Pitfalls of Bank's Pilot Mortgage Forgiveness Program

       Recently a large national bank has announced that it is launching a pilot program that will allow some homeowners facing foreclosure stay in their homes. The program would allow homeowners, who are behind in their mortgage, deed the property back to the bank and then have their mortgage debt forgiven. At this point the former homeowner would then lease the property from the bank at a lower rent than the monthly mortgage payment. The tenant would also not be responsible for the property taxes or insurance.

       This program benefits the bank for a few reasons. The bank saves the expenses it costs them to do a foreclosure (The average foreclosure takes nearly two years to complete, according to Florida-based Lender Processing Services, and costs nearly $78,000, according to a Congressional estimate.). However, the bank will face some additional costs/ responsibilities. The bank will bear the costs of property taxes, insurance, maintenance, land scaping, repairs, security, waste disposal, and other property management requirements. Furthermore, the bank would need to employ an attorney to oversee any evictions that would occur.

       For the property owner this may seem like a good way to remain in his home, however there would be some negative consequences. For instance, forgiveness on a debt is considered by the IRS as taxable income, so the homeowner could be left with a very large tax bill after a $150,000 mortgage is forgiven. Moreover, the former homeowner could be removed from the property a lot faster than if he owned the home. If the property were being foreclosed, the procedure could a couple of months and the homeowner has the protection of the Bankruptcy Code, where filing bankruptcy would cease the foreclosure and allow the debtor to make up any missed payments. However, with the former homeowner now renting his house, he can be evicted from the house in about two to three weeks if he were to miss a rent payment. Also, the Bankruptcy Code is very favorable to landlords. Remaining in the house during a bankruptcy does not alleviate the tenant's responsibilities from paying rent, while a homeowner can remain in the home a lot longer without making a mortgage payment; the post-petition rent that comes due during the bankruptcy will also not be discharged, and the tenant can later be sued for it, unlike a homeowner.

       Though it seems like this program could help the bank and homeowner, it may also be just substituting one problem with another.

Nashville Probate Committee Hosts Judge Kennedy

       Today, the Nashville Bar Association Probate Committee had the pleasure to have Davidson County's Probate Judge Randy Kennedy speak at our monthly meeting.  Various topics were discussed including new procedures for his courtroom and advice/tips for petitions to probate wills, specifically lost wills. But the bulk of the discussion involved the Judge discussing the proposed amendments to the State of Tennessee's Conservator and Guardianship laws.  Judge Kennedy summarized many of the changes and possible ramifications.  Overall, his main message was for the Tennessee bar members to read through the legislation and submit any comments, concerns, and questions to the legislature.  

       The Tennessee Bar Association is putting together a committee to research the new proposed amendments and submit a report discussing the positions of the probate bar.  A future article will include a more thorough discussion of the amendments and the specific provisions and their potential ramifications.  If interested, the following are links to the proposed amendments:

http://www.capitol.tn.gov/Bills/107/Bill/SB2519.pdf

http://www.capitol.tn.gov/Bills/107/Bill/SB2398.pdf

http://www.capitol.tn.gov/Bills/107/Bill/HB2456.pdf

Property Taxes in Bankruptcy

       As I write this article, the issue of property taxes is still unsettled in the Federal Districts of Tennessee, the 6^th Circuit, and in Bankruptcy law all over the country. Nevin Law Firm was fortunate enough to be the ones with the case to settle this newly arisen issue.

       This issue involves the treatment of property taxes in a Chapter 13 plan. Tennessee statute states that late paying property taxes are subject to 1% per month (12% per year) interest rate and a .5% per month (6% per year) penalty for a total of 18% rate. Section 506 of the Bankruptcy Code determines what post-petition interests and “fees, costs, and charges” are allowed. We are arguing that the additional 6% penalty is not a fee, cost, or charge and therefore should not be allowed. Metro Trustee, obviously is arguing they are entitled to the additional 6%.

       Now, for a Chapter 13 debtor every dollar counts. Debtors are placed on a very tight budget to pay as much as they can afford to their creditors so an additional 6% payment can break a budget, even if its only a few dollars extra per month. Additionally, after combining all these cases, the 6% penalty can mean hundreds of thousands of dollars to the counties of Tennessee and even more when addressing the entire 6^th Circuit. Another implication of this is that if a “penalty” is found to be a “fee, cost, or charge” other secured creditors will be able to collect post-petition penalties that accrue in the case. This will surely equal millions of dollars.

       We argued the issue two weeks ago and submitted supplemental briefs last week. Currently, the Judge is researching and writing his own opinion to decide whether we or the Metro Trustee is correct in interpreting the Bankruptcy Code, and I am eagerly awaiting his decision. It is very likely this case will go to the 6^th Circuit Court of Appeals and possibly the Supreme Court (which would be such an honor as a venue to argue the issue). Thus no matter the current decision, the issue will continue to be contested for the next couple of years. Again, we are very excited at the Nevin Law Firm to have the honor and responsibility to be handling this case and will post an update as soon as we receive the decision.

Loan Modifcations: Tips and Warnings

       As a Bankruptcy Firm, we see many good, hardworking people whose homes are in foreclosure. And after all these stories, I am surprised to see that many of them fell behind because of Loan Modification Programs. To be clear, modifying your loan can help you financially; however, I want to set out many tips and warnings you need to know before attempting a modification so you do not fall victim to what has led others to foreclosure and consequentially, bankruptcy.

       First, you need to know the truth. Very few borrowers after the process end up with a loan modification. I recently spoke with a friend of mine in the mortgage loan market and learned that approximately only 6% of those who apply end up lowering their mortgage payments. Six percent, that's all!

       Second, if you want to hire an attorney to work with you and your bank for a loan modification, DO NOT hire an attorney, agency, or professional who wants to be paid up front. I've heard plenty of stories, where a person pays a couple thousand dollars to an attorney to work with their bank. That money would be better spent on paying down your actual mortgage or to savings. Lots of times, these agencies are scams who take your money and run. Other times they are legitimate, but remember SIX PERCENT success rate. The only fee arrangement you should make is that the attorney you hire will receive a percentage of any savings from a successful modification. If anyone wants money up front, go somewhere else. A contingent fee makes the person you hire actually try to succeed since that is the only way of him getting paid. If he has already been paid, then he won't care if you end up being part of the 94% who fail.

       Lastly, keep making your mortgage payments during the process! Many people have said how their Bank told them that they don't have to make payments while applying, or that the bank only accepts those who are behind in their mortgage. If you must be in default to qualify, do not do it on purpose, stay current. And when your bank tells you that you are not obligated to keep making payments, the fine print says that if you do not succeed in getting a modification, all of those missed payments come due immediately along with interest and late fees. And then the bank ends up foreclosing on your home. So keep making those payments, and if you choose not to, do not spend that money. Save it on the great chance that do not succeed in modifying your loan.

       The Loan Modification is a long, complicated, and drawn out process that will likely lead to nothing. So please be smart about your money. Hopefully, you may end up as part of the 6%, but as you go through the process, remember these helpful tips and warnings.