their work is done.

Wrong.

Usually the information is incomplete, ’cause they either don’t read, don’t think about the “bankruptcy bargain”, or can’t believe that we really need all that information.

Believe me, we wouldn’t ask for it if it wasn’t necessary.

Staggering in our door and paying us money just gets you out of the starting blocks in the Bankruptcy Relay.

The finish line is getting the discharge, and there are miles to run between those two points.

I’ll pour a cup of coffee and get down to work.

More

When waiting is wise

Mistakes to avoid before you see a lawyer

Interviewing a bankruptcy lawyer

List it or lose it:  intangibles in bankruptcy

 

Image courtesy of AdamL212

Unfiled Tax Returns Are A Life Sentence

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clock face blueTwo clients, each with $200,000 in tax debt,  came to my office this week.

One can escape it all now;  the other is facing several years before bankruptcy will do anything for him.

What’s the difference?

Filed tax returns

The first man had filed his tax returns, even though he hadn’t paid the taxes called for.

The second man had not filed returns for the last 10 years.

In each situation, the IRS computed their tax debt to be the same.

One I can help today, the other has to fend of the feds for at least two years before bankruptcy can help.

Why?  because you cannot discharge liability for tax year for which you have not filed a return.

Erasing taxes in bankruptcy

You CAN discharge most taxes. [Read more…]

New Bankruptcy Trends From An Old Hand

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bankruptcy trends

I’m seeing a real change in the people seeing me about filing bankruptcy.

Used to be, the problem was credit card debt, unemployment, or divorce.

A surprising trend over the past six months is developing.

I acknowledge the sample size is small.  Statistically, you can challenge the significance, but here are the trends.

My office is crowded with single women scammed on dating sites;  on line borrowers from virtual lenders; and small retailers.

Different, huh?

Scam victims tap their credit

The women are single, moderately prosperous,  and looking for a romantic connection.  The men are elsewhere, seemingly interested, and broke.

My clients each maxed out their credit, took out loans and even took lines of credit secured by their homes to help their “boyfriend”.

And when the credit was tapped out, the “boyfriend” was gone.

The debt hung around, and the women next met a bankruptcy lawyer.

Virtual lenders supplant credit cards

On line lending is the new source of money for the financially challenged.  Fire up the computer and order up some cash.  Give the lender access to your bank account.

Never mind that the rates are awful, and the ease of borrowing is deceptive.

I’ve seen several instances where the loan amount ranged from $50,000 to $90,000.

It’s my guess that the borrowers are even less likely than normal to read the terms, understand the transaction.

The deal doesn’t even require an ink signature.

I’ll need an ink signature, however, on the bankruptcy petition.

Small retailers reeling

You’d think that any retailer that survived the Great Recession was solid and good for the long haul.

Not so, apparently.

I’ve seen two in the last two months who can see they won’t make it.

Traditionally, small business folk come to see me when times are tough and they want the magic wand to fend off creditors.

Not so for this duo.  Each arrived in my office ready to throw in the towel.

Bankruptcy relief beckons

If there is a lesson here, it is that money troubles touch lots of people, in different realms and under different circumstances.

The stereotype of the reckless and self centered spender is just that: a stereotype.

And mercifully, you don’t have to explain how you got into financial trouble to use bankruptcy to get out of trouble.

Getting Excused From Bankruptcy’s Means Test

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rp_800px-Chihuahua_portrait-300x225.jpgYou can get a pass on the means test without claiming your dog ate your homework. 

If your debt is not “primarily consumer debt”,  you don’t have to pass the means test to file bankruptcy.

So, you need to total up the consumer debt you have and compare it to the rest of your debts.

Don’t miss the fact that tort claims aren’t  “consumer debts” under the means test.

So if tort judgments or even unliquidated tort claims total more than your consumer debt, you don’t have to take the means test.

Check the box, and come on in and file the bankruptcy chapter of your choice.

Tort explained

Let’s start by defining a “tort”.  A tort is a civil wrong, other than a breach of contract, that causes injury or damage to another without excuse.

Automobile accidents make up the largest group of torts.  The law requires everyone to conduct themselves so that others are not hurt.  One who negligently fails to use appropriate care such that someone else is hurt has committed a tort.

Whereas people choose to enter into contracts, and the contract can specify the remedy if one breaches the contract, tort liability is imposed by law.

It is that imposition of liability that courts have looked to in finding that tort damages are not consumer debts for the purposes of bankruptcy law.

Means test controls access to bankruptcy

Virtually everyone who comes into my office has heard about, and obsesses over, the means test.

Often they assume that merely making more than the median income disqualifies them from bankruptcy relief.

Cheat sheet to pass the means test

I remind even bankruptcy lawyers that debt incurred for business or investment purposes and tax debt is not “consumer debt”.  If non-consumer debt predominates,  the means test does not apply.

Now, the logic of giving a pass in bankruptcy to those who don’t pay their taxes eludes me, but that’s Congress for you.

Not consumer debt

But there is a little discussed additional category of debt that is not debt “incurred for personal, family or household” purposes (§ 101(8)) :  tort claims.  The reported cases hold that these sorts of debts aren’t incurred in the manner of contract debts like credit cards and medical bills.

The client in my office had no contractual debt, other than a tiny student loan.  But the pending lawsuit accused him of harboring a dangerous dog.

Now mind you, the dog didn’t weigh 5 pounds and the wound it inflicted was objectively insignificant.  The suit, nonetheless, was expensive to defend, stressful, and could blight an otherwise sound financial life.

The bankruptcy case became just that much simpler  when I recognized that we could bypass the means test.

Tort claims aren’t consumer debts; since the dog bite claim dominated the client’s list of debts, it became irrelevant how much money the client made.

The best way to ace the means test is to avoid it altogether.

More

Even High Income Families Pass The Means Test

The Problem Even A Good Bankruptcy Lawyer Can’t Fix

Discharging Taxes In Bankruptcy

Image courtesy of Wikimedia Commons.

When Realtors Go Rogue

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real estate train wreck

True story from the mortgage meltdown 10 years ago.

Usually, I try to be the voice of common sense, conservation of energy, and moving on after a debacle.

The client I saw the other day had the warrior side of me overwhelming the lawyer’s logic.

The facts: the client, an immigrant carpenter with limited English literacy, “invested” in a rental house with partners who bailed on him. The loan was the typical sub prime, adjustable rate loan where the rents on the house could never have covered the debt service.

Then the “friendly” real estate professional helped him borrow some money on the rental to pay the closing costs on a no-money-down purchase of a home for himself. Realtor gets a real estate commission on the purchase and a fat commission on the two loans to buy the house.

Again there were supposed to be partners who would contribute to the debt service and own some interest in the property. None of it was in writing, others bail, and again my client is left holding the mortgage “bag”.

Meanwhile, the home’s value goes down and the mortgage payments go up. While the client is willing to walk away from the rental, some self interested “expert” tells him that if he defaults on the rental mortgages, he will lose his home, on which he is current, even though the property is upside down.

He works huge amounts of overtime, loses sleep, figures he will lose everything. He’s near tears when he sees me.

The good news in this scenario is, such as it is, that all the client has invested in these deals is about $15,000, and a year and a half of inflated mortgage payments on “investments” that are worthless now, and probably when purchased.

When I analyzed the first loan on the home, I calculated what the mortgage payment would be if, instead of an exploding ARM, it were a conventional, 30 year fixed rate note at 6.5%. The answer was that the monthly mortgage payment on a loan of that size, if it could be restructured, equaled his gross monthly income!

What lender makes such a loan?
The rational part of me wants to tell the client, take your lumps, be glad you didn’t lose any more than you did following the American dream.

The warrior side of me says, who were this guy’s friends who engineered these “deals”, with commissions to themselves? Who gets away with misrepresenting the consequences of a foreclosure on the rental? Who were the lenders who participated in exploiting a simple man who couldn’t read the relevant documents?

Again, my advice will probably be to live in the property payment free til the lender forecloses . But my personal inclination is to sue the assorted bastards involved in this mess.

643 Bair Island Road
Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

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