Debt Negotiation

There must be a lot of money to be made in debt negotiation. Just listen to all the advertising. Do you think they are out there for your benefit? They are trying to make money off you. It has gotten so bad that Attorney General's throughout the country are shutting the worst offenders down.

Here is my perception of how they work. First, your creditors will not negotiate with you when you are current with your payments. So, you must start missing payments. The reality is, you have to miss about six payments before you can get to someone with authority to settle the case. While you have missed six payments, late fees and interest accumulate. Thus, your debt becomes higher.

If you are using a debt negotiation company, they will likely charge you a monthly fee. At the same time you will start to put money away. After six months, when creditors are starting to talk to you, or the negotiator, a lump sum settlement amount will be negotiated. While it may seem like 50% of the amount owed, in reality it is probably closer to 75% or 80% of what it was 6 months earlier considering the new late fees and interest that has accumulated. And, you have ruined your credit.

A better approach may be to make minimum payments on certain debts each month while dedicating extra money to the lesser of your credit cards. Eventually, you will pay off that creditor. When that creditor is paid off, you move on to the next creditor until you are debt free.

Of course, this is much easier said than done, and takes a lot of discipline. But, the reward is worth the sacrifice.

What About My Credit Score?

It seems that many Americans are more concerned with their credit score than their net worth. I have many clients that have $50,000 or more in credit card bills that are more worried about how bankruptcy will affect their credit score than they are with getting rid of the debt. Each month they are paying $1,000.00 per month or more to pay off credit cards. They are killing themselves with worry and stress to pay this debt. They aren't working for retirement or a financial future but instead are working to pay debts.

As I have stated before, I think bankruptcy should be a last resort. There should be a plan to get out of debt before resorting to bankruptcy. But, if it is impossible to pay off the debt due to income limitations or illness, bankruptcy is a very good financial option. It is certainly better than being a slave to your debt.

How will bankruptcy affect your credit score? It will affect it between 100 and 200 points. Now, we've got that out of the way, what does it mean? Bankruptcy stays on your credit report for 7-10 years. However, once you obtain your discharge in bankruptcy, you can begin to rebuild your credit.

As you make each car payment and each mortgage payment, you are rebuilding your score. When looking at your credit score, examiners will see higher income and low debt levels (debt to income ratio) because you have just discharged your debt in bankruptcy.

While rebuilding your credit score will take time, rebuilding your life will be easier.

BEWARE OF TRANSFER OF PROPERTY

I always thought this was an obvious point, but after having many clients ask me, "what if I give the property to my (insert family member)", I think this issue should be addressed.

When one files bankruptcy, they have a duty to disclose their entire financial picture, including any transfers they have made over the past two years. The failure to knowingly list a transfer may result in the denial of the debtor's discharge, meaning that there was no reason to file bankruptcy. Or worse, the Debtor could be subject to criminal prosecution for bankruptcy fraud.

Sometimes a potential client may have an asset that is not subject to being exempt (that is, untouchable by the trustee). Sometimes it is a car. After going through the scenario of either losing the car in a chapter 7 or paying for the car in a chapter 13, I often get the question, "what if I transfer the car to my brother?" One is free to make the transfer, but the transfer must be disclosed in the bankruptcy.

If the transfer was done without consideration, that is, the person who the property was transferred to gave nothing in return, the bankruptcy trustee can recover the property. The bankruptcy laws give a lot of authority to the trustee. The trustee in a bankruptcy case has a duty to investigate a debtor's financial affairs. Within that investigation is the examination of any transfers from the debtor to anyone else. The Trustee can apply the law of the state and look back four years in Florida.

Even if the transfer was done with no intent to hide the asset and was given as a repayment of a debt, the Trustee could still seek recovery of the asset. Transfers to family members within one year of the filing of the bankruptcy, even if it is for the repayment of a debt, can be avoided by the Trustee as a "preference".

The rationale for these recoveries is to put all creditors on equal footing. The court does not distinguish American Express from Aunt Millie.

HOME LOAN MODIFICATIONS

Maybe as a result of the market, or because of the bailout, there has been a lot of success with loan modifications. Some banks are more willing to work with you than others. You have to be patient with the results. In what seems like a good gesture on their part, the bank may initially allow you to miss a few payments if you come up with a significant down payment towards your past due amount. This will not be the best offer the bank can make. Nor will it likely be in your best interest to take what they offer.

There are various companies offering to assist with the modification. Some of these companies have good success. Others really do not do much for you. If you are going to try to do a loan modification, make sure you use a reputable company.

When seeking to modify, you will need to provide:

hardship letter
tax returns for 2008 and 2007
a month of paystubs
bank statements
original loan closing statements
list of income and expenses

Modification should be an option that you should examine thoroughly. It could lead to a good result for you.

SHOULD I STAY OR SHOULD I GO?

With the depreciated real estate market, many of my clients wonder if they should continue to pay for a home they can barely afford. Of course, I can't make this business decision for you, but here are some alternatives for you to consider.

ALWAYS CONSULT AN ATTORNEY OR ACCOUNTANT BEFORE MAKING THESE TYPES OF DECISIONS.

1. Stay in the home if you can afford it. Take a hard look at the realities of the numbers. Can you find a new place to live for a lot cheaper? Or, will it be marginally cheaper. Sure, your house is worth less than you owe. But, if you can afford it, stay there. The market has to move up sometime, doesn't it?

2. Try a short sale. To do a short sale, your mortgage company has to agree to the sales price. This can be difficult, if not impossible, if there is a second mortgage. The second mortgage company has to agree to take a very low price, or even nothing at all. Sometimes the second mortgage company will agree to the short sale if the buyer agrees to sign a new promissory note to repay the debt. DON'T DO IT.

3. Deed in Lieu of Foreclosure. This means you give the bank the house instead of them foreclosing on the home. The reality is, banks don't want your home. They are in the business of money, not real estate. They would rather a short sale. Sometimes they will agree to this. But, this cannot be done if there is a second mortgage on the home.

[Note as to numbers 2 and 3: banks are sometimes requiring proof of hardship to accept either a short sale or a deed in lieu of foreclosure. If you are an investor, you may not be able to do either. It is easier to do if it is your primary residence]

4. File Chapter 13 Bankruptcy. Bankruptcy can be used as a tool to strip off a second mortgage. The second mortgage has to be completely unsecured. That is, if the property is worth $200,000, the first mortgage has to be more than $200,000 to "strip" the second mortgage.

Bankruptcy can also be used to catch up on your mortgage. Instead of coming up with a lump sum payment to catch up on payments, bankruptcy can be used to pay the arrearage over time.

5. Modification of mortgage. Banks are trying to make deals to redo the loans. I have yet to see a mortgage amount be reduced in principal. So, if you owe $275,000, you will continue to owe that amount, but the bank may offer a lower interest rate. At the end of the day, you still have to be able to afford the payment.

6. Just walk away from the home. Many people are choosing to walk away from their homes. The ramifications for this action are yet to be brought to light. Many attorneys wonder what will happen 5 years from now. Although the mortgage companies are not trying to collect on the notes for the homes, there is a fear that 4-5 years from now, the notes will be sold to debt buyers who will try to sue you later.

7. Obama to the rescue? The President Elect promises changes. But, will he be able to do it fast enough. One possible change expected to be proposed is allowing bankruptcy judges to value homes at their present values. Great news for me as a bankruptcy attorney, and great news for someone whose home value has plummeted. Under the hoped for legislation, a home owner who owns a home worth $175,000 but owes $300,000 could go to a bankruptcy court and have the judge rewrite the loan for $175,000. It's hard for me to get my head around the machinations of this, so I am doubtful whether it can work. But, we can hope.

As always, the above information should not be relied on to make a decision. Consult an attorney.

BEWARE OF FORECLOSURE HELP

I am a bankruptcy lawyer, having practiced for 18 years. With the foreclosures on the rise, I have seen various schemes to take advantage of those who are being foreclosed. There are even lawyers taking advantage of these people. I recently had a client who was charged $3,000.00 by someone who would help them "workout" of the foreclosure. The same client also retained an attorney who was charging $350.00 per month for each month that the home was not foreclosed. The sad thing is that these people did nothing for my client.

Looking first at the "foreclosure speacialists". These people charge anywhere from $1250 to $3,000 to assist you with modifying your mortgage. These people have no special knowledge and are doing nothing that you can't do for yourself. They tell you to put aside some money each month, "above your mortgage amount" while they are working on the modification. The way they work out a modification - they fill out a form that the mortgage company gives them. Do you know what information they use to fill out the form? Information you give them. You can fill out the same form. The trick with the modification is to give the mortgage company the information that they ask for. Try to keep in communication. The frustrating part for you is trying to get the right person to talk to with the mortgage company. But, mortgage companies are starting to be more responsive to your inquiries. Or, they should be.

Attorneys are also taking advantage of your situation. There are legitimate charges to assist with foreclosure defense, but when an attorney charges $350 for each month that you stay in the house, they are taking advantage of the current court workload. These attorneys are doing nothing to forestall the foreclosure. Rather, courts are taking a long time to process all the foreclosure cases. When contacting an attorney, it should cost no more than $1000.00 to file an answer in your case, appear at any hearings, and communicate with opposing counsel. When an attorney charges you a certain amount per month, run away.

How Does Bailout Help You?

As you are well aware, Congress passed a "Bailout Plan" on October 3, 2008. A portion of that bill will help homeowners who are behind on their mortgage. It appears the relief will be limited to "troubled loans controlled" by the government. As of the date of the bill, troubled loans controlled by the government are Fannie Mae and Freddie Mac loans. If your loan is a loan generated by Fannie Mae of Freddie Mac, the government will likely be handling your loan, if you are behind.

What does this all mean? The government will likely be more helpful in trying to workout a payment arrangement. What concerns me is that rarely does government move quickly. That could work to your advantage if you have no interest in keeping your home. It may be frustrating if you are trying to keep your home and workout a new arrangement.

The Bailout Plan will not help those people whose loans are current.

As we get more details about the Bailout Plan, we will update this blog.