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Mortgage Forbearance And The Hidden Gotcha: Escrow

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forbearance escrow

Got a mortgage forbearance? Watch out for the escrowed taxes after the forbearance is up.

While the CARES Act made forbearance on federally backed mortgages available for the asking. But no one talked about the escrow portion of the skipped mortgage payments.

Federal guidance urged servicers to offer easy ways to pay the skipped payments after forbearance but seems to have skipped any discussion of a timeline for making the lender whole for taxes due during the forbearance.

So, if you need a forbearance, make a plan for the escrow shortage.

What are escrow items

If your lender or mortgage servicer collects property taxes and/or homeowner’s insurance along with your loan payment, those are escrow items.

In essence, the servicer collects monthly a slice of funds that are paid out only once or twice a year, but are required to keep the taxes paid and the home insured. The servicer pays them when due, on your behalf.

Escrowed taxes after forbearance

At the end of the forbearance period, the payments skipped remain due. But, there’s no single way that the details of the repayment will be handled. The skipped payments may simply be due at the end of the loan. The loan may be modified. The rules may change yet again.

But what seems clear, now, is that the skipped escrow payments may be due far sooner than the principal and interest accrued during the forbearance. Existing law gives the lender/servicer the right to increase the escrow portion of the future payments to recapture the missed escrow payments.

The standard period for recapturing escrow shortages is to add one/twelfth of the total escrow default to the monthly payments for a year. Fannie Mae and Freddie Mac have instructed servicers to extend the period for paying the escrow shortfall to 60 months.

Keep escrow in mind

The issues arising in the COVID-19 emergency and the multitude of different kinds of home loans make this subject complicated and not subject to a single, simple answer.

And whatever guidance we have now may well be upended by the next legislative remedy that governments and lenders propose.

The takeaway is to be mindful of the escrow portion of the payments missed in any forbearance, and to ask questions about how any deferral or modification affects escrow shortages.

Or, if your circumstances permit, set aside the escrow portion of your regular monthly payment each month of the forbearance, so you can pay that amount at the end of the forbearance.

How to tell if your mortgage is backed by Fannie or Freddie.

Fannie and Freddie have online look up tools that need only the property address and the last four digits of your Social Security Number to perform a search.

• Fannie Mae: http://www.knowyouroptions.com/loanlookup
• Freddie Mac: https://ww3.freddiemac.com/corporate

More on finances and Covid

Guide to surviving the pandemic driven economic downturn

Mortgage Forbearance For Non-government Backed Loans

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Covid 19 home loan forbearance

Are you one of the homeowners whose mortgage isn’t eligible for the government’s COVID forbearance protections?

Home loans not backed by the federal government are excluded from the protections for borrowers implemented by FHFA .

But as much as one third of US home loans are not backed by the federal government. If that includes you, here’s what the National Consumer Law Center has to say about your options in times of COVID-19.

Assisting Homeowners Who Do NOT Have a Federally Backed Mortgage Loan

If a homeowner has a mortgage loan that does not meet the definition of “federally backed mortgage loan,” CARES Act protections do not apply (except for the credit reporting provisions in CARES Act § 4021, discussed above).

State Foreclosure Relief

Many states have adopted broad foreclosure moratoriums that protect borrowers regardless of loan type, and some states have instituted mortgage loan forbearance programs.

For a continuously updated list, showing which actions are still current, see Covid-19 State Foreclosure Moratoriums and Stays.

Voluntary Federal Guidance

Federal bank regulators have issued guidance encouraging institutions to work with borrowers and relaxing some standards that may previously have limited a servicer’s flexibility to offer relief.

How to Get Non-CARES Act Relief and What to Ask For

Borrowers should contact their servicer by phone or online. Online may be the faster option as servicers are currently overwhelmed by the number of calls they are receiving. Log in to the borrower’s account and see what options the servicer is offering. It may be possible to apply online.

Borrowers can also request assistance by writing to the servicer. Check the servicer’s website or a recent account statement for the appropriate mailing address. Letters to the wrong address may be delayed or lost (or not effective if intended as a Request for Information).

Frame the letter as a Request for Information (RFI) about loss mitigation options. Such a letter will be governed by the response rules in RESPA’s Regulation X.

A sample RFI borrowers may use to ask about available loss mitigation options can be found here (PDF version) (MS Word). A sample RFI that advocates may use for information about a loss mitigation application can be found at of NCLC’s Mortgage Servicing and Loan Modifications Appx. E.2.7.

There is a private right of action to enforce these rules.

Used with permission. The entire NCLC article is found here.

Protecting your home

For those with loans not backed by the government, the options are clearly going to be less standardized and less predictable.

It’s worth watching the news for further government programs that impact non-federal home loans: the situation is certainly in flux.

Know that if you can’t reach an acceptable deal with your servicer, Chapter 13 is a workable tool for curing mortgage arrears while being protected from forclosure.

More

How Chapter 13 works to save your home

When Is The Time Right To File Bankruptcy

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time to file bankruptcy

Just like stand up comedy and batting in baseball, filing bankruptcy is all about timing.

Timing your bankruptcy filing is no different.

File bankruptcy too early, or too late, and you risk losing assets or advantages that better timing could have assured.

Admittedly, you don’t always have the luxury of filing bankruptcy on your own schedule. But for those who can plan ahead, better bankruptcy outcomes are available.

When IS right time to file bankruptcy

Bankruptcy law measures lots of rights with reference to events occurring before filing. Some of these rights involve you, the debtor. Other rights belong to the bankruptcy trustee, or your creditors.

These time periods affect

  • Exemptions  
  • Discharging taxes  
  • Tax refunds  
  • Clawbacks of money transfers  
  • Eligibility to file bankruptcy  
  • The amount of your Chapter 13 payment  

File bankruptcy before

The most common and avoidable mistake in bankruptcy is waiting too long to file. Filing sooner can avoid

  • Spending money you could keep if you filed bankruptcy  
  • Enduring stress caused by debt  
  • Foreclosure  
  • Creditors get liens you can’t avoid  

File bankruptcy after

Some events you want behind you before you file. Usually, you want to know that the worse of the debt is behind you. File bankruptcy when

  • Finances are improving
  • Tax year is closed
  • Receipt of one time income event
  • Payments to insiders have aged

Juggling timing

It doesn’t take much to realize that each of these timing issues are complicated. And each issue interacts differently with other timing issues.

bankruptcy factors

Sometimes you have to weigh some circumstances that suggest an immediate filing against others suggest waiting.

Weighing those competing factors is what a good bankruptcy attorney does for you.

Nationally recognized financial writer Liz Weston had thoughts about considering bankruptcy. Her thoughts boil down to plan ahead. Get advice early, so you can pick the time that’s right.

Any attorney can fill out the forms for you. Skilled attorneys understand what the information in those forms means for the outcome of your case.

Just as importantly, skilled attorneys help you understand the pro’s and con’s of filing at any particular time.

More

What you have to do to file bankruptcy

How to interview a bankruptcy lawyer

Mortgage Payments During California Shelter-in-Place

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mortgage in pandemic

Is my house at risk if I have no income due to coronavirus?

With economic activity at a dead halt due to COVID-19, California homeowners worry about next month’s mortgage payment.  And the month after that, for as far as the pandemic can see.

While it’s early days, and I fully expect broad governmental measures to protect homeownership, here’s what we know at present.

Federal protections from foreclosure

HUD has imposed a 60 day suspension of foreclosures and evictions on loans from the FHA.  Loans backed by Fannie Mae and Freddie Mac will also get a 60 day reprieve, with promises of further extensions if the circumstances require.

So, how do you know if Fannie or Freddie owns or guarantees your home loan.  There’s a tool, or rather two tools, for that.

Look up your loan.

Fannie: 

Freddie

Thus, California homeowners with existing foreclosure or eviction actions are protected for at least two months.  I fully expect that period will be extended.

Dealing with missed payments

What if  you were current when the shut-down was imposed but you can’t make next month’s payment?

What’s a loan servicer?

If  your loan is owned or guaranteed by Fannie or Freddie,  servicers have been directed to  offer flexible payments or a suspension of all payments for up to a year.

I anticipate federal regulations that will require servicers to offer loan modifications or payment extensions.  We can hope that the system has more teeth than the HAMP modifications following the Great Recession.

Not Fannie or Freddie?

It’s less clear, at this point, how lenders with loans that aren’t federally insured will proceed.

Early data suggests that lenders are prepared to be flexible.  We’ll have to wait to see if the federal government requires it some time down the road.

Check on line for the latest from your lender/servicer.

California 90 day grace period

Governor Newsom has reached agreement with 4 of the top five federally chartered banks who own or service home loans.  (Bank of America is the hold out.)

Two hundred state chartered banks and credit unions have joined the agreement

The banks agreed to waive mortgage payments for 3 month  regardless of income level.  No fees or penalties will accrue, and there will be no negative credit reporting.

Borrowers do have to document that their inability to make payments was traceable to the coronavirus.  Details on what kind of documentation is required varies among lenders.

For Californians, the most reassuring news is that California foreclosures take a long time.  While California foreclosures don’t involve the courts, the notice and cure periods mandate 4-6 months between the start of foreclosure and an actual foreclosure sale.

And the people who conduct foreclosure sales are in lock-down, too.

Write and call

For every debt that you can’t pay because of the shelter in place order, call the creditor to tell them how you are affected.  That’s what the creditors all say.

I say, follow up that call with a short letter repeating the facts of your situation.  Doesn’t have to be long or fancy.  Just get paper in the creditor’s hands.

Keep a copy for yourself.  Don’t count on the creditor to be able to file your letter and find it later.

Then you’ve made a record of your call and your situation.

Looking forward

I fully expect that we will see muscular, nationwide programs to keep people in their homes.  As a society, and an economy, no one benefits if masses of families lose their homes.

It will take time to work out just what those programs look like and how well they work.

But work it out we will.

Updated 3/30/2020

More

When you can’t pay your bills during pandemic

 

 

Does Bankruptcy Bar Retirement Savings?

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Ongoing retirement saving by Chapter 13 debtors has been a touchy subject since the means test became a part of the bankruptcy scene.

The means test was intended to squeeze every available dollar from consumer debtors. It works by limiting the expenses that can be deducted from income in figuring what a debtor can/must pay his existing creditors.

Retirement savings accounts have been broadly protected from the reach of Chapter 7 trustees and excluded or exempted in the asset analysis in Chapter 13.

But courts have been split over whether debtors are permitted deduct as a reasonably necessary expense their ongoing contributions to voluntary retirement schemes while in Chapter 13.

So, I’m cheering the 6th Circuit’s decision in Davis which held that monies withheld by a debtor’s employer to fund her 401(k) plan were an allowable deduction from income under the means test.

Ongoing 401(k) contributions allowed

The Davis decision effectively allows the debtor to reduce the amount the means test formula would require her to pay to her creditors by the amount of her 401(k) contributions.

The court described its ruling as narrow: it applied to contributions withheld by the debtor’s employer from her wages during the means test look-back period of six months.

Only by virtue of the provisions of Section 541(b)(7) that reference sums “withheld by an employer” were the contributions deductible in calculating “current monthly income”. The self employed or those whose contributions to retirement savings took another form are not protected like Ms. Davis.

In deciding that Ms. Davis could make ongoing 401(k) contributions, the appeals court had to wade through more sloppy drafting of the bankruptcy “reform” act of 2005. The drafters inserted this protection for ongoing contributions to retirement in a section that deals with property of the estate, rather than with the means test. The Davis decision decided that the judicial canon that says “every word matters” trumped the location of the text in the Bankruptcy Code.

Californians still barred from savings

Sad to report, but the retirement-friendly Davis decision comes from the 6th Circuit, not the 9th Circuit which includes California.

federal judicial circuits

The 9th Circuit BAP held in Parks, 475 B.R. 703 (B.A.P. 9th Cir. 2012) that a Chapter 13 debtor could not deduct any voluntary retirement contributions in calculating what debtors pay in Chapter 13.

While it’s unclear the extent to which BAP decisions bind bankrutpcy courts in its circuit, as a practical matter, it will take an appeal to the 9th Circuit or legislation to assure Californians filing bankruptcy that they can continue to make provisions for their old age.

Retirement savings are necessary

I’ve long advocated for treating retirement savings as a necessary expense for purposes of both the means test and the debtor’s projected budget.

It is ludicrous to contend that individuals don’t have to make regular and meaningful contributions to their retirement accounts to enjoy a stable retirement.

And by mandating that savings are not permitted in Chapter 13, we condition debtors to spending every penny they make either for current living expenses or plan payments to deal with past debts. We forfeit the opportunity to habituate debtors to looking at their needs beyond the upcoming month.

Planning to file bankruptcy

Too often, individuals find themselves filing bankruptcy with little or no forethought. But if you see a bankruptcy in your future, and have the opportunity to have 401(k) contributions deducted from your paycheck, do it.

Means Test Means Little In Bay Area With New Census Numbers

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The latest numbers used in means test for the San Francisco Bay Area after April 1, 2020 are out.  They reinforce my contention that the means test is meaningless for most in Northern California.

Bankruptcy’s means test was sold to Congress in 2005 as a way to make sure those filing bankruptcy really needed relief.

It added expense and complexity to bankruptcy, which was  what the drafters secretly wanted.  They’d heard this story of people casually filing bankruptcy to avoid the inconvenience of paying their bills.

Of course, that was a myth; but that’s another story.

The income dividing line increases

Those whose gross family income is below the median get a pass on the means test.  It simply doesn’t apply to below median income debtors.

Median: the middle number in a sequence of numbers 

The median income for a family of four this spring in California is $101,315.

Make less than that, exclusive of Social Security, and you are free to file bankruptcy without taking the test.

Housing costs drive the bus

If you make more than the median income, the means test applies.  That doesn’t mean you can’t file bankruptcy.

It just means you have another hoop to jump through.

The means test formula purports to calculate how much money you have available each month after paying essential expenses.

The ugly truth for this high-cost part of the world is that housing eats up far too much of our budgets.

Lets assume you are just over the median income line and gross $102,000 a year, a fine salary in many places, but not really enough here.

The folks at the Census Bureau, who supply the bankruptcy system the numbers that drive the means test, say it costs $4173 a month to house a family of four in San Mateo County.

That’s almost half of the gross monthly income of a $102,000/year household.  Not much is left to pay for food, clothes, medical care and transportation.

Good news, bad news, there’s nothing really available to pay creditors, inside or outside of bankruptcy.

So bankruptcy is available because you’ve passed the means test.

Mortgage payments deductible

The same calculus applies to homeowners:  over median families can deduct monthly mortgage payments, property taxes, HOA dues, and hazard insurance from their gross income in doing the means test.

Again, those expenses tend to swallow up a huge part of most incomes.

Leaving little or nothing for creditors.

And leaving you the choice of which chapter of bankruptcy furthers your goals.

More about the means test

Who gets excused from the means test

Cheat sheet for passing means test

See a bankruptcy lawyer before making any of these stupid moves

No Rush To File Bankruptcy

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file bankruptcyWhen the virus steals your income, it’s easy to be overwhelmed with unpaid bills and terrifying economic uncertainty.

Immediate relief by filing bankruptcy may look appealing.

Make it all go away, you say. I’ll never pay this off.

But not so fast.

With few exceptions, this bankruptcy attorney thinks it’s too early in this pandemic to think about filing bankruptcy.

Here’s why.

Creditors have few remedies

In the short run, unpaid creditors can’t do much about non-payment.  Courts are essentially closed, lawyers are at home, and sheriffs have been ordered to stand down.

The normal legal remedies for non-payment simply aren’t available.

And few creditors think that hard ball tactics and lawsuits are actually going to make money magically appear.

We’re not at the bottom

One of  my indicators that it’s time to file bankruptcy is when you know you’ve hit the bottom.

When things are looking up and your future income is exposed to past debts, then it’s time.

Relief in bankruptcy is a rationed item:  you can only file Chapter 7 every eight years, and Chapter 13 slightly sooner, but not at will.

You don’t want to shoot your wad too soon.  Move too quickly and you may find that more debts accumulate but you’ve already played the bankruptcy card.

Today’s debts dischargeable tomorrow

You needn’t worry that you have to file bankruptcy before you are sued, or before a judgment is entered, or even before your bank account is levied.

At any point in the life of a debt, the debt can be discharged.  Assuming it’s a dischargeable debt, which most are, its age or procedural posture makes no difference.

Governmental action may change the picture

Given the massive nature of the COVID-19 recession, further action from the government to stabilize the economy and protect the millions of people affected is assured.

The shape of that assistance, the size of the help, and whether it actually keeps people from needing bankruptcy, it’s too soon to know.

But this bankruptcy veteran is counseling that we take it slow and understand the lay of the land before rushing to bankruptcy court.

More on Coronavirus economic survival

California Statute of Limitations Gets Teeth

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law has teeth

California law on debt collection finally has teeth.

Recent changes to California law say that a debt collector must allege that the statute of limitations has not run when it files a lawsuit.

No more suing on long-dead debt and winning unless the consumer files an answer and pleads the statute of limitations.

No more collectors relying on consumers being broke, scared, or ignorant of the legal facts about the timeliness of a lawsuit.

The timeliness of the lawsuit has gone from being matter of defense to an element of the cause of action.

Score one for consumers.

California statute of limitations on debt

The law on when you can sue someone on a contract, like a credit card, a medical bill, or a personal loan, lives in the Code of Civil Procedure.

AB 1526 added to the statute of limitations in § 337 the following:

(d) When the period in which an action must be commenced under this section has run, a person shall not bring suit or initiate an arbitration or other legal proceeding to collect the debt. The period in which an action may be commenced under this section shall only be extended pursuant to Section 360.

Before the 2019 change

Used to be, a creditor was free to sue on a debt, even if the creditor knew that the four year California statute of limitations was long past.

The burden to assert the statute was on the defendant to raise the statute as an affirmative defense.

An affirmative defense operates to say, in the pleadings, that even if everything you claim is true, you don’t win because….

As a result, the issue of whether a debt was too old to be enforced through the courts was seldom considered by the judge because the consumer-defendant never filed an answer.

If no answer is filed, the judge effectively never considers the merits of the lawsuit.  The system assumes that if a lawsuit is defective, the defendant being sued will answer and point it out.

But that’s not how most collection actions go.  The overwhelming number of collection actions go to judgment by default, because the defendant never spoke up.

New law in action

As of now, Spring 2020, there don’t seem to be reported cases applying the new rule.

Over time, it will be worth looking at whether the number of collection actions goes down.  That may be hard to discern if we hit a period of further economic distress.

More

What to do when you are sued

All about California judgments

Will bankruptcy wipe out a judgment

SBA Loans Collectible Long Past Business Failure

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The SBA has eagle eyes and sharp talons when it comes to collecting from guarantors of business loans.

SBA collection tools are ruthless, efficient and ageless.

So I learned when a client consulted me about a business that had failed 12 years ago.

Yet the SBA had never sued him, nor had it filed a lien on his home.

He reported that every time he changed jobs, however, the SBA just appeared and garnished his wages.

At this rate, his exposure on his SBA loan guarantee will live long beyond the next decade.

Statute of limitations

The United States Code 28 USC 2415 prescribes a six year statute of limitations on lawsuits to collect non tax debts owed to the US.

That six year period is reset with each payment the feds receive on the debt.

Understand the liability of a guarantor

So, the SBA has six years from the last payment made to file a lawsuit against a guarantor for a money judgment.  With a judgment comes a slew of collection tools under the law, including liens  and levies.

But, it turns out, the feds don’t need a judgment to exercise powerful collection actions that usually require a judgment.

Administrative garnishment

Like the IRS, the SBA has a right to garnish wages without ever going to court.

13 C.F.R. 140.11  lays out both the limits on how much of each paycheck can be garnished and the procedure for challenging a garnishment.

Chillingly, the regulation provides that the feds have the right to garnish until the debt is satisfied, or until there is a settlement.  So that’s how the SBA kept surfacing for my client at each new job.

Offset into retirement years

Retirement isn’t a reprieve from SBA debt, either.

The government retains the right to offset any money it may owe you, as in tax refunds or Social Security benefits, to pay the debt. 31 USC 3716.

So, the passage of time will bar the initiation of a law suit that could result in a lien or a right to levy your assets, but the right to garnish wages or offset
mutual debts appears to have no time limit.  A guarantor of the debt of a long dead business may be paying on that debt until the guarantor’s death.

SBA debts dischargeable in bankruptcy

If an SBA borrower isn’t able to reach a settlement of the debt with the SBA, any unsecured debt to the SBA  is fully dischargeable in bankruptcy.

Secured debt owed to the SBA is only secured in a bankruptcy case to the extent that there is equity in the asset after liens senior to the SBA are paid. Thus in a Chapter 13, an SBA lien can be crammed down to the value of the collateral.

In the usual circumstances, the SBA is not protected by the provisions of Chapter 13 that bar modification or bifurcation of debts secured only by the debtor’s home:  SBA debts are almost always secured by the assets of the business for whom the loan was taken out.

More

No tax consequences when SBA guarantees compromised

Is a corporate bankruptcy safe for shareholders?

Thoughts on winding down failing business

California Renter Protections From Eviction: How To Qualify

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california eviction protection California  bans evictions for non payment triggered by the COVID-19 shut-down under Gov. Newsom’s executive order of March 27,2020.

The protection comes with a big IF:  A tenant must act to trigger these protections, which run through May 31,2020.

Who is protected

The order covers tenants who have been

  • laid off
  • had hours cut
  • suffered other income reductions
  • missed work to care for a child whose school closed

The loss of income has to be traceable to the virus, the state of emergency, or related government response.

How to qualify

You need to do two things to invoke eviction protection.

One, you need to notify your landlord, in writing, that you need to delay, in whole or in part, payment of the rent due.

That notice needs to be given before the rent comes due or within 7 days of the due date.

Two, you need to keep paperwork that supports the claim that your income is reduced by COVID-19.

That documentation can be

  • pink slips;
  • payroll checks;
  • bank statements;
  • medical bills, or
  • signed statement from your employer that explains your changed financial circumstances.

What protection is provided

The order makes two changes to existing law.

First, tenants get an extension of time to answer an eviction complaint.

Normally, a tenant’s answer to an unlawful detainer action (legalese for “eviction complaint”) is due 5 days from service of the summons.

The executive order extends that period for the 60+ days this order is in effect.

Second, no writ of possession may be enforced against a tenant who qualifies under the order.  That means the sheriff can’t evict you if you have taken the steps above.

What’s unclear

This order doesn’t seem to address the situation where the tenant was behind before the order became effective.

That situation may be addressed in further orders.

In most California counties, the issue may be moot because, independently, county boards of supervisors have instructed sheriffs not to enforce pending evictions.

What’s to come

I fully expect that this order or one like it will be extended if the economic shutdown continues beyond May 31.  It’s hard to imagine that it won’t, as I write this.

In the meantime, stay home, stay healthy, and stay hopeful.

More on the virus money crunch

When you can’t pay your bills because of the virus

Car payments and the pandemic

California tax deadlines extended

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