Los Angeles Bankruptcy Blog

You are stuck with your debt if you can’t budge it.

How will the mortgage and credit crisis play itself out? Today’s paper offers a clue:

Like many, I’ve wondered how our home mortgage finance system will rebuild itself, and how we will be able to contain problems in the financial system so they don’t infect corporate America, lower profits, and lead to massive layoffs. The answer to these questions became much clearer to me on a recent Sunday when I drove to downtown Los Angeles and joined approximately 2,000 others in the Convention Center. They had come to participate in an open auction of 120 foreclosed homes from Los Angeles, Orange and San Diego counties. What I saw there reinforced to me that the only resolution to the crisis is to let the free market repair itself.

A number of lenders had foreclosed on and taken possession of the houses, with the objective of selling them to people at prices they could afford. They hired a company, National Home Auction, to run the show. Buyers all had to bring certified checks for $5,000 in order to participate. If they were successful in the auction, they had to post another $5,000 immediately, and then go upstairs where they were qualified for a mortgage. Once they were, the buyers moved to another room where the closing process was begun with the title and escrow company. Final closing was scheduled for 21 days later. Seventy-five percent of the homes auctioned that day have closed; would-be buyers and lender-sellers are still negotiating the rest.

It’s not pretty, but every house has a value and a selling point. The sad part is that many people who are hoping for a sale or deed in lieu or quick sale vastly over-estimate what this price point is.

In today’s WSJ, they quote the Becker-Posner blog:

Hardly a day goes by during this housing crisis that the media does not report on families in foreclosure proceedings, or in arrears in repayment on mortgages that had close to zero down payment requirements and low “teaser “ interest rates. The many excuses offered by some home owners for their plight, and also eagerly by the authors of these human interest stories, is that the borrowers did not understand that these introductory interest rates might rise a lot after a few years, or that they would have negative equity in their homes if housing prices stopped rising and began to fall. An obvious alternative explanation for their behavior is that they gambled that the good times would continue indefinitely.

Do you agree or disagree? Post your comments.

The latest information from the us trustee’s office median income regarding median family income by family size is here. Updated for cases filed after March 17, 2008.

To find out if you qualify to file bankruptcy under Chapter 7, contact a Los Angeles bankruptcy attorney.

I see a lot of people in my office asking about filing bankruptcy. More often than not these days, it’s a realtor or mortgage broker or loan officer who has lost income. Oh, and they have two investment houses and those investments aren’t panning out. As I said, this happens a lot nowadays.

Yesterday, a gentleman who is from the above template strolls in. I’m very sympathetic to his plight. He might have to let two properties go, his wife’s income barely pays the mortgage where they live. At the end of our time together, I ask, “have you sold, given away or transferred any valuable property in the last four years?”

The answer? Yes, I sold a house. How much did you get? $250,000. No, I mean, how much did you clear from the transaction after the mortgages and liens were paid? Same answer: $250,000. Great! And you purchased your current home that same year… how much of that did you put down? Zero down. When did this happen? Less than two years ago: 2006. And where is that quarter-million dollars now? Home improvements. You must have a lot of receipts from Home Depot. The Chapter 7 Trustee will be wanting to see all of them. He looked at me, puzzled.

Who gets a ton of money from selling a house and goes zero down on their new home and can’t show where the gobs of cash went? Is it possible he’s telling the truth? Sure. But if he were to file bankruptcy, you can bet the US Trustee will be all over him.

It’s just amazing to me.

I was particularly taken by this opinion piece that touched on the mortgage and housing crisis. A sample interesting quote was:

With liberalized credit rules, many people with limited income could access a mortgage and choose, for the first time, if they wanted to own a home. And most of those who chose to do so are hanging on to their mortgages. According to the national delinquency survey released yesterday, the vast majority of subprime, adjustable-rate mortgages are in good condition,their holders neither delinquent nor in default.

There’s no question, however, that delinquency and default rates are far too high. But some of this is due to bad investment decisions by real-estate speculators. These losses are not unlike the risks taken every day in the stock market.

What’s fascinating is when you learn the piece touching on the credit crisis was written by George McGovern.

Every now and then, someone asks me, “why would you want to be a Los Angeles bankruptcy lawyer?” I mean, all of my clients don’t have a lot of money, they have real problems and need help.

Actually, that’s the reason: people need help. It’s nice to make a difference in people’s lives.

Also, to be a bankruptcy lawyer means that you really have to know about other areas of law that crossover. It’s not unusual to have to unravel issues real property, wills/trusts and estate planning, and just this morning, there’s a very basic contract law dispute that came up. And this doesn’t even mention the community property, since a lot of bankruptcy cases coincide with a separation or divorce.

So, the practice of being a bankruptcy attorney is never boring or dull, as you get the “I’m getting a divorce, but we transferred the house to someone and used my uncle’s inheritance to put a down payment on a new house but we never finalized the offer” situations. Discuss.

And it’s really neat to help people.

In today’s housing market, many people are upside down with their mortgages. Not to mention, many homeowners have an adjustable rate mortgage (ARM) that has the payment skyrocketing. As a result, there are people who approach me with this basic of questions:

Should I do a short sale or let the house go in foreclosure?

The question is not easy to answer. In a short sale (also sometimes called a quick sale), you are agreeing to sell your house back to the bank at a reduced price. Now, banks are not crazy about owning homes; they’re in the making-money-from-interest-and-loans business. They don’t want to own homes. Especially if your entire neighborhood is faltering. Will they own your entire block? What about half your block? Is this really what Bank of America, Countrywide, HomEq and Chase Mortgage are in business for?

In addition, with a shortsale, you may have to pay taxes on the amount you were forgiven, the write-off. Talk to your CPA about the tax consequences of this. A 1099c for the cancelation of
debt might be sent to you, and then you have to pay taxes. (not to mention property taxes) Check with your tax advisor.

A foreclosure, on the other hand, is where the bank takes possession of the house again. In some ways, it’s like a car repossession. However, unlike a car repo, there are many statutory requirements about notice and such that the mortgage servicer has to abide by which are beyond the scope of this article.

The thing to get out of a foreclosure is that, unlike a quicksale, you won’t owe additional income taxes if a foreclosure happens on your residence, thanks to the Mortgage Forgiveness Act that President Bush signed into law last year.

Also unlike a short sale, there is no aggressive and extremely hungry real estate agent seeking a commission off your transaction. Are they looking out for you?

Summary

Short sale: Realtor gets commission, possible tax bill to IRS, no leftover debt, roller-coaster ride.
Foreclosure: No realtor, no tax assessment or 1099, credit hit, possible collection for unpaid mortgage

And it’s this last point where a bankruptcy could swoop in, remove any lingering debt owed to a mortgage company that didn’t have thier lien paid, eliminate the other debt you have, and get you a fresh start, tieing this all up in a neat little bow. (call to set up a consultation for more info)

No easy answers, both are imperfect solutions. As of today, no bankruptcy attorney or judge can change your mortgage payment or balance or payout. It is what it is. However, if you want a fresh start, no property tax debt, no Internal Revenue Service bill, and just to move on, a bankruptcy after a foreclosure might be the way to go.

People think that being a bankruptcy lawyer is easy, just about filling in forms. Here is how I spent part of my day on Friday:

• Preparing an Objection to Proof of Claim for a Chapter 13 case where the pro se creditor thinks they should be a priority debt compared to a general unsecured non-priority claim. Of course, I needed a Declaration to go along with this for my client, the debtor.
• Researching and negotiating a claim for a Chapter 13 bankruptcy where the Los Angeles Chapter 13 Trustee thinks that it might be unfair discrimination between claims in the same class to pay one nondischargeble claim 100% compared to the others.
• Responding to a letter from the United States Trustee questioning whether a client should be entitled to a Chapter 7 discharge based on prior income.
• Replying to a creditor who is very curious about massive credit card spending the debtor in another Chapter 7 case did prior to filing bankruptcy. There may be an adversary proceeding here on 11 USC 523.
• Answering a bunch of questions from existing clients who, after hiring me to let ther house go in foreclosure during the bankruptcy, are now suddenly prey to realtors and real estate agents who want to “help them” with a quick sale and why bankruptcy is better than a short sale.
• Personally reviewed a bankruptcy petition (you know, the simple bankruptcy forms) with a client before we both signed it and I file bankruptcy for him.
• Preparing for court on Tuesday where I’m helping three clients get their cases “confirmed” at their Confirmation Hearings at the bankruptcy court in Woodland Hills. (do we have the mortgage declarations? the plan payments? did we satisfy the Chapter 13 trustee’s requests for business expenses and short form?).

And I didn’t even fill in one free bankruptcy form.

People don’t realize that practicing bankruptcy law is a bit more involved than, say, filing taxes. I love it, and I wouldn’t give it up for anything in the world.