By Jesse Callahan
Arizona’s economy is struggling through a perfect storm caused by the implosion of the construction and real estate industries and exacerbated by record high unemployment. Many people are struggling to pay their day-to-day expenses and, in some cases, they must choose between paying an “upside down” mortgage or their living expenses. For some, bankruptcy can provide much needed relief from these turbulent economic times, but many choose to avoid bankruptcy—for a variety of reasons—or they simply wait too long to take action. This article addresses some of the most common misconceptions people have regarding bankruptcy, and shows how bankruptcy alternatives, such as short sales and loan modifications, frequently make matters worse and serve as mere preludes to an eventual bankruptcy filing.
Many people mistakenly think they will lose their home if they file for bankruptcy. A debtor who files for bankruptcy can, however, usually keep his or her home as long as they are current on their monthly payments. In fact, a debtor can often go through a bankruptcy, reaffirm his primary mortgage, fully discharge his second mortgage, and come out still owning his home and immediately building equity. This can be the key to getting back on track to financial success.
Lenders are quick to offer a loan modification program for two primary reasons: 1) many lenders receive a fee from the federal government for each loan modification they make, and 2) the loan “modification” typically involves keeping intact the first and second mortgages, temporarily reducing the monthly payments and adding years of extra payments to the end of the loan. In many cases, the lender merely extends the life of the loan (thus collecting additional interest), and receives a check from the federal government for doing so. This may be a good deal for the lender, but it is not always a good deal for the borrower.
In addition, lenders will almost always require a borrower to go into default for up to three months prior to considering a loan modification request. Because the borrower is then in default, the lender has the right to start a trustee’s sale to sell the borrower’s home in the event the loan modification request is denied. Clients bring us stories of this troublesome situation all too often, thinking they were in the middle of a loan modification process and that the lender, therefore, could not foreclose on their home. Unfortunately, the lender is within its legal rights to do so.
A “short sale” is the sale of a house for less than the amount owed on the mortgage or mortgages. A short sale requires the lender’s permission. The standard short sale agreement proposed by most lenders is typically not fully understood by the borrower and may include a provision waiving the borrower’s protections under Arizona’s anti-deficiency statutes. In a short sale transaction, without proper documentation and legal counsel, an otherwise unenforceable deficiency claim can become a significant liability. Obviously, this is exactly the opposite result sought by people going through a short sale and, in the end, may actually force the borrower to file for bankruptcy.
We frequently hear cases where a person strategically allowed their home to be foreclosed on. In reality, there is nothing “strategic” about such a decision. A foreclosure is, in our opinion, always a less desirable alternative than bankruptcy. In fact, in evaluating a person’s creditworthiness, a foreclosure on a credit report generally is worse than a bankruptcy or a tax debt. In our experience, a lender would prefer to work with a borrower who filed for bankruptcy protection, rather than with one who has a foreclosure on his record.
A common pitfall for people with credit card debt is to negotiate relief on their own, or through one of the many debt relief agencies advertising on radio and late-night television. These debt relief agencies generally charge a hefty fee, and often do not accomplish the desired result. Even when the debtor or debt relief agency successfully negotiates a compromise settlement of credit card debt, the debtor may be subject to income tax liability on the canceled or forgiven debt. In a bankruptcy proceeding, however, a debtor can frequently eliminate all credit card debt without incurring tax liability.
Bankruptcy is not an option in every case. If, however, you are having financial difficulties and think bankruptcy might be an alternative for you, or if you simply would like to know your legal rights, please contact us to schedule a no-obligation consultation.
Required Notice: We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.
The information contained in this article should not be construed as legal advice or legal opinion on any matter discussed. The contents are intended for general information purposes only. Always consult a qualified attorney for legal advice on a specific matter.
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