This is a common question posed to us.  Can I do a short sale AND a bankruptcy.  The answer is yes, BUT.

Below is a short article by a Boston BK attorney who I think does a decent job of explaining both options.  That said, I think that way too often homeowners jump right to the bankruptcy plan when a short sale would “do them just fine.”

Bottom Line:  No need to blow-up your credit for years with a BK if instead you can pull off a short sale and get back on your feet.

- The Bank Slayer

Bankruptcy and Short Sales

by Nicholas Ortiz, Boston Bankruptcy Attorney

Should I try a short sale, file bankruptcy, or both? That is the question. Do short sales and bankruptcy make sense together? The answer is, not usually.

Often when people are in the eye of a financial storm they address problems piecemeal. They may try credit counseling for credit card debt, an offer in compromise for tax debt, and to get out from under a burdensome mortgage they might try the obvious: selling their house. The problem with this last idea is obvious, if the house is “under water” or, in other words, saddled with a mortgage worth more than the house, one can’t sell it without the lender’s permission. That’s called a short sale.

A short sale happens when a lender agrees to allow a person to sell his house for an amount that does not result in the mortgage being paid off. Along with mortgage modifications, short sales are a useful tactic to try when a mortgage is the main source of trouble. There are also significant credit reporting advantages to a short sale over the alternative, a foreclosure.

But in bankruptcy it’s a different story. The main purpose of a short sale is, after all, to get out from under a mortgage debt. This can be achieved by “surrendering” a house in bankruptcy. This is possible in either a Chapter 7 or Chapter 13 bankruptcy. The surrender to the mortgage lender, however, still will occur via a foreclosure. That’s how a mortgage lender gets the house back after it’s surrendered. This results in some credit reporting damage, but the homeowner walks away from the mortgage debt with no deficiency debt. Consequently, a short sale is often unnecessary when someone has multiple debt problems and bankruptcy is inevitable.

However, with all that being said, a short sale can be possible and even advisable if the homeowner has the energy and the desire to avoid a foreclosure on his credit record (in addition to the bankruptcy) after the bankruptcy case is over. The timing on these post-bankruptcy short sales can be tricky. Ask your bankruptcy lawyer if this is an avenue you are interested in exploring. He or she may be able to refer you to a real estate broker experienced in short sales.

Although we typically advocate bankruptcy as a last, last and then one more last resort, this is an interesting article that shows that sometimes a defense to the banks attempt to collect on a debt is simply: I told you, you should have known, follow the rules.

If you or someone you know is facing a battle with a big bank or their mortgage company contact our office today.

- The Bank Slayer

Supreme Court Says Creditors Should Read Their Mail

by Wendell Sherk, Missouri Attorney on March 24, 2010 · Posted in Bankruptcy Cases & Legislation,Bankruptcy Practice and Procedure, Discharge of Debt, Featured, Student Loans

This week a unanimous Supreme Court concluded that bankruptcy creditors ought to read their mail once in awhile.  Perhaps even pay attention and act upon what they read there.  Otherwise, they have only themselves to blame.

This not-so-remarkable — yet important — decision involved a complicated — yet simple — case.  A man filed a Chapter 13 plan in 1993.  He included a provision in this plan that would discharge the interest on his student loans — something that normally would require he prove undue hardship through an adversary proceeding.  He mailed a copy of this plan to the lender.  The lender filed a claim asking to be included in the case but did not object to the plan.  So the court approved the plan.  The consumer completed his plan, received his discharge and that should have been the end of it.

But the student loan lender did not agree and sought a ruling from the courts that it should not be bound by the plan.  It admitted it received notice of the case and a copy of the plan.  It just apparently didn’t read the plan.  So several years after the fact, it wanted to go back and “fix” the problem.

The Supreme Court disagreed.  It said, in effect, the federal rules allowing a party to a case to set aside “void” judgments or decisions should not be used in this way.  And this is true, even where the debtor has included a provision in the plan which would normally not be allowed.  If the creditors, the trustee and the court do not object, it will be binding on the creditors who receive actual notice and sleep on their rights.

Of course, for most people it doesn’t take the Supreme Court to tell you to pay attention to legal mail.  Many children and most adults could grasp this simple logic.  But the irony is that multi-billion dollar companies would prefer the courts change the rules so that carefully reading the fine print of documents sent by consumers is not required.  Of course there’s little appetite among large creditors to have the fine print disregarded — if they wrote it.

The predictable next step is already presaged.  If you thought that means large creditors will devote more resources to paying attention to Chapter 13 plans, then you are probably wrong.  They will lobby Chapter 13 trustees to protect them from the nefarious plots of consumer debtors to “put one over” on them.  After all, the trustee has to read the plan, so why not get her to absorb the extra costs of objecting to “inappropriate” plans.  No muss, no fuss.

After all, Citibank and Chase and Wells Fargo really are no match for a single bankrupt consumer and her lawyer.  Even if the Supreme Court thinks otherwise

David Leibowitz posted a short blurb on stripping liens from a property.  Bottom line is that the “underwater portion” of a mortgage may be fair game as it is unsecured.  This is a huge benefit for investor or the average homeowner who also has a rental property or two.  Too bad it is not readily accepted for homesteads (yet).

Although bankruptcy may be an option or even the answer,  property owners should explore all options

Chapter 13 can save an investment property – Lien stripping in action

by David Leibowitz, Illinois and Wisconsin Bankruptcy Attorney

Today, a Wisconsin client asked what we could do to help save his investment property. It’s worth only about $70,000. It has a first mortgage for $80,000 and a second mortgage for $30,000. Our client bought the property at the top of the market. He can afford the first mortgage, but not the second. And he certainly doesn’t want a short sale or a deficiency judgment. He makes enough money that he could afford to pay it. What can be done?

Our client has little other unsecured debt.

But the entire second mortgage really is unsecured – there’s no equity in the building to support it. So in chapter 13, we can treat that debt as unsecured and strip away the second mortgage.  Instead of paying 11% interest on the second mortgage, our client can pay it off in full over a period of five years – and he could afford to do that.  Not only that, but $10,000 of the first mortgage can also be treated as unsecured and paid off in full over 5 years – without interest. That’s because it is perfectly OK to modify a non-residential mortgage loan in chapter 13 even though you can’t modify a mortgage loan secured by your personal residence. Wasn’t that a smart idea of Congress to reject mortgage modification? Gee, we really could have made some progress with our mortgage crisis.

Anyway, our client will be able to keep his building, reduce the mortgage considerably, pay off his debts over a reasonable period of time without interest and get the second mortgage lien released, thanks to the creative use of chapter 13.