Bankruptcy & Loan Modifications

Recently, I have heard many Creditor rights and debt settlement companies making statements about bankruptcy that are at best inaccurate, and at worst an attempt to dissuade Debtors from filing bankruptcy in lieu of loosing their home and entering into long-term pay back plans with Creditors that are not in a Debtor’s best interest.  For example, I read one blog article, What No One Tells You About Bankruptcy, Foreclosure and Your Credit, that suggests filing bankruptcy will not always stop a foreclosure, or that your credit score will be harmed beyond repair for a decade by filing a Chapter 13 case.With all due respect to these positions on bankruptcy and its effect on credit, I would suggest that most homeowners facing foreclosure are already at the bottom of the credit score spectrum.  Additionally, the only way to guarantee that a foreclosure is stopped is by filing a bankruptcy.  Pursuant to section 362(a) of Title 11, once a bankruptcy case is filed, the foreclosure MUST be stopped, and the only way a creditor can continue is by filing a motion for relief from the automatic stay.  In order for a creditor to do this, the homeowner must fail to make there subsequent payments. 

I will grant you that many Chapter 13 cases do fail, but the reason for that are unrealistic plans, and underestimating a Debtor’s expenses on schedule J, or an artificially inflated income on schedule I based upon untrue revenues from self employment. 

What I have found in my practice is that a Debtor needs to take a hard look at there situation and determine if their house is (1) worth saving, and (2) if the homeowner has enough income to stay current and pay back their missed armaments over a 5 year period.

With respect to the contention that one’s credit score will decrease with the filing of a bankruptcy and be harmed for up to 10 years, that is a very dangerous statement to make.  In fact, it is actually possible for your FICO score to increase after your bankruptcy discharge.  The reason for this is very simple, approximately 35% of your credit score is based upon the amount of debt.  If you discharge thousands of dollars in debt, then that part of the calculation can only increase.  Another approximately 35% of the FICO score is based upon your payment history.  If by filing a bankruptcy, you no longer have debts to be in arrears on, then again you can only go up, over time as you make your chapter 13 plan payments.  This is not to say that filing of a bankruptcy does not take a negative toll on your credit score, but it is balanced by the positives.  In many situations, Debtors, especially those with a mortgage can rebuild their credit with in 24 – 30 months to the point of obtaining new secured debt loans.  I do however, caution my clients to be careful not to fall into their old bad habits which created the need for the bankruptcy filing.

The bottom lines is that if you are facing a foreclosure or have a significant amount of unsecured debt, it is always a good idea to talk to a bankruptcy attorney or consumer debt advocate in your area before making any decision.  Most of these attorneys such as me do not charge a consultation fee for the initial meeting and can provide you with a great deal of insight.

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     The process and procedures to dispute an inaccurate charge on a credit card is well documented and supported by Massachusetts & Federal Laws. Consumer laws have been protecting individuals from wrongful actions of creditors.  There are certain steps an individual must take to take advantage of the law’s consumer protection: contacting the creditor, waiting for response, settling dispute.

            The Fair Credit Billing Act was established to protect consumers from creditors. The settlement procedures apply to disputes of “billing error”. These may be unauthorized charges, charges with wrongful date or amount, charges for goods or services that were not accepted by you or never delivered, math errors, and failure to bill to current address. It is important to acknowledge the law applies to “open end” credit accounts. Credit accounts would include credit cards, revolving charge accounts or department store accounts.

            An individual may find protection under the Fair Credit Billing Act against wrongful credit card fees. The individual must write to the creditor inquiring the information of the charges.  The individuals name, address, account number and description of errors must be included in the letter. Additionally you must attach copies of documentation that supports your claim. The letter must be delivered within 30 days after the bill is recieved, containing the error. This is clearly stated in Section 166 of the FCBA. It is advantageous for you to send the letter by certified mail and return receipt request. This allows you to have proof the creditor received the letter within the time frame.

            Within thirty day the creditor must acknowledge your complaint. The creditor must explain the error or inaccurate amount on bill through writing. If the creditor recognizes the mistakes the letter back will include a change to your bill. Also, the creditor must remove all finance charges, late fees or other charges obtained during or related to this issue. However, the creditor may pursue the balance of the disputed amount (Section 166(a).

            If the creditor questions and pursues the disputed amount, it is necessary you keep the received letter from the creditor of the disputed amount. At this time the creditor will investigate the charges; information may be requested to prove the charges.

            During the dispute, all other payments not in dispute must be paid. A legal or other action to collect the dispute amount is restricted during investigation. The closing of your account is also restricted to creditor. However, the disputed amount may be applied against your current credit card limit. The dispute must be resolved within ninety days or two billing cycles after receiving the letter.

            Throughout the dispute process, under the Fair Credit Billing Act section 161(a), “a creditor or his agent may not directly or indirectly threaten to report to any person adversely on the obligor’s credit rating or credit standing because of the obligor’s failure to pay the amount indicated by the obligor”. This section protects an individual’s credit report allowing stability while the claims are in dispute. 

It is important to realize the creditor’s investigation may result in the determination that the bill was correct. If this happens, the creditor must immediately send notification with a descriptive reasoning. The individual may request documentations proving the bill was correct. At this time, the individual will need to pay the owed amount and finance charges collected during disputation. There may be a minimum payment required because of the dispute (Fair Credit Billing)”.�
            If you disagree with the findings of the investigation, you can act within 10 days. The letter must state your refusal to pay the disputed amount because you do not feel you owe the funds. Collection procedures may begin at this time. What if the creditor fails to follow procedure? In the case the creditor does not follow procedure, the creditor will not be able to collect amount disputed or any related funds up to 50 dollars. The collector may not collect the funds if the investigation result is finding the billing was correct.

            If a creditor has contacted a credit collections agency during the period of investigation, it is against the law. The creditor is breaking Section 166(a) of the FCBA and chapter 93 Section 49 regulation of trade. Under this section (d) the creditor communicates with alleged debtors through the use of forms or instruments that simulate the form and appearance of judicial process. This action would break the process and violate the judicial process. However, the letter of dispute must have been received by the creditor within 30 days of the incorrect bill. The creditor may pursue the individual for liable amounts if this was not fulfilled.

            All in all, the procedures to dispute an incorrect fee are a timely mannered process. The federal and state laws established will help the individual fight the creditor. It is important to realize the creditor may result in correct billing. Also, it is important to remember the finance charges which can be established throughout the process that you will be liable if the creditor is correct.

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Consumers who file for bankruptcy under Chapter 13 are in a unique position with respect to their debts and how much of those debts get paid. Under a Chapter 13 bankruptcy case, the Debtor is proposing to reorganize his or her finances and to pay back not only missed payments on mortgages, cars loans, and taxes, but also a portion to unsecured creditors. In the past that amount has been based upon the disposable income of the person filing for bankruptcy. However, in making that determination, certain allowances are used to decide how much someone is allowed to spend. In addition, the amount of money one is believed to make each month was not based upon their current situation as much as it was based upon their income over the last six months.Recently, the United States Supreme Court had the opportunity to issue a ruling relative to the plan payment and how to determine a person’s true disposable income”. The Court held that “when a bankruptcy court calculates a Debtor’s projected disposable income, the court may account for changes in the debtor’s income or expenses “that are known or virtually certain at the time” their plan payments is confirmed by the court. This is important because a person who may receive a lump sum payment or bonus could conceivably be required to may much more money each month then they really earn. Equally important, a person who earned a large salary, but whose income is about to be reduced, need to suffer due to the fact that their income was at one point in time higher then it is on the day they file, or even higher then anticipated over the next few months.

In the case of Hamilton v. Lanning, 545 F. 3d 1269 (2010), the court held that taking the forward-looking approach should begin by calculating disposable income, and in most cases, nothing more is required…, but the court can take into account other known or virtually certain information about the Debtor’s future income or expenses.”

What this all boils down to is that when deciding if bankruptcy is the right option, Debtors now have a guideline that they can point to in working with the Trustee and the Court to somewhat accurately anticipate their Chapter 13 Plan.

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Many Creditors have found themselves in the position of being owed a significant amount of money but having no way of collecting that money.  In some situations though, the Creditor may be privy to information that the reason they are not being paid is not due to a lack of funds by the Consumer or business, but rather due to the fact that the funds are being diverted to other parties or even being embezzled.  If this is happening, what options do Creditors have?  One option is certainly to commence a case in state court for breach of contract, which will then require discovery to enforce a judgment.  However, there is another option which is underutilized; a Creditor can petition the Court to force the Debtor into a bankruptcy. The purpose of an involuntary bankruptcy is to prevent and protect Creditors from unfair activities. A direct result of forcing an involuntary bankruptcy is the ability to recover payments or wrongful transfer by the Debtor.  The filing of involuntary bankruptcy allows the avoidance of time restrictions on three important elements: Inside transfers prior to filing within two years, fraudulent transfers made within one year prior to filing and non-insider preferences made within 90 days prior to filing are protected.

            Forcing an involuntary bankruptcy has two main benefits. First, filing a bankruptcy presents the opportunity to appoint a Trustee over the case. 11 U.S.C. § 303 As a result, the Debtor’s actions can be thoroughly examined and the Debtor can be held accountable.  A secondary benefit for the Creditors is a claim for “actual, necessary expenses” acquired through the time of ordered relief. This event occurs when the court accepts the petition.  The Creditors involved have the opportunity to submit this claim that includes Attorney’s and Accountant’s fees, cost for preparation for petition, and filing the petition. Also, the claim can involve any litigation necessary for petition. Under the bankruptcy law, administrative claims (11 U.S.C. § 507(a) (1) are a first priority and are finically compensated before all other claims.

            An individual or corporation as a Debtor becomes a likely candidate for an involuntary bankruptcy for two activities. First, the Debtor is missing several payments or regularly missing payments. Secondary, the Debtor can become subject if a custodian was appointed or had taken possession of the debtor’s property before the petition within 120 days.

            There are five necessary elements needed to force an involuntary bankruptcy. To file a petition, the debtor has to have at least three creditors our of twelve who are owed a minimum of $10,000 dollars together; If there are less than 12 creditors owed, only one creditor is necessary which is owed at least $10,000 dollars. The 12 creditors may not be insiders, employees or anyone getting preferences. The debts must not be dependent, meaning that they cannot be claims for a law suit yet to be matured. Additionally, the disputes must not be bona fide claims.  Bona fide cases are debts with “good faith” to fulfill. Also, until such time as the bankruptcy case is discharged or dismissed, additional Creditors may also join a pending petition.

            The process of filing an involuntary bankruptcy begins with filing a petition and a summons with the clerk of the U.S. Bankruptcy Court. The Debtor has a 20-day time

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It is known to everyone that many homeowners have defaulted on their mortgage loans due to the economic downturn in the recent past (2007-2009). The homeowners had not been able to get loan modification help from their lenders. So, the Government has introduced Home loan modification Program (HAMP) taking help of which the homeowners can avoid foreclosure and get current on their mortgage loans by making affordable monthly payments. The lenders participating in the program are also eligible to get financial incentives if they modify the loans. However, recent reports reveal that there have been only 300,000 permanent modifications till April 2010, which is only a 50% success rate.According to researches, more than 673,000 households are presently in the trial face of the program. During this trail phase, homeowners need to make their mortgage payments consistently. It has been noticed that many homeowners cannot continue making payments for the entire period till the new loan is secured. There have been about 278,000 failed trials, which indicate that, the number of successful and failed trails is more or less the same. So, the administration has asked the loan servicers to verify the income of households in the beginning of the trial instead of verifying it at the end.

According to Mortgage Bankers Association, about 10% homeowners have missed at least one payment during January-March period in 2010. It is a record high as it shows one-month delinquency is up by about 9.1% as compared to the same period a year back. However, more number of homeowners just starting to experience trouble has lessened. Till March 2010, about 3.5% homeowners have missed one month of home loan payment. It is down from 3.8% as compared to the same period a year back. As per industry experts, about 4.3 million homeowners (about 8% US citizens with a mortgage) are presently at risk of losing their home. These mortgage borrowers have either missed 3 mortgage payments or are in foreclosure. So, if loan modification programs fail to help them, then their homes would be foreclosed or short sale would happen. To help these homeowners, the Government has introduced another program, HAFA (Home Affordable Foreclosure Alternatives) program that complements HAMP by providing a viable alternative to the homeowners, who’re eligible for HAMP but is not able to keep their homes. The program has come into effect on April 5, 2010.

However, the homeowners who’re not able to take advantage of HAFA or want to keep their properties may take help of Chapter 13 bankruptcy. However, you need to qualify the Means Test and satisfy the eligibility criteria to file a Chapter 13.

This article was written by Samantha Taylor, who is the Community Mentor of MortgageFit and has been contributing her suggestions to the Community since 2005. Not just that, she has also made notable contributions through the various articles written on different subjects related to the mortgage industry. Few of her popular articles would include names like ‘Mortgage that you can afford’ , ‘ Mobile Home Loan with Bad Credit’ , and ‘ How much mortgage can I borrow”?

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The term loan modification is not a new one, but it has picked up a lot of speed over the past year. In the past, homeowners and lenders have been able to workout deals to change the essential terms of a mortgage through private negations. However, in March of 2009, the United States government released their Home Affordable Modification Program (“HAMP”) and all of a sudden it was the new craze. The problem is now that the Government is involved at least to some extent, consumers seem to believe that banks have an obligation to “modify” or change a loan. When in reality, the government has no teeth to force the banks to do anything. A loan modification or credit workout is purely an optional program.With that said, many consumers and frankly even Consumer Debt Advocates have been taken advantage of by the banks who have at the very least given the appearance of acting in a deceptive manor with respect to these loan modifications. Many homeowners were accepted into a loan modification trial program, in order to prove that they could make modified payments. The homeowners has made these payments for several months and after they have been faithfully making good on that agreement are kicked out for no reason, or even fraudulent or deceptive reasons and are facing foreclosure.

Many of use know the deal; the bank requests a bunch of documentation to review. They claim that they have not had a chance to review it and so ask for updated information. They do this while arrears are building up, and then finally offer a trial plan. Once the homeowner is in the trial plan for what is represented to them as 3 months, they soon learn that it can become two to three times as long, all the while the homeowner faithfully performs their obligations under a new agreement and pays sometimes tens of thousands of dollars to the bank, instead of investing that money in other avenues that my be more effective, such as filing for a chapter 13 bankruptcy, or challenging the standing of the banks.

It has been suggested by many on the interest though various blogs and chat rooms that this loan modification is nothing more then the banking industry’s “well-thought-out scam where the lender, knowing full well they ultimately intend to foreclose string the homeowner along to collect a few additional payments.

What many people do not seem to realize, is that there are other opportunities to save your home, or in the alternative, cut your losses before they arrears get too great to manage. The key to remember is that should you want to walk away from your home, if the home is sold for less then you owe, you may be liable for the debt. In order to avoid this, a simple Chapter 7 bankruptcy can eliminate that risk. Additionally, you can file a Chapter 13 case and pay back the missed payments over 5 years interest free. Perhaps more importantly, when you file a bankruptcy, the bank must stop any foreclosure or collection attempts for past due amounts. It may provide you with the time you need to go into court whether it be through the bankruptcy court, the land court or even superior court to challenge the standing of the bank.

The lender must prove that they even have a right to foreclose and in order to do this, they must have a copy of your original mortgage and note. If they can not produce that note, then a judge may indefinitely stay their foreclosure. If they file a claim for past due amounts, the bankruptcy court may hear this as evidence of a challenge to the proof of claim. You also may request a copy of your loan application and find out that there are many untrue statements that bank used to issue the loan. If this is the case, you may even be able to strengthen your position and negotiate a “real modification” where you have now come full circle.

Additionally, should you have a second mortgage that is not supported by any equity, you may be able to strip the lien entirely though a Chapter 13. In the event that the home is not your primary home, but rather an investment, you may even be able to cram down the principal to its current fair market value and a reasonable interest rate through a court order.

The bottom line is this, do not trust that you will obtain a loan modification even if you have been put into a trial period. You have several options, and should contact a qualified consumer debt attorney to learn what options are at your disposal.

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There are many forms of unsecured debt, including credit cards, personal loans and essentially, any debt that is not secured by an actual asset or collateral. However, the one form of unsecured debt that does not get much treatment or conversation is medical bills. Incurring significant medical bills could happen to you as a consumer at anytime. If you are injured or become sick and require a trip to the emergency room or surgical room, it could result in thousands of dollars in medical bills. Even with health care insurance, you may end up facing appalling debt due to your medical situation. More specifically, many health care providers have unfair billing practices that only add to the consumer debt you may confront. The problem is that many patients simply do not think about this and what happens if the insurance declines to pay, or there is a large co-payment required.

Medical bills are viewed in the same way as credit card debt, it is unsecured. However, if you don’t pay your bills you can be sued for the balance. Health care providers can send medical debts to collections, file judgments, garnish wages and obtain home liens over medical bills that you can’t afford to pay.

Let’s take a quick look at exactly how medical insurance works. Typically, you have an insurance policy that will require you to pay the first part of a bill, say $25 - $500. The heath care insurance picks up the balance, so long as the treatment is determined to be medically necessary. In some case, after you are admitted to a hospital, a doctor must determine if it is medically necessary for you to stay. Each day a decision is made for the following day.  If you are able to transition on, and you want to stay, then a Nurse Case Manager will discuss your situation with the insurance company, and if the insurance company decides they will not pay, the financial burden shifts to you as the patient.

If the insurer decides they will not pay, you do have many options. First, you should look into the decision to determine if a denial was proper. In many states just as there are consumer protection laws, there are also laws specific to the regulation of insurance and fraudulent and deceptive denials of coverage. 

If it is determined that the denial was proper, or you simply did not have coverage, you still have many viable options to deal with the medical debt. There is a well established system to discharge all legitimate unsecured debt, more specifically, filing a Chapter 7 bankruptcy, or reorganizing your debt though a Chapter 13 bankruptcy. You also can of course pay the health care bill with third party funds or a credit card. The problem is that you are going to incur interest on the debt that in most likelihood, higher then the bill itself. You can also negotiate with the creditor and enter into a payment plan or settle the debt with the medical provider for less then full amount, and then negotiate a release of liability.

The bottom line is that even if you have a massive medical bill, do not panic, there are solutions and opportunities out there for you. Your first step is to get all the facts, and then speak to a consumer debt advocate who may be able to direct appropriately.

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     The general rule of thumb is that no one is going to renegotiate a contact of any sort unless it is advantageous to them. What I mean by this is that if it is not in your bank’s interest to modify your loan, then why should they? As a result of this theory, many people who do not truly understand how the Federal loan modification programs work or how many of the private mortgage workouts are set up, will tell you that you need to miss at least a few mortgage payments before anyone will even consider you for a modification.    

    This is simply not true. If you can avoid falling behind on your payments, without causing any undue suffering for your family, such as not being able to pay your utility or grocery bills, your best bet is to keep your mortgage payments current. As soon as your start missing payments by more then thirty “30” days, your credit score will start to decline. For this very reason, the government has added the specific language of “immanent default” to those homeowners who could be helped by a loan modification. More importantly, the investor is looking at a situation of not simply have you already stopped paying your mortgage, but if nothing changes will you be able to continue paying your mortgage. Additionally, there are actually incentives to the banks that choose to modify home owners who are current, by providing a financial contribution from the government. For more information on incentives, check out the Making home affordable press release.

     The key to a successful loan modification is not necessarily to be delinquent, but rather to be proactive. Talk to your lender before you get to the situation where you have already missed several payments and may not be able to catch up without help.

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Let me preface this blog by stating that I am a consumer debt attorney.  I typically represent homeowners or small business owners in negotiations with banks and other creditors, or in protecting consumer rights though use of the Bankrutpcy code.  Now with that said, I am going to do somthing for my brothers and sisters, stick up for the “Dark side”.

 Last week the highest court in the land rendered a decision relative to the Fair Debt Collection Practices Act that will greatly empower home owners to negotiate with their mortgage companies.  More importantly, the ruling in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, limits a lawyer’s ability to deceive a homeowner and claim it was a “bona fide error”.  Should Creditors counsel advise their client to take certain steps where there is conflicting case law regarding the Fair Debt Collection Practices Act, and if a court rules that the route taken by the lawyer was not the proper interpretation, then the court may access personal liability against Creditors Counsel.

The ruling stemmed from a case where a law firm representing a mortgage company sought to foreclose on a home. It sent a letter to the debtor that said the debt would be considered valid unless the debtor disputed the claim in writing, even though the Fair Debt Act does not require a written dispute. The mortgage company acknowledged that the debtor had already paid the debt in full, and the firm withdrew the foreclosure suit.

In my opinion, this is a very scary ruling.  Even though, I represent consumers and Debtors in these types of actions and almost always find myself on the other side of the fence from Creditors Counsel, it is hard to agree with a ruling that limits any attorneys ability to interpreter law.  I mean, isn’t that what we have been trained to do from the first day of Law School to studying for the bar exam and now in practice.  More importantly, isn’t our entire judicial system built on the adversarial concept of two parties arguing different points of view over the same issue?  This seems like an awfully slippery slope to me.

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