[This post was published by a contributor to Patrick.net.]Many of you are living in houses that once were worth a lot of money and made you look rich. Now the source of your wealth has dropped as much as 50%.
Some of you have already executed “a strategic default” or simply walked away from an underwater mortgage. Some of you have become squatters sitting in the house waiting for the day somewhere in the distant future when some bored sheriff’s deputy will knock on the door and tell you that you have a few days to vacate the house. Many of you are still paying on the underwater mortgage and praying for a return to a good real estate market. (Although you know down deep in your heart that is not going to happen.)
Today I am going to share with you the moves Elena and I made to cure underwater mortgage situations without walking away from our home or rental property. I am going to discuss moves that will affect your credit in a negative way or send you to bankruptcy court.
Those of you in the following occupational categories cannot take advantage of this advice as follows:
1) US government and US military people with high-level security clearances.
2) Employees of civilian contractors with high-level security clearances doing work for the US government.
3) Law enforcement officers working for any level of government.
4) Any employee of a financial institution.
5) Some employees of state or local governments in sensitive positions. (If in doubt is this area please get legal advice.)
To those of you in the categories above, please continue to read only out of academic curiosity.
For those not in the categories above let us get to work.
Many people got into their houses without a down payment. A second mortgage was obtained to make the purchase of the property. In the alternative one paid some down payment and also took out a second mortgage to buy the house. There were also some of you who put big second mortgages on your house, using it as an ATM machine and the market went crazy and we all thought that we were rich.
Now the lien is still on house but there is little or no actual equity to keep the second lien as a secured debt. In this case you are left with a large debt that is a credit card debt. If you default on this debt, the bank cannot foreclose your house because they no longer have a security interest. The bank will harass you with all sorts of phone calls and letters. Eventually some bored process server will appear at the door and serve you with a lawsuit.
If you do not know your legal rights or you are broke and cannot afford lawyers, the bank will get a deficiency judgment against you. Soon your wages will be garnished and you will be humiliated in front of your work mates and family.
If you understand your legal rights or can afford lawyers, you will file a defence to the lawsuit. The lender is in for a legal battle that will last 3-5 years with huge legal costs. The lender wants to avoid this at all costs and would eventually “settle the suit” outside of court for far less than the amount owed.
Since you know this you do not have to wait for a lawsuit. You could go right into a Chapter 13 bankruptcy filing. Once the court determines that the second lien no longer has any equity to support it. The lien will be stripped from the property. The debt will become an unsecured debt. Based on your income and remaining assets you might get the whole debt erased or a good part of it. Please consult a bankruptcy attorney like The Comfort Law Firm to get guidance here.
There are negative consequences of a bankruptcy filing. If you do not want to go bankrupt there is another way to deal with the second lien. You default and let collection action begin. Once you are past due a few months, you can hire a professional loan negotiator to approach the bank. I recommend Mr. Alan Sherman of the Comfort Law Firm. This negotiator will go to the bank. He will point out that he can put you into bankruptcy and the bank could end up with nothing. In the alternative he can offer to settle the debt for 10% to 15% of the face value.
In our case we had a $152,000 second lien with Wells Fargo Bank. My Sherman settled the debt for $20,000. We did not have to go bankrupt over it. You have the potential to do the same.
There is also a situation where there is a controversy over the value of the house and the second lien might have some equity left. Your negotiator will need to hire a very professional real estate agent to make a study of houses sold in the local market and those sold in short sales and foreclosure. This study will find the true value of your house.
Once we solve the second lien some of you will still have a first lien that is underwater. There was a big push on years ago to allow bankruptcy judges to modify first liens. The big banks literally bought off the US Senate and stopped this. First liens are exempt from any legal intervention. A professional loan negotiator can’t help you here.
But there is a way. If one is the owner of a rental property or properties, you can file a Chapter 13 petition. The court will entertain professional appraisals on the true values of the properties. The bankruptcy court will have the power to reduce the debts to what the properties are worth now. The only catch here is that the courts treat rental properties like car loans. You will need the cash flow to pay off the property or properties in 60 months.
You could get help on your personal residence first lien by moving out and leasing the house. This has to be bonafide in every way. Any false statement or misrepresentation could land you with a felony conviction and a trip to Federal prison.
Under this strategy you wait 6 months after the move out. Then you file for Chapter 13 bankruptcy with the legitimate claim that the house is a rental property. You can rest assure that the bank is going to object and raise hell. You also will need to keep it rented out for the life of the bankruptcy proceedings. You would have a high monthly payment.
I have a rental property and went into Chapter 13 bankruptcy. I bought the property for $415,000 and got its value reduced to $265,000. The judge agreed with it. I had to withdraw from the Chapter 13 when the property value dropped to $160,000 and we were facing a $100,000 loss.