Mortgage Forgiveness in Massachusetts

March 13th, 2010

income taxes
Mortgage Forgiveness Debt Relief Act and Debt Cancellation Act is a significant relief of taxable income in the event that you conducted a short sale from 2007 to 2010.   In the past, if you sold a home for less then you owed the bank and the bank agreed to forgive the difference, you would have to declare the difference as income, and would be subject to paying taxes as the difference was income.  This does not make a lot of sense to those who had to sell for a loss, for if they had the income, they likely would not have sold by way of short sale.  However, the Mortgage Forgiveness Debt Relief Act eliminates that requirement.

The rub on this tax relief is that the relief is only relative to your Federal taxes.  However, not so much with your state taxes.   Each state has its own set of tax regulations.  For example, in Massachusetts, their is no such relief, and you still have to declare the loss as taxable income at 5.3%.   If you find yourself in this situation, there are still options including, making an offer in compromise with the Department of Revenue, putting your taxes into a chapter 13 bankruptcy, or simply paying it out at a normal interest rate.   The bottom line is if you sold your home for less then you owed, you should speak to a tax professional this year

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How bankruptcy can affect children

March 6th, 2010

The affects of bankruptcy can have a lasting impact on a person. Once a child is involved the affects can last for a long time. The topic of dealing with the affects of bankruptcy on children is not a topic that has received much attention over the years, but this topic is one that should be addressed.In many cases, parents try to minimize the affect of a bankruptcy on the family. Children in most situations may not even know anything has transpired. Moreover, it may be far less traumatic even if the children know their parents are facing financial distress, then to know your home has been taken away by the bank.

Once a bankruptcy claim is filed the courts will decide which debts require payment. As such, the court can determine that certain expenses are allowed while others are not. Once such expenses is 529 plans or other savings accounts for college. During times like this consulting with an attorney can be beneficial in order to get a good understanding of how your child may be affected once you file for bankruptcy.  In addition, there are many other situations that can comingle a parents debt with the financial interest of their kids.  To read more about these situations, check out Jonathan Ginsberg an Atlanta bankrutpcy attorney’s blog. 

There is no doubt that the stress of bankruptcy can take a toll on a child. A study conducted by the Iowa State University Institute for Social and Behavioral Research states that children who experience socioeconomic adversity at an early age are at an increased risk of experiencing mental health challenges during their teen years. A child may begin to wonder whether or not their family will have a place to live or what will happen to them in the future. A family’s financial status can affect a child because of society’s emphasis on being financial stable and achieving a certain level of success. Once a child realizes the lack of financial resources available for their family that child may be embarrassed and could be subjected to negative treatment amongst his or her peers.

Despite all the negative emotions associated with bankruptcy it is important to keep your children involved in the financial matters of your family. If a parent is laid off from their job of made the decision to file for bankruptcy the financial make up of that family changes. The next step is to explain the financial situation of your family with your children so they are aware of the situation. Parents must remember that children are learning from how their parents are dealing with bankruptcy and other financial matters.

The issue of bankruptcy is not an issue topic to discuss. For parents the issue of bankruptcy can become even harder to explain because their financial outlook can be affected as well. Despite this obstacle, it is important to minimize as much stress as possible and make the right decisions that will benefit your children in the future.

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Why Your Tax Forms Are So Important to Your Attorney

February 15th, 2010

tax formsWhen you work with an attorney on a bankruptcy filing, there’s a long list of documents you’ll be asked to gather and give to your attorney. Some of the most critical documents you’ll gather are your last three years’ worth of tax filings, both state and federal. Why are these so important?

First, and most important, tax returns contain a great deal of the financial information that your attorney will use when preparing your bankruptcy petition. Your attorney will review your returns to get a good foundational grasp of your financial situation—what real estate you own and whether it’s investment property; what bank accounts or investments you may hold; whether you are self-employed and how the business has been doing over time, and so on.

Similarly, your attorney uses your tax returns as a kind of financial checklist when preparing your bankruptcy petition. Most of the information that you’ve already reported on your tax returns is information that your attorney must include in your petition.

Importantly, bankruptcy is information-based. In other areas of law, when you go to court, you may be asked to testify and tell your side of the story. At your bankruptcy hearing, your bankruptcy petition—the specialized financial report that your attorney has presented to the court for approval—tells your story for you. The bankruptcy trustee who examines your petition may ask some questions, but the more accurate and detailed your attorney’s information, the easier it is for the bankruptcy trustee to review and approve your petition.

So don’t flinch when your attorney asks for copies of your tax returns. You can share them confidently, knowing that your attorney is helping you toward bankruptcy’s “fresh financial start.”

The forgoing post was drafted by Marsha Graham and Liz Weishaar who have both been heard on the Consumer Debt Radio Show and work in an of counsel relationship to The Law Office of Goldstein and Clegg, LLC as well as for the Law Office of Weishaar and Graham.

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Protecting debtors from failure to hire, promote or termination after filing bankruptcy

February 9th, 2010

The stigma of filing bankruptcy has stopped many debtors who rightfully and propably necessarily need to file bankruptcy. The truth of the matter is that filing bankruptcy is a right granted to all Americans by Congress and as such, is a protected right. As a protected right, it is illegal to discriminate against debtors as employees pursuant to both Massachusetts law, MGL 151B, and Federal Law (Civil Rights Act and Bankruptcy Code). More specifically, 11 U.S.C.A § 525(b) provides, “No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt”.

There has been several cases directly on-point with the forgoing. In one case, a Police department rule rendering a city policeman subject to dismissal for the filing of a petition in bankruptcy was unconstitutional under U.S.C.A.Const. Art. 6, cl. 2, since the rule, while intended to insure a reliable and respectable police force, had the effect of prohibiting a policeman burdened with staggering debts from obtaining “a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt”, an effect in direct contravention of the stated purpose of this title. Rutledge v. City of Shreveport, W.D.La.1975, 387 F.Supp. 1277.

Chapter 13 debtor, a former chief appraiser for a county tax appraisal district, was fired from her job in violation of the Bankruptcy Code’s antidiscrimination provision where it was apparent from the totality of the circumstances that appraisal district’s board of directors determined that debtor would be discharged because they were embarrassed that she had filed bankruptcy and that it had become public knowledge. In re McKibben, Bkrtcy.E.D.Tex.1999, 233 B.R. 378.

Pursuant to Federal and state law, it is also a violation of law to either refuse or fail to promote or hire an employee based upon their status as a bankruptcy filer. In one case, an employer’s failure to offer participation to debtor in commission advancement program after debtor had filed for bankruptcy, when all other account specialists were offered participation, violated antidiscrimination provision of Bankruptcy Code, where determining reason for failing to offer participation to debtor was fact of his bankruptcy. In re Vaughter, bkrtcy.W.D.Tex.1989, 109 B.R. 229.

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How to Remove a Judgment Lien from your property

January 6th, 2010

Many homeowners have found themselves in the position of owing money on a debt which they simply can not pay back, or have been sued by someone and failed to respond to the law suit. When this happens, the Plaintiff often will attempt to collect on their judgment by putting a lien on the homeowner’s property. Many of my bankruptcy client’s have come to me with just such a situation. This becomes an issue after a consumer’s unsecured debts have been discharged in bankruptcy. The reason is simple; the homeowner has a lien against their house post bankruptcy and they do not owe any money to the lien holder.

After a Chapter 7 discharge, a debtor may avoid a judicial lien by motion to the Court. To the extent lien impairs an exemption to which the debtor otherwise would have been entitled under the Bankruptcy laws. As a result, the bankruptcy court will grant a Chapter 7 debtor’s motion seeking to avoid a judicial lien if debtor’s equity in the property is less than the amount protected under the Massachusetts Homestead Act, which currently stands at $500,000 in value for the land and building, M.G.L. c. 188 § 1, and when the creditor’s lien fully impaired the debtor’s equity in the property. In re Lyons, 355 B.R. 287 (2006).

So what is the gist of all of this legal speak? When the collateral has no value, the creditor has no claim against it because it will be treated as unsecured, and thus the debtor may discharge that lien.

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Home Affordability Modification Program: The Troubling Reality

January 3rd, 2010
President Obama’s Home Affordability Modification Program (HAMP) was intended with the purpose of keeping homeowners in their houses. Unfortunately, the idea was wonderful and the basic core concepts of the HAMP appear to be generated with good faith in mind but it lacks one key component—success in purpose. In other words, HAMP is failing and the troubling reality of the program is becoming very clear.
 underwater home

Image Credit: blog.Foreclosure.com

The HAMP was designed to get consumers to work directly with their mortgage company to get into a modification of their current mortgage payment.  The program was intended to make the modification so the consumer could actually make a payment that they could afford.  The amount of the payment is based upon the general economic principle that a mortgage payment should be about a third of the homeowner’s income.  The problem with this philosophy is that the principle owed to the mortgage company is too large to minimize to a third of the homeowner’s income or the homeowner’s income and other expenses cannot meet even the third payment.      

However, there are more problems on the surface of the HAMP.  Once a homeowner is initially accepted into the trial period, the homeowner is given the false hope that this is a final agreement.  The “trial” period is exactly that—“a trial.” It is not a final agreement.  A homeowner can make all the required payments asked of them in this trial period and still not receive a final agreement from the mortgage company.  The real issue is that a mortgage company is only required to “consider” the homeowner for the program. (See Home Affordability Modification Act 2009). A mortgage company is not required to do anything at all for the homeowner under the HAMP. 

The troubling reality of the program is that a homeowner could make three months of payments and still not have a final agreement and still be facing a foreclosure sale.  Unfortunately, the most common pattern that we are seeing with this program is that homeowners are making three months of the trial payments and then being denied without cause or for some superficial reason.  If this should happen to you, you should immediately seek a bankruptcy attorney to ensure protection of your home from a foreclosure sale. 

So what was once thought to be the hope of a nation is really a troubling facade.

If you have experienced the troubling reality of the HAMP, we want to hear from you.  Please email us at http://www.consumerdebtradio.com/contact.asp.

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Home Affordability Modification Program: How does it work?

January 1st, 2010

Everyone knows about President Obama’s program known as the Home Affordability Modification Program (“HAMP”).  Many have wondered if the program can help them save their home, but how does it work?  In brief, the HAMP was designed to save your home if you are struggling to pay your mortgage.  It was also designed for consumers to be able to work through the process on their own without the need of an attorney or a consultant. 

The HAMP process is not really that difficult. A consumer should review the mortgage company’s web site for all required documentation which is needed in order to be considered for the HAMP.  Once all the required documents are submitted the company will put the consumer’s request for review under the HAMP into a pool of thousands of other like consumers. 

It sounds simple right?  Well, there are many problems hidden within this simply process.  A consumer should keep in mind that the mortgage company in the HAMP is trying everything not to get the consumer into the review of the program.  What I mean by this is that the mortgage company is likely to reject a consumer’s request for not having all documents requested even though you’ve submitted them.  Also, the mortgage company is not going to stop foreclosure proceeding while the consumer’s request sits in the pool of thousands of request.  The biggest issue with this process is time.  The HAMP process is likely to take 3 to 12 months. 

How to ensure that this process works for you?  You really will need to either make a commitment to setting aside at least two hours a week to follow up with the mortgage company for updates and to ensure that the mortgage company continues to review your request.  Alternatively, you could hire a professional like an attorney to ensure that the mortgage company continues to review your request and to ensure that the process is documented.

Overall HAMP is a simple process, but be prepared to dedicate the required time to prepare the documents and also for the long review process.

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Home Affordable Mortgage Program Calculation

December 25th, 2009

Many Consumer’s have heard of the Home Affordable Modification Program (“HAMP”). This is the Federal loan modification program. However, what most consumers do not realize is that the calculation of a new mortgage payment is very guideline specific. The following is a detailed explanation of how the program calculates the new or modified payment under HAMP.

The goal for borrowers, as they seek a HAMP Modification, is a Front-End Debt-to-Income of 31%. In plain English this ratio measures the percentage of monthly gross income that is consumed by debt and housing payments. This rate considers the value of consumer expenses compared to the borrower’s gross monthly income. This calculation begins with the reduction of mortgage payments by the investor to no more than 38%. The subsequent reductions by the lender, to get to the target of 31%, rest on the reduction of the borrower’s interest. If, however, the reduction reaches the floor of 2% without reaching 31%, the borrower may need to account for the difference with annual increases of the interest rate.

Once the lender reduces mortgage payments to no more than 38% Front-End Debt-to-Income ratio, the Federal Government will match further reductions in monthly payments down to 31% Front-End Debt-to-Income ratio for the borrower. At this point, lenders may capitalize arrearage.

The target Front-End Debt-to-Income (DTI) is 31%. The Standard Waterfall step that results in a Front-End DTI closest to 31% without going below 31% will satisfy the Front-End DTI Target. Front-End DTI is the ratio of PITIA to Monthly Gross Income.

  1. Gross Monthly Income—the amount before any payroll deductions.
  2. The total first mortgage debt and monthly payments (PITIA). This includes principal, interest, taxes, insurance, and homeowners association and/or condominium fees.

The calculation to reduce the interest rate to reach the Front-End DTI Target is subject to a floor of 2%. The interest rate reduction shall be made in increments of 0.125%, with the goal of bringing the monthly payment as close as possible to the Front-End DTI, without going below 31%.

If the modified interest rate is at or above the highest interest rate allowed by the original mortgage note, the modified interest rate will be the new note rate for the remaining loan term. If, however, the modified interest rate is below the maximum allowed rate in the note, the modified interest rate will be in effect for the first five years, followed by annual increases, until the interest rate reaches the interest rate cap, of up to 1% per year. The interest rate will be fixed once the interest rate reaches the interest rate cap. If the Front-End Debt to Income target has not been reached, the term of the loan shall be extended up to 40 years

It should be noted that there is no requirement to use principal reduction under HAMP, but servicers may forgive principal to achieve the Front-End Debt-to-Income target. Consumers should recall that the goal is to reduce Front-End DTI to 31%. By forgiving principal, monthly payments (as part of the PITIA calculation) are drastically reduced, thus reducing to overall ratio.

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Foreclosure or Bankruptcy – Which Is the Lesser of Two Evils?

December 25th, 2009

In the past, “bankruptcy” and “foreclosure” were dirty words. But in today’s economy, they’re realistic solutions to financial black holes brought on by job joss, medical catastrophe, or predatory mortgage lenders and credit card companies. If you’re a homeowner struggling with financial disasters, you probably know that you need to decide whether a foreclosure or a bankruptcy is the lesser of two financial evils.

If you choose bankruptcy, you may be able to eliminate credit card debt, medical bills, court-ordered judgments, and even debts for overdue utilities. With a discharge of these overwhelming debts, you can often keep up with the mortgage, thus saving the family home.

In contrast, choosing foreclosure means you’ll lose the house… but the house may not be worth saving if its value is less than the remaining mortgage. Homeowners who’ve worked with us have chosen to rent, or sometimes they own investment properties that they can move into, such as a multi-family house.

But neither bankruptcy nor foreclosure is an easy, one-size-fits-all, solution. For example, a bankruptcy stays on your credit report for 10 years, while a foreclosure is there for 8 years. Because a foreclosure drops off a credit report 2 years earlier than a bankruptcy, many homeowners believe it’s a “better” solution. But many reputable credit counselors report that a foreclosure has twice the negative impact on a credit score as a bankruptcy. It’s extremely difficult to get a new mortgage after losing a property to foreclosure. And some individuals who’ve gone through foreclosure report that they haven’t qualified for apartments they wanted, even though they’re able to afford the rent after the mortgage is gone.

On the other hand, we’ve seen that individuals who’ve gone through bankruptcies are better candidates for future financing, and often receive it earlier than individuals who’ve gone through foreclosures. The reason is simple: bankruptcy erases debt. After a bankruptcy, you don’t owe anything to anyone. Your income is yours again. And creditors also know that you can’t file for bankruptcy for another 8 years, so you can’t walk away from any new debt that you incur.

In some cases, a homeowner may be so far behind on the mortgage that a foreclosure is inevitable. There are two typical solutions. First, the homeowner could file for bankruptcy right before the foreclosure. If the mortgage lender sells the property for less than the mortgage owed, the difference between the foreclosure price and the mortgage (which the homeowner would ordinarily have repay to the lender) is discharged through the bankruptcy. Second, mortgage lenders know very well that homeowners can discharge this difference in bankruptcy instead of paying it back. So they’ll often wait to foreclose, which gives the homeowner an option to do a short sale (to be discussed in an upcoming blog).

In short, if you’re a homeowner struggling with debt, you have a lot of options. If you’re facing a financial crisis that may end in either foreclosure or bankruptcy, talk to an experienced attorney who can help you determine your best option. The right decision can save you years of financial trouble.

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Short Sales

December 25th, 2009

If your home is in jeopardy of foreclosure and a loan modification is not an option to save the home, a short sale may be the next option.  A short sale is simply the sale of a home for less than the value of the mortgage owed on the property.  It is no secret that most home values have declined below their original purchase value.  Short Sales are a good option if the homeowner simply does not want to save their home and needs to get out from underneath the debt of the mortgage.  The best part of a Short Sale for the homeowner is that if the home sells for less then the value owed to the bank, the homeowner is released from liability coupled with a release of tax liability pursuant to the 2007 mortgage forgiveness relief act.

More specifically, a short sale, also called a distress sale has significant benefit for the lender because the lender avoids the expenses and hassle of seizing a delinquent customer’s property. In addition, lenders realize that they could lose money if the borrower’s home is auctioned in a foreclosure proceeding.

To decide whether or not to accept a short sale, lenders look at various factors. Those factors are:

  1. Whether the seller truly has a hardship limiting his or her ability to pay the mortgage.
  2. Whether it would be cheaper to simply repossess and sell.
  3. How many other properties the lender has in default.
  4. Whether there are cosigners on the mortgage who can be held responsible for the balance covered on the mortgage.

Even when borrowers engage in a legitimate short sale, there is no guarantee of success.  It’s difficult to have an agreement where the interests of all parties are satisfied. One has to take into account the interests of the lender, homeowner, agent, buyer and investor who held the mortgage. Also, if the husband and wife were divorcing, then both would have to agree to have a short sale.  With regard to managing a short sale, it’s important that sellers review loan documents with an attorney to make an informed decision.  Also, is recommended to that you hire a law firm specializing in loss mitigation to help get you through the process. 

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