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If you file bankruptcy, can you do a loan modification while awaiting  discharge?  The answer depends on whether you file a Chapter 7 or Chapter 13.

In a Chapter 7, the debtor may not be able to keep the property and make  the payments unless the lender consents to a modifcation.  In a Chapter 7, there is no provision in the Bankruptcy Code for modifying a mortgage loan.  In Chapter 13, you cannot modify a mortgage loan secured on a debtor’s primary residence.  However if the lien on the house is totally unsecured, you can strip it off in a cram down.  Legislation that would have allowed that died in Congress earlier this year after opposition from the Banking Industry prevailed.  In Chapter 7 cases the case only lasts about 3 1/2-4 months.  There is no provision or program to cure the default over time, and once the discharge is entered, the automatic stay is lifted.  That means that if any arrearage or default has not been cured by that time, the lender can proceed to foreclose on the property.  The lien is not discharged in the bankruptcy, the the debtor should seek a loan modification outside bankruptcy in order stay in the house.

In a Chapter 13, the debtor needs to get approval for any kind of modification, refinancing or sale of the property, from both the Chapter 13 Trustee and the Court.  The debtor may not be able to confirm a Chapter 13 plan unless a 1st deed of trust consents to a loan modification.  The question is feasibility.  If the debtor’s plan does not propose to cure the default in the Chapter 13, the plan cannot be confirmed.  In this case, the debtor may not be able to confirm a plan and will as a result end up losing the house.  Another question is whether the loan modification would alter the debtor’s disposable income and increase the amount available to unsecured creditors.  If the debtor is able to cure default, the language of Chapter 13 provides that all disposable income must be pledged into the plan.  That might mean that if the debtor obtains a loan modification during the pendency of the Chapter 13 plan, both the plan payments and the plan need to be modified to reflect the change in disposable income reflecting decrease in mortgage payments.

The sooner you get started on a loan modification, the better.   Recent articles and anyone working the industry will tell you that it is not easy to make contact with the lenders who have been besieged with loan mod requests.  While the banks are attempting to ramp up their loan mod program staffs, the number of loans in default is expected to increase over the next two years.  As a practical matter, doing anything and everything to reduce your expenses is a good idea.

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TransUnion, a major credit reporting company predicts that mortgage  delinquency rates will continue to rising in the Sacramento area– with 12 percent of homeowners falling at least two months behind on their payments by year’s end. That figure is nearly twice the national projection and a dramatic jump from just two years ago, when less than 2 percent percent of area homeowners’ notes were delinquent.

“There are serious issues confronting the housing industry, and it’s not out of the woods by the end of the year,” Becker added. He predicted the would begin falling in 2010. It analyzed trends in the for the second quarter and offered year-end projections for the Sacramento market and the state.

Today, 60-day mortgage loan delinquency rates, i.e, the percentage of homeowners at least 60 days behind on their mortgage payments, stood at 9.62 percent, just below the state’s rate of 9.7 percent. That compares to the national rate of 5.81 percent, which is projected to rise to 6.93 percent by the end of the year.

California, Arizona, Nevada, which has the highest delinquency rate at nearly 14 percent are a tracked closely as key indicators because the 60-day threshold is traditionally seen as a step toward foreclosure.

In markets where home values have dropped most sharply, delinquency and foreclosure rates are highest. By that measure, the capitol region remains in trouble. According to First American Core Logic, more than half of Sacramento area homeowners owed more on their homes than they were worth.

“As long as housing values continue to decline, the delinquencies and foreclosures are likely to continue,” particularly at the same time as unemployment is rising. turns around, there’s not much hope for those rates to reverse. And until the housing decline will probably not change course.

TransUnion also predicted that by the end of the year, 12.2 percent of Sacramento area homeowners and more than 14 percent of homeowners statewide will be at least two months behind on their mortgage payments, as a result of double-digit percentage unemployment and unpaid furlough days. The impact is also being felt on borrowers with conventional loans and are increasingly catching up with homeowners who have “safe” fixed-rate loans. Borrowers who borrowed to stay in the house and keep up with living expenses,are now being confronted with the choice between paying their mortgage loan or their living expenses.

Despite the ominous cloud of current darkness, Becker of TransUnion predicted the sun could come out in 2010. and further predicted that the delinquency rate would fall three times faster than in the nation as a whole. With the State’s budget in turmoil on the rise, housing sales flat, it is difficult to understand the basis for this prediction.

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Following the latest news on Loan Mod Metrics, the reports on the most recent foreclosure statistics are in.

According to RealtyTrac, in July, there were more than 360,000 properties with foreclosure filings — including default notices, scheduled auctions and bank repossessions — an increase of 7% from June, and 32% from July 2008. That number represents that one in every 355 U.S. homes had at least one filing during July.

The July report marked the third time in the last five months where a new record has been set for foreclosure activity.

Those numbers indicate that neither the stimulus package or the loan mod program is working.  In fact, the rate of foreclosures and defaults is increasing.  The fact that foreclosures are delayed as people go through the loan mod process is misleading.

RealtyTrac statistics revealed that more than 87,000 properties were repossessed by lenders.  There have been a total of 464,058 repossessions — or REOs (Real Estated Owned) in industry parlance — so far this year.  Foreclosures were blamed on more option ARM resets, triggering defaults, but also on more prime loans, which are failing due to job losses.

The worst hit areas continue to be in the “sand states,” with California posting the highest number of total filings, 108,104, and Nevada posting the highest rate of foreclosure at one for every 56 homes.  The other hardest hit states are Arizona, at one filing for every 135 homes, and Florida, at one for every 154. Las Vegas, with one for every 47 homes, had the highest rate among metro areas. It’s the 31st consecutive month topping the list, a dubious honor.

This does not bode well for the recovery some experts had hoped for in 2010.

At the same time, another report by Deutche Bank predicted that 50% of homeowners would be underwater by 2010 as more option Arms kick in, noteably those of the 5/25 variety.

PR: wait… I: wait… L: wait… LD: wait… I: wait… wait… Rank: wait… Traffic: wait… Price: wait… C: wait…

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It appears that the Federal plan to revitalize the mortgage industry that was announced in February is off to a slow start. The first institutions to join began accepting applications in April.  The Treasury Department reported that only 9% of delinquent borrowers are in trial modifications. The figure represented 235,247 loans that were at least two months delinquent. The Obama administration said it was on pace to help up to four million homeowners over the next three years. That projection anticipates that there are a lot more defaults on the horizon.

After hearing a flood of complaints from borrowers who complained about lack of response to loan mod requests, Tuesday’s report came a week after the administration invited servicers to Washington, D.C., to discuss ramping up the program’s implementation. Officials want to see 500,000 loan modifications under way by Nov. 1.

The administration is apparently hoping to “hold institutions responsible” for their performance by releasing the servicer’s progress reports. The monthly reports will allow the public to see which institutions are lagging in implementing the plan. This of course assumes that the institutions could be publicly shamed into compliance or that would somehow magically rewrite loans for the borrows. The question is whether this is like asking the fox to guard the henhouse after raiding it.  If the numbers regarding the institutions’ losses were not enough to influence their behavior, it is doubtful how forcing disclosure of their record regarding implementing loan modifications is going to influence their actions.

Institutions have extended modification offers to 406,542 troubled borrowers, or only 15% of those behind in payments. The bulk of trial modifications have been done by a handful of servicers. There is an obvious staffing problem which may be a major impediment that needs to be removed before any substantial numbers are achieved.

Performance was very uneven among the 38 servicers participating in the program, which was led by Saxon Mortgage Services, a subsidiary of Morgan Stanley putting 25% of its delinquent loans into trial modifications. Saxon was followed by Aurora Loan Services, a subsidiary of Lehman Brothers Bank, with 21%.

GMAC Mortgage, which is partly owned by the federal government, put 20% of its delinquent loans into trial modifications.

Among the major banks, JPMorgan Chase came in first with 20% of late loans in trial modifications, followed by Citigroup with 15%. Wells Fargo and Bank of America lagged behind the pack with 6% and 5%, respectively.

Servicers contacted acknowledged they need to improve their performance, saying they were committed to the president’s foreclosure prevention plan. They also stressed that they were doing many modifications outside of
the administration’s initiative.

Wells Fargo said it will eliminate its backlog within weeks, attributing it to the time lag between when the government announced the initiative and when it released the guidelines. It did not start modifying loans owned by private investors until the end of June, though it began adjusting loans owned by Fannie Mae and Freddie Mac in April. The bank vowed that it soon will be able to send eligible borrowers the trial modification agreement within 48 hours. In a change from past practices, it will enroll homeowners in a preliminary adjustment right away after receiving the initial application if they meet the basic eligibility requirements. During the three-month trial, the servicer will gather additional information to see whether the borrower qualifies for a permanent modification.

Wells Fargo, Chase, Citigroup and Bank of America promised to ramp up efforts to expedite the loan process.

Bank of America also acknowledged it needs to improve its efforts to reach out to those in need. B of A, which purchased the behemoth Countrywide Financial last year, had done only 28,000 trial modifications after extending nearly 100,000.00 offers. That number accounts for nearly one in four trial modifications offered under the Obama plan, but has by far the largest number of eligible delinquent loans: nearly 800,000.

Amidst complaints of lost paperwork and lack of response, both the Obama administration and the industry are feeling mounting pressure to respond to calls and applications.

The Criteria for the Program is follows:

1) Participation by Institutions in the program is voluntary, though once an institution agrees to participate, it must offer a trial modification to those who meet the criteria. The 38 participating servicers cover 85% of mortgages.

2) The loan modification plan allows eligible borrowers who are in or at risk of default to lower their monthly payments to no more than 31% of their pre-tax income through a loan modification. Adjusting the loan must recover more value than foreclosing on the home would for a modification to be offered.

3) The adjustments are made permanent after the homeowner makes three on-time payments. Homeowners, servicers and mortgage investors receive thousands of dollars in incentive payments in hopes of increasing participation.

So far, the government has committed $20 billion to the effort and has said it would provide $75 billion overall. There did not appear to be any information on loans modified after bankruptcy proceedings were initiated or how many borrowers were in default following permanent modification or how many failed to meet the trial period.

Earlier this year, congress defeated the bill that would allow modifications of loans in the bankruptcy court with the unemployment rate growing and number of defaults continuing to rise, time will tell whether publishing reports will be effective holding the institutions responsible. Given the poor performance rate thus far in proportion to the eligible number loans, the mortgage crisis continues to slow down the economy.

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When you file bankruptcy, a fictitious legal entity is created, called the “Bankruptcy Estate.” All of your property goes to the estate, and can be liquidated by Bankruptcy Trustee for the benefit of your creditors. That’s the bad news. The good news is that you are entitled to keep whatever you can claim as “exempt.” Your exemptions vary from state to state, so one of the reasons why you need to get a bankruptcy lawyer is to make sure you keep your stuff by claiming the appropriate exemptions.

Some states, like California, have opted out of the Federal exemption systems, and under California law, you can claim exempts under two different exemption statutes found in the California Code of Civil Procedure. The property in your estate is determined at the time of filing, so if you have non-exempt assets, doing some appropriate exemption planning may be necessary. If your property is not exept, or if you fail to claim the appropriate exemptions, you may lose your stuff.

The concept of the “estate” also differs depending on which Chapter you file under. If you file a Chapter 7, your estate is determined at the time of filing; any income you earn after that is yours. If your income changes dramatically between the time of filing and the your meeting of creditors, you might face a motion to dismiss or convert your case to Chapter 13 under the theory that your filing is not in good faith.

Although, your property may be exempt, the exemption goes only to the amount of equity in the property. For that reason, until the time passes for creditors or the trustee to exemptions, you should not dispose of any of your property after filing. If you claim an exemption in a homestead, for example, you need to get the trustee’s permission before doing a short sale of the property or otherwise disposing of your house, because if the trustee or creditor objects to your exemption amount, you are going to have a problem if you transfer the property to a third party before your case is over or the time has passed to object to exemptions. When in doubt ask first. In the bankrkuptcy court its better to get permission than to seek forgiveness.

The concept of the estate also varies in Chapter 13 and Chapter 11. Unlike Chapter 7, in a Chapter 13 or Chapter 11 your income or all earnings necessary to implement the Plan are property of the estate.

Partial interests in property, such as joint interests in real estate or being a co-signer on a checking account can be deemed as property of the estate, even if it has nominal value. You need to disclose all your assets and all your debts, so even if you equitably have little or no interest in property, legally you may have an interest that is greater than you claim. That can lead to a dispute over the amount of the appropriate exemption and the extent of your interest in the property. So the moral of the story is that when in doubt disclose it to your bankruptcy lawyer. If your lawyer doesn’t know about it, he cant’ help you protect it.

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CHAPTER 7
What is Chapter 7?

The most common form of Bankruptcy is a Chapter 7 or straight liquidation Bankruptcy. You get rid of all your debts that are “dischargeable,” like credit cards, medical bills, personal loans, paydays, deficiencies following a repossession or foreclosure and other unsecured debts. You get to keep whatever property is “exempt” according to State and Federal Law.

CAUSES OF FILING BANKRUPTCY:

The chief reasons people seek bankruptcy protection is to stop foreclosures, repossessions, wage garnishments, lawsuits and the neverending harassment of abusive debt collectors. Although most people would willingly pay their debts if they could circumstances like divorce, uninsured medical expenses, catastrophic illness or accident, downsizing, outsourcing, job loss, and just life all contribute to the filing of a bankruptcy.  Like any experience, the trick is to learn the lessons from life and not make the same mistakes that led you to where you are.

DISCHARGING DEBTS

The reason why most people file Chapter 7 is to take advantage of the Chapter 7 Discharge. Most unsecured debts are dischargeable, such as credit cards, medical bills, payday loans, personal loans, and other debts such as a deficiency following a foreclosure or repossessed vehicle. Some things, however, are “excepted” from or not subject to discharge, such as taxes that are fresher than 3 years old, spousal support and child support or domestic support obligations, students loans, intentional torts, and money or property obtained by fraud, i.e., knowing you can’t pay it back.

The way as Bankruptcy case works is like this:  You have to file paperwork with the court called “the Petition”.  Your petition is basically a description of your assets and debts, and a description of your financial transactions in the past few years.  Its not designed to question why you got there, it’s only trying to see where circumstances find you.

The discharge can be entered 60 days after first meeting of creditors. 99% of Chapter 7 filings are uncontested, and a creditor has to have specific reasons for objecting to your discharge which usually involves fraud. In order to dispute your bankruptcy, a creditor has to file a complaint objecting to the Discharge, an Adversary proceeding in the Bankruptcy Court. Once the discharge is entered, your creditors are permanently barred from making any further attempts to collect on their debts and are prohibited from contacting you again! That’s the whole point of a Chapter 7 Bankruptcy.

Secured debts, such as car loans, mortgage loans, and some types of loans involving personal property, survive a bankruptcy filing. That means that you have to keep paying those debts even after you file, by entering into a “Reaffirmation Agreement”19 and agreeing to remain personally liable ono the debt.

THE CHAPTER 7 DISCHARGE:

The goal of a Chapter 7 is to receive a Discharge and get rid of all your debts, credit cards, medical bills, payday loans, personal loans, judgments, deficiencies following a repossession or foreclosure and any other unsecured debt. When the discharge is entered, your creditors are forever barred from contacting you or taking any further action to collect on any debt. They can’t come back years later to see if you are then able to pay them. The credit reporting agencies are required to report your debts as discharged. There can be sanctions imposed against anyone who violates a discharge order, so you can finally live in piece after the Discharge is entered on the court’s files.

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