Understanding the National Mortgage Settlement

loan modification national mortgage settlement


In the last few months, there has been a steady stream of news stories about the “National Mortgage Settlement” reached by the biggest mortgage lenders, the federal government, and every state that isn’t Oklahoma.  As with any trending news related to the foreclosure crisis, this development has prompted dozens of calls to my office from clients and potential clients who want to know about its impact, if any, on their efforts to save their homes.

While the mortgage settlement itself is complex, the general outlines can be expressed simply.  The settlement affected the “big five,” which are Bank of America, Wells Fargo, Chase, Citibank, and GMAC (now known as Ally Financial).  Those lenders agreed to a combination of loan modifications and loan forgiveness to atone for their bad behavior, which included false affidavits and other legal shenanigans during the foreclosure crisis.

One important thing to mention about this is that the settlement does not REQUIRE the banks to modify any particular mortgages.  However, while they are allowed to choose in which cases they will offer relief, they have certain financial obligations to meet.  In total, these amount to $17 billion.  How each modification or loan forgiveness is counted for this purpose is complex; the important thing to keep in mind is that they are obligated to offer some form of relief to hundreds of thousands of people.

In addition, the settlement provides payments for some people who lost their homes in foreclosure, if there were mistakes or abusive practices involved.

From a practical standpoint, here is what we are seeing: more people are getting approved for modifications, and they tend to be processed much more quickly than in the past.  They are also approving loan modifications while the borrowers are in bankruptcy, in some cases more easily than before the bankruptcy was filed.  This is likely due to a combination of factors, including the elimination of unsecured debt or the management of back taxes.  That makes the borrower less of a risk to re-default, and makes the banks more likely to offer relief.

For borrowers in an active bankruptcy, loan modifications are still available.  However, Court approval may be required, though it is almost always given if the documents are filed  properly.  If the case is filed under Chapter 13, the plan may need to be modified, or in certain cases, the case can simply be dismissed or converted, since the modification usually fixes the arrears and brings the loan current.

As a borrower, the way to take advantage of this settlement is to contact your lender, and apply for a loan modification.  In addition, there is a claim form you can fill out, and this must be done by January 18th, 2013.  It really is that simple.  And, while I won’t give my whole spiel about this topic, resist the urge to pay a company thousands of dollars to “assist” you in obtaining a loan modification.  If it can be done, it can be done by you, and professional help is only likely to lighten your wallet.

You also should check to see if your state has a website with specific information about the settlement.  Those sites generally contain information and instructions on how to take advantage of the settlement.

Good luck, and happy hunting!



Realistic Budgeting for your Household

household budget expenses


Funny enough, most people I know don’t have a household budget.  Oh, they might have a broad idea of how much they have, how much their monthly bills run, and other “big ticket” expenses, but in terms of an actual household budget, most haven’t a clue.

In my experience, people who have comprehensive household budgets fall into one of three categories: those in financial trouble, those who are exceedingly well-organized, and those whose New Year’s resolution have not yet lapsed.

That said, having a budget is a really, really good idea.  Even if you are financially comfortable, it will help you save, prioritize your spending, and get a realistic picture of your budget priorities.  However, it is not as easy as you might think.

As part of my consumer debt practice, I frequently ask people to outline a budget of their actual expenses.  A few things I have noticed:

-Everyone underestimates food.  The reason is simple: I ask you what your monthly food expense is, and more often than not you will figure out how often you go the grocery, and how much you typically spend on each trip.  This is only part of the equation.  Most families spend a significant amount of money eating out, and this is often under-reported.  A realistic budget should include between $250-$300 per person, per month: that only works out to $3.33 per meal.

-It’s okay to recreate.  “Recreational expenses” are a category every budget should include, and the number should be realistic.  There is nothing wrong with going to the movies once in a while, or seeing a concert.  “All work and no play…” doesn’t end well.

-Some items can’t be measured monthly, such as car repairs, home upkeep, dental bills, annual dues, and other expenses that do not recur on a set schedule.  A client once told me that his budget was just fine, until he blew three tires in the same month; there is no way to precisely budget for that type of expense.  Rather, you should figure out how much these bills typically run per year, and then divide by twelve; call this amount your “contingency fund,” and write it into your budget.  If the money isn’t used in a particular month, set it aside.

Follow the money.  No guess or estimate can ever replace the cold, hard facts.  If you rely on debit cards or credit cards for most transactions, it makes this part easy.  If not, either start, or keep a small pad of paper to record all of your purchases (how much, what for).  The only way to accurately figure out how much you spend is to look at the real numbers coming out of your account.

-Start with a real budget, then work on the target budget.  Too many people conflate the two.  You may see from the “follow the money” step that you are spending $350 per month on recreation, and you may think that is too much.  Resist the temptation to reduce it in your first budget document; first get an accurate budget, then work on changing it to meet your goals.  That way, you can see where you started, and what progress you make over time.

-Finally, take a look at your taxes.  Getting a big refund each year is almost as bad as owing; you are letting the government hold onto your money without paying interest.  If need be, adjust your withholdings; you want to aim for a “break even” result at tax time.  Accountants are very useful in figuring out how to accomplish this.

No doubt about it, budgeting is a chore.  However, it is among the most important things you can do to ensure your financial success.  Household budgets give your spending some structure, and if you keep them up-to-date, they give you a good roadmap of your spending priorities, and areas you can improve.  I can’t recommend them highly enough.


Christmas and Bankruptcy

Christmas gift asset bankruptcy transfer


One of my more detail-oriented clients asked me an excellent question today about Christmas and bankruptcy, and I want to share some of my thoughts in this forum.

The client is planning to file for bankruptcy in January, or possibly February, and his biggest concern was about how this was going to affect Christmas.  You see, one of the questions asked in the bankruptcy process is whether you have given anything away to family members or friends in the months before you file.  She was concerned that this meant she could not give any gifts for Christmas!

To examine how this works, we need to look at the rule about “fraudulent transfers” and the role it plays in bankruptcy.  The purpose is simple and straightforward: we don’t want people with big assets being able to simply give those assets away, and then file for bankruptcy.  This would be unfair to creditors, who might be entitled to money if the assets hadn’t been given away.

The purpose is NOT to interfere with ordinary, everyday aspects of living, and this can include holiday gifts.  While a strict, technical reading of the code implies that even the smallest gift can be “avoided” by the trustee (essentially, the trustee takes it back from the recipient), in practice, as long as the gift is reasonably small and typical, that simply doesn’t happen.

This is for two reasons.  First, the amount of time and money the trustee would spend to get a small gift back is simply not worth it in administrative expenses alone.  Second, trustees are real people!  They have families, often have children, and most of them celebrate some December holiday involving gift exchange.  They understand, as long as you aren’t being abusive about it.

When we run into problems is when the gift is exceptionally large, like a vehicle or a transfer of over a thousand dollars.  It is not okay to give away large amounts of money or assets when you can’t repay your creditors; if you are heading for a potential bankruptcy filing, that doesn’t mean you can’t give gifts, but those gifts should be modest, with an emphasis on personal rather than price-tag.

One additional note: charitable giving is exempt from this analysis.  The code specifically allows you to make charitable donations.

This is one of those situations that calls for common sense.  Don’t buy things you can’t really afford, and don’t go overboard if you will be embarrassed explaining the transaction later to a trustee.  That said, a looming bankruptcy is no reason to cancel Christmas.


Understanding the Chapter 7 Bankruptcy Trustee

Chapter 7 bankruptcy trustee


If you file for Chapter 7 bankruptcy, you will probably never sit in a courtroom, or appear before a judge.  Oh, you’ll have a judge, you just won’t ever meet them.  The only person, aside from your attorney, you will ever meet is likely to be your bankruptcy trustee.

At the outset, you should know that most chapter 7 trustees are not government employees.  You can think of them more like contractors.  They get appointed to cases randomly, and their job is two-fold: they ensure that you are eligible for relief and not attempting any fraud on your creditors of the Court, and they examine your assets to see if there is anything to distribute to your creditors.

One of the best ways to explain their motivation is to examine how they get paid.  Trustees receive a small flat fee (in our district, $60) for each case they administer.  They also receive a “cut” of any assets they liquidate, based on a complex compensation scheme.  Most trustees I know tell me that they don’t make any money on “no-asset” cases, which are cases in which they simply get the standard fee.  Their real compensation comes off high-value, complex cases in which they administer assets.

After your case is filed, the trustee is randomly assigned.  The first contact with them will generally come from your attorney, who is required to turn over certain documents in advance of the Meeting of Creditors.  That meeting will be the first time you meet the trustee. I have previously written about this meeting, click the link to read more about it.

When I explain chapter 7 bankruptcy to potential clients, I often use the analogy of a “snapshot.”  That is because we examine a snapshot of your financial situation, both assets and debts, on the date your case is filed.  You can think of the trustee as your photographer (see, now the image makes sense).  They are the ones actually looking at the situation and assessing the state of your finances on the date you filed your case.

It is also important to remember that the trustee is NOT an adversary.  In fact, as a debtor you and your attorney have a duty to cooperate with them.  That is not to say we don’t fight with trustees- we often do!- but most of the time the situation speaks for itself, and the debtors know exactly what to expect.

This is also one part of the bankruptcy process in which it helps to have an experienced attorney.  A good attorney who practices in the district will have a good working relationship with all of the trustees, and can help the case administration go much more smoothly.  The importance of trust and rapport between your attorney and the trustee cannot be overstated.  One long-serving trustee told me that the single most important thing on any bankruptcy petition she examines is the name of the attorney preparing the documents.

Bankruptcy trustees are not judges; often, they are not even attorneys.  They are appointed administrators, and their job is to examine your case, make sure no funny business is going on, and see if there are any non-exempt assets they can liquidate.  They are also real people, and most are reasonable and easy to work with.  They are not your enemy in the bankruptcy process, and you certainly should not be afraid to meet them.


Assets, Hidden in Plain Sight

hidden assets property bankruptcy


Almost every discussion about your financial situation boils down to two important questions:  what do you own, and what do you owe?  While most of us can answer the second question fairly easily (with a little help from a credit report), I am yet to see anybody make a comprehensive list of their assets- the stuff they own- on the first try.

The reason for this is that some assets are obvious- money in your bank account, valuable coin collections, vehicles, real estate- and others are not.  For example, if you have written a story, or invented a process or product, or have a catchy trade-name used in the community, those are assets.  Specifically, those are “intellectual property,” and while it is difficult to figure out how much they are worth, they are worth something.

“The right to sue” is another oft-overlooked asset.  If you can sue somebody, that right has value, and can even (in some situations) be sold.  It definitely can be settled!

Accounts receivable, future tax refunds, and earned but unpaid wages (the money you have already earned, but haven’t yet gotten a check for) are also usually forgotten by my asset-listing clients.  In many states, like California, your vacation time is an asset, since it has cash value.

Knowing how to identify your assets in a comprehensive, detailed way is important in several contexts.  When you are looking to settle debts or assess your net worth, overlooking assets may mean missing opportunities.  When crafting an estate plan, you want to account for all things of value, or else they may be left out of your trust or will.  Finally, when filing a bankruptcy or responding to a judgment debtor’s examination, you need to be complete when listing things that you own.

This is one area where practicing consumer debt law has taught me a thing or two.  “Assets” includes not just the things we see and the things we have, but dozens of different categories of rights, items, and even ideas that, while not obvious, definitely have value.


Understanding the Meeting of Creditors

Bankruptcy Meeting of Creditors

In a typical bankruptcy case, the only thing the debtor has to “go and do” is attend the Meeting of Creditors, known among attorneys as the “341 hearing.”  Attorneys have the annoying habit of naming things after code sections; it’s what makes us special.

The first thing you should understand about this meeting is that it is a misnomer: it is very unlikely that any of your creditors will attend.  They were all invited, but unless they have specific questions, they usually rely on the trustee to make an examination.

While there is some variety among districts and individual trustees, most Meetings of Creditors take between three and five minutes.  The trustee will swear in the debtors, check their photo identification and social security card, and ask two types of questions.

The first type of question is highly-scripted, and is asked of every debtor.  If you have the opportunity to observe any hearings before yours, you will already have heard them.  “Did you read and sign the bankruptcy petition and schedules?  Was all the information in those schedules true, complete, and accurate?  Did you list everything you own?  Did you list everyone to whom you owe money?”  There are approximately twenty such questions asked of all petitioners.

The second type of questions vary from case to case, and are those asked by the trustee to clarify or investigate specific items from the petitions.  Remember, the trustee has already made an initial review of the bankruptcy petition, the schedules, and the tax return and pay stub information provided in advance of the hearing (aka “the 521 documents:”  see, attorneys are weird).

There are two primary reasons for holding this meeting.  The first is to get you on the record stating that all the information you submitted to the Court is true.  The second is to investigate potential assets or issues raised by your filing.  For the majority of filers, this will be the one and only time they need to attend any hearing; it is very rare for a chapter 7 bankruptcy debtor to meet their assigned judge.

At the end of the brief hearing, one of three things can happen.  Most commonly, the meeting is concluded.  The trustee will then issue a report, and the debtors are not required to return.  In some cases, the trustee will “continue” the hearing, setting a new date.  If this happens because the trustee wants additional documents or records, most of the time debtors are not required to attend this later hearing date; it is simply set up as a back-stop, in case the documents or records are not provided, or in case the trustee has additional questions.  The trustee will later let the debtor know, through their bankruptcy attorney if they have one, whether or not they need to attend.

Finally, in relatively rare cases, the trustee will have significant issues or problems with the filing, and will continue the meeting and require an appearance.   Generally, this is due to fraud, major asset issues, or undisclosed assets; you probably will know (or your attorney will tell you!) if you are at risk of this outcome.

Generally, the Meeting of Creditors is a relatively painless requirement in the bankruptcy process.  The most common thing my clients say to me as we walk out of the hearing room is “that was it?”


How to Save a Home in Chapter 13

chapter 13 save home mortgage foreclosure

Most people struggling to keep their home know that bankruptcy is one way to avoid foreclosure.  In this post, I will explain the nuts-and-bolts of how you can save your home- and cure your mortgage delinquency- through a Chapter 13 bankruptcy reorganization.

First, let me briefly explain what a reorganization is all about.  It is NOT a bankruptcy in which you are simply walking away from your debts.  Rather, you are proposing a plan, usually lasting three or five years, in which you will repay a portion of your debts based on your ability to repay them.  Each month, you make a single payment to a bankruptcy trustee, and they pay your debts on your behalf according a plan you draft with your attorney.  That plan, when approved by the Court, is binding on all your creditors.

Now, not every district is the same when it comes to mortgage delinquency.  In some areas, including the Sacramento area, the trustee makes your mortgage payment, as well as repaying your arrears.  This is known as a “conduit” jurisdiction, since the trustee is a conduit for your regular monthly payments.  In other areas, you continue to pay your monthly mortgage payment, and the trustee only pays the portion needed to cure your arrears.

The payment is calculated as follows:  First, your regular, ongoing mortgage payment remains the same.  It must be paid each month.  Second, your total amount of mortgage arrears must be provided for, though usually without interest or further penalties.  For example, if you have a $1,000 per month mortgage payment, are $15,000 in arrears, and propose a five-year reorganization plan, your new payment to your mortgage lender will be $1,250.  That is the ongoing amount, plus just enough to “cure” the arrears over five years (sixty months).

As you can see, the Chapter 13 plan operates as a kind of “reverse modification,” in that your payment is likely to go up, not down.  However, being in a Chapter 13 does NOT mean you cannot apply for a loan modification.  Several of my clients have entered Chapter 13 to save their homes from foreclosure, and have later gotten modifications that deal with the arrears and lower the monthly payments.  If that happens, the court will usually approve a modified plan that allows you to pay the modified amount to your mortgage creditor, so you are not locked in to the higher payments of your plan.

Chapter 13 plans are not “fire and forget.”  They can be modified at any time.  While you are in the plan, however, your mortgage creditor cannot foreclose on you, as long as you keep making your payments according to the terms of the plan.  It is a solid defensive strategy to avoid foreclosure.

One additional note about Chapter 13: if you have a second mortgage that is entirely underwater (i.e. your home would be underwater even if you didn’t have a second mortgage, but you do), most courts will allow you to “strip off” the second mortgage, and treat it as unsecured debt.

If you have taxes, car loans, or other secured debts, those might also affect your Chapter 13 plan, so you should talk to your attorney to see what the broader plan will look like in your situation. However, the basics of saving a home through Chapter 13 will be consistent with the explanation above.

Chapter 13 is usually the best solution if you are seriously delinquent due to an interruption in income or a major life event, but you have enough money to resume making your mortgage payments, plus pay a small part of your arrears each month.  It is not for everyone, but in many cases, it is exactly what a homeowner needs to avoid foreclosure and keep their home.