Why Chapter 13 for Homeowners in Foreclosure?

       

      Last substantive blawg, we scratched the surface of the long and involved Vermont foreclosure process and hinted that a Chapter 13 bankruptcy sometimes may be an option for borrowers facing foreclosure.  As described previously, with the available modification programs such as HAMP, it is usually recommended to seek modification through the lender or through mediation before resorting to bankruptcy.  This is because the bankruptcy code specifically limits a debtor’s ability to modify their home mortgage through a Chapter 13 plan without consent. 

        Outside of home mortgage debts, a Chapter 13 debtor has a number of tools available to restructure their financial situation.  One very powerful tool is called “cram down,” which, put simply, allows a borrower to pay only the value of the collateral rather than the whole balance due under a note.  For example, if a borrower had some investment property or equipment worth $50,000, but owed $150,000 to the lender, that borrower could restructure the debt to pay only $50,000 and treat the remaining $100,000 as unsecured, paying a small percentage along with credit cards and other non-collateralized debt.  Another tool would allow that borrower to utilize what may be a lower interest rate in bankruptcy.  Finally, if that loan were already called or due in full, a debtor can instead pay that lower debt over 5 years, instead of immediately.  When dealing with loans that aren’t the debtor’s primary mortgage loan, these powerful tools allow debtors to cram-down the value, interest rate and modify the terms of certain loans.  These tools are an essential part of the bankruptcy process, utilized in all Chapters in slightly different ways, but useful modification methods nonetheless.

        When a loan is specifically collateralized by a debtor’s primary residence, however, the modification tools have been limited.  While this may seem counterintuitive, since it would seem a borrower’s home is always more important to save than investment property or equipment, the bankruptcy code specifically prohibits a Chapter 13 debtor from restructuring or modifying their home loan.  This ‘anti-modification’ provision has been in existence since the original bankruptcy code and was affirmed by the US Supreme Court in 1993.  As became all too clear in 2008, the mortgage industry, while more volatile than we may have thought, is the backbone of our economy.  The lobbying efforts for that industry are so strong, that any attempt to allow bankruptcy judges to modify home mortgages was met with strong and forceful resistance, citing the collapse of our entire economy as a result.  While most bankruptcy judges, scholars and consumer advocates would agree that allowing Chapter 13 debtors to modify or cram-down home mortgages would have gone and would go a long way toward repairing the economy, the lobby could not be overcome. 

        If no modification, what are a Chapter 13 debtor’s options with respect to his or her home?  While the modification programs are extremely helpful to those who have a chronic or ongoing hardship, they do not offer much assistance to people who are recovering fairly well from a past, temporary hardship.  Most modification programs are focused on trying to get the borrower to an affordable mortgage payment, which under HAMP is 31% of their gross income, including taxes and insurance.  This really is the upper end of “affordable” for most people.  Where prospective debtors have a household monthly income of $5,000 and a mortgage payment of less than $1,550, they will find that there are likely no modification options available, since the mortgage is already “deemed affordable.”  This is notwithstanding that they may now have an arrearage of $25,000 which has been accruing during the foreclosure case, during which the lender has refused to accept payments.  Most lenders will require the $25,000 up front or over no more than 12 months, and offer no modification for this scenario.

        Enter Chapter 13.  While the loan in this scenario can’t be modified in Chapter 13, a Chapter 13 would allow the debtors to force a reinstatement over time, up to a period of 60 months.  For debtors who have recovered from a hardship and can now pay their regular mortgage payment, plus 1/60^th of the arrearage every month (plus Chapter 13 administration costs), a Chapter 13 will allow them to save their home.  The mortgage lender can be forced to reinstate, accept regular payments and accept the arrearage over a 60 month period.  This is undoubtedly expensive, but may be the only option available for those who have recovered from a prior hardship and don’t otherwise qualify for a modification. 

        I would encourage anyone who has been through mediation or has been denied a modification for reasons such as “unable to lower PITI payment,” loan “deemed affordable” or “housing ratio too low” to consult with bankruptcy counsel and see if a Chapter 13 would assist them in saving their home.   We take the counseling aspect of our job very seriously, so that if the Chapter 13 option seems too expensive or the loan-to-value ratio on the home does not seem to make economic sense, we will take the time to discuss all available options and alternatives so that our clients can make the best informed decision as to how to proceed.  If this all seems overwhelming and technical, don’t worry!  You won’t leave OEBlaw without a greater understanding and skilled counsel to help you navigate this process.

Y Just Chillin'?

We are sure all of our loyal followers (however many there may be) have been anxiously awaiting our next installment of the Bankrupt-C Y-Blawg.  How can anyone go through a month without detailed information on foreclosures or bankruptcy or the practice of bankruptcy law in Vermont?!?! Truly frightening, we know.

Well, as much as we hate to disappoint, this will not be a blawg on foreclosure, or student loans, or the different chapters of bankruptcy...stay tuned...it's all coming soon!  Maybe it's the large cases we were working on lately, maybe it's the summer schedule or many of life's hurdles.  We won't bore you with excuses.  Today, however, it's just too dang hot.  So here is today's installment, one of OEB's mascots, Noodle the Labradoodle, enjoying a bit of that fine OEBlaw air conditioning, just chillin'.

We hope everyone has a fun, relaxing, safe and happy Fourth of July weekend.  We should all take a lesson from Noodle and enjoy some time just chillin'.!
(although for now we are all diligently working away surrounded by a/c, so give us a call...someone is just about always here!)

Why Foreclosure Mediation?

Why Foreclosure Mediation?  The Vermont foreclosure process is lengthy and complicated, so there is no way to substantively address the process in sufficient detail in one blawg entry.  But you can’t get anywhere in life without trying, so here goes…

Despite all the press out there about robo-signings, bad affidavits, lost notes and gross misdeeds by banks, the fact remains that the majority of foreclosures are initiated after legal cause and standing has been painstakingly researched by the lender’s counsel.  Vermont has all but taken care of many of these problems by requiring lenders to jump through hoops in order to even file a foreclosure case.  While it is not always the case, and seeking counsel is always recommended, in most cases, the borrower will find that the lender has their substantive legal ducks in a row.  Now whether the actual accounting is in order and whether a larger servicer has lost or misapplied checks is a different issue all together, but that comes later.

In order to actually foreclose in Vermont, in most cases the lender has to: file the proper paperwork, notify the borrower of their rights, including the right to mediation, get a judgment from the Court if there is no response with an accounting, give an occupying homeowner 6 months to redeem (ie pay off the debt in full), and thereafter set an auction for sale.  The process, then, barring no complications, takes no less than 8-10 months.  If a borrower answers, challenges the default, requests mediation or otherwise participates or objects, the process can be even longer. When considering the process and that the end best result for the lender is likely merely ownership of the property, it is safe to say that in the vast majority of the cases, the lender doesn’t actually want to complete a foreclosure—the lender just wants to be paid.  While this is generally true for all lenders, it is especially true for the large national mortgage servicers, as explained below.

 

As a result of the bailout, many mortgage servicers are required to comply with various home retention and modification programs, the most popular being the HAMP, Home Affordable Mortgage Program.  Under these programs, servicers are incentivized to offer modifications to borrowers that reduce their payments and make the home affordable.  In order to do so, many of the programs lower the interest rate considerably, stretch out the term and defer or even eliminate principal, depending upon the borrower’s income and home value, among other things.  The standards for each program are extremely rigid.  Only with strict compliance to the documentation guidelines can a borrower get a modification offer.  While some seem ridiculous, (“what do you mean you need the blank ‘balance your checkbook’ page 3 of my bank statement?”), servicers cannot deviate from the fraud prevention measures and auditing standards.  No modification of any kind will be offered without the lender receiving a complete documentation package that they can send to underwriting.

Enter mediation.  The Vermont mediation process provides a forum for this documentation exchange and review to be policed. The mediation program was created in response to horror stories about borrowers being denied or not even reviewed for HAMP and other government programs based upon an arguable failure to provide documents.  The borrowers insisted that all necessary items were sent; the lender cited to missing documentation.  While I have no doubt that the larger lenders and servicers have lost or misplaced their fair share of documentation, especially in the early days of the programs, I also have no doubt that borrowers have failed to complete the paperwork based upon poor communication, assumptions regarding the requirements and mistrust.  Surely it would be logical to assume that the page 3 described above would not be needed, but that assumption would be wrong!

 

The mediation program allows effective communication to enter the process where the exchanges between the parties and the review under documented programs can be policed by the mediator and ultimately by the Court.  Borrowers do not have an absolute right to modify their obligations under the note, so modification is not always the outcome.  But when the loan is modified, the case is ultimately dismissed.  

If modification is not an option, the process at least insures that the parties are communicating and that all foreclosure alternatives have been considered.  Loan balances and payment application can be reviewed, as well as the specific reasons for a denial of modification.  Borrowers can ask questions about the status of the foreclosure case and sale date, which may result in them seeking counsel to explore other options, such as a Chapter 13 bankruptcy.  Since the onset of the mediation program, a good percentage of borrowers have successfully modified their mortgages and have been able to keep their homes, which is a win for both sides.  And isn’t that what mediation is all about—reaching a solution where everyone gets something they want?

Y-Vermont, revisited.

Spotted at OEB law-- one modern lawyer in action!  Don Hayes is sporting the casual look, complete with Khakis, Keenes, and of course one chillin’ bundle of joy.  We here at OEB law go with the flow, because that’s the Vermont way of doing things.  About 10 years ago, I, too, sported the office bassinet having taken, oh, 2.5 weeks off throughout my whole cesarean ordeal.   We were in the midst of a rather large case and I did not have the luxury of taking more time.  Everybody here was accommodating and understanding as always-- as I dove right back in, baby in tow.

Some days, we take the 11:59:59pm electronic filing deadline literally.  We channel our inner New Yorkers and stay until the wee hours to meet that due date.  On any given day we may have hours of 6am-4pm for one, while they are 9am to 8pm for others.  Soccer tournament? Tennis?  No problem!  Just make it up another time.  Ray Obuchowski can be spotted here on most weekends because that is when it is quiet.  We are flexible with our clients’ schedules as well.  If anyone understands that life happens, it is a bankruptcy lawyer.  Hearing all of the humbling stories from clients teaches us to enjoy every minute of life, while simultaneously diving into the law practice with both feet (sometimes 4…see photo #2).

Like many other Vermont law offices, you may come to OEB law to find a dog, or a baby, or an attorney wearing an old T-shirt, but no matter what else you see, you are guaranteed to find live humans who are caring, hard-working professionals.  Unlike the bankruptcy debtor in the recent US Supreme Court case, Law vs. Siegel, who fabricated a mortgage to create the illusion of less equity in his home, our Vermont clients are also honest, hard-working people looking for a fresh start or solution to their unfortunate situation.  There is no place I’d rather practice law.  We strive to be accessible, knowledgeable and practical, because that is the Vermont way! 

Stay tuned for our next y-blawg, commencing our substantive law series – First up? Foreclosure!

Y-Business bankruptcy?   The area of business bankruptcy is extremely specialized.  The bankruptcy code is so complex that a business bankruptcy filing is not to be undertaken lightly. Under the right circumstances, a business can completely turn around, being limited only by the creativity of the people involved. Even if a bankruptcy filing isn’t the right course of action for a particular business, the same bankruptcy concepts and knowledge can be used to assist a troubled business in moving forward in a positive direction.

         Why do I enjoy assisting businesses? From a bankruptcy lawyer’s perspective, one of the best parts of assisting businesses is working with the skilled, smart and dynamic personalities of the at-times successful ventures. I have met so many amazing entrepreneurs over the years. Another positive aspect is learning about various types of thriving businesses where formerly I had no familiarity. Where else can mere lawyers get to deal with asbestos mass torts, railroad switchyards, construction businesses, truckers, loggers and manufacturers who deal with almost every raw material imaginable? It is important to become somewhat familiar with the processes so that you are better able to understand the options for the business. 

        While consumer bankruptcy practice is extremely rewarding, especially in light of the true relief that we can assist individuals in achieving, business bankruptcy adds another layer of intellectual stimulation you can’t always get from the more routine consumer cases. Even after countless years in the field of bankruptcy, a business case can involve a section of the bankruptcy code that we’ve either never encountered or never really utilized fully. During those more complex cases, we small-town Vermont lawyers get to interact with and work with some of the most skilled bankruptcy legal minds in the country. With all that creative thinking, the possibilities are endless!

Y- Consumer Bankruptcy Law?

         Y-Consumer bankruptcy law?  Why do I enjoy practicing in the field of consumer bankruptcy law?  This is an easy one.  Did you ever wish you had a magic wand you could use to make problems simply vanish?  Doesn’t everyone?  Bankruptcy is a unique area of law where under the right circumstances and when the case is prepared correctly, relief magically appears!  Obviously it isn’t magic, and the bankruptcy laws are extremely complex.  But in what other area of the law can you fix problems relatively quickly and inexpensively and provide a complete fresh start?  Bankruptcy erases bad luck and bad choices, allowing the client to start over and build anew.  

 

Other practitioners assume bankruptcy is depressing because clients are struggling, having reached a complete low-point in their lives.  But in reality, the practice has the complete opposite effect.  Generally, clients are truly happy with the result and can move forward with a huge weight lifted off of their shoulders.  Sure in other areas of law, winning a long legal battle can have the same effect, but nothing is as quick and efficient as a simple Chapter 7 bankruptcy case in making problems disappear.  

 

 In our practice, we are constantly reminded that bad things happen to good people, which of course is humbling and somewhat depressing.  But by recognizing this, we have the ability to objectively distill the issues in each case, without judgment, and figure out the best way for the client to move forward in a positive direction.  The vast majority of clients say they feel that the weight has been lifted even just after the initial consultation. 

 

I would implore anyone who is struggling to stay afloat to consult with a bankruptcy lawyer early enough so that all options can be explored.  Bankruptcy is undoubtedly a last resort and is not always the best option.  We will be the first to suggest alternatives if they truly apply.  Our job is to listen and find out the best options for each client.  And just maybe, the client might be a perfect candidate for that magic wand. 

       Y-Blawg?  With all the blogs out there, why blog?  Sure, blogs are a way to start a conversation, share knowledge and experiences and familiarize the reader with your subject matter.  The most important aspect, though, is the blog’s ability to bring the reader closer to you.  Law by its nature is very impersonal and almost always seems to find a way to de-humanize a process.  When looking for a bankruptcy lawyer, certainly knowledge and experience are foremost. But then what? A client wants to work with someone that they are comfortable with.  Someone a client can feel like they ‘know’ even if they’ve never been over to the lawyer’s house for tea.  So blog #1 is about me!

 

I’m not going to repeat my bona fides here.  You can read about my federal clerkship, years in practice, teaching experience and my work with the Vermont Bar Association on our website.  Not to toot my own horn, but when it comes to bankruptcy law, I know my stuff.  I’d have to!  I chose to stay in Vermont after my clerkship, despite the ridiculously low pay scale, because I met my husband here in 1992.  We were in love with the State almost as much as with each other.  Where else can you still leave doors unlocked and really know most of the people you deal with on a regular basis?  With all its beauty and amazing people, there is nowhere else I’d rather be.  I live very close to the office with my husband, son and our shaggy labradoodle.  We love to play tennis, to hike and to just be outdoors.  My husband, being from Ireland, is obsessed with soccer, as is our son, so much of our spare time of late is trekking to and from games and practices. 

 

What I hope you will notice when you come in for a consultation is that I truly listen.  Because of the nature of my practice, no one wants to come see me.  I realize that.  Everyone’s story does have some element of similarity, whether it be bad luck, bad choices, bad health, bad relationships – something bad. But by recognizing that no one wants to see me, I also recognize that everyone wants to tell their story as to how they got to where they are.  And I want to listen, because no two stories are exactly alike. You can’t fully gauge the best options for someone without knowing where they came from and where they want to go.  We provide a sympathetic ear combined with the knowledge and experience necessary to move forward in a positive direction.