Short Sale, Foreclosure and Strategic Default


Wednesday, December 19, 2007

short sales - forgiveness of debt, deed in lieu

GovTrack: H.R. 3648: Text of Legislation: "December 14, 2007.

Resolved, That the bill from the House of Representatives (H.R. 3648) entitled `An Act to amend the Internal Revenue Code of 1986 to exclude discharges of indebtedness on principal residences from gross income, and for other purposes.', do pass with the following


Strike out all after the enacting clause and insert:


This Act may be cited as the `Mortgage Forgiveness Debt Relief Act of 2007'.


(a) In General- Paragraph (1) of section 108(a) of the Internal Revenue Code of 1986 is amended by striking `or' at the end of subparagraph (C), by striking the period at the end of subparagraph (D) and inserting `, or', and by inserting after subparagraph (D) the following new subparagraph:

`(E) the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2010.'.

(b) Special Rules Relating to Qualified Principal Residence Indebtedness- Section 108 of such Code is amended by adding at the end the following new subsection:

`(h) Special Rules Relating to Qualified Principal Residence Indebtedness-"

Thursday, December 13, 2007

san diego short sales and Non-Recourse Clauses - recourse loans

Here is a good article on the question many people ask. However, be aware this article may have more application in commercial property negotiations.

Negotiating Non-Recourse Clauses - Fredrikson & Byron P.A.: "A recent article in The National Law Journal stated 'Real estate financing in the 1990s has been characterized by a steady erosion of the principle that loans secured by real estate should be non-recourse....' (Leinhardt, W. and Berg, M., December 25, 1995-January 1, 1996) The article discusses the interpretation of the term 'waste' as used in typical non-recourse clause 'carve-out' provisions. According to recent interpretations, the non-payment of taxes against the mortgaged property constitutes waste. The trend in the 90s, as discussed by Leinhardt and Berg, is not for lenders to refuse to grant 'non-recourse' loans; it is for the courts and the drafters of 'non-recourse' clauses to expand the 'carve-outs' for which borrowers remain responsible under a non-recourse loan -- 'carve-out' liabilities. However, the battle is fought more in the drafting room than in the courtroom. Most institutional lenders expressly include the non-payment of taxes in their list of 'carve-out' liabilities. Other typical 'carve-outs' under non-recourse loans include liability for: * Damages suffered by the lender on account of waste, fraud, or willful misrepresentation by the borrower; * Any retention of rental income or other income of the property after and event of default"

Wednesday, November 21, 2007

San Diego Short sales - lender info

You Can Avoid Foreclosure and Keep Your Home: "Mortgage lenders The mortgage lenders listed below have voluntarily joined the federal government to assist homeowners who are concerned about the future or have suffered due to recent changes in the economy. If your lender is listed here, you can help protect your home by contacting them immediately! Lender Phone #1 Phone #2 Bank of America (800) 846-2222 (716) 635-2264 Chase Home Finance (800) 848-9136 Chase Home Finance (800) 526-0072 ext. 533 (800) 527-3040 CitiMortgage (800) 926-9783 Countrywide (800) 763-1255 (800) 669-4576 HSBC Mortgage Corporation (800) 338-6441 (888) 648-3124 Irwin Mortgage Corporation (888) 444-6446 James B. Nutter & Company (800) 315-7334 Midland Mortgage (800) 552-3000 (800) 654-4566 Mortgage Service (800) 449-8767 National City Mortgage (800) 367-9305 Nationwide Advantage Mortgage (800) 356-3442 ext. 6002 Principal Residential Mortgage, Inc. (800) 367-6448 (800) 962-4450 Sun Trust Mortgage (800) 443-1032 Option 2 Wells Fargo Mortgage (800) 766-0987 Wendover Financial Services Corporation (888) 934-1081 (800) 436-1022 Washington Mutual Home Loans, Inc. (866) 926-8937 (800) 254-3677"

You Can Avoid Foreclosure and Keep Your Home

You Can Avoid Foreclosure and Keep Your Home: "If keeping your home is not an option - call your lender to discuss these possibilities: - (Top) * Sale: If you can no longer afford your home, your lender will usually give you a specific amount of time to find a purchaser and pay off the total amount owed. You will be expected to use the services of a real estate professional who can aggressively market the property. * Pre-foreclosure sale or short payoff: If you can't sell the property for the full amount of the loan, your lender may accept less than the amount owed. Financial help may also be available to pay other lien holders and/or help towards some moving costs. You may qualify if: o The loan is at least 2 months delinquent o You (or your real estate professional) can sell the house within 3 to 5 months o A new appraisal (obtained by your lender) shows that the value of your home meets HUD program guidelines * Assumption: A qualified buyer may be allowed to take over your mortgage, even if your original loan documents state that it is non-assumable. * Deed-in-lieu of foreclosure: As a last resort, you 'give back' your property and the debt is forgiven. This will not save your house, but it is less damaging to your credit rating. This option might so"

This information is good in general, but it does not necessarily apply to owners of California properties. You definitely need to speak with a California Real Estate Attorney before selecting any of these options.

Monday, November 19, 2007

Home Foreclosure and Tax Liability for Debt Cancellation

Questions and Answers on Home Foreclosure and Debt Cancellation: "Questions and Answers on Home Foreclosure and Debt Cancellation 1. What is Cancellation of Debt? If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt. Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you. 2. Is Cancellation of Debt income always taxable? Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve: * Bankruptcy: Debts discharged through bankruptcy are not considered taxable income. * Insolvency:"

Sunday, November 18, 2007

san diego short sales - deed in lieu of foreclosure

With San Diego real estate sales slowing to lowest levels since in decades, how can a short sale property in San Diego be sold? What if the listed price is already much lower than the competitions? How will your Realtor ever get the short sale approved by a lender?

For now you may not have to sell it. An alternative to foreclosure is a deed in lieu of foreclosure.

And in the last two weeks the lenders have been contacting me and asking if my clients are still interested in offering a deed in lieu of foreclosure.

If you have received a Notice of Default, so not just hope that you may get an offer. Some properties are just not going to sell at a price a lender will accept. Speak to a real estate attorney licensed in California.

Interestingly for many upside down homeowners, a deed in lieu of foreclosure may be a far superior option to a short sale.

purchases have slowed to incredibly low rates. Property are not selling whether thThere is a lack of qualified buyers. This has negativleand this effects not only right side up homeThe lack of qualified buyer has effected

The north san diego county association of Realtors reported very slow sales. Median prices dropped over 5% in both September and October. This lack of sale is also being felt by owners with upside down properties.

Prices are high and very few people with the cash or high enough salaries to qualify for the requisite loans are buying. The lack of qualified

Thursday, November 15, 2007

California Association of Realtors - San Diego Real Estate

DESPITE PRICE DECLINES, HOUSING STILL SAFE LONG-TERM" - This was sent to me in my email by the California Association of Realtors.

Why do Realtor Associations insist on being like CNBC guests during the Nasdaq crash. Which still has not come back all the way.

I suggest they get some guys and become credible. Saying things like no one really knows when prices will stabilize but hey some of the really nice properties in San Dieg were not available during the up market so now might be your time to pick of the great property at a good price.

Thursday, October 25, 2007

California housing prices, short sales and forelcosure

Until lenders are wiling to make loans that do not make financial sense, it would seem that the short sales and foreclosure will continue in places like San Diego and other parts of California. People can not afford to buy expensive houses, if they have to have 20% down, 6 mos worth of payments and the bank and steady salary or income commensurate with the amount of the loan for which they are applying. So in one respect CAR is absolutely right. Prices will not go up until there is a stimulus - perhaps cheap available money.

But, I think there is another factor. People were willing to be house poor and risk their financial health in an up market because they had to. In a down market does anyone want to be house poor to lose money on a depreciating assets.

This bubble will unwind until people say, that house is worth the sacrifice or when supply dries up. Until then short sales and foreclosure will feed the demand we currently have and put every increasing pressure on prices.

Sales/Price Report Sept 07

Wednesday, October 24, 2007

Foreclosure, fire insurance and short sales

If your real estate was upside down and damaged in the recent San Deigo fire, you may want to consider all your options before you rebuild.

If you had been considering a short sale you may wish to consider a deed in lieu with certain conditions set up to either preserve the status quo or improve your position vis a vis a short sale and deficiency judgments or tax liability for loan forgiveness.

Before entering into any agreement you should have your deal reviewed by san diego attorney familiar with pre-foreclosure solutions.

Tuesday, October 23, 2007

Bankruptcy change and foreclosure remedies

This proposed change to the bankruptcy laws could give consumers more leverage with the lenders when negotiating to avoid foreclosure

Bankruptcy change could save 600,000 homeowners - Oct. 1, 2007: "NEW YORK ( -- One consumer group estimates that 600,000 foreclosures could be avoided over the next two years by making a simple change to the bankruptcy code. The Center for Responsible Lending (CRL) calls it a tweak, but it could be a significant change for homeowners and the market for mortgage-backed securities."

Violations of truth in lending

A short sale and foreclosure attorney may be able to help you review your loan documents.

Mortgage ads may still be deceiving consumers, FTC says - MarketWatch: "Some of the ads were for rates as low as 1%, but didn't disclose that the stated rate was a 'payment rate,' and not the interest rate, which applied only during an initial period, according to the release. Also not disclosed in some of these ads was the loan's annual percentage rate, the uniform measure of the cost of credit that consumers can use to comparison shop for mortgages. Other ads that promoted very low monthly payments failed to give adequate disclosure of payment increases or final balloon payments."

Mortgage ads may still be deceiving consumers, FTC says - MarketWatch

Before negotiating with a bank - you may wish to inquiry into this are of the law. It may give you a great deal leverage when negotiating a short sale

Mortgage ads may still be deceiving consumers, FTC says - MarketWatch: "CHICAGO (MarketWatch) -- Some of the mortgage advertisements currently appearing in Web sites, newspapers, magazines, direct mail and unsolicited email and faxes may be violating federal law, and on Tuesday the Federal Trade Commission said it was sending warning letters to more than 200 advertisers and media outlets informing them of the possible violations. Some of the claims made in the ads are 'potentially deceptive,' or violating the Truth in Lending Act, according to a FTC news release. The advertisements were identified in June during a review of claims that touted very low monthly payments or interest rates without fully disclosing other important loan terms."

Friday, October 19, 2007

San Diego short sales or no sales

Homedex reported the median real estate property in North County San Diego, declined by 5% in september. The number of single family detached homes declined by 39% since same time last year.

In my opinion we have 3 major factors contributing to the lack of sales. Homes were overpriced because of the availability of cheap money inflating the prices.

Now we have the flip side, although interest rates are fine, only people with steady income, 2O% downpayments and 6 mos of deposits can get the good loans. (there are some other loan products coming back on the market, but you get my drift).

So lets say you are considering a $1,000,000 dollar house in Carlsbad or a similar area in San Diego like Poway, Rancho Bernardo, Ecinitas etc. If you can even get a jumbo loan for $800,000 you will still need a very high paying steady salary, (perhaps over 200 thou a year and about a quarter million in cash.

That cash number is no longer pretend equity in your current home, it is real cash. How many people in that situation are going to buy a short sale or foreclosure in Carlsbad right now when they suspect they might have a shot at ocean view property in in Del Mar or La Jolla next year.

The other fact that is contributing to the drop is the way short sales are being marketed in California and florida. Ironically although I hate the concept I have advised my clients and Realtors that have to be out ahead of the pack. Mark the property low and bring in offers. Who cares if the bank rejects the first one, it gives the buyer and seller a chance to feel out the bank. After the first offer is rejected my client will know whether he or she will have to push the bank on TILA or Respa issue or if the bank is going to agree to refrain from collecting on the deficiency an or agree the debt is disputed.

Personally, I believe it will be better for everyone if the MLS would refuse to allow listings which have meaningless prices which are "subject to third party approval". Short sale clients will be much better served if the banks are forced to pick a price.

Thursday, October 18, 2007

California short sale addendum - Legal comments

California Association of Realtors short sale addendum with this authors lawyers comments to follow.

- Advises that the seller may be required to bring in funds to close
escrow or to obtain lenders' agreement to accept less than what's
- Advises that alternatives to a short sale may be more appropriate,
such as refinancing, bankruptcy, or foreclosure, depending on the
seller's own circumstances.
- Authorizes the listing agent to advertise a property as a short sale.
- Authorizes the listing agent to contact lenders concerning their
approval of a short sale.
- Advises the seller that a short sale has possible tax, credit, and
other legal consequences and that Broker has advised seller to consult with tax and legal counsel. Broker cannot give legal or tax advice.. "

The new addendum accomplishes two things, it rather mildly puts sellers on notice they should seek legal advice and illustrates when Realtors begin to practice law without a license.

1. Conspicuous by their absence are the words "negotiate" with banks or "represent". Real estate agents in California may be authorized (by the seller) to seek approval of the short sale transaction from the lender. Notice -- how limited the Realtors role may be. The Realtors may advertise a short sale and seek approval of the short sale from the lender.

California Real Estate agents are not hereby authorized to review a homeowner's financials, send those financials to the lenders as part of a short sale package or negotiate agreements with the bank in which the bank agrees to refrain from seeking deficiencies or report loan forgiveness to the IRS.

2. Note California homeowners are hereby advised there may be superior options to a short sale such as refinancing or foreclosure. So, before a California home or real estate owner agrees to a short sale, she should be aware a FORECLOSURE may be a more appropriate option.

(I am surprised that a Deed in Lieu of Foreclosure is not mentioned as this option when negotiated by an attorney is far superior to short sale in most situations for California homeowners. Realtors are not licensed to discuss this effects of the wide array of pre foreclosure options.)

3. Sellers are also advised that there may be possible tax, credit and legal consequences. Again, it seems pretty clear this addendum is not giving permission to Realtors to advise sellers about these consequences.

I think this addendum is a good first step. At least now some of the public will realize they need to find out from a lawyer if a short sale makes sense. (in my opinion it almost never does unless certain releases are negotiated drafted and signed by the lenders. )

Sunday, October 14, 2007

Short sale and foreclosure warning

Realty Times - Real Estate News and Advice: "Furthermore, you want to make absolutely sure that even should the lender approve the short sale, you will not be obligated to make up this difference, which is called a deficiency. Unfortunately, most lenders will not put their agreement in writing, so your legal advisors will have to satisfy themselves -- and you -- on this matter."

Other real estate lawyers are starting to warn Realtors (at least implicitly) that the short sale paperwork must be reviewed by an attorney. In California is particular important that a san diego homeseller or a seller in any other part of the state understand what their exposure to deficiency is.

this is becoming my mantra. Because of the protections built into the are of foreclosure law, some Californians are better of accepting a foreclosure than a short sale. Do not do a short sale until you have been advised by someone licensed to give you an opinion which is backe up by mal practice insurance. (in my legal opinion). Too many people have contacted me after it is too late. They did a short sale and now the lender is seeking to collect on the deficiency after a successful short sale

Thursday, October 11, 2007

Lenders Not Helping Borrowers Keep Their Homes - Press Release

Survey Results Show Lenders Not Helping Borrowers Keep Their Homes - Press Release: "Only one mortgage counselor reported in CRC's survey that loan modification was a very common outcome presented to borrowers. In fact, counselors reported that the industry as a whole is not consistently modifying loans for long-term affordability, as they claim. When lenders do modify loans for borrowers in early delinquency, or facing unaffordable rate resets, survey results show they are not offering fixed rates for the long term. Counseling groups responded that lenders are only willing to fix interest rates for one year at a time. These short-term modifications are unlikely to solve borrowers' problems, and will most likely only delay the situation, Stein says. CRC's survey also revealed that most counseling agencies do not see lenders reaching out to borrowers before they face problems from rising rates and monthly payments. A surprising 24 of the 33 respondents said that in their experience, the industry as a whole is not contacting borrowers before delinquency."

Thursday, October 4, 2007

California Home Equity Sales Act

This California Real Estate law requires special documentation. Any investor in the California short sale or pre-foreclosure market has to be aware of it.
CA Codes (civ:1695-1695.17): "1695.17. (a) Any representative, as defined in subdivision (b) of Section 1695.15, deemed to be the agent or employee, or both the agent and the employee of the equity purchaser shall be required to provide both of the following: (1) Written proof to the equity seller that the representative has a valid current California Real Estate Sales License and that the representative is bonded by an admitted surety insurer in an amount equal to twice the fair market value of the real property which is the subject of the contract. (2) A statement in writing, under penalty of perjury, that the representative has a valid current California Real Estate Sales License, is bonded by an admitted surety insurer in an amount equal to at least twice the value of the real property which is the subject of the contract and has complied with paragraph (1). The written statement required by this paragraph shall be provided to all parties to the contract prior to the transfer of any interest in the real property which is the subject of the contract. (b) The failure to comply with subdivision (a) shall at the option of the equity seller render the equity purchase contract void and the equity purchaser shall be liable to the equity seller for all damages proximately caused by the failure to comply."

Investors looking to buy short sales which may be about to have an NOD Filed should be working with a Realtor and attorney on their team.

Sunday, September 23, 2007

Foreclosure, Short Sales and Debt relief

Foreclosure and Debt Relief
Q 1 . What are the federal income tax results of a foreclosure?

A A completed foreclosure is treated the same as a sale for income tax purposes. It is reported on the taxpayer's tax return as a sale or exchange in the year the foreclosure is finalized.

As with other sales, a foreclosure can result in either gain or loss. Gain or loss is the difference between the net foreclosure proceeds ("amount realized") and the borrower's adjusted basis in the foreclosed property. "Basis" is usually the amount the taxpayer paid for the property when it was purchased. "Adjusted basis" means basis, plus the cost of improvements added to the property, minus depreciation. If the seller did not acquire the property by purchase, basis is calculated differently. ( 26 U.S.C. §§ 1001 through 1016.)

Q 2. What are the federal tax results of a short sale?

A A short sale can result in both capital gain or loss, and relief of debt income. These are calculated separately. (See 26 U.S.C. § 61 and §§ 1001 through 1016.)

Q 3. What are capital and ordinary assets?

A If property is held for a purpose other than resale or inventory, it is generally considered a "capital asset." There is no such thing as "debt relief" loss. Gain or loss on the sale of capital asset is called (and taxed as) capital gain or capital loss.

An example of a capital asset is a personal residence. Another example is an office building used in a trade or business.

If property is held for resale, the assets are considered inventory, or ordinary (non-capital) assets. Gain or loss on the sale of inventory is called (and taxed as) ordinary gain or loss.

An example of property held for resale is lots or subdivision units held by the developer.

(See 26 U.S.C. §§ 1221 and 1231.)

Q 4. How is capital gain or loss calculated in a foreclosure or short sale?

A Capital gain or loss is the difference between the taxpayer's basis in a capital asset (usually cost, plus improvements, minus depreciation) and the price the property sells for at the foreclosure sale or short sale.

If the basis is greater than the foreclosure or short sale price, the difference is capital loss. If the basis is less than the foreclosure sales price, the difference is capital gain and is generally taxable.

Capital loss on business or investment property can offset other types of income and lower the taxpayer's taxes for the year in which the foreclosure occurs. However, capital loss on personal use property, such as the taxpayer's residence, cannot offset other types of income and gives the taxpayer no tax benefit.

Q 5. How about some examples of how capital gain works?

A Here are several examples:

Example 1: Loan was obtained to purchase commercial property (recourse debt). Loan balance is $300,000. Foreclosure proceeds are $350,000. The borrower's adjusted basis (purchase price, minus depreciation) is $250,000.

Amount Realized (foreclosure proceeds) 350,000
Borrower's Basis -250,000
Capital Gain 100,000

Example 2: Loan was obtained by refinancing the borrower's residence which she previously owned "free and clear" (recourse debt). Loan balance is $300,000. Foreclosure proceeds are $250,000. The borrower's adjusted basis (purchase price, plus bathroom added) is $250,000.

Amount Realized (foreclosure proceeds) 250,000
Borrower's Basis -250,000
Capital Gain 0

If the lender is barred from pursuing the borrower for the difference (e.g., the lender used a trustee sale foreclosure, which is the most common foreclosure method in California), or if the lender forgives the difference, the borrower will also be liable for debt relief income, which is taxed as ordinary income unless an exemption applies. (See Question 12)

Example 3: Loan was obtained to purchase the borrower's residence, and is secured by that residence (non-recourse debt). Loan balance is $225,000. Foreclosure proceeds are $350,000. The borrower's adjusted basis (purchase price, plus room second floor added) is $250,000.

Amount Realized (foreclosure proceeds) 350,000
Borrower's Basis -250,000
Capital Gain 100,000

Example 4: Loan was seller financing on the purchase of vacant commercial-zoned land (non-recourse debt). Loan balance is $325,000. Foreclosure proceeds are $300,000. The borrower's adjusted basis (purchase price, plus retaining wall added) is $275,000.

Amount Realized (Loan Balance) 325,000
Borrower's Basis -275,000
Capital Gain 50,000

In this example the amount realized is the loan balance, not the foreclosure proceeds. This is because the amount realized is either the loan balance or the foreclosure proceeds, whichever is greater.

Q 6. What other kind of income or loss can result from a foreclosure, in addition to capital gain or loss?

A In addition to capital gain or loss, the borrower can also be taxed on "debt relief" income.

Q 7. What if the borrower pays a debt off at a discount?

A If the lender accepts less than the full balance due (i.e., the lender gives a discount on the payoff) to mark the loan paid in full, the difference between the loan balance and the amount paid is debt relief income. Debt relief income is taxable as ordinary income. (26 U.S.C. § 61 (12).)

Q 8. What about debt relief on recourse debt?

A If the borrower is personally liable for the debt (also called "recourse debt"), the "debt relief" rules will apply. This means the borrower may have to report and pay ordinary income taxes on the amount of debt relief income. This debt relief income tax is in addition to any capital gain income tax the seller may owe.

Debt relief is also called "discharge of indebtedness" or "relief from indebtedness."

The amount of debt relief is equal to the amount of debt that is discharged or forgiven, minus the amount "realized" (i.e., net proceeds) from the foreclosure sale. It will not matter whether the purchaser at the foreclosure sale is the lender or third party bidder.

Capital gain or loss, and debt relief income, are each calculated and reported separately.

An example of recourse debt is a bank loan obtained to finance the purchase of an office building. Another example is a loan obtained to add improvements to a residence the borrower owns.

Q 9. What about debt relief on "nonrecourse debt"?

A If the borrower is not personally liable for the debt (also called "nonrecourse debt"), there is no debt relief income to be taxed. For a nonrecourse debt, the principal balance of the loan at the time of the foreclosure is considered the amount realized on the sale, even if the value of the property is less than the principal balance of the loan.

An example of nonrecourse debt is a loan obtained to purchase a personal residence of the borrower. Another example is seller financing carried on any type of real property. (These examples assume that the property is in California and that the loan is not modified after it is made. A number of other special rules can affect whether a loan is nonrecourse.)

Q 10. Can you explain debt relief income further?

A Debt relief income is also called cancellation of debt (COD) income. Debt relief in distressed real estate situations can result from:

* Debt restructuring that results in reduction of the amount of a recourse or non-recourse debt.

* Transfer of property to a lender, that is accepted by the lender in full satisfaction of the debt even though the property is worth less than the balance of the debt. This includes transfers by deed in lieu of foreclosure; sale under power of sale in a deed of trust (because California law bars a deficiency after a non-judicial foreclosure); judicial foreclosure (if the creditor waives the right to seek a deficiency judgment); and other conveyances.

Q 11. How is a deed in lieu of foreclosure treated?

A For non-recourse debt, the amount "realized" is the balance of the loan. This means the borrower will have capital gain or loss, but will not have debt relief income.

For recourse debt, the borrower can have both capital gain or loss, and debt relief income. The result depends on whether the value of the property is more or less than the loan balance.

For recourse debt, the loan balance or the property value, whichever is less, will be used in calculating capital gain or loss, and the borrower will be liable for debt relief income tax on the loan balance minus the property value.

Q 12. Do the debt relief income rules always apply?

A No. Exemptions from the debt relief income rules are provided (i.e., debt relief income tax can be avoided) for:

* Borrowers who discharge debt through bankruptcy.
* Borrowers who are insolvent (even though not in bankruptcy), to the extent of the insolvency. Insolvency means that the taxpayer's debts exceed his or her assets. If the debt cancellation results in the taxpayer's remaining debts being less than his or her assets, the borrower must report and pay tax on debt relief income to the extent he or she has been made solvent as a result of the debt cancellation.
* Borrowers with a discharge of qualified farm indebtedness.

If a borrower meets one of the above exemptions, the amount excluded from debt relief income must be used to reduce the following tax "attributes" in the following order:

* Net operating loss and net operating loss carry forward.
* General business credit, reduced by one-third of excluded debt relief income.
* Minimum tax credits, reduced by one-third of excluded debt relief income.
* Net capital loss and capital loss carry forward.
* Basis reduction, limited to basis before reduction over remaining undischarged liabilities.
* Passive activity losses and credit carry forwards.
* Foreign tax credit carry forwards.

However, a borrower who is insolvent or in bankruptcy can, instead of following the order above, elect to reduce the basis of any remaining depreciable property by the amount of debt relief. This is limited to the amount of the taxpayer's depreciable property as of the beginning of the tax year following discharge.

If the borrower is solvent, any debt reduction involving purchase money, seller-carried financing will be treated as a reduction in purchase price that affects the borrower's basis instead of being treated as gross income.

If the borrower is solvent and the debt is "qualified real property business indebtedness," the discharged amount will not be treated as gross income but will be treated as a reduction in basis first in the subject property, and then in all other depreciable property owned by the borrower. Any debt relief that exceeds basis will be treated as discharge of indebtedness income.

(See 26 U.S.C. § 108.)

Q 13. What does "qualified real property business indebtedness" mean?

A "Qualified real property business indebtedness" is debt incurred or assumed in connection with real property that is used in a trade or business and is secured by that property. (26 U.S.C. § 108(c).)

Q 14. How about an example of the application of a debt relief rule?

A Here's an example:

Borrower owns a commercial building securing a "qualified real property business indebtedness" with a balance of $200,000. Borrower's adjusted basis (cost, minus depreciation) is $70,000. Value is $110,000. Lender accepts a short payoff of $110,000. As a result, the borrower:

* Has a basis of zero in the property (due to the reduction of basis rule).
* Has debt relief income of $20,000 ($90,000 discharged, minus $70,000 adjusted basis).

Q 15. When a lender issues a 1099 in connection with a foreclosure or short sale, is the amount shown in the 1099 taxable?

A Not necessarily. The law requires lenders to issue 1099s to borrowers in these circumstances. This is so that the IRS will be able to keep track of whether the borrower properly reports the foreclosure or short sale transaction. However, the fact that a 1099 is issued doesn't mean that the full amount shown -- or even any part of it -- is subject to capital gain or debt relief income tax.

The questions above explain various reasons why the foreclosure or short sale transaction do not result in taxable income. When a 1099 is received, it is important for the borrower to discuss the situation with a trained professional tax advisor. If the borrower prepares an income tax return by himself or herself, there is a good chance that the amounts shown in the 1099 won't be handled correctly, resulting in the borrower paying too much income tax; being selected for an audit; having to pay penalties and interest; and other consequences.

Q 16. Where can readers obtain more information on the subjects covered above?

A Information is available from a variety of sources, including:

* The Internal Revenue Service (IRS) (, which has detailed publications available for free on many tax related subjects.
* The IRS Tele-Tax system, which is an automated voice message information system with recorded information on many commonly asked tax questions. Tele-Tax can be reached by calling 800.829.4477.
* A tax professional, such as a certified public accountant, tax attorney, or enrolled agent.

California Association of REALTORS®
Member Legal Services
525 South Virgil Avenue
Los Angeles, California 90020

This article was believed to be accurate in 2005 - The preceding blog entry was dated september 10 2007

Short sale tax implications

Santa Barbara Association of REALTORS®: "TAXATION OF SHORT SALES Q 9. What are the tax implications of a short sale? A A short sale where the lender agrees to reduce some or all of the outstanding debt may give rise to forgiveness of debt income. The amount of the debt that the lender agrees to write off is treated as ordinary income. The taxpayer will generally receive a 1099 from the lender in the amount of the debt reduction. This rule applies whether or not the underlying debt is recourse or nonrecourse. Even though the lender may be taking this action to facilitate the sale by the owner who is under a notice of default and facing a foreclosure, the agreement between the owner and the lender is voluntary and treated as a debt reduction. In addition, if the owner has owned the property for some time and has refinanced to take out some of the equity, the owner could be subject to capital gains taxation when selling the property as well. For example, the borrower has a remaining loan on the property when the borrower refinances in order to buy other investment property (or to buy a car, or to take a vacation, etc.) and now owes $300,000 to the lender. Thus, the taxpayer’s adjusted basis may be lower than the outstanding balance on the loan (as in the example below). The tax calculation would look like step one"

While this is from the Santa Barbara association of Realtors is applies to San Diego real estate owners as well as others in California. This is just an article your attorney may have a different opinion.

However, non Californian's owning California property should check with an attorney to see if all the consumer protection allows apply to them.

California Recourse and Non Recourse debt

Santa Barbara Association of REALTORS®: "RECOURSE DEBT Example Two: If the amount realized at the foreclosure sale is more than what the lender is owed, there will be no forgiveness of debt and, thus, no ordinary income to the taxpayer. 1. The unpaid principal of the recourse debt is $300,000; 2. The fair market value of the property is $400,000; 3. The taxpayer's adjusted basis in the property is $200,000. Step one: FMV ($400,000) less taxpayer’s adjusted basis ($200,000) results in capital gains for the taxpayer. FMV $400,000 Less Adjusted Basis $200,000 Capital Gains $200,000 Step two: The debt is fully paid (since the FMV exceeds the loan amount) resulting in no forgiveness of debt income. Q 7. How is the amount realized (taxable income) calculated for a “nonrecourse” debt in a foreclosure? A If the debt is nonrecourse, meaning the owner is not personally liable for any deficiency (beyond the value of the property), the amount realized is the difference between the greater of the foreclosure proceeds or the entire outstanding debt and the adjusted basis of the property. This amount is treated"

This is courtesy of the California association of Realtors legal dept.

California foreclosure -Recourse and non recourse debt

Santa Barbara Association of REALTORS®:

"Q 1. Are foreclosures, deeds in lieu of foreclosure, and short sales subject to federal tax income taxation? A Yes. However, the income is taxed differently depending on several factors, including whether there was a foreclosure, a deed in lieu of foreclosure given to the lender, or a short sale (a sale where the lender agrees to reduce the amount owed in order to facilitate a sale), and whether the underlying debt is “recourse” (the borrower is personally liable for the debt) or “nonrecourse” (the borrower is not personally liable for the debt). For federal income taxation as a result of foreclosure, see generally 26 U.S.C. §§ 1001 through 1016. For federal income taxation of short sales, see generally 26 U.S.C. §§ 61, 108 and 1001 through 1016. TAXATION OF FORECLOSURES OR DEEDS IN LIEU OF FORECLOSURE

Q 2. What is the difference between a foreclosure and a deed in lieu of foreclosure? A A foreclosure refers either to a trustee’s sale foreclosure (not a judicial proceeding) or to a judicial foreclosure (a judicial proceeding). A deed in lieu of foreclosure means that the lender has agreed to accept title to the property and the borrower transfers title to the lender rather than waiting until the lender forecloses on the property. A deed in"

This is an excellent summary of the law by the legal department at the California Association of Realtors.

The implications of short sale will be discussed in the next blog.

Market's vital signs indicate when prices have bottomed out

Market's vital signs indicate when prices have bottomed out

Looking for a bottom in home prices in Florida or southern California. This article suggets some indicators.

One author claims his indicators are totally accurate for the San Diego real estate market. This reminds me of similar claims we see from stock market hucksters but I would have to see his data and his methods before I would pass judgment.

Friday, September 21, 2007

Short sale - will you still be on the hook?

Short sales are very common in San Diego California and becoming increasingly common in Sarasota and Bradenton Florida. However, I have been contacted by multiple homeower's concerned that the bank is going to seek a deficiency against them (after a short sale). How can that be when so many real estate professionals have been trained to believe the short sale means settlement in full. Many people homeowners are under the same impression that that a short sale will automatically release them from deficiency liability so they just go ahead with the process.

I can understand the confusion. Lots of short sale advisors on the internet say the owner sells the property in exchange for a settlement in full. What these advisor can not say is that they must negotiate the deals and review the legal documents. Why don't they say it? If you have been reading my blog, you know.

Some banks state expressly in in their documents that the short sale is a release of deedonly and then state in the instructions to the closing agent that the homeowner is responsible for note. It is my understanding they make the borrower sign this document at the closing table.

At least in some instances Countrywide tells the closing agent it will not seek a deficiency under certain circumstances. However, if Countrywide were to go into a reorganization is that document binding as to the borrower.

My advice to homeowners: do not agree to a short sale unless your are satisfied that you will not be responsible for a deficiency and/or tax liability.

My other advice to homeowners - do not go to the short sale closing table unless you are with an attorney licensed in your state.

Tuesday, September 11, 2007

Fed Banks taking over? Conspiriacy proven? Worldwide

If you are homeowner contemplating selling your upside down or almost upside down property, is this good news or bad. Countrywide is probably illiquid and who knows how far from being upside down themselves. The question is what are these banks going to get for their cash infusions.

I am know conspiracy theorist but those anti federal reserve bank guys said this was going to happpen. I was wondering how, now we know, they buy the biggest most broke home lender out there. Will they foreclose or will they agree to pre-foreclosure workouts. With one choice we will all be toast. The other probably mean two to three years of short sales and foreclosure before we see a supply demand balance at lower prices.

Wednesday, September 5, 2007

California Association of Realtors pushing for larger loan limits

Gmail - C.A.R. Newsline: "C.A.R. URGES SWIFT PASSAGE OF GSE AND CONFORMING LOAN LIMIT REFORM BILL C.A.R. is pushing for swift passage of a bill in the Senate calling for increases in loan limits to match median home prices in California and other high-cost areas and the creation of a new regulator to oversee Government Sponsored Enterprises (GSEs), such as Fannie Mae and Freddie Mac. Vigorous support helped push the measure, HR 1427, through the House in May, but it has since stalled in the Senate. The bill would raise the current maximum size of a conforming mortgage loan from $417,000 to a capped amount at 150 percent of the national limit or $625,500, allowing low- and moderate-income home buyers in high-cost areas better access to low-cost, low-rate fixed mortgages. C.A.R. President Colleen Badagliacco was recently quoted in a 'San Jose Mercury News' story on the issue, saying that a loan of $417,000 'may buy a mansion in Des Moines but it doesn't buy anything in San Jose.'"

Larger loan limits should help increase demand in markets in San Diego like Carlsbad and San Marcos.

Saturday, September 1, 2007

san diego refinance foreclosure info

Should a San Diego or California homeowner refinance their loan in this market.


Is the loan you will retire a purchase money loan?
Is there a risk your property is upside down or will go upside down
Is there chance you will not be able to make payments
Do you have other assets to protect
Would you worry about a the potential for tax liability for loan forgiveness
Do you have second loan or a heloc as well?

These a just a few of the questions that need to be considered.


If you have a non recourse loan in California you would be giving up some of your protections against deficiency judgments and protection from tax liability for loan forgiveness. Therefore, you have to do a cost benefit analysis.

I remember a time when my old lender countrywide would call my house and ask us if we wanted to refinance our mortgage. I never remember them advising me I might be losing very vital protections.

If you have refinanced out of a purchase money loan and now you are upside down you might want to speak with an foreclosure attorney before you take any further action.

The more I work with upside down homeowners the more I realize that the predatory lending and the related disputed debt argument must be considered as part of your deed in lieu or short sale negotiations with the lender.

Thursday, August 30, 2007

Record decline in Home prices

Real Estate price tracking indices are finally catching up with reality. The case shiller composite which seems a bit sluggish is showing a record annual decline. The true home reality in many markets is if you do not own a home which shows perfectly on a great lot in a very desirable area most likely your home price is down enough to make you wish you had sold. Prices are even more depressed if there are other homes like yours for sale. (I do not say this with glee.)

There are two main reasons causing the news to report information which does not match your purse. One it has been reported that foreclosures are reported as sales. Therefore we are getting a lot a sales at the 2005 and 2006 100% finance price. And two, most of the reports and indices track the median price of a home. Every Realtor knows you do not buy medians you by price per square foot. I know examples where price per square foot is down 20% while the median is down less than 10%. In other words sales prices are staying higher as buyers get more house for the money.

The S&P/Case-Shiller(R) U.S. National Home Price Index Posts a Record Annual Decline in the 2nd Quarter of 2007:

"2007 Q2/ 2007 Q1/ 2007 Q2 2007 Q1 2006 Q4 1-Year Level Change (%) Change (%) Change (%) U.S. National Index 183.89 -0.9% -0.9% -3.2% June 2007 June/May May/April 1-Year Metropolitan Area Level Change (%) Change (%) Change (%) Atlanta 136.12 0.8% 0.6% 1.6% Boston 171.30 0.2% 0.8% -3.7% Charlotte 135.05 1.2% 1.1% 6.8% Chicago 165.96 0.2% -0.1% -0.7% Cleveland 118.54 0.1% 0.8% -3.6% Dallas 126.53 0.8% 0.6% 1.6% Denver 138.09 1.3% 1.1% -1.0% Detroit 109.57 -0.5% -2.4% -11.0% Las Vegas 221.86 -1.3% -0.8% -5.1% Los Angeles 262.12 -0.4% -0.1% -4.1% Miami 264.89 -1.7% -1.5% -4.8% Minneapolis 164.35 0.0% -0.2% -3.8% New York 208.52 -0.8% -0.8% -3.4% Phoenix 212.52 -0.7% -0.5% -6.6% Portland 185.76 0.3% 0.9% 4.5% San Diego 231.37 -0.2% -0.4% -7.3% San Francisco 209.48 -0.7% -0.3% -4.0% Seattle 191.92 0.7% 0.9% 7.9% Tampa 219.37 -1.2% -0.9% -7.7% Washington 233.52 -0.8% -0.3% -7.0% Composite-10 217.07 -0.5% -0.4% -4.1% Composite-20 199.18 -0.4% -0.3% -3.5% Source: Standard & Poor's Data through June 2007"

Saturday, August 25, 2007

Short Sales Effect Credit - Impact of Short Sales on Credit Reports - How Short Sales Affect Credit

Lately I have been getting a lot of questions for California Real Estate owners about how a short sale will effect their credit. I am giving a link to this information because I have found some of this realtors information to be pretty good but not perfect in the past. I have also found many Realtor cite making roughly the same claims about the effect on an upside down homeowners credit. However I rarely see the cite attribute the information to anyone.

Next, I note that this information may be old and getting older. As I have reported elsewhere on this blog it has been reported the Fico people are working to make a short sale and a foreclosure have an equivalent effect on your credit report. It makes sense because a short sale is really no better than a deed in lieu. Finally, I would like to remind people that you really need both a Realtor and an attorney working as a team to create your best solution.

Short Sales Affect Credit - Impact of Short Sales on Credit Reports - How Short Sales Affect Credit

here is a summary of what the realtor resported:

Fico points lost:

* Foreclosure or Deed-in-Lieu of Foreclosure
250 t0 280 points
* Short Sale
80 to 100 points
Waiting Period Before Buying Another Home

* Foreclosure or Deed-in-Lieu of Foreclosure
36 months till you can get a reasonable rate on your loan
* Short Sale
18 months
Please remember to make sure you are crafting your solution to eliminate deficiency judgments and/or tax liablity for loan forgiveness. (something you can do by yourself or with your lawyer) If your Realtor claims to be able to negotiate these agreements for you - it may be a good thing - because imo they will be practicing law without a license. Just make sure they work for a large non indenpendent broker with deep pockets.

Real Estate Auctions

Interesting article about foreclosures and auctions. Note, each state has different rules for instance California's rules for redemption by foreclosed former owners are different.

Let the Home Auction Bidder Beware: "'Banks have a duty to bid as much as they are owed' on an outstanding mortgage, says Ryan Slack, chief executive of, an online real estate research company in New York City. 'But investors don't want to buy a property unless it's [priced] at a discount,' he adds. Indeed, at a July 13 foreclosure auction at the Queens County, N.Y., Supreme Court building, only four of the 18 properties auctioned that day attracted any bids from the public. The rest, observers said, ended up in the hands of their mortgage lender. But the ability to obtain troubled properties doesn't end there: Some time after the lender takes title to foreclosed properties, a new selling phase typically begins. That's when banks try to shed unwanted properties - typically by selling them through a real estate agent or by offering them at a second auction. These post-foreclosure auctions are attractive to lenders, experts say, because they can unload their mounting stocks of properties on a specific date. Thus, 'you're seeing [post-foreclosure auctions] of 20 to 30 properties at a time, held at conference centers or hotels,' says Rick Sharga, marketing vice president at RealtyTrac Inc., a real estate information company in Irvine, Calif. 'In the past, [such lenders] didn't have enough inventory' to hold such events. For"

San Diego Real Estate fallout > News > Business -- Summer job cuts in county offset by year-to-year gain: "“There's a relatively good chance that unemployment will hit 5 percent in coming months,” said Alan Gin, economist with the University of San Diego. “The fallout from the declines in the real estate market have not been completely realized as far as the local economy is concerned.”"

Thursday, August 23, 2007

Gross: Bush needs to rescue homeowners: Financial News - Yahoo! Finance

Gross: Bush needs to rescue homeowners: Financial News - Yahoo! Finance

Bill Gross of Pimco, one of the biggest players in notes and bonds in the world suggest that Bush should help bail out homeowners.

I am sure many owners of San Diego real estate hope that Gross is floating a trial bubble for the administration.

Tuesday, August 21, 2007

San Diego Real Estate Mess - Blame?

A quote from a comment to the article cited in my previous post about San Diego Real Estate.

By MJB on 08/19/2007

Bankers are getting quite cranky,
forced to give up their loan hanky-panky.
"Let's foreclose on the fools
who followed our rules,
and blame the whole mess on Bernanke!" > News > Business > Dean Calbreath -- S.D. housing market may only be in eye of storm > News > Business > Dean Calbreath -- S.D. housing market may only be in eye of storm: "This trend will worsen next month, which is the two-year anniversary of the nationwide peak in the housing boom. By October, more than $50 billion worth of adjustable-rate mortgages will require higher monthly payments, and that number is projected to grow by more than $30 billion each month through September 2008, according to the Credit Suisse banking firm. Because many of the borrowers could scarcely afford to make their payments at the teaser rates, they are going to be in a bigger bind when the rates adjust upward. Even if the Federal Reserve moves to push interest rates lower, many borrowers will be forced to sell their homes at a loss or go into foreclosure. Already, the number of"

Sunday, August 19, 2007

Loss Mitigator: The Ins and Outs of Short Sales & Understanding Credit Reports/ Q&A

Real Estate Blog - Loss Mitigator: The Ins and Outs of Short Sales & Understanding Credit Reports/ Q&A

The author of the article gives us his notes after going to a lecture from a "Loss Mitigator".

Please be aware the information regarding deficiency and tax liability does not apply to many California real estate owners. California has a complex web of consumer protection statutes which protect many California homeowners from deficiency judgments. (Tax liability is another complex area of law. It should only be tackled by a lawyer with the tax regulations in front of him (or her), and understanding of the anti-deficiency statutes and case law.) Finally, it is my opinion a short sale is rarely the best option for a California homeowner. In fact from my perspective the Lender is the party who should be suggesting the short sale and making the concessions if the homeowner negotiates properly.

Here is my condensed version of the "notes" for the lecture.

Credit Reports

A credit history which shows a history of making mortgage payments is important. Lenders may forgive missed payments if the applicant had a very good reason for the missed payments.

The above information about credit may not apply during our current credit squeeze. (I think there is a strong chance this will hold true in the future.)

Short Sale Negotiation

The negotiator should convey the following:

- We want to work with with you (the lender) to minimize your loss.
- We have determined reason for delinquency. (What factor did the lenders miss during underwriting which should have tipped the bank off to the increased risk.

- Ask the bank if it is willing to give up some of the fees and penalties to get a sale done.
- Also ask the bank if they are willing to reduce the principle.

- At the time of the lecture the loss mitigator stated the banks did not want to believe their appraiser would have let the borrower pay too much for the real estate. (Banks no longer suffer from this illusion.)

- It is helpful to have the listing aged and to show the property has zero interest at a higher price.

- The loss mitigator does not make the decision, he packages it up for a supervisor or officer at the bank.

- And now perhaps for my favorite piece of advice which I have suggested before. Attorneys have options which bring the loss mitigators or the foreclosure departments to the negotiating table. If your home is in danger of becoming upside down, you should work with a San Diego attorney who understand this area of the law. Your short sale team should have a licensed California attorney and a licensed California real estate agent.

"Again, banks do not want to believe they made a mistake by approving your homeowner. However, they want to minimize losses. They also want to avoid a bankruptcy filed by the homeowner at the very last minute right before the forced sale. If you can document your homeowners desire to file bankruptcy (via attorney letterhead) then you may have a better chance at getting the short sale done according to your terms."

Saturday, August 18, 2007

North San Diego County Real Estate

A natural correction -- Psychology, shakeout of speculators slowing regional real estate market, not economy North County Times - North San Diego and Southwest Riverside County News

If you are looking for a reason to buy and hold San Diego real estate this is the article your need to read.

The most interesting point made is that San Diego keeps adding jobs. One third of a million jobs since 1993.

Top 10 Foreclosure Cities - Yahoo! Real Estate

Top 10 Foreclosure Cities - Yahoo! Real Estate

California has 4 cites on the to 10 foreclosure list

The top 10 rates of foreclosure are:

1. Stockton
2. Detroit
3. Las Vegas
4. Riverside/San Bernardino
5. Sacramento
6. Bakersfield
7. Denver
8. Miami
9. Memphis
10. Cleveland

San Diego California Foreclosure Timeline

Foreclosure Timeline in San Diego and the rest of California.

Day 1 - Notice of Default (NOD) gets recorded

Within 10 Days - Notice of Default is mailed

30 Days - Notice of Default is mailed

3 months - Lender can have a sale date set by the Trustee

At least 20 days before sale - Publish, Post and mail notice sale.

25 Days before sale - Notification to IRS if necessary

10 Days after first notification - Send info to beneficiaries

The above is basic non judicial foreclosure timeline for California. Typically a lender waits for a few payments are missed, before commencing the foreclosure process, however there is no guarantee the lender will grant a homeowner extra time.

Friday, August 17, 2007

Short sale addendum California Association of Realtors

The following is the addendendum mentioned in my article the law as applicable to Short Sale in San Diego.

a new standard-form Short Sale Listing Addendum (SSL). Listing agents
may attach this addendum to their listing agreements to advise sellers
of various aspects of short sale transactions. Key provisions of the
Short Sale Listing Addendum include the following:

- Advises that the seller may be required to bring in funds to close
escrow or to obtain lenders' agreement to accept less than what's
- Advises that alternatives to a short sale may be more appropriate,
such as refinancing, bankruptcy, or foreclosure, depending on the
seller's own circumstances.
- Authorizes the listing agent to advertise a property as a short sale.
- Authorizes the listing agent to contact lenders concerning their
approval of a short sale.
- Advises the seller that a short sale has possible tax, credit, and
other legal consequences. "

California Short Sale addendum from the California Association of Realtor

The following is an addendum from the California Association of Realtors. It seems designed to notify homeowners they may actually be hurt by short sales. California has a complex legal framework which is designed to protect homeowners from deficiency judgments. These same laws may operate to protect Californians from tax liablity. Oddly, in many situations it may be better for the homeowner to accept a foreclosure rather than agree to a short sale.

Unfortunately far too many Realtors have been imporperly advising homeowners to short sale their property.

The following California Association of Realtors short sale addendum seems designed to advise homeowners to review other options before agreeing to a short sale. In my opinion, the addendum also puts limits on Realtors activities in this area of pre-foreclosure solutions.

In my opinion Realtors are on notice that they may only adverstise short sales and they may only "seek approval" of the sale from the lender. Conspicuous by their absence are the words, negotiate, represent or other words Realtors have been using to cover up the fact they have been practicing law in short sale transactions.

Saturday, August 11, 2007

Tax liability for non recourse loans?

I spoke with a Carlsbad and Point Loma homeowners this week and they wanted to know if they would be responsible for deficiency judgments and or potential tax liability.

Of course the tax deficiency question revolves around the issues of whether a loan is a recourse or non recourse loan. Since we have already covered those questions recently in this blog we will move to the next question.

Will there bill tax liability if the loan is forgiven. While I knew the answers, I did not have legal support for my opinion. If a lawyer does not have the law, the case, or the code, he or she will not feel comfortable giving his opinion. (this is why lawyers have a tendency to qualify their responses). So, after spending some time reading IRS publications I now have the support I need to give my opinion.

Since this topic of tax liability and loan forgiveness can be somewhat complicated, I am willing to answer a few questions here on this blog. Please submit your questions as comments.

Friday, August 10, 2007

Without Jumbo loans are more short sales and foreclosures inevitable?

Loan broker jonathan santiago said this:
For more on what the Federal Reserve is doing now, check out:

For the recent news regarding Countrywide and Washington Mutual, check out:

It's not just stated loans that are getting higher rates. Jumbo loan rates are getting higher too (A Jumbo loan has a loan amount over $417,000). It doesn't matter if your clients have a score of 800 and have tons of reserves. Any non-conforming loan (basically a loan that Fannie Mae and Freddie Mac don't purchase) is viewed as too risky. No one wants to buy those kinds of mortgage-backed securities unless they have a higher rate or return which means a higher interest rate for your borrower. (The Saga of the US Mortgage Market has more details).

Will the Federal Reserve come to the rescue? While the market is certainly hoping so, there are still some experts out there who feel that they won't cut rates. Cutting rates may be seen as a panic move and would roil the markets even further. Instead, they may just keep adding cash to the system thereby increasing liquidity for these lenders and making sure they stay afloat. It's a real catch-22 for the Federal Reserve and a task that Ben Bernanke faces that no other Federal Reserve Chairman has ever faced before. Hold on's already a real bumpy ride!

Former New York Stock Exchange corporation are now trading at pennies on the dollar.

"HomeBanc Corp., an Atlanta-based mortgage lender, filed for bankruptcy protection today, two days after saying it would sell some of its assets to Countrywide. The company said Aug. 7 bankers had cut off credit and left it unable to fund loans."

from bloomberg.

I can't imagine prices in San Diego staying where they are if people can not get jumbo loans at reasonable rates. If the fed does not wish to figure this problem out we could be in real trouble. Although the equity in my house is getting crushed, I can't help but predict short sales and foreclosures are going to skyrocket in the high priced ares like San Diego and other parts of California.

Wednesday, August 8, 2007

Bad faith waste of a foreclosure property

Many people working in Real Estate in San Diego have seen nice homes in nice subdivisions trashed by homeowners who were subject to foreclosure actions. California homeowners should be aware that bad faith abuse and possibly even omissions to act could take the homeowner out of the protection anti-deficiency provision of California law.

Any deliberate impairment of the security (real estate for our purposes) and sometimes omissions causing impairment to the security could subject homeowners to deficiency proceedings.

California anti-deficiency law

Two fairly common "non standard" transactions which therefore do not merit California 580b protection are:

1. an unsecured note
2. an action for recovery against a guarantor of a note. I also saw a note about letters of credit not being subject to 580b protections.

There are other exceptions.

pre-foreclosure - non-recourse loan?

Does the second have right to go after the borrower. It seem that there is a basic rule and a caveat

The basic rule is that 580b protection would apply in standard transactions with sold out juniors.

However the 9th circuit has made a ruling which seems to leave this area of the law somewhat open to good arguments. In the Prestige case the court distinguished cases in which the security was exhausted by a senior sale without giving us much further guidance.

I am just thinking this through but we seemed to be left with the the strange conclusion that an upside down homeowner worried about deficiency may be "incentivised" to make sure the second is "sold out".

Also note this information does not necessarily apply to non standard transactions or construction loans. And seriously please have your situation reviewed by a California attorney. The above information is a quick overview at best. If you were my client I would do a great deal more research before giving any "advice".

antideficiency, recourse and non recourse loans

Many of the questions I have been getting lately come from people with a first and a second loan. The second is usually very underwater and the question is - will the bank come after me. So in with respect to this scenario lets answer the question.

Answer - it depends.

Purchase money loans were once characterized as loans for the seller of the property. California extended the law to third parties who provided loaned funds to the buyer to purchase the property from the seller.

California Code of Civil procedure section 580b in general stands for the fact the buyer is protected from deficiency judgments after foreclosure from the seller of the property. A buyer would also be protected from third parties who provided funds for the purchase of the property.

For the purposes of this discussion please remember that lenders can and do attempt to get around the 580b protection by arguing the transaction was not a standard transaction. (which is why I have all the disclaimers at the bottom of the page about having your facts reviewed by licensed attorney.)

Monday, August 6, 2007

No Money Down Disappearing as Mortgage Option -

No Money Down Disappearing as Mortgage Option -

No money down mortgages or 100% financing are becoming rare as major lenders have pulled out of the market.

I remember back in the late 90s when people needed to put down 20% or get very unfavorable rates. In fact even in 2003, going with less than 10% down sometimes caused a penalty in your rates > News > Metro -- Foreclosure agents bask in bad times

" > News > Metro -- Foreclosure agents bask in bad times: "Today, of the nearly 24,000 listings of resale houses, condominiums and mobile homes, roughly one-fifth were identified by Sandicor, a local multiple listing service, as distressed properties either in foreclosure or approaching the stage where owners could lose their homes.

Agents who specialize in the properties, known as real-estate-owned homes, or REOs, say they're having a field day. While it may be a bit morbid there is a certain side of the real estate industry which does well in bad times."

If one fifth of the properties are distressed one would have to wonder what is keeping the prices up. Over the weekend I noticed some home in Carlsbad which were REO listings. And these listings were priced significantly below the market. Homes were for sale for 700 thousand or less which buildes were attempting to sell for over 800,000 in January.

Sunday, July 29, 2007

LIVING THE AMERICAN NIGHTMARE / FORECLOSURES ON THE RISE: As the housing market softens, a combination of consumer naivete and aggressive lending mean

Here is a quote from a Bay area newspaper.

LIVING THE AMERICAN NIGHTMARE / FORECLOSURES ON THE RISE: As the housing market softens, a combination of consumer naivete and aggressive lending means owners with subprime loans are increasingl: "Some observers say that many of those facing foreclosure should never have bought a house. To be sure, many consumers were seduced by the American dream of homeownership and so financially unsophisticated that they didn't apply due diligence. For Bay Area residents, more than a decade of consistently rising home prices may have led to a mob mentality of people overeager to jump into the real estate market, confident they would quickly gain equity.

On the other side of the equation, many lenders pushed the envelope. For example, Ameriquest Mortgage Co., the nation's leading subprime lender, is now paying $325 million to 725,000 borrowers nationwide for allegedly improper sales practices, including failing to adequately disclose home-loan terms and rates, refinancing borrowers into inappropriate loans, inflating home appraisals, and charging excessive fees and prepayment penalties.

Foreclosures have a much broader impact than just misfortune for the people who lose their homes. Within neighborhoods, they cause real estate prices to sink because houses on the verge of foreclosure or already foreclosed upon often are resold at lower prices. That, in turn, has a ripple effect on the"

Real Estate Blog - Mortgage Fraud + Shielding a Client--Part I

Real Estate Blog - Mortgage Fraud + Shielding a Client--Part I

I was driving around Carlsbad California today with a friend who is a Real Estate investor. When I mentioned that I saw this same no money down sign all over Encinitas and Carlsbad.

He said yes, and a few weeks ago there was a sign all over which spoke of an apprentice job where they were looking to pay the apprentice 20,000. My investor friend figured they were looking for someone with good credit to pull a fraudulent real estate deal.

The link above is an example of the type of fraud that seems prevalent in the San Diego Real Estate market, according to my investor friend. As we were driving through his neighborhood he pointed out two homes which involved homes that were marked up too high and then sold with cash back to the buyer.

Therefore, at least 2 of the 4 recent comps for a very popular neighborhood are fraudulent.

Buying a home in Carlsbad or other parts of San Diego - make sure you know what you are doing or you are working with someone who knows what they are doing.

Saturday, July 28, 2007

County foreclosures leap higher | The San Diego Union-Tribune

County foreclosures leap higher | The San Diego Union-Tribune

Home foreclosures in San Diego County continued a troublesome climb into record territory in June, but analysts say the number has yet to reach a threshold that creates a drag on real estate prices or the economy.

From May to June, county foreclosures increased from 532 to 657, a 24 percent increase and a record for any month since 1988.

Graphic: Default notices in Southern California
County notices of default, the first step in the foreclosure process that occurs when homeowners begin missing mortgage payments, totaled 8,314 for the first six months of 2007, compared with 3,311 in the same period last year, a 151 percent increase. From May to June of this year, default notices rose from 1,441 to 1,596, an 11 percent increase.

Although foreclosures are spiking, there is no reason for homeowners to

NAR: Prices Rise, Existing-Home Sales Decline in June

NAR: Prices Rise, Existing-Home Sales Decline in June

Update on the national foreclosure situation from the National Association of Realtors

New-home building permits plummet in O.C. - Los Angeles Times

Large declines in building permits for San Diego.

New-home building permits plummet in O.C. - Los Angeles Times

The decline there outpaced the drop in the Inland Empire and San Diego County, two of the weakest markets for new-home sales. In each of those areas, permits fell 67%, the construction board said.

Monday, July 9, 2007

Are Foreclosures inevitable?

We have been speaking with loan brokers and investors. Some are now convinced the banks are just trying to contain the inevitable. The banks are not allowing sales are prices which interest buyers. Perhaps because they know what that will do to their loans. Upside down homeowners now have to consider that they are not going to be able to sell their homes in a short sale because banks are just not moving quickly enough.

Therefore imho, all pre-foreclosure solutions must be customized. If banks are not going to get these houses sold at the prices buyers are willing to pay right now the homeowners are not going to be responsible for the large deficiencies the banks my try to collect later.

Deed in Lieu, Short Sale, Forclosure info

Here is an explanation of you solutions from the FTC, with a few edits from me. If you are a California homeowner please consult an attorney before you make any big moves. Mistakes can be very very expensive and time consuming.

Mortgage Payments Sending You Reeling? Here’s What to Do

The possibility of losing your home because you can’t make the mortgage payments can be terrifying. Perhaps you are one of the many consumers who took out a mortgage that had a fixed rate for the first two or three years and then had an adjustable rate. Or maybe you’re anticipating an adjustment, and want to know what your payments will be and whether you’ll be able to make them. Or maybe you’re having trouble making ends meet because of an unrelated financial crisis.

Regardless of the reason for your mortgage anxiety, the Federal Trade Commission (FTC), the nation’s consumer protection agency, wants you to know how to help save your home, and how to recognize and avoid foreclosure scams.
Know Your Mortgage

Do you know what kind of mortgage you have? Do you know whether your payments are going to increase? If you can’t tell by reading the mortgage documents you received at settlement, contact your loan servicer and ask. A loan servicer is responsible for collecting your monthly loan payments and crediting your account.
Here are some examples of types of mortgages:

* Hybrid Adjustable Rate Mortgages (ARMs): Mortgages that have fixed payments for a few years, and then turn into adjustable loans. Some are called 2/28 or 3/27 hybrid ARMs: the first number refers to the years the loan has a fixed rate and the second number refers to the years the loan has an adjustable rate. Others are 5/1 or 3/1 hybrid ARMs: the first number refers to the years the loan has a fixed rate, and the second number refers to how often the rate changes. In a 3/1 hybrid ARM, for example, the interest rate is fixed for three years, then adjusts every year thereafter.
* ARMs: Mortgages that have adjustable rates from the start, which means your payments change over time.
* Fixed Rate Mortgages: Mortgages where the rate is fixed for the life of the loan; the only change in your payment would result from changes in your taxes and insurance if you have an escrow account with your loan servicer.

If you have a hybrid ARM or an ARM and the payments will increase — and you have trouble making the increased payments, find out if you can refinance to a fixed-rate loan. Review your contract first, checking for prepayment penalties. Many ARMs carry prepayment penalties that force borrowers to come up with thousands of dollars if they decide to refinance within the first few years of the loan. If you’re planning to sell soon after your adjustment, refinancing may not be worth the cost. But if you’re planning to stay in your home for a while, a fixed-rate mortgage might be the way to go. Online calculators can help you determine your costs and payments.
If You Are Behind On Your Payments

If you are having trouble making your payments, contact your loan servicer to discuss your options as early as you can. Most loan servicers are willing to work with customers they believe are acting in good faith, and those who call them early on. The longer you wait to call, the fewer options you will have. After you’ve missed three or four payments and your loan is in default, most loan servicers won’t accept a partial payment of what you owe. They will start foreclosure unless you can come up with the money to cover all your missed payments, plus any late fees.
Avoiding Default and Foreclosure
If you have fallen behind on your payments, consider discussing the following foreclosure prevention options with your loan servicer:

Reinstatement: You pay the loan servicer the entire past-due amount, plus any late fees or penalties, by a date you both agree to. This option may be appropriate if your problem paying your mortgage is temporary.

Repayment plan: Your servicer gives you a fixed amount of time to repay the amount you are behind by adding a portion of what is past due to your regular payment. This option may be appropriate if you’ve missed only a small number of payments.

Forbearance: Your mortgage payments are reduced or suspended for a period you and your servicer agree to. At the end of that time, you resume making your regular payments as well as a lump sum payment or additional partial payments for a number of months to bring the loan current. Forbearance may be an option if your income is reduced temporarily (for example, you are on disability leave from a job, and you expect to go back to your full time position shortly). Forbearance isn’t going to help you if you’re in a home you can’t afford.

Loan modification: You and your loan servicer agree to permanently change one or more of the terms of the mortgage contract to make your payments more manageable for you. Modifications can include lowering the interest rate, extending the term of the loan, or adding missed payments to the loan balance. A loan modification may be necessary if you are facing a long-term reduction in your income.

Before you ask for forbearance or a loan modification, be prepared to show that you are making a good-faith effort to pay your mortgage. For example, if you can show that you’ve reduced other expenses, your loan servicer may be more likely to negotiate with you.

Selling your home: Depending on the real estate market in your area, selling your home may provide the funds you need to pay off your current mortgage debt in full.

Bankruptcy: Personal bankruptcy generally is considered the debt management option of last resort because the results are long-lasting and far-reaching. A bankruptcy stays on your credit report for 10 years, and can make it difficult to obtain credit, buy another home, get life insurance, or sometimes, even get a job. Still, it is a legal procedure that can offer a fresh start for people who can’t satisfy their debts.

If you and your loan servicer cannot agree on a repayment plan or other remedy, you may want to investigate filing Chapter 13 bankruptcy. If you have a regular income, Chapter 13 may allow you to keep property, like a mortgaged house or car, that you might otherwise lose. In Chapter 13, the court approves a repayment plan that allows you to use your future income toward payment of your debts during a three-to-five-year period, rather than surrender the property. After you have made all the payments under the plan, you receive a discharge of certain debts.

Before you have any conversation with your loan servicer, prepare. Record your income and expenses, and calculate the equity in your home. To calculate the equity, estimate the market value less the balance of your first and any second mortgage or home equity loan. Then, write down the answers to the following questions:

* What happened to make you miss your mortgage payment(s)? Do you have any documents to back up your explanation for falling behind? How have you tried to resolve the problem?
* Is your problem temporary, long-term, or permanent? What changes in your situation do you see in the short term, and in the long term? What other financial issues may be stopping you from getting back on track with your mortgage?
* What would you like to see happen? Do you want to keep the home? What type of payment arrangement would be feasible for you?

Throughout the foreclosure prevention process:

* Keep notes of all your communications with the servicer, including date and time of contact, the nature of the contact (face-to-face, by phone, email, fax or postal mail), the name of the representative, and the outcome.
* Follow up any oral requests you make with a letter to the servicer. Send your letter by certified mail, “return receipt requested,” so you can document what the servicer received. Keep copies of your letter and any enclosures.
* Meet all deadlines the servicer gives you.
* Stay in your home during the process, since you may not qualify for certain types of assistance if you move out. Renting your home will change it from a primary residence to an investment property. Most likely, it will disqualify you for any additional “workout” assistance from the servicer. If you choose this route, be sure the rental income is enough to help you get and keep your loan current.

Consider Giving Up Your Home Without Foreclosure

Not every situation can be resolved through your loan servicer’s foreclosure prevention programs. If you’re not able to keep your home, or if you don’t want to keep it, consider:

Selling Your House: Your servicers might postpone foreclosure proceedings if you have a pending sales contract or if you put your home on the market. This approach works if proceeds from the sale can pay off the entire loan balance plus the expenses connected to selling the home (for example, real estate agent fees). Such a sale also would allow you to avoid late and legal fees and damage to your credit rating, and protect your equity in the property.

Short Sale: Your servicers may allow you sell the home yourself before it forecloses on the property, agreeing to forgive any shortfall between the sale price and the mortgage balance. This approach avoids a damaging foreclosure entry on your credit report. You still may face a tax liability on the amount of debt forgiven. Consider consulting a financial advisor, accountant, or attorney for more information.

Deed in Lieu of Foreclosure: You voluntarily transfer your property title to the servicers (with the servicer’s agreement) in exchange for cancellation of the remainder of your debt. You will lose any equity in the property, and you may face an income tax liability on the amount of debt forgiven. A deed in lieu may not be an option for you if other loans or obligations are secured by the property on your home.

Scam artists follow the headlines, and know there are homeowners falling behind in their mortgage payments or at risk for foreclosure. Their pitches may sound like a way for you to get out from under, but their intentions are as far away from honorable as they can be. They mean to take your money. Among the predatory scams that have been reported are:

* The foreclosure prevention specialist: The “specialist” really is a phony counselor who charges outrageous fees in exchange for making a few phone calls or completing some paperwork that a homeowner could easily do for himself. None of the actions results in saving the home. This scam gives homeowners a false sense of hope, delays them from seeking qualified help, and exposes their personal financial information to a fraudster.
* The lease/buy back: Homeowners are deceived into signing over the deed to their home to a scam artist who tells them they will be able to remain in the house as a renter and eventually buy it back. Usually, the terms of this scheme are so demanding that the buy-back becomes impossible, the homeowner gets evicted, and the “rescuer” walks off with most or all of the equity.
* The bait-and-switch: Homeowners think they are signing documents to bring the mortgage current. Instead, they are signing over the deed to their home. Homeowners usually don’t know they’ve been scammed until they get an eviction notice.

General Ways to work out of debt

From the FTC

Knee Deep in Debt

Having trouble paying your bills? Getting dunning notices from creditors? Are your accounts being turned over to debt collectors? Are you worried about losing your home or your car?

You’re not alone. Many people face a financial crisis some time in their lives. Whether the crisis is caused by personal or family illness, the loss of a job, or overspending, it can seem overwhelming. But often, it can be overcome. Your financial situation doesn’t have to go from bad to worse.

If you or someone you know is in financial hot water, consider these options: realistic budgeting, credit counseling from a reputable organization, debt consolidation, or bankruptcy. Debt negotiation is yet another option. How do you know which will work best for you? It depends on your level of debt, your level of discipline, and your prospects for the future.

Developing a Budget: The first step toward taking control of your financial situation is to do a realistic assessment of how much money you take in and how much money you spend. Start by listing your income from all sources. Then, list your “fixed” expenses — those that are the same each month — like mortgage payments or rent, car payments, and insurance premiums. Next, list the expenses that vary — like entertainment, recreation, and clothing. Writing down all your expenses, even those that seem insignificant, is a helpful way to track your spending patterns, identify necessary expenses, and prioritize the rest. The goal is to make sure you can make ends meet on the basics: housing, food, health care, insurance, and education.

Your public library and bookstores have information about budgeting and money management techniques. In addition, computer software programs can be useful tools for developing and maintaining a budget, balancing your checkbook, and creating plans to save money and pay down your debt.

Contacting Your Creditors: Contact your creditors immediately if you’re having trouble making ends meet. Tell them why it’s difficult for you, and try to work out a modified payment plan that reduces your payments to a more manageable level. Don’t wait until your accounts have been turned over to a debt collector. At that point, your creditors have given up on you.
Dealing with Debt Collectors: The Fair Debt Collection Practices Act is the federal law that dictates how and when a debt collector may contact you. A debt collector may not call you before 8 a.m., after 9 p.m., or while you’re at work if the collector knows that your employer doesn’t approve of the calls. Collectors may not harass you, lie, or use unfair practices when they try to collect a debt. And they must honor a written request from you to stop further contact.

Managing Your Auto and Home Loans: Your debts can be unsecured or secured. Secured debts usually are tied to an asset, like your car for a car loan, or your house for a mortgage. If you stop making payments, lenders can repossess your car or foreclose on your house. Unsecured debts are not tied to any asset, and include most credit card debt, bills for medical care, signature loans, and debts for other types of services.

Most automobile financing agreements allow a creditor to repossess your car any time you’re in default. No notice is required. If your car is repossessed, you may have to pay the balance due on the loan, as well as towing and storage costs, to get it back. If you can’t do this, the creditor may sell the car. If you see default approaching, you may be better off selling the car yourself and paying off the debt: You’ll avoid the added costs of repossession and a negative entry on your credit report.

If you fall behind on your mortgage, contact your lender immediately to avoid foreclosure. Most lenders are willing to work with you if they believe you’re acting in good faith and the situation is temporary. Some lenders may reduce or suspend your payments for a short time. When you resume regular payments, though, you may have to pay an additional amount toward the past due total. Other lenders may agree to change the terms of the mortgage by extending the repayment period to reduce the monthly debt. Ask whether additional fees would be assessed for these changes, and calculate how much they total in the long term.

If you and your lender cannot work out a plan, contact a housing counseling agency. Some agencies limit their counseling services to homeowners with FHA mortgages, but many offer free help to any homeowner who’s having trouble making mortgage payments. Call the local office of the Department of Housing and Urban Development or the housing authority in your state, city, or county for help in finding a legitimate housing counseling agency near you
Credit Counseling and Debt Management Plans

Credit Counseling: If you’re not disciplined enough to create a workable budget and stick to it, can’t work out a repayment plan with your creditors, or can’t keep track of mounting bills, consider contacting a credit counseling organization. Many credit counseling organizations are nonprofit and work with you to solve your financial problems. But be aware that, just because an organization says it’s “nonprofit,” there’s no guarantee that its services are free, affordable, or even legitimate. In fact, some credit counseling organizations charge high fees, which may be hidden, or urge consumers to make “voluntary” contributions that can cause more debt.

Most credit counselors offer services through local offices, the Internet, or on the telephone. If possible, find an organization that offers in-person counseling. Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate nonprofit credit counseling programs. Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals.

Reputable credit counseling organizations can advise you on managing your money and debts, help you develop a budget, and offer free educational materials and workshops. Their counselors are certified and trained in the areas of consumer credit, money and debt management, and budgeting. Counselors discuss your entire financial situation with you, and help you develop a personalized plan to solve your money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions.

Debt Management Plans: If your financial problems stem from too much debt or your inability to repay your debts, a credit counseling agency may recommend that you enroll in a debt management plan (DMP). A DMP alone is not credit counseling, and DMPs are not for everyone. You should sign up for one of these plans only after a certified credit counselor has spent time thoroughly reviewing your financial situation, and has offered you customized advice on managing your money. Even if a DMP is appropriate for you, a reputable credit counseling organization still can help you create a budget and teach you money management skills.

In a DMP, you deposit money each month with the credit counseling organization, which uses your deposits to pay your unsecured debts, like your credit card bills, student loans, and medical bills, according to a payment schedule the counselor develops with you and your creditors. Your creditors may agree to lower your interest rates or waive certain fees, but check with all your creditors to be sure they offer the concessions that a credit counseling organization describes to you. A successful DMP requires you to make regular, timely payments, and could take 48 months or more to complete. Ask the credit counselor to estimate how long it will take for you to complete the plan. You may have to agree not to apply for — or use — any additional credit while you’re participating in the plan.
Protect Yourself

Be wary of credit counseling organizations that:

* charge high up-front or monthly fees for enrolling in credit counseling or a DMP.
* pressure you to make “voluntary contributions,” another name for fees.
* won’t send you free information about the services they provide without requiring you to provide personal financial information, such as credit card account numbers, and balances.
* try to enroll you in a DMP without spending time reviewing your financial situation.
* offer to enroll you in a DMP without teaching you budgeting and money management skills.
* demand that you make payments into a DMP before your creditors have accepted you into the program.

Debt Consolidation

You may be able to lower your cost of credit by consolidating your debt through a second mortgage or a home equity line of credit. Remember that these loans require you to put up your home as collateral. If you can’t make the payments — or if your payments are late — you could lose your home.

What’s more, the costs of consolidation loans can add up. In addition to interest on the loans, you may have to pay “points,” with one point equal to one percent of the amount you borrow. Still, these loans may provide certain tax advantages that are not available with other kinds of credit.

Personal bankruptcy generally is considered the debt management option of last resort because the results are long-lasting and far reaching. People who follow the bankruptcy rules receive a discharge — a court order that says they don’t have to repay certain debts. However, bankruptcy information (both the date of your filing and the later date of discharge) stay on your credit report for 10 years, and can make it difficult to obtain credit, buy a home, get life insurance, or sometimes get a job. Still, bankruptcy is a legal procedure that offers a fresh start for people who have gotten into financial difficulty and can’t satisfy their debts.

There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7. Each must be filed in federal bankruptcy court. As of April 2006, the filing fees run about $274 for Chapter 13 and $299 for Chapter 7. Attorney fees are additional and can vary.

Effective October 2005, Congress made sweeping changes to the bankruptcy laws. The net effect of these changes is to give consumers more incentive to seek bankruptcy relief under Chapter 13 rather than Chapter 7. Chapter 13 allows people with a steady income to keep property, like a mortgaged house or a car, that they might otherwise lose through the bankruptcy process. In Chapter 13, the court approves a repayment plan that allows you to use your future income to pay off your debts during a three-to-five-year period, rather than surrender any property. After you have made all the payments under the plan, you receive a discharge of your debts.

Chapter 7 is known as straight bankruptcy, and involves liquidation of all assets that are not exempt. Exempt property may include automobiles, work-related tools, and basic household furnishings. Some of your property may be sold by a court-appointed official — a trustee — or turned over to your creditors. The new bankruptcy laws have changed the time period during which you can receive a discharge through Chapter 7. You now must wait 8 years after receiving a discharge in Chapter 7 before you can file again under that chapter. The Chapter 13 waiting period is much shorter and can be as little as two years between filings.

Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments and utility shut-offs, and debt collection activities. Both also provide exemptions that allow people to keep certain assets, although exemption amounts vary by state. Note that personal bankruptcy usually does not erase child support, alimony, fines, taxes, and some student loan obligations. And, unless you have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or security lien on it.
Another major change to the bankruptcy laws involves certain hurdles that a consumer must clear before even filing for bankruptcy, no matter what the chapter. You must get credit counseling from a government-approved organization within six months before you file for any bankruptcy relief. You can find a state-by-state list of government-approved organizations at That is the website of the U.S. Trustee Program, the organization within the U.S. Department of Justice that supervises bankruptcy cases and trustees. Also, before you file a Chapter 7 bankruptcy case, you must satisfy a “means test.” This test requires you to confirm that your income does not exceed a certain amount. The amount varies by state and is publicized by the U.S. Trustee Program at
Debt Negotiation Programs

Debt negotiation differs greatly from credit counseling and DMPs. It can be very risky, and have a long term negative impact on your credit report and, in turn, your ability to get credit. That’s why many states have laws regulating debt negotiation companies and the services they offer. Contact your state Attorney General for more information.
The Claims

Debt negotiation firms may claim they’re nonprofit. They also may claim that they can arrange for your unsecured debt — typically credit card debt — to be paid off for anywhere from 10 to 50 percent of the balance owed. For example, if you owe $10,000 on a credit card, a debt negotiation firm may claim it can arrange for you to pay it off with a lesser amount, say $4,000.
The firms often pitch their services as an alternative to bankruptcy. They may claim that using their services will have little or no negative impact on your ability to get credit in the future, or that any negative information can be removed from your credit report when you complete their debt negotiation program. The firms usually tell you to stop making payments to your creditors, and instead, send payments to the debt negotiation company. The firm may promise to hold your funds in a special account and pay your creditors on your behalf.
The Truth

Just because a debt negotiation company describes itself as a “nonprofit” organization, there’s no guarantee that the services they offer are legitimate. There also is no guarantee that a creditor will accept partial payment of a legitimate debt. In fact, if you stop making payments on a credit card, late fees and interest usually are added to the debt each month. If you exceed your credit limit, additional fees and charges also can be added. This can cause your original debt to double or triple. What’s more, most debt negotiation companies charge consumers substantial fees for their services, including a fee to establish the account with the debt negotiator, a monthly service fee, and a final fee of a percentage of the money you’ve supposedly saved.
While creditors have no obligation to agree to negotiate the amount a consumer owes, they have a legal obligation to provide accurate information to the credit reporting agencies, including your failure to make monthly payments. That can result in a negative entry on your credit report. And in certain situations, creditors may have the right to sue you to recover the money you owe. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home. Finally, the Internal Revenue Service may consider any amount of forgiven debt to be taxable income.
Damage Control

Turning to a business that offers help in solving debt problems may seem like a reasonable solution when your bills become unmanageable. But before you do business with any company, check it out with your state Attorney General, local consumer protection agency, and the Better Business Bureau. They can tell you if any consumer complaints are on file about the firm you’re considering doing business with. Ask your state Attorney General if the company is required to be licensed to work in your state and, if so, whether it is.

Some businesses that offer to help you with your debt problems may charge high fees and fail to follow through on the services they sell. Others may misrepresent the terms of a debt consolidation loan, failing to explain certain costs or mention that you’re signing over your home as collateral. Businesses advertising voluntary debt reorganization plans may not explain that the plan is a bankruptcy filing, tell you everything that’s involved, or help you through what can be a long and complex process.

In addition, some companies guarantee you a loan if you pay a fee in advance. The fee may range from $100 to several hundred dollars. Resist the temptation to follow up on these advance-fee loan guarantees. They may be illegal. It is true that many legitimate creditors offer extensions of credit through telemarketing and require an application or appraisal fee in advance. But legitimate creditors never guarantee that the consumer will get the loan — or even represent that a loan is likely. Under the federal Telemarketing Sales Rule, a seller or tele-marketer who guarantees or represents a high likelihood of your getting a loan or some other extension of credit may not ask for or accept payment until you’ve received the loan.

You should be cautious of claims from so-called credit repair clinics. Many companies appeal to consumers with poor credit histories, promising to clean up credit reports for a fee. But you already have the right to have any inaccurate information in your file corrected. And a credit repair clinic cannot have accurate information removed from your credit report, despite their promises. You also should know that federal and some state laws prohibit these companies from charging you for their services until the services are fully performed. Only time and a conscientious effort to repay your debts will improve your credit report.

If you’re thinking about getting help to stabilize your financial situation, do some homework first. Find out what services a business provides and what it costs, and don’t rely on verbal promises. Get everything in writing, and read your contracts carefully.
For More Information

For more information, see Fiscal Fitness: Choosing a Credit Counselor, at

The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint or to get free information on consumer issues, visit or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.
December 2005