When Should I See a Bankruptcy Lawyer?

Remember that old Master Card commercial? You know the one that went something like this: Your daughter’s dream wedding dress $3,000, securing the perfect venue for the wedding $5,000, feeding over 100 guests $10,000. Seeing your little baby girl walking down the aisle for the first time…priceless. Some things in life money just can’t buy, for everything else, there’s Master Card.

And how in the world does this relate to bankruptcy?

Well, here is my version of this commercial with a twist:

Being forced into filing a chapter 13 instead of a chapter 7 bankruptcy because Susan’s salary has increased from $60,000 to $70,000 after putting off filing for several years=$10,000 in unnecessary payments.

John’s decision to file for bankruptcy AFTER the foreclosure sale has occurred instead of before and depriving himself of this expense on the means test = an additional $15,000 in payments.

Joe’s decision to move out of the marital home after he and his wife have decided to file for divorce and thereafter deciding to file for bankruptcy necessitating a  chapter 13 bankruptcy filing due to his high earnings =$20,000 in wasted payments.

Seeing a bankruptcy lawyer well in advance, when you first detect trouble, so that you can formulate a plan and know your options, priceless!

We hear it all the time, life is all about timing, and when it comes to bankruptcy law, that is especially true. The timing of the bankruptcy filing can make a huge difference. In other words, procrastination, as usual, can lead to problems. So, whether you live in Alexandria, Virginia or some other part of the Commonwealth, go and see a bankruptcy attorney and get his/her advice.  Notice that I said go and see a bankruptcy attorney; you don’t necessarily have to hire them, just get yourself informed.

And in case you are wondering, the names I have used in this article are indeed fictitious, but the factual scenarios regrettably are not. Most bankruptcy lawyers offer a free initial consultation. Take advantage of that now, instead of later. At the very least arm yourself with information.

Can I avoid foreclosure with a Loan Modification?

When it comes to loan modifications and the Home Affordable Modification Program (HAMP), the old mantra of, “Hope for the best, but prepare for the worse” could not be more true. Unfortunately, for most homeowners who are counting on a HAMP loan modification in order to prevent a foreclosure on their home, the ordeal they face is just a stepping stone to bankruptcy.  But before I get ahead of myself with my explanation of why so many people who are in the loan modification process end up visiting a bankruptcy attorney and wind up in bankruptcy court, I would like to address the fundamentals of the HAMP loan modification process and why it has garnered so much deserved criticism.

How do loan modifications under HAMP work?

HAMP is “supposed to” (and if there was ever a time to state strong emphasis on “supposed to” this would be it) reduce a borrower’s mortgage payment to no more than 31% of the homeowner’s monthly gross income.  That is, if the homeowner is able to demonstrate that their current mortgage payment is no longer affordable due to a financial hardship.  You are supposed to be given a temporary 3 month loan modification, after which time, a decision is supposed to be made to determine if you qualify for a permanent loan modification. The whole purpose of the program is to reduce your monthly mortgage payments after you have suffered a financial set back and allow you to avoid facing a foreclosure of your home.

So what’s the problem with the HAMP loan modification program?

 

It is an extremely long and grueling process that rarely results in the banks agreeing to a loan modification.

While at Church on Sunday with my wife (we were celebrating our 1 year anniversary that day by the way), I read something interesting that struck a cord with me.  Mind you, this is not a religious message, but a short story about struggle and persistence.  The homily spoke about Jesus telling a parable on the necessity of never losing heart. In the story of a widow who suffered injustice from her opponent, the judge was hardhearted, unconcerned with her rights or God’s justice. The woman persisted in her demands, yet he refused to listen. Eventually, though, the judge was worn down by the woman’s pleas and settled the case in her favor.

As has been documented time and time again since the HAMP program was launched last year, if you intend to secure a loan modification, then you had better be extremely persistent and be prepared to wear down the mighty banks.  Like the Judge in the foregoing story, the banks will be hardhearted and unconcerned.  Expect to make dozens and dozens of calls, faxes, letters, and so forth to the banks, all while being given different responses perhaps in the same day.

Who enforces the HAMP loan modification program? Who enforces the HAMP guidelines and ensures that people who qualify for a loan modification do in fact get one from the bank?

 

No one. The HAMP program is voluntary.  The HAMP program is not law.

Contrary to what some may think, you are not entitled a loan modification.

The banks are not legally obligated to give you a loan modification even if you are able to demonstrate, as so many people have, that you qualify for a loan modification.  And despite the hundreds of articles that have been written on the subject, I have been amazed at how little emphasis there has been to highlight this fact. That is until I read the Washington Post article this past weekend titled “With a change in approach, housing crisis can be eased” by Ezra Klein. And so, while the Treasury Department might give the banks a talking to from time to time, to date, despite such legal arguments as “third party beneficiary,” there has been no judge in the country that has ruled that banks must, and not merely ought to, approve a loan modification when the circumstances and numbers are there.

Are permanent loan modifications really permanent?

No. The term “permanent loan modification” is actually somewhat deceitful.

The reason I say that is because there is nothing permanent about the HAMP loan modification program.  There is a reason that you will see some articles putting the word permanent in quotation marks. If you are in the minority, those fortunate enough to emerge from this hellish process with that sought after “permanent” loan modification, then you need to understand that while cracking open that bottle of champagne might be in order, this is not in fact a permanent solution.

The terms of your “permanent” loan modification will only last for five years. What happens after five years? Well, that very low interest rate that you currently have, which has allowed for your much smaller mortgage payments, will be increased by 1% every year until it reaches a certain Freddie Mac cap rate.  So, eventually (granted, years down the road) your mortgage payments will once again reflect roughly what you were paying before you were approved for a loan modification.

What happens to the money that is reduced by the banks if a loan modification is granted?

The banks are not giving you principal reduction.  The difference between the original mortgage payment that you were paying and the monthly payments that took effect during the temporary and so called “permanent” loan modification period are not forgiven. The amount of savings is actually set aside in an account that the homeowner must pay upon sale, refinance or the maturity of the loan.  So, those tens of thousands of dollars that you are able to save during the 5 year “permanent” modification period will have to be paid back to the banks eventually. As with student loans, this is basically a deferment.  And as with any deferment, it will help you in the short run but it hurts you in the long run!

How do Debt Settlement Companies work?

Debt settlement companies are smart.  They know your weakness. They know that for the majority of folks out there, filing for bankruptcy is the last thing in the world they would ever consider doing.  Debt settlement companies understand all too well that there are people out there like my Dad who would rather cut off his left hand and go without food and water for a week then be branded “bankrupt.” For most, filing for bankruptcy is simply viewed as not an option. Debt settlement companies know this, and they play on your vulnerability. Debt settlement companies purport (strong emphasis on purport) to offer you an out that will be your salvation while at the same time relieving you of the need to file for bankruptcy. The problem is, debt settlement simply does not work.

In theory, debt settlement is supposed to work as follows: Rather than paying the full amount that you owe to your credit card companies, debt settlement companies, using their “savvy business skills” will negotiate with your credit card companies and get them to accept only one half of the amount you owe.

Now, let’s look at the disadvantages with debt settlement companies.  First, debt settlement companies will claim that using their services will save your credit score.  That simply is not true.  Debt settlement companies might be telling you, or you might be telling yourself, that filing for bankruptcy will destroy your credit score whereas using the debt settlement route will avoid this huge blemish on your credit report. What’s the problem with this logic? Well…ah…it’s wrong. The majority of people when they are at the crossroad of bankruptcy vs. debt settlement have a credit score that is, well, how should I put this, pretty bad. Filing for bankruptcy at this point will not harm your credit score. If you credit score is below 600 there is not a whole lot left to harm.  In fact, filing for bankruptcy will stop the bleeding and give you the opportunity to start to rehabilitate your credit score.

What about the people who are still hanging on, making their minimum monthly payments and have a credit score that is 600 or higher? Aren’t they better off choosing debt settlement to avoid bankruptcy? Well, that brings me to my next point; using a debt settlement company will destroy your credit score.  One of the first things a debt settlement company will tell you is to stop paying your credit card companies and start making monthly payments to them instead.  They will go on to explain that once they have accumulated 50% of your outstanding credit card debt they will then enter into negotiations with your credit card companies to settle your debt. For most people that typically means several years of payments to their debt settlement company. What’s the problem with this seemingly logic tactic? Well, within 2 to 3 months your credit score will be severely damaged.  After 1 year, it will be completely destroyed.  Credit card companies want timely payment from you every month and they can care less that you are working with a debt settlement company.

And here comes problem number three; debt settlement companies leave you exposed. If you think that credit card companies are going to sit idly by while you are making payments to your debt settlement company then, I hate to tell you, you are simply mistaken. Credit card companies will eventually sue you, get judgments, and seek to garnish your wages, all while you are making payments to your debt settlement company. And what happens when you complain to your debt settlement company? After a whole bunch of nonsense and run around, your debt settlement company may have the temerity to suggest that you should file for bankruptcy.  In fact, here comes the kicker, they might even encourage you to retain their services for the filing of your bankruptcy as well.

The remaining problem with working with a debt settlement company comes down to dollars and cents. They want a whole lot of money and they want it upfront.  Moreover, the money is non-refundable, regardless of whether you successfully complete their payment program! Meaning, during those initial six to twelve months of payments, virtually all of that money is going into their pockets.   Debt settlement companies typically want 15% of your credit card debt as their fee, plus some additional junk fees.  For instance, if you have $40,000 in credit card debt, expect to pay them at least $6,000 for playing the middle man.  Not to mention the fact that for most folks being put on a payment plan of anywhere between $500-$1000 per month for several years is next to impossible.

So, are there any benefits to using debt settlement companies? Does my article speak the truth or offer you a biased opinion of a bankruptcy lawyer? Are you wondering what sort of track record do debt settlement companies have? Read the following articles to see for yourself: The New York Times article Peddling Relief, Firms Put Debtors in Deeper Hole as well as

A Shocking Peek Inside the Seedy World of Debt Settlement Companies by Avvo.