How to Walk Away From a Mortgage

Realizing that you can no longer pay for your home means that you have difficult decisions to make.  While modification and even lien stripping in bankruptcy may be options for some, if you truly cannot afford to keep your home, you must decide on the best way to walk away. 

Do Nothing

If you do not pay your mortgage payment, the lien holder will foreclose on your property.  Although not paying your mortgage payment and the resulting foreclosure will significantly harm your credit rating, the home finance industry is presently in such turmoil that it may be months to more than a year before the lien holder forecloses on your property.  During this time you live rent free and can save for the future.  Note that if you do not maintain insurance and do not pay real estate taxes, the foreclosure timeline will likely accelerate.  Also note that under the Mortgage Forgiveness Debt Relief Act, which extends through 2012, income normally attributable by the IRS in connection with a foreclosure is not taxable, although you may be liable for a deficiency balance when the home is sold for less than you owe.  A foreclosure is listed as a public record on your credit report and the late payments are also reported. 

Deed in Lieu of Foreclosure

Some financial “experts” have advised distressed homeowners to “just walk away.”  Walking away from a home is easier said than done, since you still own the home and are legally responsible for the property in a variety of ways.  One way to legally “walk away” is to transfer title of the property via a Deed in Lieu of Foreclosure.  Now the lien holder owns the property, which may sound pretty good until the property is sold for less than you owe, triggering a deficiency balance.  You may also end up owing taxes on the difference.  

Short Sale

A Short Sale is a sale for less than what is owed by the seller.  A lender will sometimes agree to allow the property to be sold for less than you owe if it is clear that you are unable to continue paying for the property and the home is upside-down.  In many cases the Short Sale deficiency is forgiven by the lien holder, but that will depend on the lender and on state law.  A Short Sale is identified as a settlement on your credit report and will hurt your score, although not as much as foreclosure or bankruptcy. 

Bankruptcy

A bankruptcy is a legal discharge of your debt.  It is the cleanest and most powerful option to “walk away” from the home with no contract or tax obligation.  A bankruptcy uses the power of federal law to stop further negative credit reporting and collection attempts.  In the end your credit report identifies the loan as “Discharged in Bankruptcy” with a “Zero Balance.”  The bankruptcy record will stay on your credit report for up to ten years, but by surrendering the property you will avoid a foreclosure on your record. 

If you need to walk away from your home and are weighing your options, consult with an experienced bankruptcy attorney and learn how the federal bankruptcy laws can help.  Bankruptcy can provide you time to move without foreclosure and without owing money in connection with the home.

Law of Unintended Consequences Hurts Big Banks

In 2004 and 2005, the banking industry spent millions lobbying for tougher bankruptcy laws.  Washington Mutual, Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. collectively spent $25 million during that period.  The big banks’ efforts paid off in a major overhaul of the Bankruptcy Code in 2005 making it more difficult for struggling families to discharge credit card debt.  However, the banks did not foresee the current housing crisis, and new research suggests that the 2005 changes to the Bankruptcy Code may have caused mortgage default rates to rise. 

A paper published by the National Bureau of Economic Research states that the 2005 changes “raised the cost of filing and reduced the amount of debt that is discharged” thereby making it more difficult for debtors “to shift funds from paying other debts to paying their mortgages[.]“  In other words, before the 2005 changes, many debtors struggling with a mortgage arrears and credit card debt could file bankruptcy, discharge the credit card debt, and free-up money to pay the mortgage.  The new bankruptcy provisions make this process more difficult.  As a result, fewer debtors are able to afford to save their homes through the bankruptcy process. 

Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank said, “Be careful what you wish for.  [The banks] wanted to make sure that people kept paying their credit cards, and what they’re getting is more foreclosures.” 

If you are facing overwhelming debt and want to keep your home, there are many alternatives available to you.  An experienced bankruptcy attorney can review your finances and explain your legal options for discharging or repaying your debts.  Bankruptcy is not the only option for saving a home from foreclosure, and many cases are successfully resolved using a combination of bankruptcy and non-bankruptcy methods.  Get the facts today and solve your debt dilemma!

Report Finds Many U.S. Homeowners are Underwater

Home values in the United States have plummeted 26.7 percent since peaking in 2006, according to a report released by Zillow.com.  The report also sites the hardest-hit cities are Miami-Fort Lauderdale, FL; Detroit, MI; Pheonix, AZ; Riverside, CA: and Orlando, FL, each recording more than a 50% dip since 2006. Zillow estimates that 27% of all U.S. homeowners have negative equity in their property.  The Zillow press release can be found here. 

Some economists are predicting that the real estate market will bottom out soon and then begin a slow recovery process.  Sadly, foreclosures may rise again in 2011 and reverse the negative equity statistic as people with underwater mortgages lose their homes.  Nationally, about one home in every 1,000 was foreclosed on during December, 2010. 

Foreclosure is a very stressful process.  It is a public record and is often published in the newspaper.  A foreclosure can happen rapidly and often forces the homeowner to move before ready.  This can be a major disruption to family and children.  Of course it impacts your credit score for years. 

By filing bankruptcy, the foreclosure process can be avoided.  In some cases, a Chapter 13 bankruptcy can provide the debtor time to cure an arrearage over three to five years in small payments and stop foreclosure completely.  In other cases bankruptcy can strip away an entirely unsecured second mortgage, thereby freeing up money to pay the first mortgage.  Lenders are also able to modify your home mortgage during bankruptcy through the federal Making Home Affordable Program. 

If you are underwater and struggling to pay your home mortgage, speak with an experienced attorney and learn how the federal bankruptcy laws can help you.  Whether you need to pay past-due mortgage payments, strip away a junior lien, or surrender the property and “walk away,” your bankruptcy attorney can explain the costs and benefits of each option.  Call today and get the advice that can help you build a better financial future.

Short Sale Tax Consequences

A short sale is the sale of real estate for less than the balance owed on the property. Short sales are common in today’s real estate market, where home prices have fallen and the home owner is no longer able to pay the mortgage loan. A short sale takes cooperation between the home owner and the lender to sell the property at a loss. Both parties must consent to the sale. A short sale can avoid a foreclosure, which can be mutually beneficial to the parties. The lender avoids the expense of a foreclosure and the home owner avoids the negative impact on personal credit. 

Short sales were seldom used by homeowners prior to the mortgage crisis because a short sale results in a deficiency balance obligation to the homeowner. The home owner was sometimes sued for the difference between the amount owed on the home and the short sale price, or, more commonly was taxed by the IRS on the amount “forgiven” by the lender. Either way, a short sale created another heavy burden on the home owner. 

In response to the mortgage crisis, the Mortgage Forgiveness Debt Relief Act was signed into law in 2007 which excludes from income a discharge of debt on a principle residence. Debt forgiven by a lender in connection with a foreclosure, refinance, or short sale in calendar years 2007 through 2012 is eligible for this relief. Up to $2 million is excluded ($1 million if married filing separately). This relief only applies to a principal residence, and does not include a second home, credit cards, or a car loan. 

A forgiven debt is generally taxed as income to the tax payer, but that is not always the case. The most common exclusions of this tax are: (1) if the tax payer was insolvent immediately before the debt was forgiven; (2) if the debt was discharged in bankruptcy; or (3) if the debt is a qualified principal residence indebtedness until 2012. 

If you are struggling with a home mortgage and need to walk away, consult with an experienced bankruptcy attorney and learn how the law can work for you. Your attorney can explain your options and together you can make the decisions for a better financial future.

“Foreclosure-Gate” Causing Chaos In The Mortgage Industry

Recently allegations have been made against several prominent mortgage lenders claiming the use of flawed and in some cases fraudulent documents during the foreclosure process.  In one GMAC Mortgage has been accused of using a “notary-mill” to crank out upwards of 10,000 foreclosure documents each month without reviewing the documents.  Similar accusations have been leveled at Bank of America.  In states that use judicial foreclosure, this activity amounts to a fraud upon the court and is illegal. 

JPMorgan Chase, Ally Bank’s GMAC Mortgage and PNC Financial have all suspended foreclosures in states that require a judge’s order.  Bank of America has suspended all foreclosures in all 50 states.  State attorney generals across the nation have joined an investigation into these foreclosure practices.  In Congress, Nancy Pelosi and Christopher Dodd, have called for a federal investigation, and U.S. Attorney General Eric Holder said he is looking into the matter.  

Potentially millions of foreclosures across the United States are subject to challenge.  In some cases courts are denying the lender’s foreclosure suit because it cannot produce clear title.  A recent lawsuit in federal court in Louisville alleges that banks participating in MERS (a mortgage document clearing house) conspired to produce false promissory notes, affidavits, and mortgage assignments to be used in mortgage foreclosures.  Similar class actions have been filed against MERS in Florida and New York. 

As a result of this mortgage document fiasco, one title insurance company, Old Republic National Title Insurance, has announced that it will no longer write new insurance policies for homes that have been foreclosed on by JPMorgan Chase and GMAC Mortgage.  Homeowners who have purchased foreclosed homes may not have clear title and may face difficulty in selling their homes in the future. 

If you are facing foreclosure, consult with an experienced bankruptcy attorney and discuss your options.  There are many options for homeowners who are unable to make their mortgage payments.  Your bankruptcy attorney can discuss your options and protect your legal rights.