Palm Springs Law Blog

I don’t handle most types of real estate issues in my practice, but so many of my bankruptcy clients are in dire straits because of their mortgage situation that I must try to prevent them from losing their homes. Nearly 10 million homeowners in the U.S. are at risk of foreclosure and need to take action.

We know that lenders contributed to, and sometimes caused the mess by offering risky loans to people, and then by foreclosing on many properties without following the rules.

In fact, a general lack of strict rules in the home loan industry often allowed unethical and predatory lenders to operate freely and without oversight. 

New federal and state guidelines are in place, with more on the way. There are programs to help homeowners avoid foreclosure. If you or someone you know is having difficulty making mortgage payments, or equity in the property is less than the mortgage, here is some information that may help:

• First, NEVER pay an agency or organization an up-front fee to negotiate a loan

modification for you. In California, such fees are illegal. Even so, there are scam artists everywhere trying to take advantage of distressed homeowners. If you encounter one, report it right away to the California Department of Justice.

• The Home Affordable Refinance Program (HARP) has been in place for some time for loans backed by Fannie Mae and Freddie Mac (about 60% of all California mortgages). It allows homeowners current on their monthly payments, but unable to refinance because of the drop in value of their homes, to refinance at today’s low interest rates and secure a lower monthly payment. But lenders were reluctant to negotiate with homeowners because of liability and other issues, strict requirements for homeowners’ credit ratings and income, and other tight rules. The original hope to help 3 to 4 million homeowners fell way short, with only about 822,000 actual mortgages refinanced.

• HARP 2.0 is a redesigned refinance program which is taking effect right now. Many of the limitations and restrictions of the original plan have been removed, so that more lenders are likely to participate, and more homeowners likely to qualify. The program requires Fannie and Freddie to update their automated loan underwriting and approval software, which was to be completed in March 2012. You must have made at least 6 consecutive on-time mortgage payments, and your equity in the home must be less than 20%.

• The nationwide settlement with 5 major banks, Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial a few weeks ago, will reduce home loans for up to 1 million homeowners across the country. California will receive up to $18 billion, to be used to modify loans for homeowners who are behind in their payments, repair blight in neighborhoods where there were multiple foreclosures, and other actions to alleviate the abuses that occurred in the home loan industry. This agreement does not apply to home loans held by Fannie and Freddie.

• California Attorney General Kamala Harris is promoting a package of bills called the California Homeowner Bill of Rights, which would prohibit many of the unethical and risky practices of lenders, write the terms of the 5 bank nationwide settlement into state law and apply it to all lenders, investigate and prosecute foreclosure crimes, and give homeowners, renters and blighted neighborhoods new rights when properties are underwater and/or subject to foreclosure.

• The federal government has now negotiated a blanket grant of permission from many large lenders to allow homeowners to refinance their 1st mortgages when they also have a 2nd mortgage or home equity line of credit. Until now, many lenders holding 2nd loans refused to agree to refinancing of a 1st loan.

• The Small Business Administration has relaxed its rules for refinancing mortgages on small firms’ commercial property. Small businesses can now use refinancing proceeds to turn their real estate equity into working capital, to be spent on salaries, rent, utilities, inventory and other items.

When you lose a job, become injured or ill, lose a partner or spouse, or suffer any other blow to your finances, things can quickly go from bad to worse. Credit problems can really destroy your life.  Here are a few of the things that you may face:

Liens and Garnishment – If you owe money to a creditor and don’t repay it according to the terms of your agreement, the creditor may go to court and put a lien on your property; or may attach a portion of your earned income. A lien on property must be paid off when you sell the property. Garnished wages are deducted from every paycheck you receive, until the debt is repaid. Creditors are permitted to take up to 25% of each paycheck.

To garnish wages, the creditor must file an action in court, and the court issues you a summons to come to a hearing. You have an opportunity to explain why the debt is not paid, and whether you might be able to pay it soon. If you don’t attend the hearing, it is almost certain that the court will grant the creditor’s request, and the sheriff will be instructed to garnish your wages. The sheriff notifies your employer’s payroll department to start withholding money from your check, usually beginning with the next pay period.

It amazes me that so many people ignore a summons for a court hearing, and then rush in a panic to find an attorney when they receive a garnishment notice. It is often too late to do anything to prevent the garnishment once the sheriff’s notice has gone to your employer. Sometimes, if a person has severe financial problems, filing bankruptcy will stop the garnishment  -  but it takes time to file a petition. It can’t be done overnight. Most garnishment notices are received just a few days before the garnishment starts.

Cancelled or Forgiven Debts  -  Your credit card and other debts may have been written off by lenders, but you may still be on the hook because the amounts are considered taxable income to you. Creditors will send you an IRS Form 1099-C, showing the taxable amounts, and they also send a copy to the IRS, which will compare it to the tax return you file. You may not owe taxes on the amounts if you filed bankruptcy and those debts were discharged. If you did not file for bankruptcy, but your debts exceeded your assets when the debt was forgiven, some or all of it could be exempt from taxes. You must list all debts and all assets for the IRS on the appropriate forms.

Poor Credit Can Affect Employability  -  Some employers are now checking the credit of prospective employees, and passing over those with a prior bankruptcy or poor credit scores. These employers state that they believe poor credit shows a lack of responsibility. More and more states (including California) have now passed laws to restrict this practice, but often with exemptions for employees responsible for handling large amounts of cash. There are many good reasons for bankruptcy or poor credit scores, and financial problems are not necessarily a predictor of an employee’s ability to do the job.

Reverse Mortgages Can Lead to Foreclosures  -  A reverse mortgage loan allows older homeowners to convert the equity in their property into cash. This loan, the fees, and the interest on the loan do not have to be repaid until the house is sold. If any equity remains from the sale, it would pass on to you or your heirs.

But these loans can be risky. What happens if you use up the loan proceeds, and your remaining income is reduced because of medical problems, or your savings or investments run out? It is likely that you can no longer afford to pay property taxes and homeowners insurance, and if you fail to pay these, you will be in default on your loan. The lender can foreclose on your home. Instead of saving your home, you could be losing it after all.

I am pretty sure I could remove my own appendix… but should I?  It takes years of study and training to make a person into a skilled surgeon.  If I had appendicitis, I definitely wouldn’t want an amateur doing the job.  I’ve had no medical training. I’m clueless when it comes to surgical techniques.  I think everyone would think I was crazy if I risked operating on myself. 

So, why is it that so many people think they can do it themselves when it comes to serious legal issues, tax problems or critical financial planning?  It takes years of training and study to become a lawyer, a CPA or a registered financial planner.  These professionals, like doctors, have acquired skills that other people don’t have.  But when there is a legal or financial crisis, people often choose to ignore the experts, and strike off on their own. 

I have noticed over the past few years that many people attempt to file bankruptcy on their own.  I explain to all my prospective clients that filing bankruptcy is a very serious matter, and there are many complex rules that have to be followed.  Every bit of income, every debt, and all assets have to be documented and verified.  Deadlines for filing various documents have to be met.  The bankruptcy petition itself is many, many pages of questions that have to be correctly answered.  There are the federal rules which must be followed, as well as local bankruptcy rules.   An experienced attorney knows how to navigate all of those rules, and understands how the system really works.  Wise debtors let an attorney handle their bankruptcy. 

However, all too often I have to pick up the pieces (if it’s possible to pick up the pieces) after “do-it-yourselfers” who think they know the law as well as an experienced lawyer.  The fall-out is always painful, and often ugly, for the client.  And worse, that person’s actions often affect family members and others.  I’ll tell you about two recent real-life examples which should serve as a strong reminder that legal work should be left to legal professionals:

 A prospective client called me. He was in a panic.  He told me he filed for bankruptcy pro per (meaning by himself and without the assistance of an attorney), and the bankruptcy trustee was selling his house because there was substantial equity.  He wanted me to jump in and “fix it.”  He desperately wanted my help, but it was too late.  In a Chapter 7 bankruptcy, once the process is started it’s extremely difficult to stop it.  This debtor did not understand the rules, and worse, he had relied on advice from his CPA, not an experienced attorney, on how to handle his house in the bankruptcy.  The CPA had little more understanding of the bankruptcy laws than his client.  The debtor’s decision to do it himself, and to rely on advice from a non-attorney, created a very unhappy situation.

 In another sad story of a pro per bankruptcy filer, a gentleman filed for Chapter 7 bankruptcy protection.  He did not properly list his income or his expenses, and used the wrong set of bankruptcy exemptions to protect his few assets.  There were so many red flags in his case that the United State’s Trustee took a keen interest, as well as the Chapter 7 bankruptcy trustee.  This led to numerous court hearings, examinations, and requests for documents.  The debtor wanted to have his case dismissed, to basically undo what he had done, but the Judge said no.  He was denied a discharge of his debts and prohibited from filing bankruptcy again for another year.  His case remains open though, and there is still the possibility that he will lose some of his assets.

 In both of these cases, had the pro per hired an experienced bankruptcy attorney, many of these issues could have been avoided.  In the first example, an attorney hired by the debtor would have immediately identified the equity in the house and the risks associated with filing.  The attorney could have advised the client to wait to file until the house was sold, or at least provided advice on what was likely to happen.  Timing can be everything.

 In the second example, an experienced attorney would have been well aware of all of the red flags.  The attorney would have used the correct set of exemptions and made sure that the income and expense calculations were accurate.  What became a nightmare of a bankruptcy could have been an ordinary, relatively simple route to a discharge of debts and a fresh start in life for the debtor.

 Doing it yourself sounds like a good way to save money and get the job done on your own time.  The first step may look easy…   but it’s all the steps that come after that can trip you up.  And those can be terribly costly and make your life miserable, for sure.