Florida Bankruptcy Law Blog

Company Recommended To Help With Mortgage Workouts

People facing foreclosure occasionally asks me whether they should hire an attorney or a nonlegal company to help them negotiate mortgage modification. I explain that most attorneys, including myself, do not do that type of work and that negotiating a mortgage settlement is primarily not a legal matter. I also tell them that most clients report that hiring a private company to assist with mortgage workouts is not worth the money charged; most firms charge a significant fee up front. For the first time last week I spoke with bankruptcy clients who have a very favorable experience working with a company that assisted them with a mortgage workout.

These clients had hired a company based in California called Access Loss Mitigation Company. They said the company successfully renegotiated a short sale of a property for which they were delinquent in mortgage payments. Access Loss Mitigation does not charge any up-front fees. They are, according to my clients, charges part of the real estate commission paid in the short sale. The clients said the company was responsive and actively involved in trying to solve their mortgage  problem through either a short sale or a renegotiation of payment terms.

I have no personal experience with Access Loss Mitigation. I am not personally recommending this company . I am passing on other peoples’ experience with the hope that other people have a similarly positive experience and are able to get  get professional help solving mortgage problems without having to seek legal help.

Why Won't Mortgage Company Negotiate With Me?

At least once a day someone calls me about problems they face paying one or mortgages on their Florida real estate. Many people ask if I could assist them, or at least advise them, in negotiating a work out agreement with their lenders. They assume their lenders will realize that it is better for the lender to adjust their mortgage payment schedule than to force the borrower into foreclosure. The unfortunate fact is that as a practical matter very few lenders will work out customized deal with mortgage borrowers. Some lenders will accept short sales for borrowers already in default, but otherwise, most lenders will not deal with borrowers individual financial situations and modification requests. The main reason for lender inflexibility was expressed in a Wall Street Journal article written by economist Martin Feldstein

The article appearing in the March 7, 2008 Journal stated,

“Most mortgages are no longer held by originating lenders, but are securitized and sold to investors world-wide. More significant, mortgages are used to create complex, asset-backed securities that are cental to current credit-market problems. Investors no long own specific mortgages but only have rights to certain conditional payment streams. So generally, it is no longer possible to prevent foreclosures by negotiations between borrowers and lenders” In other words, you can’t negotiate adjustments to your mortgage payment and terms because there is no one to negotiate with.

For the same reason, there is no one in charge of pursuing deficiency judgments. The best approach for most people who find themselves hopelessly behind their upside-down mortgages is simply send in the keys and walk away.

Dealing With Annoying Debt Collectors

Many bankruptcy clients become upset and worried because they are harassed by credit card collectors. I usually advise people filing Chapter 7 to stop making credit card payments upon deciding to file bankruptcy. Ceasing payments increases collection activity. As a debtor you have rights to protect your privacy and your peace of mind. Federal law prohibits creditors from engaging in "over the top" collection tactics .

The Fair Debt Collection Practices Act (FDCPA) applies to collection of all personal, household, and family debts. Under the FDCPA:

Bill collectors may contact you only between 8 am and 9 pm

Bill collectors may not contact you at work if your employer disapproves of practice

Bill collectors may not harass, oppress, or abuse you.

Bill collectors may not lie.

Bill collectors may not threaten you with criminal prosecution

And most important, bill collectors must stop contacting you if you so request in writing.

The practical problem is that enforcement of the FDCPA requires you to file suit in a federal court. You will need to pay an attorney to effectively enforce FDCPA violations in federal court. On the other hand, a bankruptcy debtor can bring an action against a creditor as part of his federal bankruptcy proceeding.

posted by Jonathan Alper, banrkuptcy and asset protection attorney, Orlando, Florida

Suits Under Mortgage Note Rather Than Foreclosure Of Mortgage

More than half of my bankruptcy calls are from people facing foreclosure on their investment property and who fear a deficiency judgment. One person asked me today if it makes a difference whether a bank sues for foreclosure or whether the bank sues on the promissory note underlying the mortgage security. For general information, most lenders sue to foreclose mortgages in default because foreclosure gets the lender the title to the property. After recovering the property, the lender may choose to pursue a judgment for the deficiency between the amount owed and the property value. To get a deficiency judgment the lender has to prove that the property value on sale date was less than the mortgage debt balance.

A lender can also sue the borrower for a default under the promissory note without pursuing a foreclosure and recovery of the property. If payments are past-due most promissory mortgage notes allow the lender to accelerate the note and demand full payment of the note. If the borrower does not pay off the note immediately the lender can proceed for to get a judgment against the borrower for the full amount of the note plus interest and usually attorneys fees. In a declining real estate market some lender may elect not to take back the real estate and sue directly for a judgment against the borrower individually, especially if the lender believes the individual debtor is vulnerable to collection. By suing on the note the lender does not have to prove the value of the property in order to get a judgment against the borrower.

Bankruptcy can discharge individual liability to the lender regardless of whether the lender sues for a deficiency judgment or sues directly for default of the promissory note.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Beware Of Short Sales

Many people who invested in real estate at the end of the boom are in financial trouble. I have been getting more and more inquiries from individual investors facing foreclosures of their investment properties. Often, people tell me they are discussing "short sales" with their mortgage lenders. In a short sale, the lender allows the house to be sold for less than the mortgage balance. The borrower avoids a deficiency judgment. The lenders would rather get most of their mortgage through a sale arranged by the owner then take the property back at a foreclosure sale. Borrower should beware of short sales.

The problem for the borrower in a short sale is that the difference between the payment to the mortgage company and the full mortgage balance is a forgiveness of debt for tax purposes. The mortgage company is forgiving the debtor’s liability for the deficiency. The IRS considers forgiven debt to be taxable income to the borrower. The mortgage lender may send the borrower a Form 1099 for the amount of the deficiency. Most borrowers who cannot afford mortgage payments can even less afford additional tax liability. Owing money to the IRS is usually worse than owing money to a mortgage lender. Many mortgage lenders will not pursue debtors for deficiency judgments; the IRS will always pursue unpaid taxes. For that reason, most borrowers will fare better by letting their property go to foreclosure, even if the foreclosure may result in a deficiency liability.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Using Bankruptcy To Halt Eviction Against A Business

A caller late Friday asked whether a business could file bankruptcy to stop an eviction. The caller owned a small business with a few locations. Each location was owned by a separate corporation. One of the locations was doing poorly and was facing eviction within the next week. The lease was in the name of the business and personally guaranteed by the owner. The caller wanted to know if bankruptcy would stop the eviction and give the business more time to improve its operations.

A corporation can file Chapter 7 or Chapter 11. A Chapter 7 would stop the eviction, but the business would have to cease operations and its assets, if any, would be liquidated. A Chapter 11 would stop the eviction and give the business time to reorganize. However, this caller, like many small businesses, so not realize that Chapter 11 cases are complicated and very expensive. Chapter 11 generally is not appropriate for a small business which cannot afford even to pay rent.

The caller asked if he could file a personal Chapter 13 to stop the eviction. In that case, the individual owner, and not the corporation that owned the store, would be the bankruptcy debtor entitled to the benefits of the automatic stay. There is what is known as a "co-debtor" stay in Chapter 13, but the co-debtor stay applies to consumer debts. In this case, the individual’s Chapter 13 would no stay an eviction against the non-filing corporation.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Bank Freezes Check Account To Collect Credit Card Debt

A creditor can garnish a bank account after it obtains a money judgment and the Sheriff’s office issues a writ of execution. I am often asked whether a credit card company can freeze an account without a judgment and without even filing a lawsuit. The general answer is "no" but it does happen occasionally.

This week a prospective bankruptcy debtor called to complain that his bank had frozen his account without warning because he was delinquent on a credit card issued by the bank. Sometimes people don’t convey complete information to attorneys, and it could be that the credit card company had a judgment already. Another possibility is that the bank had issued a secured credit card and that there was a credit card agreement which gave the bank the right to collect by taking money from the borrower’s bank account without first going to court. In the absence of a secured credit card arrangement or a civil judgment the bank may have improperly collected its credit card debt in which case the borrower could have a claim against the bank.

posted by Jonathan Alper, bankruptcy and asset protection lawyer, Orlando, Florida

Creditor Not Sanctioned For Stay Violation

Overheard an interesting case in bankruptcy court concerning a debtor’s petition to sanction a creditor for pursuing a state court case against the debtor after he filed bankruptcy. The debtor’s attorney explained to the judge that he had repeatedly told the creditor’s collection agent and their attorney about the debtor’s bankruptcy and suggested they drop their action against the debtor. Nevertheless, the creditor’s attorney pursued discovery from the debtor and went as far as filing in state court a motion to show cause why the debtor should not be held in contempt of court. The debtor had to appear in state court with his attorney to personally explain to the judge that his bankruptcy stayed further discovery or any other activity in the state proceeding. The debtor appeared in bankruptcy court in a wheelchair breathing through an oxygen mask and unable to speak directly to the judge. His attorney showed that the debtor’s disability made it unusually difficult for him to go to state court because the creditor would not abide by the bankruptcy stay.

The debtor’s attorney stated that the debtor sought sanctions against the creditor company but not against the creditor’s attorneys. The judge denied sanctions. The judge reasoned that while the creditor’s attorney clearly knew that collection and discovery was going on after the bankruptcy there was no evidence that officers of the company knew their attorney was violating the stay. Since the debtor’s attorney had dropped demand against the creditor attorney the judge had insufficient evidence of intentional wrongdoing on behalf of the creditor company even though, as the debtor argued, the creditor’s attorney was acting as an agent of the client.

In this case a debtor’s attorney extended some professional courtesy to a fellow attorney to relieve them of personal liability and by doing so lost a recovery for the debtor at this hearing. It seemed clear that the bankruptcy judge would have entered a sanction against the creditor’s attorney in favor of the debtor. Before an attorney lets a fellow attorney off the hook he should make sure the client consents after the client understands what may be the loss of a potential source of monetary recovery.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Credit Cards After Bankruptcy

Many bankruptcy clients have asked me if they should reaffirm one or more credit cards during their bankruptcy. As alternative to reaffirming a debt, the clients could pay off a small credit card balance before filing and not list the bank as a creditor. I always explain to people that it rarely makes economic sense to reaffirm credit card balances which could be discharged in a Chapter 7 bankruptcy because the bankruptcy debtors will get new credit card offers in the mail soon after they file bankruptcy

There are subprime credit card lenders who seek out bankruptcy debtors as new customers. The interest rates are high, but the cards are available. For example, First Premier's credit card offer. 29% is the standard interest rate, and 39% is the default rate, plus other charges. The interest rate is not a problem if recent bankruptcy filers become disciplined to pay off monthly balances after all other unsecured debts are eliminated in bankruptcy.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida