Foreclosure Alternatives

Barring new legislation (HFSTHA having died in the Senate about a year ago), Chapter 13 Bankruptcy will not allow you to modify the terms of the mortgage note, though it still remains an excellent option for curing arrearage and stopping foreclosure. The automatic stay that accompanies a bankruptcy filing puts the brakes on foreclosure proceedings, and debtors are permitted to cure the mortgage arrears over the life of a 3-5 year plan (and in the Eastern District of Wisconsin, do so at 0% interest).
Other options you might want to consider to deal with bad mortgages:
Consider whether the house is truly worth keeping. Even if you are successful in negotiating with a mortgage company to restructure, refinance, or improve the terms of the loan – a victory isn’t a victory if you can’t afford the new terms. Do a reality check, and be willing to walk away from the home when it is impractical for you to keep up payments. Speak to a budget counselor if necessary.
Wisconsin homeowners should contact WHEDA (www.wisconsinforeclosureresource.com) for referral to non-profit agencies who can help you negotiate your loans. If you run into a dead-end, also try the Department of Housing and Urban Development (www.hud.gov).
Make a qualified written request under RESPA (many consumer attorneys can assist with this) to obtain full loan history information with all payments and escrow payments. You might also ask to find out who the current holder and owner of the mortgage lien and the note. Be advised that the loan and the lien securing the house are two separate items. Be sure you are able to distinguish between the mortgage broker, the mortgage originator, mortgage holder, note holder, and mortgage servicer. These are rarely the same entity, and often change hands over time.
If you have been served with a summons, ensure that the plaintiff actually owns the note and mortgage. If they do not, they might not have standing to bring the foreclosure action.
Have an attorney who specializes in foreclosure defense work analyze your mortgage, note, closing statement (HUD-1), Notice of Right to Cancel, and Truth in Lending Statement for TILA violations.
Other laws that COULD be of use: Home Ownership and Protection Act (HOEPA), Real Estate Settlement Procedures Act (RESPA), Fair Debt Collections and Practices Act (FDCPA), common-law fraud, common-law misrepresentation, common-law unconscionability, and common-law negligence.

A word about tactics and loopholes…

One of the regrettable parts of being an attorney is being associated with the stereotypes that we lie and we exploit loopholes. Even more unfortunate is that the stereotypes are not unfounded. There are many out there who think nothing of a miscarriage of justice by merely omitting facts or by taking advantage of a technicality. There are some of us out there that have some integrity (and yes, I do like to think of myself as falling within that group). So I wanted to take a moment to discuss a few tactical and ethical issues as they pertain to bankruptcy.
Sometimes, I get the client who says “I talked to so-and-so and they said that I can do this-and-that. Why are you telling me something different?” Getting two different stories from two different people doesn’t necessarily mean that one is lying or even incompetent. First, you need to consider the source. If you are speaking to someone else who went through bankruptcy – a non-lawyer – they may misunderstand the legal mechanics that led to a particular result. I’ll give you an example. Client comes in to see me, and I tell her that she is going to lose her vehicle. Client complains that her friend said that when she filed for bankruptcy she didn’t lose anything. What my client doesn’t realize is that her friend didn’t lose her vehicle because the value was small enough to be fully exempt, and in my client’s case, she owns a collector car worth $80,000. Just because the vast majority of bankruptcy debtors don’t lose their personal property does not mean that being able to keep everything is an automatic privilege. Everything is in context. Another example – I once told a guy that he made too much money to qualify for Chapter 7. He got angry with me and said that his co-worker, who made more money than him, was able to qualify for Chapter 7. What he forgot to consider is that his co-worker is married and has 2 kids, whereas my client was a bachelor with no kids. The applicable median income level was different. Circumstances can change everything about a case.
Even if you get different stories from two attorneys, it’s not necessarily a sign of incompetence. Often, attorneys are not working with the same quantum of facts. Our advice is only as good as the information we can collect from the client. Often, I see clients get bad news from one attorney, then they seek a second opinion and they leave out a critical piece of information (intentionally or unintentionally). Then they ask why the first attorney said something different. When I’m the second opinion, I can often detect what the missing information is based on what the client tells me about the first attorney’s advice.
Then again, some attorneys have different levels of integrity. They are willing to bend rules, overlook facts, lie, remain intentionally ignorant of certain facts, or pretend to be ignorant of facts. If you choose an attorney who practices like this, you do so at your own risk.
I require my clients to tell me the entire truth and nothing but. I’m sure clients have lied to me and gotten away with it without me ever knowing. But I am clever enough to catch a good chunk of it, and once I discover a client has lied to me, it is immediate grounds for termination of our attorney-client relationship. I find that a lot of people think that they can protect themselves by omitting certain information that would be detrimental to their case. Works great if they get away with it. It sucks if they get caught because they can be denied discharge, even criminally prosecuted (yes, perjury is a bad thing). What makes lying absurd is that with bankruptcy, virtually every single problem can be mitigated or negotiated, particularly in Chapter 13. It might not be the result you had hoped for, but it certainly is a better result than getting caught defrauding the court. But your attorney (whether it’s me or someone else) can only help you and protect you if he has all of the facts. Once the case is filed, a lot of control and bargaining power is taken out of our hands and it becomes far more difficult to negotiate resolutions. In other words, if there is bad news that will impact your case, it is far better for your attorney to find out about it from you now, before your case is filed, as opposed to finding out because a creditor or trustee figured it out later.
Finally, I want to talk about loopholes. As bureaucratic as the bankruptcy process can be at times, we are not devoid of any sense of justice or subjective analysis. In theory, a debtor could be in technical compliance under all applicable statutes and rules, and still find himself on the defense of a § 707(b)(3) which allows for a case to be a dismissed when the “totality of circumstances” demonstrates abuse – or what many attorneys often refer to as the smell test. Therefore, I don’t encourage exploiting loopholes in the statutes as a way to cheat the system. The system will bite back – think of § 707(b)(3) as a universal patch for bankruptcy loopholes.

Should I sell my property before I file for bankruptcy?

No! Once you have decided to file for bankruptcy, all of your assets should stay with you. If you sell or gift property to another person, the mere act (regardless of intent) creates the appearance that you are trying to hide or shield assets away from the Trustee, which could result in a whole slew of problems for your bankruptcy case (and possibly the person you transferred the asset to).
Some people take the position that a transfer is not fraudulent if you sell the property for more than or equal to the fair market value, because then you at least have the cash, which can be accounted for on your schedules and either liquidated or taken as exempt in place of the property transferred. Trustees will certainly take that analysis into consideration. However, don’t expect that fact alone to save you. For one thing, as I have mentioned many times before in this blog, the value of property is ordinarily subjective. What you think something is worth might not be the same as what the Trustee could sell if for. And by transferring the property, you are taking away the Trustee’s ability to evaluate your assets for himself.
Furthermore, be advised that in the state of Wisconsin, it can be a felony to sell property that has a lien on it unless you are able to satisfy the debt owed to the lienholder.

Should I be paying my credit cards before I file for bankruptcy?

I don’t recommend it for two reasons. One, you’re spending money on debt that is about to be discharged. That’s a waste of money. Second, you are paying creditors what we call a preference. A preference is when you treat one or more creditors differently than other creditors in the same class – namely unsecured creditors. When you file for bankruptcy, all unsecured creditors ought to be discharged equally and treated the same. Once you have decided to proceed with bankruptcy, stop paying on all of your unsecured debts.
Similarly, do not pay any family or friends any informal debts you owe them until after the bankruptcy is over. The Trustee could sue to recover those payments, and you’d end up doing them more harm than good by paying them.

Can I max out my credit cards before I file bankruptcy?

No! This is fraud in its most flagrant form. There is a statutory presumption of abuse for incurring debt above a certain dollar amount within a certain time-frame of filing, but that doesn’t mean a creditor can’t challenge you outside of that automatic presumption. Do yourself a favor. Once you have decided to proceed with bankruptcy, stop using credit cards and taking out loans.