BANK SETTLEMENT WITH HOMEOWNERS IS “TOO LITTLE, TOO LATE”by Marc A. Collins (COLLINS LAW GROUP, LLP)
Earlier this year, the nation’s five biggest mortgage lenders and the attorneys general from each of the States, came to a settlement on mortgage industry claims. Under the settlement, approximately one million borrowers will see their mortgage principal balance slashed by as much as $100,000.
This sounds like good news right? GOOD LUCK if you think you are going to be able to take advantage of this settlement. Sure, the bank will find some homeowners that qualify, and you will hear a lot of publicity about how they worked with borrowers to save their houses. However, our guess is that this is going to have little if any impact on the borrowers who are most in need in the general population.
Like many earlier failed attempts to save face with the public by “agreeing” to work with borrowers who were behind in their mortgage payments, big banks are likely to only give principal reductions to homeowners who are current on their mortgage payments. If the past is any indication, the banks will also require a strong credit report and stable income, before agreeing to any reduction. These requirements will likely weed out most of the general public from this program.
For those individuals who have been hit hardest by the downturn in the real estate market and general economy, such as those who have lost their jobs or had wages cut, this settlement will offer little or no hope, and many homeowners will find themselves right back where they started – wasting time filling out and sending in paperwork that is continually lost by the banks or never received, all to no avail.
USING BANKRUPTCY TO KEEP YOUR ASSETS
Many individuals don’t understand that the Bankruptcy Code offers many protections when it comes to preserving your assets. Some believe that when you file a bankruptcy case, you lose all of your assets, but this is simply not the case. The Bankruptcy Code was designed to put people back on their feet, and not to leave them desolate and in the street.
Exemptions provided by State laws allow you to keep most or all of your personal assets while eliminating your unsecured debts. Examples of assets retained in a Chapter 7 case by the debtor include 100% of clothing, furniture, appliances, and 401k employer sponsored retirement accounts. Although there are limits on some asset categories (like very expensive jewelry or artwork), the average consumer will retain most if not all of their assets.
If a debt is secured by the right to recovery property (like a home secured by a deed of trust, or car secured by a lien), you can always choose to reaffirm these debts. Reaffirmation means that in spite of your bankruptcy filing, you agree to keep paying on certain debts. Many times this can save the house, car, or other assets that might not be completely exempt. What’s more, if you are behind on your mortgage payments, certain chapters of the Bankruptcy Code allow you to set up convenient and affordable payment plans, over a period of 3 to 5 years, which will allow you to keep your house and get caught up on those missed payments from the past.
THE MYTH OF THE BANKRUPTCY FILING STIGMA
Is there still a stigma that follows people who file for protection under the Bankruptcy Code? After speaking with many clients over the years, we find that for the majority of clients facing personal bankruptcy, certainly still feel a sense of guilt if they are unable to pay back their obligations. But given the economic climate they face, there is simply no other viable choice. As many of their friends and business associates face similar situations, the former stigma appears to be fading to the past.
Filers also harbor another fear, which is patently false, that filing a bankruptcy case will prevent them from ever getting credit again. Most individuals who even contemplate filing a bankruptcy case have already damaged their credit to the extent that obtaining the “fresh start” upon discharge makes more sense than not filing. Some lenders may even be more enticed to lend to someone who has recently filed bankruptcy and will offer credit cards and car loans to them, compared to someone who is still burdened by old, stale debt. As a consumer may only receive a discharge every seven years, would you rather lend credit to someone who is burdened by a lot of debt, or to someone who just had his or her debt erased and can’t do that again for several years? A debtor who received his Chapter 7 discharge is trying to rebuild his credit, get back on his feet, and make something of his future. Doesn’t that sound like a safer bet to lend to?
Even if you need to file a bankruptcy case, lenders will still find you. You will still get credit card offers and will still be eligible for loans (although you will most likely be required to pay back these funds at higher interests rates). After an initial period of time with little or no credit, faithfully paying your debts on time will eventually lead to more credit as lenders trust you with your accounts. Overtime, you can again find yourself right on par with those who have good credit. Bankruptcy is one option to help you get that process started.