Chicago Foreclosure Lawyer Blog

As the foreclosure crisis drags on, the time it takes to complete the average foreclosure increases. This, in turn, feeds a desire to determine the cause of the slowdown. There are obvious choices such as the incredible volume of foreclosure cases and the home owners in default who have not yet been sued. Logically, if you continue to add inputs to a closed system, it will eventually become overwhelmed by those inputs and cease to function as efficiently. The fact that we have inputs that are just waiting to be added makes this correlation even more obvious.

Even if every plaintiff's firm added 10 new attorneys to their foreclosure divisions, adding more judges is not as simple.

It seems that a meme is resurfacing to explain away the logical and obvious reasons for the foreclosure slowdown. Attorneys and homeowners are to blame. Here are two examples of this trend: CNNMoney and Foreclosure.com's blog. Central to the concept is the idea that homeowners are getting a free ride while their attorneys employ "stall tactics."

According to foreclosure.com, these stall tactics include:

• Challenging the bank's actions


• Waiting to file paperwork right up until the deadline


• Requesting the lender dig up original paperwork


• Declaring bankruptcy ( in some extreme cases)

After the jump, I'll discuss just how a purposeful and strategic foreclosure defense plan protects the rights of the consumer and is more than just a waste of time.

Continue reading "Why Foreclosure Defense Is More Than Just "Wasting Time"" »

In a meeting with 19 House Democrats on Wednesday, the director of the FHFA indicated that he would consider a proposal by California Representative Zoe Lofgren. The proposal would allow for principal reductions for underwater homeowners.

The proposal involves the use of Federal Bankruptcy courts to generate repayment plans for underwater borrowers, which would set interest rates to zero percent for five years while borrowers paid down loan principal over a five-year period. This is different than a principal writedown, where the lender would simply take a loss and return the borrower to zero or positive equity.

I have not yet seen concrete details on the proposal, but here is a letter from Rep. Lofgren that provides some detail. Based on her letter, the plan payments would go directly towards principal, with interest payments waived over the five year period.

What is not clear is whether the payments are waived in their entirety or simply treated as a forbearance. If a forbearance, then the interest payments would be tacked onto the back end of the loan, which would be less useful for reducing principal than a true waiver of interest payments.

Given that homeowners would have to waive any claims that they may have against their lenders, I would hope that the interest payments are truly waived. Otherwise, I'm not quite sure whether the deal would be worth it. At the very least, it's promising to see the idea floated back out there. Maybe this will start the ball rolling for a Chapter 13 cramdown bill.

The Nation recently published an excellent article discussing why we need to revive the bankruptcy cramdown legislation that failed to make it out of Congress in 2009.

Put quite simply, it is far and away the best possible solution to a rather big problem. Speeding up the foreclosure process (Hi, Mitt!) won't do anything to solve the problem of plummeting home values. It also means leaving over a million more Americans searching for a place to live while the most viable rental options dry up.

Allowing underwater homeowners to return their mortgages to fair market value stabilizes housing prices. It also frees up more disposable income. The payment on a $200,000 mortgage is significantly lower than the payment on a $300,000 mortgage. Here's an excerpt from the article:

According to a recent report by The New Bottom Line, a coalition of labor groups and grassroots networks, if all underwater mortgages were written down to market value and refinanced into thirty-year fixed mortgages, it would add about $71 billion a year to the economy and create 1 million jobs.

What's also interesting about the idea of a cramdown is that simply the threat of filing a bankruptcy and utilizing the cramdown power is a powerful bargaining chip for consumers. The consumer now has a clear picture of his best alternative to a negotiated solution (BATNA) -- use bankruptcy as a pressure valve, cramdown the underwater value, and move on.

But let's be clear. Cramdowns aren't some kind of "get out of jail free" card. If implemented as described in the 2009 bill, they would be an option in a Chapter 13 bankruptcy, but not in a Chapter 7. This means that anyone using the cramdown option would have to make partial to full repayments on other debts over a 3 to 5 year plan. Effectively, it would be better for the overall economy to allow Chapter 13 cramdowns because some money would be returning to creditors. A no-asset Chapter 7 filing doesn't do that.

At the end of the day, we need a real solution to the housing crisis. Cramdowns seem like one of the best options out there.

I've written about the "just walk away" movement before. I've pointed out that the "safety in numbers" theory is flawed -- there may be too many people to come after right now, but lenders have quite some time (seven years or more, depending on the facts), to come after you for a cash judgment. I've pointed out that the effect on your credit and ability to rent may be greater than you think.

This latest "walk away" article at the Huffington Post has given me something new to talk about. Ryan J. Downey opens his article with a great attention-grabber:

I made my last mortgage payment on November 1, 2009.

Bank Of America changed the locks on my house on September 29, 2011.

Almost two years mortgage payment/rent-free? Sign me up!

Before you start making origami cranes out of your mortgage statements, let's take a closer look at his article. Page one describes Mr. Downey's failed American Dream with the bravado of 20/20 hindsight. While recounting his tale, which is all-too-familiar for many Americans, he quips about the inefficiencies of First Franklin's staff, the lack of assistance from Washington, and other issues.

He is 100% correct. Too big to fail has become too big to function. Trying to obtain a loan modification or other assistance from a lender or servicer has been and continues to be a Byzantine process full of red-tape and incompetency. So far so good, right?

Downey debunks the "moral hazard" arguments we've all heard in the media. He does it succinctly and to great effect:

The banks call it "writing off a bad investment." But when a private citizen does it, we're scum? Please.

I have made the same points on this very blog. So why do I think this article could be misleading? The answer lies on page two.

Downey's home was located in Riverside, California. California is a non-recourse state. This means that banks can only repossess your home, they cannot pursue for a deficiency judgment. Again, they cannot collect a single red cent from you. There may be exceptions to this rule, but I am not a California attorney.

On the other hand, Illinois is a recourse state. The Downeys of Downers Grove are personally liable if they default on their underwater mortgages. That liability will take the form of a deficiency judgment. In the case of a wholly underwater second mortgage, it may take the form of a lawsuit for the full value of the second mortgage.

To make matters worse, you can never be sure whether you will be pursued or not. While the common folklore in Cook County, Illinois is that lenders don't pursue deficiencies in Chicago, don't expect this to hold true for very long. Bank of America just imposed a $5/month fee for using your debit card. As the #OccupyWallStreet movement gains steam, the financial sector is screaming about class warfare. And well they should, because they know their own creation.

There will come a day in the not-too-distant future when lenders will aggressively seek deficiency judgments. You see, the folks who walked away early are starting to recover their credit. They may even find the means to purchase a new home, albeit one at a realistic value and a more traditional loan structure. Those people will have properties ripe for a judgment lien.

The people just entering foreclosure now may find themselves ending the process with a wounded bank on the other side of the "v." Have you ever seen a huge animal that is injured, scared, and angry? Expect similar behavior from lenders as they scramble to recover whatever they can to keep their balance sheets in the black.

To reign the invective back in a bit, much of the "walk away" movement is founded on real frustration and an accurate picture of what's happening for the haves vs. the have-nots. A lot of these folks live in states that provide them immunity beyond a shattered credit score and the loss of their home. Illinois does not.

There are three sure-fire ways to protect yourself in Illinois: 1) Deed In Lieu of Foreclosure; 2) Consent Foreclosure; and 3) Bankruptcy. If you are ready to ditch your home and don't want to risk a deficiency, those are your best options.

Simply walking away in Illinois is a bad idea. It may work for some, but in the end, truly managed risk requires a bit more effort.

I saw this post on the Huffington Post and I find it to be pretty darn close to concern trolling. I have no idea what background the author, Brian Reed, has, nor do I know what his political ideology may be.

What I do know is that the use of the word, "terrifying," in the headline of his post is obviously intended to make filing bankruptcy seem like an ordeal best avoided. For some people, it most certainly is a bad deal. But the truths that Mr. Reed calls terrifying are not that terrifying. In fact, they're not even that bad in many cases. Let's address his points one-by-one.

1. It Will Remain On Your Credit Report For Years

Yes. This is true. In fact, most debt remains on your credit report for years. So do judgments obtained by your creditors, foreclosure lawsuits, &c. If you are filing bankruptcy on a whim, you should fire your attorney and stop. If you are filing bankruptcy as part of a well-considered and measured plan, odds are that the bankruptcy remaining on your credit is something for which you have already planned.

Again, if you were not made aware of this by your attorney, you need a new attorney.

2. Bankruptcy Filing Becomes Public Domain

Yes. This is also true. However, Mr. Reed fails to mention that the most vital personal information (account numbers, social security number, etc. ) must be redacted from all filings specifically because the information is part of the public record. Your personal information is by no means secure -- if you have interacted with a government agency, if you drive a car, if you are registered to vote, if you own a home, if your phone number is listed, if you use Facebook or other social media, your information is not secure.

I can find out all kinds of things about you from public records and a simple Google search. So can anyone else. With law student access to Lexis Nexis, I used to be able to find out what people paid for their homes. There are also plenty of paid services out there, including the Lexis Nexis people finder.

Basically, filing bankruptcy is not the first or the last time your personal information was put out into the public domain.

3. Filing Doesn't Erase All Debt

True. But how is this terrifying? If your attorney has not fully disclosed to you which debts cannot be discharged, you need a new attorney. To bolster Mr. Reed's non-terrifying point, you also cannot discharge child support payment obligations or judgments against you for injuries you caused while driving under the influence.

4. Filing Is Expensive for Those Without Money

True. You also get what you pay for. Bankruptcies starting at $100 never end up costing $100. Again, this is just part of the process. Hiring a lawyer for anything costs money. The entire concept of "hiring" someone necessarily involves the exchange of cash for services. How this is terrifying, I do not know. If your attorney is not fully disclosing fees, get a new attorney -- and possibly come after the old attorney for violations of the Bankruptcy Code.

5. Good Luck Finding a Decent Home Loan Any Time Soon

True. Mr. Reed seems to think that there are people out there in dire financial situations who are also thinking of purchasing property. In practice, this is not what we see on a daily basis. Many people considering bankruptcy are trying to save or surrender a property, not acquire new property.

For those surrendering, home ownership is not the only solution. As someone who still rents, I can say with the utmost assurance: renting is just fine and dandy.

6. Good Credit Card Offers Will Be Hard to Come By

True. However, there really aren't that many "good" credit cards out there. Many of the cards offered to poor-credit borrowers do have high interest rates and annual fees. They are also a first step towards better offers. Rebuilding credit after a bankruptcy takes time. Part of that process is the responsible use of credit. One low-limit card that is paid on time will do wonders for your score in a few months to a year. Going crazy with credit cards? That may be what put the consumer into bankruptcy in the first place. Mr. Reed seems to assume that the best plan for a recent bankrupt is to jump right back into the behavior that likely caused the filing.

Again, if your attorney is not telling you this stuff up front, you need a better attorney.

7. Missed Payments Under Chapter 13 Can Be Personally Devastating

True. Missing a Chapter 13 payment can cause your case to be dismissed. However, no trustee can force the conversion of your case to a Chapter 7 liquidation. There is an exception to that statement. If you initially file a Chapter 7, then convert to a Chapter 13 with the intention of causing your case to be dismissed (we call this "bad faith"), your case can be converted back to a Chapter 7.

The only other way you can convert a Chapter 13 to a Chapter 7 is if you voluntarily do so.

I also think that Mr. Reed overstates the zealousness of trustees in Chapter 7 liquidations. While it is true that any non-exempt assets may be liquidated to satisfy your creditors, it is also true that many trustees will only try to liquidate things that are easily liquidated. You may find a trustee who is willing to sell every last scrap of non-exempt assets, but good luck finding a buyer for that old couch or a scratched up 45 RPM version of "U Can't Touch This."

At the end of the day, Mr. Reed's post has some useful information. However, the tone contains and undue amount of sturm und drang for general "know before you file" factoids. If you are considering filing a bankruptcy, these are the things your attorney should address with you. A major part of filing a bankruptcy petition should be the careful selection of your attorney. You need an attorney that you can trust and that will give you the best possible advice given your individual financial situation and needs.

It is possible that a bankruptcy is not the right solution for you. It is possible that you cannot qualify for a Chapter 7 and that your income is not stable enough to advise a Chapter 13 filing. Anything can happen in three to five years, and that should be taken into account.

If there's one "terrifying" truth about filing for bankruptcy is is that even a mediocre attorney can do you more harm than good. Take time to interview attorneys, find one that you like. If that attorney has not advised you about Mr. Reed's seven "terrifying" truths, DO NOT HIRE THAT ATTORNEY.

It's really that simple.

This concludes this edition of "Someone Is Wrong On The Internet."

Bankruptcy practitioners sometimes refer to Chapter 20 bankruptcy. A Chapter 20 bankruptcy is when an individual files a Chapter 7 bankruptcy to liquidate debts and then files a Chapter 13 bankruptcy to strip liens on his home.

There has been some significant litigation related to Chapter 20 bankruptcies. If the Chapter 13 is filed within four years of the Chapter 7, the debtor is not entitled to a second discharge. The issue being argued in our court system is whether someone who is not entitled to a second discharge can still use the protections of Chapter 13 to catch up mortgage payments and strip unsecured/underwater mortgage liens.

A recent decision from the Eighth Circuit Bankruptcy Appellate Panel* has come down in support of the Chapter 20 strategy. The court held that even though the debtor was not entitled to a Chapter 13 discharge, he could strip the unsecured mortgage liens and pay them as unsecured creditors. Unsecured creditors receive a percentage of the money owed over the course of the plan. The court further stated that section 1325(a)(5)(B) only applied to secured creditors and thus the junior lien holders could not block the confirmation of the Chapter 13 plan.

This is good news for home owners seeking to restore some equity in their homes while also getting rid of their other debts.

* In re Fisette, No. 11-6012 (8th Cir. BAP Aug. 29, 2011),

A not-too-shocking bit of news today: There were more bankruptcies filed in 2010 than in any year since 2005. Why was 2005 a big year? That's the year that the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) went into effect. The law made it more difficult for consumers to file for Chapter 7 relief, and 2005 saw a large surge in filings by those who wanted to file before the new rules took effect in October 2005.

Obviously, the 2010 numbers are largely driven by the overall struggling economy, high unemployment, and the foreclosure crisis. It will be interesting to see if they go higher in 2011.

It will be particularly interesting to see if the growing number of underwater mortgages spurs more people to file for Chapter 7 and Chapter 13 relief. Homeowners who do not qualify/have a hard time qualifying for loss mitigation programs may turn to bankruptcy as a way to sever personal liability on their underwater mortgages and exit their home.

For instance, if you have two mortgages on your home, and the second is entirely "underwater" debt, you can use a Chapter 13 plan to strip that debt off of your home. It gets paid as if it was "unsecured" debt (like a credit card) and you are left with only the first mortgage to worry about. While this seems simple, there are many considerations that go into filing for Chapter 13 relief, in particular whether you can afford to make the payments under the plan. These are considerations that your attorney should discuss with you before you file -- not after.

In addition to foreclosure defense, our firm also handles bankruptcies for clients who can benefit from filing.

As the person who often deletes spam comments on this blog, I have been discovering that many of them are posted by other firms that engage in bankruptcy practice. Our firm also handles bankruptcy cases, but generally separately from our foreclosure defense practice.

Here is the obligatory disclaimer: We are a debt relief agency. We assist people with filing for relief under the Bankruptcy Code.

My own concerns about the ethical implications of comments that do not provide this disclaimer aside, I feel that it is important to give it before the jump. After the jump, I will talk about bankruptcy vs. loss mitigation strategies and when they are most effectively used.

Continue reading "Bankruptcy vs. Loss Mitigation" »