Bankruptcy & Loan Modifications

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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In February of this year, President Obama signed into law the new Credit Card Act, which reglulates how banks and other collections agencies can market and promote credit cards.  In addition, the Federal Trade Commission has enacted several laws that protect consumers from fraudulent and deceptive practices of creditors as well as shaddy companies that pray on consumers.  Finally, many states have enacted laws such as the Massachusetts Consumer Protection Act, MGL 93A, that provide additional protection against unfair and deceptive commerical activity.

With all of this in place, some debt settlement companies who may have engaged in conduct that is now unlawful under the many state and federal laws have proclaimed that they will take their operations overseas and to the Caribbean in order to continue to operate their business in the same way and to avoid the protection of the United States laws. 

Steve Rhode drafted a very telling article, Here’s How Debt Settlement Companies Plan to Get Around New Consumer Protection Rules – Go Offshore! detailing inforamtion generated at a trade association presentation from The Association of Settlement Companies (TASC) that appears to suggest to TASC members to consider circumventing new consumer protection rules to come from the FTC by avoiding traditional phone lines, moving operations offshore like gambling and payday operations, and selling discounted medical & health products with the debt settlement sale.

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In order to determine if you should be granted the use and privilege of a credit card, mortgage, car loan or other source of funding, most creditors rely heavily on your credit report.  These credit reports are generated by information provided by your current creditors, that is those who you owe money for goods and services.  The score itself is derived by looking at several factors including you new debt, the type of credit used, the total amounts owed, your payment history and how long you have owed a certain debt.   

It’s estimated that 3 out of 4 credit reports contain some sort of inaccurate information.  If one of your creditors reports something negative, such as a missed payment, or an improper amount of debt owed, your credit score can decline.  So what do you do if someone has misrepresented a fact to the major credit boroughs?

The first step that you must take is become informed.  More specifically, you must know that there is a misrepresentation on your credit report and in order to do that, you need to get a copy of your credit report and review it.  The Federal Trade Commission, (“FTC”) is the government agency that regulates and monitors credit scoring, credit collections and all debt issues.  Several years ago, the FTC and other political figures pushed for a law that allows consumers to get a free credit report annually without needing to pay.  In order to obtain a free credit report you can go to www.annualcreditreport.com or call 877-322-8228. 

            Once you have confirmed that your credit report contains inaccurate information, The Fair Credit Reporting Act provides a means for correcting these mistakes by allowing you to challenge any information you believe to be incorrect. If you challenge something and the information isn’t verified within a certain period of time, the Act even requires that it be automatically removed. You can complete this process of challenging the information on your own or you can hire a professional to assist you; it is a very time consuming process oftentimes, so you must decide how much time you are able and willing to devote to the process when deciding whether or not to seek out help.

As you move forward in an effort to repair your credit, it is also helpful to be aware that there are protections available to you from debt collectors as outlined in the FDCPA (Fair Debt Collection Protection Act) that protects you from excessive and inappropriate collection methods. You can set what times collection calls can come and where, especially if you do so in writing. Generally they’re allowed to call any number they have between 8AM and 9PM. However, if you make them aware of a certain time or place that calls would be inappropriate; they are not allowed to call.

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There are two main chapters (or types) of Bankruptcy that Consumers typically file. Chapter 7 (liquidation) and Chapter 13 (reorganization). In order to sell your property in either of these, the bankruptcy court must not have an interest in the property or give permission to effectuate a sale. Under the Federal bankruptcy law, as soon as you file for bankruptcy, all of your legal and equitable interests become assets of the bankruptcy estate and as a result, is administered or managed by the Bankruptcy Court Trustee. What this means in plain English is that all of things you thought you owned, are temporarily owned by the bankruptcy court, unless those assets have been exempted in order to ensure a fresh start.In Massachusetts and most other states, the Debtor will attend a hearing called a “Meeting of Creditors” where the Trustee will ask questions about the Debtor’s property and then decide if he or she will abandon those assets. At that point, the abandoned assets are no longer property of the estate.

With respect to a Chapter 7 bankruptcy, as soon as the Trustee abandons his or her interest in the property, you are free to sell the home. If time is of the essence, your bankruptcy attorney can file a motion with the court requesting the Trustee abandon the property, but your attorney must demonstrate the sale will fail unless it is effectuated before your case is discharged, which is typically less then 60 after the Meeting of Creditors.

When determining if you can sell your home in a Chapter 13, the issues become significantly more complex due to the length of time a case is open, usually three to five years, and the nature of reorganization and the repayment plan.

As in a Chapter 7 case, the Debtor’s property remains the property of the bankruptcy estate, including the Debtor’s house or condo. The big difference is that the chapter 13 trustee shall have no responsibility regarding the use or maintenance of property of the estate, such as the Debtor’s home. As such, the trustee will have an interest in a home sale, and the debtor must obtain a Bankruptcy Court order approving the sale.

When drafting a motion to present to the court to allow a sale, the motion needs to assert the sale price, disclose the amounts of all liens and mortgages being paid off, and list payments to any professionals such as attorneys and real estate agents. The motion must be served on all parties who may have an interest in the sale, and if anyone files an objection within the 20-day deadline, the court will schedule a hearing on the motion. These motions are fairly common, and when they are done correctly, the court usually grants the motion without requiring a hearing.

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The United States Treasury Deptartment published a press release in March of this year that details the new Home Affordable Modification Program (”HAMP”).  I have written many blog posts with respect to this program and have personally been able to use this program to help many clients.  I thought it would be a good idea to post the link on the Massachusetts Bankruptcy Blog to this Press Release: http://www.treas.gov/press/releases/reports/modification_program_guidelines.pdf

 If you have any questions, you can always contact a bankrutpcy attorney in your area to discuss HAMP.

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In our current economy, there is a lot of talk about how your personal finances can permeate into your personal and professional lives. When you file bankruptcy, it is well known that your credit report will be severely impacted and that negative information will last for years. Although you might hit a roadblock in terms of borrowing in the immediate aftermath of your bankruptcy, your life will not wait.

One of the most fundamental needs a person can have is housing and after bankruptcy or foreclosure is housing. Many companies or landlords from whom you may wish to rent will conduct background checks that will include a criminal and financial check. If you’ve filed for bankruptcy, especially if it was relatively recent in the last 2 or 3 years, you might have difficulty getting someone to rent to you. One way around this is to rent with individual landlords who are more likely to have the latitude to account for your individual story once they meet with your personally. Apartments managed by a company are more likely to impose their set standards and not rent to you or be unwilling to consider your personal circumstances. Lastly, when looking for your first rental post-bankruptcy, air on the side of fiscal conservativeness and look for a very affordable unit to start. Once you build a strong post-bankruptcy rental history, it will likely over time open more options for you with future landlords.

Another area that can be affected by filing bankruptcy are services that many take for granted including insurance, cell phones, and home data information including cable, phone and internet. Many of these service providers require credit checks before they begin to offer services and if your history is unsatisfactory based on their standards, you may find yourself seeking other avenues to secure these services. If you find yourself in this position, you can expect two distinct possibilities, paying larger deposits if you are allowed to contract for these services or having to prepay for the services. Many companies will require you to pay for the services before you receive them via these larger deposits or limits on your service like prepaid cell phone plans.

Employment is a crucial aspect of anyone’s livelihood and is especially important to discuss in terms of seeking post bankruptcy employment. Potential employers will often conduct credit checks especially if the position entails handling money or other valuables. The best solution to this is to just be aware of the possibility and be certain when applying for jobs.

A final major area to expect to be drastically affected after bankruptcy is clearly the ability to be issued credit either as loans, mortgages or credit cards. Anyone who does extend credit to you will likely impose very high interest rates and severe terms. Be cautious when attempting to borrow by borrowing conservatively and being sure to account for the interest rates when you consider repayment. With credit cards, a new product has recently entered the market in the form of prepaid credit cards. Although these prepaid credit cards have “Mastercard” or “Visa” on them, they are not credit cards and are not subject to credit checks or reports to a credit bureau. Furthermore, since they are nothing more than a debit card, if they’re lost or stolen you are subject to actual cash losses and they are harder to dispute. The issuers of prepaid cards also generally impose more strict rules regarding lost or stolen cards including a requirement to report it within 48 hours or you’ll begin to bear the burden of the monetary loss.

In Massachusetts, if you find yourself facing discrimination from an existing relationship (service provider, employer etc.) after you’ve filed bankruptcy you may be able to be protected under M.G.L. Ch. 151B § 4 §§ 4A that prohibits such retaliation. Bankruptcy is a constitutionally protected act and it is illegal to retaliate against such a protected act. In any aspect of your life post-bankruptcy, the best tool you can have is knowledge so that you are not caught off guard and always have multiple options left available to you so that in the end all of your needs can be met to provide for yourself and your family.

The foregoing article was drafted by Justine Medina, for the Law Office of Goldstein and Clegg, LLC

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