Dealing with House Debt: Short Sales, Foreclosures & Bankruptcy - Part II

In this Three-Part Post, we will evaluate some of the different methods of dealing with real estate debt when a mortgage modification or forbearance agreement is not an option.

• Part I addressed the most common scenario which forces a homeowner/borrower to consider how to deal with property he or she can no longer afford.


• Part II will address short sales and their interactions with Bankruptcy.


• Part III will address "walking away" from a property through bankruptcy, and the resulting foreclosure by the lender.

Part II: Short Sale (and maybe Bankruptcy)

In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the borrower. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. Borrowers are able to mitigate damage to their credit history, and partially control the debt. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer. The borrower must work directly with the lender to seek approval of the short sale by the bank, obtain a purchaser, and complete the transaction before any foreclosure proceedings are completed. (In some cases, the bank may have initiated foreclosure proceedings, in addition to contemplating consent for the short sale.) Timing is critically important, and the debtor is an important part of the short sale process.

Short sales are a type of settlement, and they adversely affect a person's credit report, though the negative impact may be less than a foreclosure. Depending upon other credit information, it may possible to obtain another mortgage 1-3 years after a short sale, or even sooner if the borrower is current at the time of the sale.

However, if the individual does not then pay off the deficient portion of the mortgage (the unpaid portion of the mortgage after the short sale proceeds were applied to the balance), the lender can take further legal action against the debtor to collect the unpaid portion of the mortgage, which may include trustee process attachments, garnishments, or seizure of other assets, depending on the debtor's other property. The debtor may, after the short sale is complete, file for Bankruptcy upon completion of the short sale to discharge any deficiency and extinguish any further liability to the lender.

In this scenario, a foreclosure will never appear on the debtor's credit report. Although the Bankruptcy and Short Sale will appear on the debtor's credit report, some members of the mortgage lending agency will extend first mortgage financing, and even sub-prime mortgage financing, to prospective borrower with a bankruptcy that did not involve mortgage debt in as little as 3-4 years after the bankruptcy, provided the debtor has reestablished credit and used it responsibly during that time. Even if the bankruptcy included a small portion of mortgage deficiency debt, the fact that it did not include a foreclosure action will result in the debtor's credit healing much more quickly than if the debtor also went through a foreclosure during or before bankruptcy.

Deciding which option to pursue can be a daunting challenge for many individuals. Don't go alone. An attorney with Kelsey & Trask, P.C. can help you make these difficult decisions, and help you with the process. For an initial consultation, click here, or call 508-655-5980.

Dealing with House Debt: Short Sales, Foreclosures and Bankruptcy - Part I

In this Three-Part Post, we will evaluate some of the different methods of dealing with real estate debt when a mortgage modification or forbearance agreement is not an option.

• Part I addressed the most common scenario which forces a homeowner/borrower to consider how to deal with property he or she can no longer afford.


• Part II will address short sales and their interactions with Bankruptcy.


• Part III will address "walking away" from a property through bankruptcy, and the resulting foreclosure by the lender.

Part I: How did we get here? Where exactly is "here"?

Many homeowners today have negative equity in their homes, that is, they owe more on the mortgage than their homes is worth. This may be due to any number of factors, most commonly resulting from a combination of purchasing the property during the "housing bubble" of the early to mid 2000's, jumbo mortgages which finance 90% or more of the purchase price, and the use of "home equity loans" to fund consumer expenses. If you are current with your mortgage payments and plan to stay in your home, the "solution" to this problem is to basically wait out the market until home prices rise again or you have paid off enough principal of the mortgage to create positive equity in the property.

Homeowners encounter serious problems when they cannot pay (and have not paid) the mortgage and they have negative equity in the property. Perhaps the homeowner took on a mortgage payment that they could not afford - i.e., purchased "too much house" - or some other temporary situation has impacted the homeowner's finances such as an unexpected medical expense, loss of a job or other significant interruption in income. In any case, the bank may be threatening foreclosure, the homeowner is in jeopardy of loosing their home, and the value of the property at foreclosure auction is not enough to pay off the balance of the mortgage, resulting in an individual liability by the former homeowner to the bank for tens, if not hundreds, of thousands of dollars.

At this point, homeowners weigh their options and understand that they can no longer afford to keep the house. They can't afford the payments, and realize it is a loosing proposition to struggle to pay into a property that has negative net value. Assume for this scenario that the debtor's financial situation does not permit a mortgage modification. Perhaps the mortgage has already been modified; the borrower does not qualify for a modification; a modification has been denied; or the borrower's income is insufficient to to continue to make any payments, due to job loss or medical illness. After conducting some research, the homeowner is now weighting two options: A Short Sale of the property and/or Bankruptcy.

... to be continued...

Dealing with debt can be a daunting challenge for many individuals. Don't go alone. An attorney with Kelsey & Trask, P.C. can help you make these difficult decisions, and help you with the process. For a free initial consultation, click here, or call 508-655-5980.

Where's MY Bailout?!

With the economic turmoil that has well entrenched itself in the United States now starting to develop in Europe, and economic experts on both sides of the Atlantic saying something ranging from "we're not out of the woods yet" to "the worst is yet to come", it seems that we all have continued interest (and perhaps suspicion) regarding the concept of the "government bailout".

We all learned that the U.S. Government would be spending billions of dollars bailing out General Motors, Citigroup, Bear Stearns, Bank of America and AIG, and now, there are discussions of the European Union bailing out the entire government of Greece. With the billions (trillions?) of dollars at stake in these government sponsored bailouts, many people have asked, often rhetorically:

"I am overwhelmed with credit card debt; I've been out of work for months; these unexpected medical bills are piling up - I don't know what do do. Now, I'm so far behind, I can't even afford the minimum payments, and I fell behind on my mortgage - I might loose my house. Where's MY bailout?"

Surprisingly, there is a program that, if you qualify, will permit an individual, a business, or a family to seek relief of certain debts, such as credit cards, medical bills, even certain types of civil judgments so that they may be paid off for pennies on the dollar, or, often, discharged entirely. Even more surprisingly, this is not a new program: it is the Bankruptcy laws of the United States.

But wait...BANKRUPTCY? That's not a bailout. It hurts my credit!

That is true. All actions have consequences, and the government bailouts we see in corporations have their own consequences. The public trust in these businesses may be shaken, profits may be hurt, and their corporate credit will suffer. I will not attempt to equate personal bankruptcy with the Emergency Economic Stabilization Act of 2008; my comparison is only an analogy, but I will maintain that if you are in a untenable financial situation, you do have options to protect your self, your assets, and your family. For more information regarding your own personal "bailout", contact Kelsey & Trask, P.C. for an initial bankruptcy consultation. We would be happy to meet with you to discuss your situation and address the benefits and risks of bankruptcy, as well as alternatives to bankruptcy, such as debt settlement.

Radio Appearance on Money Matters Radio - UPDATED

Attorney Trask will be appearing on Money Matters with Chris Findlen on Tuesday, May 11, 2010 at 1:00 P.M.

Attorney Trask will discuss financial issues in bankruptcy. You can watch the interview live on the Money Matters website on Tuesday, May 11, 2010. Or listen at 1120 WBNW.

UPDATE: Attorney Trask's interview is now available here:

Avoid These 3 Traps Before Filing Bankruptcy

A significant majority of Chapter 7 Bankruptcy filings are completed without any significant problems to the Debtor or objection by Creditors, provided the Debtor (and their Counsel) properly and accurately discloses all necessary information required by the bankruptcy laws. However, the bankruptcy laws provide the grounds for creditors to object to the discharge of debts (meaning you will still owe the debt, even after filing bankruptcy)under certain circumstances.

A creditor may object to the discharge of amounts owed to them by the debtor under certain circumstances. If a creditor objects to the discharge of any of the debts listed in your petition or schedules, such objection must be raised within 60 days after the first scheduled §341(a) Meeting of Creditors. Alternatively, the trustee must move to dismiss your case within the 60-day period following the §341(a) Meeting of Creditors if he or she finds that the granting of relief would be an abuse of the provisions of Chapter 7.

So, what are traps to avoid objections to my petition?

Trap 1: New Debts Immediately Prior to Filing
If you incurred new debt of $500.00 or more for "luxury goods or services" within the 90-day period before your bankruptcy, or if you obtained a cash advance from a credit card or other loan in the amount of $750.00 or more within the 70-day period before your bankruptcy filing, that debt is presumed to be non-dischargeable, absent the debtor's showing to the contrary.

Trap 2: Debtor Dishonesty in Obtaining Debt
A creditor may object to your request to discharge a debt if the debt was obtained or incurred as a result of fraud, embezzlement or larceny, or any willful or malicious injuries you have caused others. If the Creditor establishes by a preponderance of the evidence that the debt was obtained by any of the above means, the debt will be deemed non-dischargeable.

Trap 3: Debtor Dishonesty in Filing for Bankruptcy
Creditors may object to the discharge of certain debts if you have concealed or destroyed any property or financial records; made any false statements in connection with incurring a debt or other financial obligation; withheld financial or other material information; failed to explain losses; failed to respond to material questions permitted under the Federal Rules of Bankruptcy Procedure; or if you were granted a discharge with respect to that debtor in a prior bankruptcy case filed within the last 6 years.

So, in conclusion, the best advice to consider if you are considering bankruptcy is to stop spending, or at least stop incurring new debt, and ensure you understand and completely disclose your financial history. As in the rest of life, honesty is the the best policy.

Should I Pay My Student Loan with a Credit Card?

Under Section 523(8) of the Bankruptcy Code student loans are excluded from discharge in bankruptcy. This means that in most cases after you go bankrupt (Chapter 7 or Chapter 13) you will still owe your student loans.

So you have a great idea, right? Why not pay your student loans with a credit card, which you could then discharge? WRONG!

Credit card debts can be discharged except for a few exceptions. For example, credit card debt is non-dischargeable when the funds were obtained with the intention of filing bankruptcy, or otherwise fraudulently (like filing a false application).

Furthermore, if a credit card is used to pay a non-dischargeable debt like a student loan or taxes, that portion of the debt will be treated the same as the original debt.

This means that even if the credit card company doesn't object to the discharge, they still might be able to pursue you after the discharge, just like a student loan company could (although best practice for the credit card company would be to object prior to the discharge).

Even worse, if the bankruptcy court found that you were attempting to commit a fraud upon the Court by moving this debt, the Court could deny your discharge altogether.

If you are looking for creative ways to pay down your student loans you should consult with an attorney regarding your options.

When filing for Bankruptcy, what financial information do I need to disclose?

Everything you own and every debt you owe must be completely and accurately disclosed in the documents filed to commence this case. Bankruptcy is not a "pick and choose" proceeding. You should not leave some debts in and leave some debts out. Everything should be included. You must value each item you own at the rate it would cost you to replace the item with one of the same condition, age, and usefulness. The information you give to an attorney, a staff member of the law firm, the Bankruptcy Trustee, or the Bankruptcy Court that is provided with your petition and during the case must be complete, accurate, and truthful.