Category Archives: Bankruptcy and Mortgages

Mortgage Interest and Fun With Numbers

By Ryan C. Wood

Do you know how much your home will cost you?  That is the total cost of the loan?  Did you look at the total amount of interest you will end up paying if you make each and every mortgage payment for 30 years?  What if you refinance in year three?  How will that change what you are paying?  One of the nastiest parts of purchasing a home is that your mortgage payments are heavily weighted to pay interest first rather than principal.  When a house value is continuing to increase this is not a huge issue.  If the value of the home is slowly increasing or the market is stagnated your investment by buying the home is actually decreasing each month.  The mortgage meltdown crisis should tell you enough about how things work. 

Too big to fail versus too small to matter is how it went down.  Just ask any bankruptcy attorney that lived the mortgage meltdown. 

The thing is though most people will never be able to pay cash for a house.  Spreading out payments over 30 years makes the loan affordable and allows more people to purchase homes that could not otherwise.  Purchasing a home and the resulting fixed monthly mortgage payment is usually a huge financial win for housing costs.  Rent increases with inflation and other market conditions significantly over time.  This is why rental properties are such a great investment under most circumstances.  Once you purchase a home though hopefully your wages increase but your housing costs stay the same.

What If Mortgage Payments Were Half Interest and Half Principal From the Beginning?

Here comes the fun with numbers part to illustrate the huge difference.  Let us take a $1,000,000 homes since that only gets you one bedroom with a bathroom on the Peninsula in the Bay Area where I am located.  With a 20% down payment to avoid private mortgage insurance the mortgage loan will be $800,000.00.  To pay off the $800,000.00 loan at a fixed interest rate of 3.7% and amortized over 30 years the total amount paid will be $1,427,615.00.  Of that total interest paid is $525,615.00.

Amortization Schedule

$800,000.00 at 3.7% interest with 360 monthly payments

Total Payments: $1,325,616.14

Total Interest: $525,616.14

The first mortgage payment is about 67% applied towards interest and 23% applied to principal.  Over the life of the 30 year mortgage these percentages slowly change.  At the 6 year mark 60% is applied to interest and 40% is applied to principal or $1,471.24 towards principal and $2,211.02 towards interest ($3,682.26 total monthly payment).  The middle mark of the loan term or the 181th payment is 43% principal and 57% interest.  The last payment of 360th payment is a mere $11.32 towards interest and $3,670.95 to principal and the loan is paid in full.  The 360th payment is 0.30% interest and 99.70 % principal.

At 2.75% interest: Total Interest Paid: $375,734.60

At 3% interest: Total Interest Paid:  $414,219.62      +38,485.02 

At 4% interest: Total Interest Paid: $574,956.05       +$160,736.43

At 4.5% interest: Total Interest Paid: $659,253.69    +$245,034.07

Let us assume we are in year 7 and you have now paid $316,674.36 in total principal and interest.  Of this you have paid approximately $174,173.00 in interest through 86 or seven years of mortgage payments.  We will come back to this below when examining the result of a refinancing the mortgage to a new fixed 30 year loan to get a better percentage rate of pull out equity that has accrued in the seven years since purchase.

So how do mortgage lenders ever lose money?  Everything they do is resulting in interest income from funds on deposit and getting money from the Federal Reserve at a lower rate.   

Why Are Mortgage Payments Primarily Applied to Interest and Not Principal In the Beginning?

This type or amortization provides for equal payments throughout the entire 360 month or 30 year term of the mortgage.  As a bankruptcy attorney I can tell you that this probably a necessary evil and helps people keep things straight.  There is a huge percentage of homeowner are just getting by each month and pay different amounts each month for their mortgage.  Why you ask?  The vast majority of people buy too much house and cannot pay a down payment totaling 20% or more to avoid private mortgage insurance.  They make it worse by choosing to not pay property taxes and insurance directly but via the monthly mortgage loan payment. You will then be dependent upon the servicer or mortgage company to recalculate the property tax and insurance as the property taxes increase.  Therefore the mortgage payment must increase too.  The problem is many servicers and mortgage companies fail to timely and regularly recalculate the taxes and insurance so this results in large changes in the monthly payment to catch up on already paid property taxes.  This system is ripe for fraud and miscalculation. 

Does Anyone Save Money When Refinancing A Mortgage Loan?

Did you calculate the amount of interest paid versus principal prior to refinancing your mortgage loan?  Or is the enticing thought of paying less each month or obtaining the cash from pulling out equity from your home too much to pass up?      

So taking our example above you paid $174,173.00 in interest during the first 7 years of your mortgage loan and decide to refinance at a lower percentage rate.  We shall use 2.70% instead of 3.7%.  After 7 years of payments the principal owed at that time and the amount refinanced is $683,076.57.  Your new refinanced loan with a new term 30 year term at 2.70% will cost you a total of

Amortization Schedule

$683,076.57 at 2.7% interest with 360 monthly payments

Total Payments: $997,395.73

Total Interest: $314,319.16

Just comparing the loans on their face you will save $211,296.98 total.  But did you take into account all the interest already paid?  Yes, you reduced the principal and you are refinancing the lower principal amount too.  How much did you really save though?  When taking into account the interest already paid totaling $174,173.00 already you will save about $37,123.98 over the total life of the 30 year loan.

Can a Lien be Stripped if Only One Spouse Files for Bankruptcy?


In California, as part of the Ninth Circuit, the answer should be yes. The main distinction here is that California is a community property state. There are decisions from of circuits that contradict the decision discussed below. California is a community property state and both spouses are assumed to have command and control of community property assets. So why can a wholly unsecured or underwater lien be stripped if only one spouse files for bankruptcy?

The scenario is that a couple buys a house during marriage and therefore the presumption is the house is a community property asset. To be clear, there is no evidence to rebut this community property presumption because there is no evidence the funds used to purchase the house, pay the mortgage, insurance or property tax came from any separate property source. If there is any question as to whether the house is not community property be careful. So in this discussion the house is clearly a community property asset when filing for bankruptcy protection. Pursuant to Section 541(a)(2)(A) or (B) of the Bankruptcy Code all interests of the debtor and debtor’s spouse in community property as of the commencement of the case that is under the sole, equal, or joint management and control of the debtor; or liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor’s spouse, to the extent that such interest is so liable.

If the provisions of Section 541(a)(2)(A) or (B) are met then the community property of both spouses becomes property of the estate when one spouse files a bankruptcy petition. See In re Miller, 167 B.R. 202, 205 (Bankr.C.D.Cal. 1994). This issue was addressed in In re Maynard, 264 B.R. 209 (9th Cir. BAP 2001). In Maynard, Lillian B. Maynard filed for bankruptcy protection under Chapter 13 of the Bankruptcy Code and sought to strip off a wholly underwater mortgage from her real property. Her spouse did not file with her. Maynard’s bankruptcy attorneys filed a motion to value the property and eventually an order was entered ordering that the creditor’s claim is stripped as an encumbrance against Maynard’s real property and shall hereinafter be treated as a general unsecured claim pursuant to Maynard’s Chapter 13 Plan.

The creditor appealed various rulings of the lower bankruptcy court including whether the lien could be stripped given Maynard’s husband did not file for bankruptcy as well. The 9th Circuit Bankruptcy Appellate Panel held that under California law each spouse has an equal right to manage community property. Lawrence P. King et al., COLLIER FAMILY LAW 4.03[3][c] (Rev. 2000). Therefore, the real property of the nondebtor or non-filing spouse is included in the filing spouses or debtor’s estate and a creditor’s entire lien is subject to valuation and avoidance pursuant to Section 506(d) of the Bankruptcy Code.

If a fractional interest becomes property of the bankruptcy estate be careful. Bankruptcy lawyers should research how the property was purchased and how title of the property was taken at the time of purchase. The whole interest in the property the lien is trying to be stripped from must be part of the bankruptcy estate.

Why are Adjustable Rate Mortgages Still Being Sold?


Our country is still trying to overcome the mortgage meltdown and stop home after home from being foreclosed on.  Adjustable rate mortgages (ARMs) were one the leading causes of the mortgage meltdown.  ARMSs are exactly what they sound like.  They are mortgages that do not have a fixed interest rate for the whole loan term.  The typical adjustable rate mortgage lures an unsuspecting borrower in with a low fixed interest rate for the first five to ten years.  After the fixed interest rate period the interest rate then becomes variable.  Variable to a mortgage company means the interest rate will increase and you will have to make higher mortgage payments.  Many new homeowners were able to afford the fixed monthly mortgage payments during the first five years, but when the interest rate adjusted up many homeowners could no longer afford to keep their homes.  This led to thousands if not millions of foreclosures.

ARMs are being advertised as beneficial given that the average person only keeps a mortgage for a few years.  So naturally you should pay a lower interest rate and therefore a lower mortgage payment.  Then just get rid of the mortgage after five years by selling the home or refinancing the existing ARM.  Okay, so why buy a house at all then?  The home will probably not go up in value any time soon and you will now have the pleasure of paying property taxes and most likely pay more for utilities.  These mortgages are also advertised as having more controls on them so that when the fixed period ends the mortgage cannot increase too much.  Also there are no longer prepayment penalties with most adjustable rate mortgages.

So why are adjustable rate mortgages still being offered by lenders?  The answer is simple, because mortgage companies make money off of them in the long run.    They make money when you obtained the adjustable rate mortgage to purchase a home, and then make more money when you have to refinance or sell the home.  In California, a homeowner is protected by what is called a purchase money security interest.  An original mortgage that is obtained for the purchase of a home protects a homeowner in California if they can no longer make the mortgage payments.  A mortgage company cannot seek any money from the ex-homeowner if they choose to walk away and the purchase money security interest is still in place.  But what happens in the event of refinancing a home?  The refinanced loan is not obtained to purchase the home, so no purchase money security interest and the mortgage company can seek any difference between the value of the house and what is owed at the time of foreclosure.  To recap; the mortgage company made money by issuing the adjustable rate mortgage, then made money when you had to refinance the mortgage to a fixed rate mortgage so you could afford the payment again, and then you lost your ability to walk away from the home debt free by refinancing and the mortgage company can now make more money after they get the house back in foreclosure.

A major bank here in the Bay Area offers an adjustable rate mortgage that is fixed for the first five or seven years at 3.125 percent.  After that the interest rate is described as projected.  So what is a projected interest rate?  The mortgage company provides the following definition:   “The government requires us to display this information.  So what does it mean? The Adjustable Rate Mortgage has a fixed rate and monthly payment for the first five or seven years. After that the rate can adjust up or down annually. As a result, we’re required to display what the rate and payment will be after the fixed rate period ends. Keep in mind, since we don’t know what rates will be in the future, the actual interest rate and payment may be higher or lower.” With interest rates at historical lows the interest rate on this loan will most likely increase significantly during the twenty-five years the interest rate can adjust.  The question is will the person who chooses this loan be able to make the higher payments after the mortgage adjusts up?  The last six years tells us no.

The only logical answer as to why adjustable rate mortgages are being sold by mortgage companies is mortgage companies make a lot of money issuing loans whether the homeowner is successful in making the payments long term or not.  This is a transaction driven industry.  Sell the original mortgage, refinance the mortgage, issue a line of credit, foreclose on the property, auction off the property and make money on each transaction.

For information about how bankruptcy can help homeowners in distress please contact our San Mateo bankruptcy attorney or San Jose bankruptcy attorney toll free at 877-963-9543 to schedule a free consultation.

What is Mortgage Forgiveness Debt Relief?

By Kitty J. Lin, Attorney at Law

Normally, the cancellation of debt is a taxable event.  This means that if a creditor forgives a debt, or accepts less than what is owed to them, they issue a 1099 and the Internal Revenue Service and Franchise Tax Board in California will consider the forgiven debt as income.  Forgiven debt is considered income because you owed a certain amount, and now you don’t have to pay it back, so you received a benefit from it.

In the current real estate crisis, more and more consumers have their homes foreclosed on them, or they have to do a short-sale due to their financial situation.  It would add insult to injury if they have to pay taxes on a second mortgage or a home equity line for a home they no longer own.  Because of this, the federal and state governments have enacted laws that protect the homeowner from this situation. As a bankruptcy lawyer in the Bay Area there is only so much filing bankruptcy can help.

For federal taxes, there is the Mortgage Forgiveness Debt Relief Act of 2007.  This law excludes debts forgiven from 2007 to 2012 on a consumer’s primary residence if their principal balance was $2 million or less.  If you are married and filing separately, the exclusion is only up to $1 million.  One limitation of this act is that it only applies to the amount used to buy, build, or substantially improve a primary residence.  If debt was forgiven and it was used to pay off your debts, or buy another car, those amounts are not subject to the exclusion.  If you had refinanced your home, only the amount of the old principal balance is subject to the exclusion, not the new refinanced amount.  Debt forgiven on rental properties, second homes, and other types of property are still subject to taxes if the debt is forgiven, unless other tax relief is available.

California has also followed suit to provide some debt relief for residents of California.  California enacted SB 401, Mortgage Forgiveness Debt Relief, to aid homeowners that had their houses foreclosed, went through a short-sale, or had their loan modified from 2007 to 2012.  It excludes canceled mortgage debt up to $500,000 of the consumer’s principal balance on their primary mortgage.  Married couples or domestic partners filing taxes separately can only exclude up to $250,000.  Similar to the federal Mortgage Forgiveness Debt Relief Act, this only applies to primary residences.  Second homes, rental property, and business property do not receive the same tax exclusions.

If it is a second home, rental property, or business property that was foreclosed or sold short, it is highly advisable that seek the advice of a professional.  To schedule a free consultation with our experienced bankruptcy lawyer, call toll free at 1-877-9NEW-LIFE or 877-963-9543.  You can also visit us online at for more information.

Purchase Money Security Interests and California Non-Judicial Foreclosure


One of the little known concepts regarding the mortgage crisis in California is PMSI or purchase money security interest.  It is a little known concept because loan officers and mortgage brokers failed to tell people about what a purchase money security interest is when convincing homeowners to refinance or take out equity lines of credit and second mortgages.  While bankruptcy is governed by Federal Law, the foreclosure laws are governed by state law.  Each state has their own laws regarding the legal consequences of losing a home by foreclosure.

What is a Purchase Money Security Interest?

In California a lender receives a purchase money security interest in a home to secure the payment of the mortgage given to purchase a home.  The key point is the mortgage was obtained to purchase the home, not refinance or obtain money from an equity line of credit or second mortgage.  When you obtain a home loan, you do not own the home until you pay off the mortgage.  The lender still has an interest in the property until you pay off the mortgage in full and the house is then owned free and clear.

As mentioned above, each state has different laws regarding foreclosure.  In California, homeowners receive protection when a purchase money security interest is still in place and a homeowner defaults on the mortgage.  A mortgage company cannot seek payment of any difference between the value of the home and the mortgage.  But this is only the case in California if the purchase money security interest still exists.  If a California homeowner refinances their mortgage, they are destroying the purchase money security interest and therefore losing protection given by California State Law.  The most unfortunate part of refinancing a home is that the loan officer or mortgage broker probably never even mentioned this consequence of refinancing.

The good news for homeowners in California is mortgage companies almost always seek foreclosure by non-judicial foreclosure and then cannot seek a deficiency judgment.  A non-judicial foreclosure is cheaper and quicker for a mortgage company to take a home back.  A typical California Non-Judicial foreclosure can be accomplished in as little as four months.

Consult our experienced bankruptcy lawyers or bankruptcy attorneys for more information about California foreclosures, non-judicial foreclosures and judicial foreclosures in California.

Ask Our San Jose Bankruptcy Lawyer: How Will a Foreclosure, Short-Sale, Deed-in-Lieu of Foreclosure, and Bankruptcy Affect Your Credit Score?

By Kitty J. Lin, Attorney at Law

Every day we have more and more clients ask us the question of how foreclosure affects their credit score vs. bankruptcy, or whether it may be more beneficial to short-sale a house rather than a bankruptcy, and the answer is always, “It Depends.”  This may seem like an evasive lawyer-like answer, but it is true.  The answer always varies depending on each particular person’s individual situation.  No two people’s credit situation is exactly alike; therefore, the answers will tend to change depending on the person’s spending habits.

There are many different factors in the determination of your credit score, including things such as how long you have had credit, if you make monthly payments on time, how much credit you have available to spend, how many different credit accounts you have.  How a foreclosure, short-sale, deed-in-lieu of foreclosure, or bankruptcy affects your credit score depends on what your credit score was prior to the foreclosure, short-sale, deed-in-lieu of foreclosure or bankruptcy.

A foreclosure occurs when you are unable to pay your mortgage for a long period of time.  The mortgage lender takes back your home to sell to someone else.  A short-sale is when you sell your home for less than what you owe on the mortgage.  You would need your mortgage lender’s approval prior to the short-sale of the home.  A deed-in-lieu of foreclosure is essentially giving title of your home back to your mortgage lender in exchange for having the debt forgiven and not having a foreclosure on your credit report.

A bankruptcy is when you receive a discharge of all your debts, and your personal liability for all of the debt is wiped out.  For secured debt, like houses or cars, you can keep the property if you continue to make payments, but the lenders will not be able to pursue you for any deficiency if you choose to surrender the property in the bankruptcy.

Most people are surprised to know that foreclosure, short-sale, and deed-in-lieu of foreclosure have approximately the same impact on a credit score.  All three of these ways to lose a home are reported to the credit bureaus as having the account settled for less than what was owed.  People have always been under the impression that a short-sale may be better than a foreclosure, or signing a deed-in-lieu of foreclosure is better than either a foreclosure or a short-sale.  However, the important factor in determining a credit score is how long an account has been delinquent, such as 30 days, 90 days or 120 days.  Most of the time people that have a foreclosure, short-sale, or deed-in-lieu of foreclosure on their credit report have been delinquent on their mortgages for a long time.  By the time the foreclosure, short-sale, or deed-in-lieu of foreclosure actually take place, the damage to their credit score has already been done.  The higher your credit score is, the steeper the fall.  The opposite is also true.  If your credit score is already low, having a foreclosure, short-sale, or deed-in-lieu of foreclosure will not affect it as much.  There is no such thing as having a negative credit score, so there’s a limit to how low your credit score can go.

Filing bankruptcy generally lowers a credit score the most, because you are receiving a discharge of all your debts, so it has a bigger impact.  However, if you are struggling under a mountain of bills and a mortgage you cannot afford, bankruptcy may be the best option for you, regardless of how it impacts your credit score.  If you are considering bankruptcy, please contact an bankruptcy lawyer or bankruptcy attorney today at 877-9NEW-LIFE or 877-963-9543 to schedule a free consultation to discuss your case.

San Francisco Bankruptcy Lawyer: Mortgage Rates Increasing

By Kitty J. Lin, Attorney at Law

Consumers that have purchased or refinanced their homes at the historically low mortgage rates will be glad to know that they were able to take advantage of those mortgage rates before they disappeared.  That is what is currently happening.  Mortgage rates are now slowly increasing again.  As of week ending February 11, 2011, the national average 30 year fixed mortgages are now 5.05%.  Interest rates have not been this low since May 2010.

Mortgage rates are tied to Treasury yields, particularly the 10 year Treasury yield.  The Treasury yield has been slowly increasing, so it’s no surprise that the mortgage rates are increasing as well.  Higher mortgage rates tend to affect people trying to refinance rather than people trying to buy a home because people looking to purchase a home are more concerned with other factors, such as the price of the home itself.  Currently, home prices are still low enough that buyers will overlook the slightly higher interest rate.

If you have any questions about bankruptcy consult with our Oakland bankruptcy lawyer or schedule a free consultation with our San Jose bankruptcy lawyer.  Call toll free 1-877-9NEWLIFE to schedule a free consultation to start your new life debt free.,

How to Get Rid of Your Second or Third Mortgage and Line of Credit in a Bay Area Bankruptcy


One of the few benefits of the recent foreclosure meltdown for homeowners is how second or third mortgages and lines of credit can be treated in a Chapter 13 bankruptcy when the value of their house is less than what is owed on the first mortgage.   When the value of a house is below what is owed on the first mortgage, then the second or third mortgages or a line of credit are not secured by any value in the house. Unfortunately, this means that your house has decreased in value significantly.   The good news is that you can get rid of the second mortgage, third mortgage or line of credit when filing a Chapter 13 bankruptcy.

Value of House =                                          $700,000 at time of purchase
Amount Owed on First Mortgage =               $550,000 at time of purchase
Amount Owed on Second Mortgage =           $100,000 at time of purchase
Amount Owed on Third Mortgage =              $50,000 at the time of Purchase

Total owed on all mortgages at time of purchase is $700,000

After four years of decreasing home values the same house purchased for $700,000 is now only worth $500,000.  This means if the house were sold or foreclosed on today the second and third mortgages listed above would get nothing given the house is only worth $500,000 and the amount owed on the first mortgage is more than that, $550,000.

So, when the circumstances above exist, and a Chapter 13 bankruptcy is filed, the second and third mortgages or a line of credit can be valued at zero and the liens securing the payment of the second and third mortgages or line of credit can be stripped from the property and can be treated as unsecured debts.  Instead of having to pay the second and third mortgages or lines of credit in full as secured debts, these debts are treated like all the other unsecured debts in the case such as credit cards or medical debts.  Once the Chapter 13 bankruptcy case is filed, the filer will only be required to pay the first mortgage and their other living expenses along with the Chapter 13 Plan payment.  If the Chapter 13 Plan calls for only paying 5% of the unsecured debts, than the other 95% of the unsecured debt is discharged at the end of the Chapter 13 Plan, including the second and third mortgages or line of credit.

In short, when filing a Chapter 13 bankruptcy case, and the value of your house is less than what you owe to the first mortgage holder, you will not have to pay the second or third mortgage or line of credit if your Bankruptcy Attorney correctly files your case.