Work with mortgage company before filing bankruptcy

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“I’m about to lose my car.”

“I’m about to lose my home.”

These are refrains commonly heard by attorney Robert M. Waud, a debtors’ bankruptcy attorney with Schober & Ratdke S.C. in Milwaukee.

If the homeowners’ only problem is, they can’t afford their home anymore, but they’re meeting all other obligations, his advice would be not to file bankruptcy.

“I always recommend to people that they should at least contact the mortgage company because with so many foreclosures going on, I think as a whole, the industry is becoming a little more willing to do work-outs with people,” he says.

While sometimes the terms of the existing loan can be modified, in Waud’s experience, that’s a rarity because frequently, the loans have been sold and securitized. “But they do have the ability, for example, to say, ‘We’ll take the payment that you’re behind and put it at the end of the loan,’ or ‘We’ll let you make an extra $200/month payment until you get caught up.’”

He additionally advises clients to give a foreclosure prevention group a call — after investigating it to ensure that the U.S. Department of Housing and Urban Development has accredited it. Wisconsin has 29 of them, all listed at HUD’s Web site at www.hud.gov/offices/hsg/sfh/hcc/hcs. cfm?webListAction=search&searchstate=WI. And, be skeptical about letters received after a foreclosure action has commenced, offering assistance to borrowers. Some are legit; some are not.

Sometimes, a “short sale” is a possibility. These occur when the amount owed is more than what can be garnered in a sale. The debtor proposes that the lender accept the lower amount and release its lien.

The property is sold, and the debt is satisfied. Waud cautions, however, that forgiveness of indebtedness is a taxable event, so that the lender should be sending the IRS a 1099 for that sum.

Should the homeowners proceed with bankruptcy under a Ch. 13 case, the reorganization plan can allow for them to keep the home. However, the bankruptcy court has no power to change the terms of the mortgage, so when the debtors retain the home, usually it’s because the interest rate is a type other than an adjustable rate, and whatever caused the debtors’ financial woes has been remedied — someone who lost a job has found another, etc.

When there are home equity loans or second mortgages, sometimes those lenders don’t seek foreclosure, but rather, they sue the debtor on those notes. In that situation, according to Waud, if the debtor qualifies for Chapter 7 bankruptcy, they can be discharged. If it’s a Chapter 13 filing, sometimes those second mortgages, if they are totally unsecured by virtue of the diminished value of the property, can be “stripped down” to zero. That’s in the Eastern District of Wisconsin; not all jurisdictions follow that rule.

Waud says that bankruptcy won’t prevent some from losing their homes. Perhaps the only “good” news he can offer them is that it’s very unlikely that the creditor will seek a deficiency judgment. Most times, all the lender wants is the home.

“A lot of people have gotten themselves into loans they simply cannot afford,” he says. “The rule of thumb is that no more than 25 to 33 percent of your disposable income should be going toward your housing, yet some people end up paying as much as 50 or 60 percent. That’s just too much.”

Often the payment has reached that level because the loan carries an adjustable interest rate.

“From my perspective as a bankruptcy attorney, the problem then is, even if they were to go forward with chapter 13 bankruptcy protection, we can’t change the terms of that mortgage. If the payment is too high before the bankruptcy, it will probably still be too high even during the reorganization.

“I feel terrible about it, but I can’t help them.”

Waud notes that there’s talk of revisions to the Bankruptcy Code to allow for modifications of mortgage terms in Chapter 13 cases. In fact, Minneapolis, Minn. Democratic Congressman Keith Ellison has spoken publicly about possibility of such legislation. His staff said that such a bill would be introduced shortly (as of press time, it had not).

One question that comes up is whether or not the revised bankruptcy rules, which took effect in October 2005 had any effect on the number of foreclosures, Milwaukee bankruptcy attorney Bruce Lanser said he didn’t think so.

“There’s nothing about the changes in the bankruptcy law that would necessarily affect if someone can make their mortgage payments,” Lanser said. “This will be affected by the things that have always them: joblessness; divorce; illness or the way the loan is structured — an adjustable rate versus a fixed rate. The fact that the bankruptcy law changed didn’t affect the volume of foreclosures.

He noted that bankruptcy is obviously an option for dealing with foreclosure when it arises.

“Ch 13 is the most commonly-filed type of bankruptcy filed to deal with foreclosures, since it stops the foreclosure and gives the debtor an opportunity to essentially catch up with those missed payments, while staying current with the regular monthly obligations,” Lanser said. “It’s sort of the court-supervised alternative to the forbearance arrangement that, hopefully, the debtor could wo
rk out with the mortgage company outside of bankruptcy court.”