An article authored by Patrick Pulatie
Chapter 13 Bankruptcy
Much has been written about the foreclosure problems facing many homeowners today. But how effective are the programs and which one should a person choose? I offer this as the topic today because there is much confusion about these programs and what is entailed. I will discuss the characteristics in basic and random order.
Chapter 13 Bankruptcy is still the most common attempt made to stave off foreclosure. With the filing, all foreclosure proceedings are put on hold. It is a legal action in which all debt is organized into what is hoped to be an affordable monthly payment for the homeowner. All consumer debt and taxes are lumped together to create one monthly payment for sixty months . Included in this amount will also be the mortgage amount that is in arrears. it is hoped that this new monthly payment will reduce monthly outgo and solve the person’s financial problems.
The problem with going this route is that one still must make the current mortgage payment, plus the bankruptcy payment. It does not address the mortgage rate or terms. So if a person has an adjustable rate mortgage, then that rate can continue to adjust up or down. So a homeowner still can face changing payments.
Also, lenders include many “junk” fees in the foreclosure process. Unless you have a sharp attorney who understands this and also how RESPA and TILA violations can be used in the bk process, you can be at a big disadvantage.
A large number of people using this method will end up losing their homes anyway.
Forbearance is a popular method promoted by lenders. It is a process where the lender will “workout” a new payment plan for you to catch up. It involves a higher payment for many months to a couple of years. Occasionally the lender will add payments to the end of the loan term.
A “wrinkle” on this plan is one I have seen from Wells Fargo. They will adjust the payment for a short period of time, in this case four months. At the end of four months, the borrower must come in with a large lump sum payment, again in this case $40,000. If they cannot pay this amount, or they miss one payment, the forbearance ends and the foreclosure picks up where it left off.
As you can see, forbearance does not address the issue of increasing interest rates, etc. This is a plan where the homeowner is likely to fail.
This is a popular program. With it, the lender will negotiate new terms on the mortgage, reducing the interest rate and payment. However, there are major problems with this program.
Lenders tend to not work with people who are not in default or late on payments. In fact, they often tell the homeowner that they must be behind on the mortgage before they can be processed for the modification. So the borrower allows himself to get behind on the mortgage and then the mortgage company starts to process the modification. But there is no guarantee that it will be approved, which is often the case. Now the borrower is behind, no modification, and they have trashed their credit. Unfortunately, I see this time and again.
I refer to this as the “Nuclear Option”. In this program, the homeowner goes to an attorney who will check over the loan for violations of RESPA, TILA, fraud, deception, and other issues. (This is usually done by outside people familiar with the loan process.) Based upon the findings, the lawyer will determine if a case exists for filing lawsuits.)
At that point, a retainer agreement is executed and the lawsuit is filed. It will usually include a Restraining Order stopping the foreclosure on the home until settlement is reached.
The issues with this method is that it is very costly. The retainer can involve payment of the initial fee upfront, or monthly payments. This can be quite overwhelming for many homeowners.
Also, while the case is ongoing, though the homeowner is not making his mortgage payment, he must have a bank account where he is depositing the monthly payments and not using them. This is interpreted by the courts as a sign that the lawsuit is being done in Good Faith.
The lawsuit must have an End Game to it. There must be a plan on how to end. Most will involve settlement whereby the loan will be rescinded or modified. Very few actually go to trial due to the high cost of litigation and lender willingness to settle out of court rather than risk trial in this current environment of the housing crisis. If there is no realistic End Game, their is no lawsuit.
The other issue is that the homeowner must understand that he is “going to war” against the lender. Lawsuits are not an easy chore. They are time consuming, stressful, and expensive. Many homeowners start a suit, only to back out midway into it because of the cost and the stress.
These are the most popular methods of stopping foreclosures. They all do have their drawbacks and risk. Nothing is ever guaranteed in these negotiations. The most important part for deciding which method to use to stop a foreclosure is to take time and carefully evaluate your options. And, when you decide which method to use, to commit to going through with it, thick and thin. It will be frustrating and time consuming, but it can be effective.
(Patrick Pulatie is currently a Loan Officer, Loan Examiner, and Court Expert Witness. Please feel free to contact him with any questions you might have about your options. He will be more than happy to answer your questions. He can be reached by email at email@example.com or by phone at 925-522-0371. BTW, He is not an attorney and does not give legal advice.)
Visit Patrick’s website at LoanModificationCA.com