Monthly Archives: November 2010

How Can Making your Mortgage Payment Actually Hurt the Economy??

By Kitty J. Lin, Attorney at Law

In this economy, many homeowners are hurting from the downturn of the housing market and subsequent reduction in the value of their home.  Many homeowners have bought their homes when the real estate market was at an all-time high, believing they have made a good investment.  Instead of realizing the American Dream, they find themselves making payments for a property that is worth significantly less than what they now owe the lenders.  It may be a hard pill to swallow for some because they could be living next door to a neighbor that purchased a foreclosed home for several hundred thousand dollars less than their current home, even though the houses are almost identical in size and amenities.

Unfortunately some of these homeowners have been unable to keep up the monthly mortgage payments on their properties, and have had their dream home foreclosed on.  Other homeowners find they are still able to afford their mortgage payments, even though their houses are not worth what they owe.  Is this good or bad for the economy though?

Most of the stay and pay homeowners are stuck between a rock and a hard place.  These homeowners cannot get a loan modification because they are still able to afford their mortgage payments. They cannot sell their home, unless it is a short-sale (short-sale is when a home is sold for less than what is owed on the mortgage(s)), there is no equity and the homeowners would end up owing the mortgage holder if they sell their homes.  Finally, although the current housing rates are at an all-time low, they cannot refinance their homes for a lower interest rate because there is no equity, or the credit scores are not high enough to take advantage of any offers.  Whichever the cause, homeowners are left with the choices of either walking away from their home or continue to make their mortgage payments and hope the value of their house increases $100k plus in the next ten years.

Some experts and bankruptcy attorneys believe the stay and pay homeowners that are actually paying their mortgage payments on time even though their houses are worth hundreds of thousands of dollars less than what they paid actually is hurting the economy.  How can this be true?

The stay and pay homeowner may be worse off than those that walk away from their homes to start fresh.  The homeowners that continue to pay the high mortgages are arguably spending a higher percentage of their pay on their mortgage than on other consumer goods.  They are most likely paying a higher percentage of interest on their loans, and may be paying a higher amount on their property taxes.  These higher costs mean that they have less money to spend on other items, like fixing up their property, or buying consumer items for themselves or their children.

While this theory makes a lot of assumptions, it may hold some water.  If these homeowners were paying less for their mortgages or renting somewhere, they would theoretically have more money to spend on other goods or services.  Is that not always true though?  If the government did not tax us so much, then people would have more money to spend on other items and services and the economy would be better.  Over time we all spend a certain amount on a home or a vehicle.  Depending upon the timing, it may be a good deal or it may not be.  At the end of the day, it all should balance out in our supply and demand economy. Unfortunately it appears more and more people will seek the counsel of bankruptcy lawyers due to increases in tax debt due to increased taxes.

Unfortunately, with the economy stagnant at best, it will be a long time for real estate prices to rise, which means the stay and pay homeowners have a longer period of time to reach before their house has equity.  However, homeowners may stay because their homes have special memories that cannot be replaced.  For those that wish to stay in their homes that are underwater, it may be possible in a Chapter 13 Bankruptcy to at least get rid of the second and third mortgages or line of credit.  See our lien stripping article here.

What Can be Repoed or Repossessed? Repossession Explained

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Repossession of a vehicle or other personal property is never something anyone plans for.  Unfortunately it does happen.  The following is a detailed explanation about what can be repossessed when payments are missed.

Repossession is possible when a creditor has a security interest to secure payment of a debt.  The most common occurrence of repossession is of vehicles.  Foreclosure of a home is also a common instance of repossession.  Not as common is when a creditor repossesses something like a refrigerator or television.  If you miss payments, the entity that issued the loan has the right to repossess the collateral securing the payment of the debt. Contact bankruptcy lawyers in your area to find out how bankruptcy can stop repossession or get your stuff back. Usually, but not always, if you are two or more payments behind, you are at risk to have the collateral repossessed.  See Chapter 7 Basics or Chapter 13 Basics at www.WestCoastBK.com for information about how bankruptcy can stop foreclosure and repossession.

Home Foreclosure

The repossession of a home or property is commonly called foreclosure.  In California, a non-judicial foreclosure allows a mortgage company to foreclosure on a home without going to court to obtain permission. The foreclosure process in California starts with the mortgage lender filing a Notice of Default with the county recorders office.  See California Non-Judicial Foreclosure Time Line for more information.

Vehicle Repossession

If you leased or financed the purchase of a vehicle and are making payments to a bank or the dealer you purchased the vehicle from, you gave them the right to repossess the vehicle if you miss payments. A creditor may also repossess a vehicle if insurance for the vehicle is not maintained.  The repossessing party may give you notice that they intend to repossess the vehicle, but they do not have to.  The personal items found in the repossessed vehicle cannot be sold.  The party that repossesses the vehicle should provide a list of the items found in the vehicle and how you can get them back.

Once the vehicle is repossessed the repossessing party will then try and sell the vehicle to satisfy the loan on the vehicle.  The problem is that new vehicles lose their value quickly after purchase.  Usually when the vehicle is repossessed it is worth less than what the loan balance is.  If this is true, you will be responsible for the difference between what is owed on the loan and what the repossessing party sells the vehicle for. As bankruptcy attorneys in your area should know, the deficiency balance or amount you owe should be dischargeable when filing bankruptcy.  Unfortunately the difference, or deficiency, could be thousands of dollars.  This debt will now be an unsecured debt though because there is no collateral to secure payment any longer.  Like a credit card or medical debt, the deficiency is dischargeable as an unsecured debt when filing a Chapter 7 bankruptcy or Chapter 13 bankruptcy.

Rent-To-Own Purchases

When you obtain an item by making payments in a rent-to-own arrangement the item you purchased is collateral to ensure repayment.  If you miss payments on a television, refrigerator or bedroom set the collateral could be repossessed just like a vehicle.

What Cannot be Repossessed

Items that can be repossessed have to be specifically named as collateral in the purchase agreement.  Most credit cards and personal loans do not specifically name collateral to secure the extension of credit.  So, when making a credit card purchase or purchases with a personal loan, the items purchased cannot generally be repossessed.

Why Sign a Reaffirmation Agreement?

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Generally, if you have secured debt when you file for bankruptcy, you have three options: 1) surrender, 2) redeem, or 3) reaffirm the debt. The 2005 bankruptcy reforms have made it difficult for bankruptcy lawyers to provide advice regarding reaffirmation agreements. Prior to the 2005 bankruptcy reforms you could just keep making your normal car payment if you were current on the payments and wanted to keep the vehicle. Now bankruptcy attorneys are asked to sign off on a reaffirmation agreement as to whether it is in the best interest of a client or not.

The first option is self explanatory; you can surrender your property to your lender and not be liable for any deficiency relating to the surrender of the property in your bankruptcy case.

The second option is to redeem your property for the fair market value of the property.  This is advantageous if your debt is significantly higher than the fair market value of the debt.  You would only have to pay what your property is worth, not what you owe to the lender.  However, the only catch is that you have to pay the lender the fair market value of the property in one lump sum payment. Most people don’t have that amount of cash readily available; however, there are companies out there that specifically help with redemption of properties after the filing of a bankruptcy petition.

The third option is to reaffirm your debt.  After the filing of your petition, if you have secured debt, such as debt for your house or vehicles, chances are, you may receive a reaffirmation agreement from your lender to reaffirm your debt.  A reaffirmation agreement is a new contract that you sign after you have filed your petition that essentially indicates that you promise to continue making payments on your property.  Although it is the current law that you must indicate your intention to either surrender or reaffirm your debt, it is normally not advisable to sign a reaffirmation agreement because you never know what the future holds.  However, sometimes the lender makes the contract more attractive by either significantly lowering the interest rate or balance due on the remaining balance.  If that occurs, it is up to you to weigh the pros and cons of signing a reaffirmation agreement.  Better terms on the reaffirmation agreement is a great incentive to sign the reaffirmation agreement, but only do so if it does not present an undue hardship for you to pay that amount every month.  One of the disadvantages of signing a reaffirmation agreement is if at any time in the future, you are unable to continue making the promised payments, the lender can repossess your property and still pursue you for any deficiencies even though you had filed for bankruptcy.  Bankruptcy does not protect you from any debts relating to post-petition contracts signed, which is what a reaffirmation agreement is.

An unspoken fourth option is to continue making payments on your property without signing a reaffirmation agreement.  You may make prompt monthly payments to your lender and continue to keep your property.  If, at any time in the future, your finances suffer and you are unable to continue making payments, you can surrender your property, and the lender would not be able to pursue you for the deficiency since the debt was discharged along with all your other debts in your bankruptcy petition.  Although the current law indicates that you need to indicate your intention to either: surrender, redeem, or reaffirm your debt, chances are, if you are making prompt payments on your property, it would not make good business sense for the lender to repossess your property.  However, there are certain companies that will repossess your property regardless of whether you are current on your debt if you did not sign a reaffirmation agreement.  Thus, there is a risk if you do not sign the reaffirmation agreement that your property may be repossessed.