How do you sell your home in a Bankruptcy

November 29th, 2009, 9:22 am

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.

Filed under Debt Negotiation, Bankruptcy, Post Petition Protection, short sale · Comments

How the HAMP loan modifications effect your credit score

November 19th, 2009, 7:39 pm

This post discusses (1) how they are being reported, (2) how they should be reported, (3) what you can do to get your HAMP-modified mortgage reported correctly, and (4) possible effects even the “correct” reporting might have on your credit score.

How HAMP-modified loans are being reported now

Many servicers are reporting the modified mortgages to the credit bureaus as a “rolling 30-day late”  while the modification is in its trial period.

(The “trial period” is generally a three month period during which the homeowner must make all payments on time under a proposed modification plan. If the homeowner does so, he or she will be offered a modification under HAMP.)

Homeowners are deemed “delinquent” during the trial period because the modified payment amount is less than the original mortgage payment amount, but the homeowner is not yet officially in the modification program.

So, the credit reporting system interprets this as the homeowner’s making a partial mortgage payment each month.  Consequently, a new 30-day late is reported each month during the trial period.

Some servicers have told homeowners they are required by the Treasury Department to report the modified mortgages this way.   Other servicers have told homeowners Treasury instructed them to report the mortgages as “late” in order to weed out people who could afford to pay the original amount of their mortgage.

How HAMP-modified loans SHOULD be reported during the trial period

But, borrowers who are current on their mortgage when they enter into the trial modification period should NOT be reported as late, according to servicer guidelines for Fannie Mae, Freddie Mac, as well as other loans (”non-GSE loans”) being modified by HAMP-participating servicers.

Homeowners who were delinquent when they entered the modification trial period, however, will continue to be reported as delinquent during the trial period.  See below for more detail.

Information to forward to your servicer if it’s reporting incorrectly

If your loan is owned or guaranteed by Fannie Mae, see page 12 of Fannie Mae Servicing Guide Announcement 09-05R for information about credit reporting for HAMP-modified Fannie Mae loans. It says:

“If a borrower is current when they enter the Trial Period, the servicer should report the borrower current but on a modified payment if the borrower makes timely payments by the last business day of each Trial Period month at the modified amount during the Trial Period. If a borrower is delinquent when they enter the Trial Period, the servicer should continue to report in such a manner that accurately reflects the borrower’s delinquency and workout status following usual and customary reporting standards.  In both cases the servicer should report the modification when it becomes final.”

If your loan is owned or guaranteed by Freddie Mac, see page 5 of Freddie Mac Publication 800 for servicer instructions re:  credit reporting of modified loans.  It says:

“Borrowers who are current when they enter into the Trial Period and make payments by the 30th day of each month, report as current, but on a modified payment.  Borrowers who are delinquent when they enter into the Trial Period or do not make payments by the 30th of each month, report according to borrower’s delinquency and workout status. Notify when borrowers have completed the modification.”

If your loan is NOT owned or guaranteed by Fannie Mae or Freddie Mac, see page 22 of  “HAMP Servicer Supplemental Directive 09-01″ for information about credit reporting guidelines for modified non-GSE loans.  It specifies the following:

 

“The servicer should continue to report a “full-file” status report to the four major credit repositories for each loan under the HAMP … on the basis of the following: (i) for borrowers who are current when they enter the trial period, the servicer should report the borrower current but on a modified payment if the borrower makes timely payments by the 30th day of each trial period month at the modified amount during the trial period, as well as report the modification when completed, and (ii) for borrowers who are delinquent when they enter the trial period, the servicer should continue to report in such a manner that accurately reflects the borrower’s delinquency and workout status following usual and customary reporting standards, as well as report the modification when completed. More detailed guidance on these reporting requirements will be published by the CDIA.”

What does this mean for homeowners who are thinking about applying for a modification?

To help minimize damage to your credit report and score, you should apply and try to get into a trial period while you are still current on your mortgage.

You do not have to be behind on your mortgage to apply for a HAMP modification.

What does this mean for homeowners who have recently applied for a modification?

Verify that your lender or servicer understands how it should be reporting your modified loan.  Do this before starting your modification program, if possible.

Several homeowners have told our office they had to send a copy of the relevant HAMP credit reporting guidelines to the servicers, who were apparently unaware the guidelines existed.

Remember, you can review all the HAMP and HARP mortgage servicer guidelines at this link.

Will the reporting of  “current, but on a modified amount” hurt my credit?

It is impossible to say for sure because FICO does not publish its scoring model.

But, “current, but on modified amount” might ding your score a little.  This reporting is telling the credit bureau you are currently paying as agreed, but less than the original amount you contracted to pay.

The FICO scoring model may not give you full credit for paying as agreed.  But, this will not be nearly as damaging as rolling 30-day lates.

What if my modification is not through HAMP?

The credit reporting guidelines above apply only to HAMP-modified loans.  If you have arranged a non-HAMP modification with your lender or you have modified your loan through another mortgage relief program, these credit reporting guidelines will not apply.

Be sure to negotiate the credit reporting with your serivcer as part of your overall modification package.  Even if the servicer insists on reporting your loan negatively, at least you can make an informed decision as to whether a particular modification package will work for you.

This post was originally posted on Karen Ware

Filed under Loan Modification · Comments

Banks’s must Produce the Note to foreclose

November 8th, 2009, 9:25 am

I recently came across a great article drafted by a former paralegal of our firm, Rick D. Misitano regarding foreclosure defense.  Below are the pertinent parts of that article.
When a lender can’t produce the original note, allowing a foreclosure to proceed puts the homeowner at risk of owing that debt again to another party in the future.

So, what happens when the lender tells the Court it can’t produce the original note, because it is lost? Let’s start with the basics. If a lender wants to foreclose on a property, it has to be able to show that it is, in fact, the appropriate person to whom the money is owed. That right to foreclose belongs ONLY to the person who has legitimate POSSESSION OF THE ORIGINAL NOTE - not a copy, not an electronic entry, but the original note itself with the original signature of the person(s) who allegedly owes the money along with appropriate raised notary seal and signature. So, if you are faced with a foreclosure, you have every right to demand that the person or entity trying to take your property, first prove to the Court that they have the legal right do to so in the first place by proving they have legal possession of the original promissory note.

In my opinion, an original mortgage note is a VERY valuable legal instrument, much like legal tender and should be guarded and protected as such by the person holding such an asset. Loosing an original mortgage note is like loosing a $100 bill or a gift card or a lottery ticket.

Let’s say (as an example) I scratched a million dollar winning lottery ticket and I just stuck it somewhere and misplaced it and now cannot find it. Do you think I could just show up at lottery headquarters and claim my prize without having the actual winning ticket? What if I made a photo copy of the ticket? Would I get my winnings then? What if you loaned me $100 and I tried to pay you back with a photo copy of a $100 bill? Would you accept my payment? What if I paid you back with a photo copy of a personal check made out to you for $100? Would you accept my payment then? Do you think your bank would honor a photo copy of my personal check made payable to you for the hundred bucks? Or do you think they would want the original check from me with my original signature so they can verify my check is authentic and is a payment I authorized? The same principle applies to the person or entity claiming to be the legal holder of an original mortgage note. He who holds the note holds the key and has an absolute duty to safeguard such an important legal instrument at all costs!

What the Lender Must Do

What often happens, however, is that the lender claims it doesn’t have the original note, because that note has been lost or destroyed. If the lender is making such a claim, the law requires the lender to prove all of the following under the “Uniform Commercial Code”, which is a set of laws governing commercial transactions that many states have adopted. It contains a specific provision on this subject (Section 3-309) which states that a person can enforce a promissory note without having the original, BUT only under certain limited circumstances.

1. The person or entity has to swear and attest that it no longer has the original note;
2. The person or entity has to prove that it was properly in possession of the note and was entitled to enforce it WHEN it lost possession of the note;
3. The person or entity has to prove it didn’t “lose” possession simply because it transferred the note to someone else (i.e., it’s not really lost); and
4. The person or entity has to prove that it cannot produce the original note because the instrument was destroyed or its whereabouts cannot be determined or it was stolen by someone who had no right to it.

All of these matters have to be definitively proven by the person or entity trying to foreclose on the property. It is not the obligation of the borrower to prove or disprove any of this. The borrower can challenge the right of the person or entity trying to foreclose and demand proof.

The Court’s Important Role

It is up to the Court to determine whether the lender has satisfactorily proven why it no longer can produce the original note. The Court also has to be satisfied that when the original note was lost, the person trying to foreclose on the property had possession of the note at the time it was lost. Until the Court has been satisfied of all of this, the foreclosure cannot proceed.

It is also important for the Court itself to understand that this issue is not merely a “technicality” and the judge should not be satisfied with anything less than full proof of this issue. The Court itself needs to appreciate the fact that if it should agree that an original note has been legitimately lost (and allows the foreclosure to proceed) it is the borrower who is still at risk.

Why? Because incredibly, even if a Court has found that the original note is lost and the foreclosure sale is finalized, if someone later turns up with the original note and proves that it is the proper holder of the note (and not the person who foreclosed on the property) the original borrower is STILL LIABLE.

That’s right. Someone took your home and the Court allowed it because it believed that the lender proved that the note was lost and it was the proper party. Then someone legitimate shows up in the future with the actual note and you still owe that person the money even though your property was taken with the blessing of the Court. Trust me, this is a very serious issue regarding foreclosures! Homeowners pursuing a short-sale should be very concerned and should seek out the advice of legal counsel if seeking such option. Homeowners who are seeking to do a loan modification should be even more concerned! This issue has affected many of our our own clients who have retained us because they negotiated a short sale themselves (or via their real estate agents) and are now being sued by parties claiming to be the legal holders of their mortgage notes even after they have already sold their homes! These homeowners had the need to sell their property by means of a negotiated short-sale (so they could avoid a foreclosure) only to find out that the entity claiming to have the legal right and authority to enter into such negotiations and accept such settlements sold their note to another entity and weren’t even aware of it. Several months (and even years) later, the newly assigned lenders (now claiming to be the rightful owners of our client’s original notes) have since come forward and have filed suite seeking to recover their entire outstanding principle balances owed to them (prior to the homeowners closing their short-sale transactions with the wrong note holders). And (if you are a homeowner seeking a loan modification) you absolutely need to verify who currently holds your original note. Otherwise, if you enter into a loan modification agreement with the wrong party (or should be successful in getting your note totally re-written for better terms) you could be creating a whole new mortgage debt that you would be responsible for if there were someone else out there claiming to legally hold your original note.

Filed under Foreclosure · 5 Comments

How to Remove a Judgment Lien from your property

November 5th, 2009, 4:47 pm

Many homeowners have found themselves in the position of owing money on a debt which they simply can not pay back, or have been sued by someone and failed to respond to the law suit. When this happens, the Plaintiff often will attempt to collect on their judgment by putting a lien on the homeowner’s property. Many of my bankruptcy client’s have come to me with just such a situation. This becomes an issue after a consumer’s unsecured debts have been discharged in bankruptcy. The reason is simple; the homeowner has a lien against their house post bankruptcy and they do not owe any money to the lien holder.

After a Chapter 7 discharge, a debtor may avoid a judicial lien by motion to the Court. To the extent lien impairs an exemption to which the debtor otherwise would have been entitled under the Bankruptcy laws. As a result, the bankruptcy court will grant a Chapter 7 debtor’s motion seeking to avoid a judicial lien if debtor’s equity in the property is less than the amount protected under the Massachusetts Homestead Act, which currently stands at $500,000 in value for the land and building, M.G.L. c. 188 § 1, and when the creditor’s lien fully impaired the debtor’s equity in the property. In re Lyons, 355 B.R. 287 (2006).

So what is the gist of all of this legal speak? When the collateral has no value, the creditor has no claim against it because it will be treated as unsecured, and thus the debtor may discharge that lien.

Filed under Bankruptcy, Post Petition Protection · 6 Comments