Is It Common For a Loan Modification To Be Delayed?

When you are having trouble making your house payments, there are options that might work well for you. One of these options is a loan modification. This is when the bank changes your loan so that you have a lower, more affordable monthly payment. Many people who try to obtain a loan modification have been facing delays of all types.

Girl on White BackgroundWhen trying to get a loan modification, there is a lot of paperwork that the lender will need to determine whether you will qualify. Once the documents are submitted to the lender, some people will then get notification from the bank that either they are missing paperwork or that additional paperwork is needed. Another thing that seems to be common lately in the process is the lender telling the homeowner that they have missed a deadline. If that happens, they may even go back to the beginning of the process and start everything over. Typically, that means the homeowner has new deadlines, and has to submit all or some the paperwork over again.

It seems common lately for banks to say that they will not even consider a loan modification if you are current on the payments. They encourage people to stop making the payments so that they will have a better chance of getting a loan modification. Then, after the homeowner is several months behind in payments, the bank denies them the modification and the foreclosure process begins.

Typically, after applying for a loan modification, the lender will put the homeowner on a trial period for a few months at the lower payment amount. Make sure you keep all information pertaining to these payments. It has not been uncommon lately for the lender to either say they did not receive the payment on time or at all, or they do not credit the payment to your account correctly.

So if you are looking into the possibility of modifying your loan, be sure you are prepared for the possibility of long delays and a lot of paperwork. There could be more than one person handling your account, so make sure you write down and keep track of the entire process, including who you talk to, what papers you receive in the mail, what payments you send in, etc. Also, be sure you are persistent and follow up with the bank so you don’t slip through the cracks.

Should I Refinance My House to Pay Off Debt?

Family Sitting in Front of HouseDesperate times require desperate measures or so the saying goes.  If you are struggling to pay your debts, primarily the result of the minimum payments on credit cards, medical bills, personal loans, taxes, student loans, etc., should you consider refinancing your home to pay off the debt?

There are several factors to consider. First, you must determine if you have any equity in your home that would allow you to refinance and take the excess proceeds to pay off your debt.  Unfortunately, with the downturn in the economy fewer and fewer people find they have equity in their home.  However, if you are one of the lucky ones that have equity in the home, you need to decide if consolidating the debts into the mortgage loan is your best option.  Is it always a bad idea to refinance your home to pay off debt, no, but you need to consider the pros and cons before you make the decision.

Pros:

The payment on the debt can be spread over the terms of a mortgage, often 30 years, therefore reducing the payment each month.

The interest rate on the mortgage is usually considerably less than what would be paid on credit cards, so there is an automatic savings.

The interest from the mortgage loan can be deducted on your taxes; interest on credit cards and most other personal debts cannot be deducted.  (Interest on student loans is the exception.  It can be deducted, but the deduction is limited and phased out as income reaches a threshold.)

You will be making one consolidated payment each month so there is a convenience factor.

This all sounds great, so why wouldn’t everyone just refinance their home to pay off their other debt.

Cons:

The monthly payment on the home mortgage is larger after refinancing and can be a stretch for the family budget.

If you are unable to make payments on the mortgage due to illness, loss of job, etc., the mortgage company can foreclose on the home.

Again, refinancing the home is not always a bad idea, but you must realize you have placed your largest asset, your “home”, at risk.

How Do I Apply For Food Stamps?

Family

Food stamps are a wonderful benefit for those who qualify.  If there are times when you are finding yourself in the predicament of deciding whether to pay the energy bill or buy groceries for the week, you should take the time to research the eligibility requirements for food stamps.  If you are in North Carolina, check out the NC food stamps website for information on how to apply for food stamps. Visit this pageto find out where the Department of Social Services (“DSS”) office is located in your county.

The most difficult part of applying for food stamps is finding the time.  If you can go to the website, print out the necessary forms, and fill them out beforehand, that is half the battle.  You will need certain documents to verify the information you have listed on the application.  These are the basic documents you will need – but verify with your local Department of Social Services to ensure you have gathered all of the documents they require:

Drivers license and social security card (or some other official document with your name and social security number on it).

Your last two months of paychecks.  If your check is usually the same, sometimes just one month will be accepted, but try to provide at least two.

Proof of your daycare/after school care expenses.

Proof of utility bills in your name.

You can make the process easier on yourself by keeping your documents organized. As you fill out your application, make note of the sections and what documentation may be required for your personal answers.

Next, you must go to the DSS office.  Unfortunately, there is no “good” time to go stand in line.  Regardless of the day of the week or time of day, you will be waiting in line and it will be crowded. If you have kids, you may want to try to find a babysitter or bring a book to keep them occupied if you have to bring them with you. Please be patient while you are there; remember the specialists are there to help and can only work so fast! They are excellent in answering questions of all types or at least giving you a number to the department you should be contacting.

After this line, you will then move to a different area (with chairs this time) to wait for your assigned case worker to call your name for an interview.  This interview is not bad and they are just going over your application, so no need to be nervous!  As a side note, if you are interested in any other services such as WIC, Medicaid, help with child support, housing, or daycare, your case worker usually can steer you in the right direction.

Food stamps are now issued as an EBT card, which works exactly as a debit card.  It makes paying fast and easy.  And the icing on the cake is that most grocery stores have an option for EBT/Food stamps, for those who need the help but are a little embarrassed.

What Is A Short-Sale?

[youtube]http://www.youtube.com/watch?v=0R3ToH3saqA&feature=youtu.be[/youtube]

If you are behind on your house payments and have decided you no longer wish to keep the house, you may be looking at your options including a short-sale, deed in lieu of foreclosure and bankruptcy.  For this blog, we will specifically look at the short-sale.  A short-sale occurs when real property (house, land, etc.) is sold to a third-party for an amount less than what is owed on the property.  The short-sale is a way of transferring the property out of the homeowner’s name, but it does not necessarily eliminate the homeowner’s responsibility to pay the balance on the loan, known as the deficiency balance, after the sale.   As a result, the homeowner may be making payments on a house he no longer owns.  The short-sale will have a negative impact on the homeowners’ credit, since it will show the house was sold for an amount less than what was owed on the property, however, it will not be considered as negatively as the foreclosure.

 

It is best to illustrate what can occur in a short-sale with examples.  The examples have been simplified and do not reflect any real estate broker fees or other real estate closing costs and fees.  These examples also assume the house is the homeowners’ primary residence.

Example One

Young Family Sitting in Front of House on Steps

There is a $150,000 mortgage loan owed on the house, but in today’s market the house will only sell for $130,000.  You may approach the mortgage company to determine if they would accept $130,000 short-sale for the property.  In some cases, this may be acceptable to the mortgage company, since they would not be required to go through expensive foreclosure process.  If there is only one mortgage loan, the short-sale can be a viable option.  However, keep in mind that although the mortgage company agrees to the reduced amount so the house may be sold, it does not eliminate their right to pursue the homeowner for the deficiency balance on the loan, in this example $20,000.

$130,000 Offer on the Property

$150,000 Mortgage Lien

($ 20,000)Deficiency Balance

Example Two

There is a first mortgage for $125,000, Home Equity Line of Credit (HELOC) for $30,000 and a Homeowners’ Association Lien of $1,000 or a total of $156,000 owed on the property.  Consistent with Example One, the offer on the house is for $130,000.  In order to proceed with the short-sale, the homeowners must get all three lienholders – first mortgage, HELOC and Homeowners’ Association – to agree to accept the $130,000 offer.  Since the first mortgage will most likely insist on being paid in full, it is unlikely they will object to the $130,000 offer.  On the other hand, the HELOC and Homeowners’ Association must both agree to share the remaining $5,000 and agree to release the liens on the property before the short-sale can occur.  Also, just because the HELOC might agree to accept the short-sale, it does not preclude them from pursuing collection activities against the homeowners for the balance owed on the lien.

$130,000 Offer on the Property

$125,000 First Mortgage Lien

$  30,000 HELOC Lien

$    1,000 Homeowners’ Association Lien

($26,000)Deficiency Balance

As mentioned, it was assumed the house being sold in the two examples was the homeowners’ primary residence.  As a result, there is no tax implication against the homeowners, since The Mortgage Forgiveness Debt Relief Act of 2007 allows the homeowners to exclude the deficiency balance, also known as “forgiven debt”, on their primary residence.  On the other hand, if the property being sold is an investment property or any other property that was not the homeowners’ primary residence, the homeowners can be taxed on the deficiency balance or forgiven debt, since it is treated as income for tax purposes.

The short-sale is a viable option for many homeowners, however, it is important to be fully informed of the impact it may have on the homeowners’ financial position in advance of completing the sale.  Request the mortgage company or mortgage companies sign a waiver stating they will not pursue a deficiency balance on the property.  In many cases, the mortgage company will not agree to sign a waiver relinquishing their right to pursue collection activities, but it does not hurt to make a request.  In addition, be prepared to make payments on the deficiency balance after the short-sale or consider filing bankruptcy to eliminate the deficiency balance and other debts.

What Is A Deed In Lieu of Foreclosure?

For homeowners that have fallen behind or “defaulted” on their mortgage loan and have decided they do not want to keep the home, a deed in lieu of foreclosure may be an option for them.  In the simplest of terms, the deed in lieu allows the homeowners to voluntarily transfer the property from the homeowners name to the mortgage company’s name without going through the prolonged and for the mortgage company costly foreclosure process.  This process also satisfies the debt the homeowner owes to the mortgage company on the loan.  Although the loan is satisfied through this process, the homeowners’ credit will still reflect that the loan was in default but satisfied by a deed in lieu.  In other words, there will be a negative impact on the homeowners’ credit from executing the deed in lieu of foreclosure, but it may not be as detrimental as a foreclosure.

House Going Through Foreclosure

There are several things the mortgage company will consider before deciding whether they will agree to a deed in lieu of foreclosure on the property.  These include:

Are there any other mortgage loans (second, third, or Home Equity

Line of Credit (HELOC)) on the property?

Are there any homeowners’ association liens on the property?

Are there any judgment liens on the property?

Are there any other blemishes on the title?

If there are any of these issues, the mortgage company will most likely not agree to the deed in lieu of foreclosure and will proceed with the standard foreclosure process.  The mortgage company cannot eliminate the other liens on the property through the deed in lieu process.  As a result, if you have more than one mortgage loan or other liens on your property, you may want to consider other options including a short-sale of the property or filing bankruptcy.  Each of these options has their own risks and benefits and is discussed in other blogs.  Most deed in lieu of foreclosure paperwork is drafted by the mortgage company’s attorney, so it is recommended that the homeowners seek the advice of an attorney, usually someone practicing real estate law, before signing the deed in lieu documents.

Do I Pay Taxes on Debts I Settle with My Credit Cards?

This is one of the potential pitfalls of debt consolidation that many consumers are unaware of until they receive a Form 1099-C from a creditor come tax time.

When debts are consolidated and/or forgiven the creditor must report it to the Internal Revenue Service (IRS) as a business loss if the amount is more than $600.00. The debtor will then receive a Form 1099-C that reports the business loss to the creditor as gross income to the debtor even though no real money was exchanged. This phantom income can significantly affect a debtor’s tax liability. Some debtors may even disregard the 1099-C thinking that they have been released from any debt liability to that creditor.

Credit Card

If you have not filed for bankruptcy you must report the discharged debt as taxable income on that year’s tax return. If you have filed for bankruptcy and you receive a 1099-C for a debt you thought had been discharged you should immediately notify your bankruptcy attorney. Debtors who have filed bankruptcy may qualify for an exclusion to the 1099-C. They must file a Form 982 with their tax return along with the 1099-C which allows them to eliminate their debt liability to that creditor.

The bottom line is if you settle a debt with a credit card and it is for more than $600 you will be taxed on that forgiven debt. If you file bankruptcy then you do not have to pay taxes on the debts that are wiped out or forgiven.

 

Does Your HELOC (Home Equity Line of Credit) Have You Locked?

A few years ago when your home had equity, you obtained a Home Equity Line of Credit or HELOC to consolidate your debt and payoff credit cards, medical bills, personal loans, etc.  It seemed like a great idea because you could eliminate all of your revolving debt and make only two payments each month…your first mortgage and your HELOC payment.  This approach also provided a way to lower your monthly payment, since the interest rate on the HELOC was less than what you were paying on credit cards.  And we all thought at that time your home would appreciate in value!

Family Walking Holding HandsThat was circa 2008 and here you are in today.  You are lucky if your home is worth what you owe on the first mortgage, there’s no way will it will cover the HELOC.  So your HELOC has you locked!  What are your options?

Do absolutely nothing – You can see what is the HELOC creditor is going to do.

The HELOC creditor could foreclose on your home but probably not, since they would receive little if anything from the sale.  However, your credit will be negatively impacted because of late, slow or no payments on the HELOC.  The impact on your credit will make it difficult for you to obtain other credit for another car or other needs.

The HELOC creditor may actually decide to foreclose on the property.  They know they will receive little or nothing from the foreclosure, but they can write-off the bad loan from their books making the company more financially sound.

The HELOC creditor may write-off the debt on the loan and send a 1099C to you and the Internal Revenue Service.  It appears that this voluntary non-payment is excluded from the Mortgage Forgiveness Debt Relief Act of 2007.  At this point you will be responsible for taxes on the forgiven debt.  You should also remember that the creditor writing off the debt does not eliminate the lien by deed of trust on your home.  If you try to sell the house in the future, you must still deal with the HELOC creditor before you can convey the deed to another person.

Sell the home – You would sell the home, but you can’t get enough to pay the first mortgage and the HELOC.

You’ve talked to the HELOC creditor about a short-sale, and they want you to come to the closing table with at least some money to pay them.

Since you don’t have the money at closing, they have agreed to release the lien for you to sell the house, but they want you to sign an unsecured loan on at least a portion of the debt you owe them.  That is an option, but do you really want to pay for a house you do not own?  If you default on this unsecured loan in the future, they can actually sue you for the unpaid debt.

Chapter 13 bankruptcy – You can file a Chapter 13 bankruptcy to resolve the HELOC and any other outstanding debt.

The key is that your first mortgage must be greater than the value of your home.

You will be required to file a lawsuit or adversary proceeding in bankruptcy against the HELOC creditor.

You must complete your bankruptcy and receive a discharge.

This approach will allow you to retain your home and make it a more valuable asset, since you will no longer be saddled with the HELOC.

We you speak with your accountant or a bankruptcy attorney to determine what option is best for you.

Bankruptcy Versus Debt Consolidation: The Pros and Cons

Bankruptcy QuestionsDo your debts have the best of you?  Once you make the decision do something about it, you usually contemplate debt consolidation or bankruptcy.  They are both valid options for you to consider. Below we have explored some of the benefits and drawbacks of each.

Debt consolidation can take many forms, but for this blog we will look specifically at companies that take some or all of your debts and negotiate a settlement with your creditors.  This agreement allows you to make a single monthly payment to the debt consolidation company who then distributes payments to your creditors.  The negotiated settlement percentage is often agreed to in advance between the debt consolidation company and your creditors.  The debt consolidation company then makes your monthly payment to the creditors.  This sounds great, so are you ready to move forward with debt consolidation?  We suggest you closely look at the pros and cons.

Pros:

You make one single payment each month for your debts to the debt consolidation company.

You may lower your overall monthly payment.

You can avoid bankruptcy.

Cons:

The debt consolidation company is unable to negotiate with all of your creditors leaving you to negotiate with some creditors on your own.

Creditors report negatively on your credit since you are not paying the full amount owed each month (this is frustrating since they agreed to the reduced amount).

The debt consolidation company may not pay your creditors timely, and sometimes not at all, each month resulting in derogatory impact on your credit.  This can stay on your credit report for seven years.

A surprise lawsuit is served on you by the Sheriff’s office when you discover one or more creditors have not been paid as part of the debt consolidation.

Creditor sends a 1099C to you for the forgiven debt, a/k/a taxable income, resulting in taxes owed to the Internal Revenue Service.

Your monthly payment is only slightly lower than before entering debt consolidation.

Duncan Law, PLLC believes that debt consolidation is a viable and appropriate approach for some individuals.  However, be careful who you choose since there are scams and questionable companies marketing as debt consolidation or credit counseling organizations.  We recommend you contact the Better Business Bureau or your local United Way to see who they recommend.

Bankruptcy is the legal approach to consolidating or eliminating your debts.  Depending on your income and your personal situation, you may want or need to file a Chapter 13 bankruptcy which consolidates your debts.  Similar to debt consolidation, you pay a percentage of your unsecured debts (credit cards, medical bills, personal loans, foreclosures, repossessions, etc.) back over a period of time.  The percentage paid back to unsecured creditors varies by client but is usually between 10% – 20%.  In some situations, Chapter 7 bankruptcy is the correct approach and it will completely eliminate debts on credit cards, medical bills, personal loans, foreclosures, repossessions, etc.  So you think bankruptcy is the best approach?  Again, we suggest you look at the pros and cons.

Pros:

In a Chapter 13 bankruptcy, you make a single payment each month to a Trustee that makes the payments on your behalf.  The Trustee is appointed by the federal government and payment made by the Trustee are scrutinized and audited.  This payment plan is a minimum of three years and a maximum of five years depending on your specific situation.

A Chapter 7 bankruptcy will eliminate unsecured debts while allowing you to retain your home and car in most cases.

Once the bankruptcy is filed, a “stay” in enacted which keeps your creditors from suing you, repossessing or foreclosing on your property, or taking further legal action against you.

You are not taxed by the Internal Revenue Service on the debt forgiven in bankruptcy.

You are able to obtain a fresh start once the bankruptcy is complete, and obtaining credit after bankruptcy is much easier than you would expect.

Cons:

Not everyone will qualify for a Chapter 7 or Chapter 13 bankruptcy.

Bankruptcy will be on your credit report for seven years from the date of filing in a Chapter 13 bankruptcy and ten years from the date of filing in a Chapter 7 bankruptcy.

In a Chapter 13 bankruptcy, you must obtain approval from the bankruptcy court for the purchase of cars, homes or other items that cause you to incur additional debt.

Bankruptcy is viable option when a fresh start is needed.  Depending on the individual’s circumstances, bankruptcy can provide a repayment plan, a Chapter 13, or a debt elimination plan, a Chapter 7.  If you are considering bankruptcy, please contact Duncan Law, PLLC to discuss your options.

Bankruptcy v. Deed In Lieu of Foreclosure

Foreclosure Sign in Front of HouseClients have frequently asked us what is the difference between a deed in lieu of foreclosure and a bankruptcy?

First, a deed in lieu of foreclosure (DLF) is when the homeowner signs over and transfers the deed to the home to the mortgage company without the legal process of a foreclosure. Most people believe this will look better on the credit report than a bankruptcy or a foreclosure. This is possible, however a DLF does not wipe out the pre-existing debt on the home as a bankruptcy would do. In other words, you as the homeowner would still owe the deficiency debt on the mortgage, the DLF just saved the mortgage company the time and expense of foreclosing. It does not eliminate the debt you owe them! This is the same on a “short sale”.

The mortgage company will eventually sell the home, usually at a loss, and demand you pay them the difference in money unless you have agreed in writing to wipe out the debt still owed. This debt is usually several thousands of dollars and possibly tens of thousands of dollars.  The difference in what you owe the mortgage company and the amount they sold the house for is called a “deficiency balance”.

If you do not pay the mortgage company the money they have demanded, they could sue you for the difference they lost from the sale of the home. The mortgage company will usually win the lawsuit because you do owe them the deficiency balance unless you have reached an agreement with them saying that you will not owe the deficiency balance.

In the alternative, the mortgage company could believe the debt is “uncollectable” from you and forgive the debt.  You may think, “that’s great!”  However, there’s a catch. The mortgage company will try to “write off” these thousands of dollars of loss on their taxes by filing a 1099(c) with the IRS eliminating your debt to them.  The drawback is the IRS will consider this “forgiven” debt to be gross income if it totals more than $600. In other words, you don’t have to pay back the full amount of the debt but the IRS will tax you on that forgiven debt as gross income. For example, the mortgage company losses $50,000 on the sale of your home.  The IRS will expect you to pay taxes on the $50,000.  If you are in the 25% tax rate, you would have to pay $12,500 in taxes to the IRS.  If you do not have the $12,500, the IRS could start assessing you penalties and interest. That could, in turn, lead to the garnishment of your paystubs!

In contrast, a bankruptcy will usually eliminate any deficiency balance you owe the mortgage company.  Therefore they cannot sue you or attempt to collect the deficiency balance you owe them. The IRS usually cannot tax you for the deficiency balance you owe the mortgage if you file the bankruptcy.  If you file bankruptcy, you are considered insolvent, and the IRS must waive the tax liability on the 1099 if you are deemed insolvent.

In conclusion, consider your options. However we believe surrendering the home in bankruptcy and wiping out any deficiency balance and eliminating your other unsecured debts, such as credit cards and medical bills, is usually a better alternative than a deed in lieu of foreclosure.