If your property has depreciated in value to the point where it will not cover your second mortgage, then you may be able to “strip off” the second mortgage and treat it as an unsecured debt in your chapter 13 bankruptcy filing, which may be a substantial reduction to your overall debt balance. This applies to third mortgages too.

WalletPop’s Lan Nguyen talks with Andy Firoved, CEO of Homeowner Toolbox.

OK. But, what are these alternatives?

1) Call you credit card loan servicer, the bank, to negotiate for better terms. Conditions are rapidly changing, some banks are still not willing to make any concessions unless you are late on your payments —which is ridiculous. But most of the major ones have moved to offer improved terms to their clients under hardship, especially if you’re asking for lower rates —a 17% to 7% interest rate reduction will save you $100 per year, for every $1,000 owed. This is my favorite solution because it’s fair. Banks know that if you file for bankruptcy, they could get ‘nada’.

2) If you can afford to live with a lower mortgage, 31% of your monthly income, check you’re eligibility for the government subsidy program Making Home Affordable, either for the loan modification or for the refinance under better terms programs.

3) Check if you have enough equity to refinance your mortgage to pay your credit card debt. I’m sure you realize that solutions 1) and 2) are much better alternatives —you may be jeopardizing your home by inflating your secured with unsecured debt, which is very likely bankruptcy dismissable debt.

4) Sell the house before you fall into arrears in your mortgage payments. I know, this takes a lot of guts, but, if you know you can’t save the house, sell it yourself before the bank gets total saying over it.

5) If you know you will not be able to afford your mortgage payments, or you know you are ‘under water’ or paying a mortgage higher than the market price of your home, you might consider asking your bank to accept a government subsidized (Making Home Affordable) Deed in Lieu (DIL). In this case, the bank accepts to eliminate your debt in exchange for the deed of the property. Review carefully any other attached conditions with your attorney.

6) If you are burdened by the conditions under 5), check with your bank to see if they will accept a government subsidized (Making Home Affordable) short sale. In a short sale, the bank accepts to reduce your debt to the market price of the house, and authorizes you to sell it at this price. In exchange, you accept to sell the property within a given period of time, after which, you waiver any delays to postpone the foreclosure. Review carefully any other attached conditions with your attorney.

7) Every jurisdiction has its own timetable to foreclosure. Discuss these milestones carefully with your attorney, in order to take full advantage of the times alloted, your conditions may change, you may find a job within this extended period.

8) Do nothing, which will lead you into a quick foreclosure.

For an exceptional explanation of the Making Home Affordable Program, I urge to visit their borrower FAQ page.

Finally, I strongly recommend discussing these options with an experienced bankruptcy attorney within your jurisdiction. Usually, this first consultation is free.

This emotional component can be very damaging if not understood, and properly taken care of. At first, we are frozen deers under the spotlights of our debt problem, we run away from all manner of task which would allow us to make a clear assessment of our situation —we sweep our debt balances under the rug. And, after sinking the ship with our inaction, in the aftermath, we continue to self inflict and cripple ourselves with what we view as the social stigma of bankruptcy.

It’s all in our minds.

First, as I’ve said before, bankruptcy’s sole purpose is to give people a second chance. And, thousands before you have been forced to take this route to get over the hump and continue with their lives. I always recall Walt Disney, who went bankrupt seven times. Hey! get over it, many of the best have tread down this alley.

Now, with a clear head, weigh your options. Are you going to sell your house now, by yourself, negotiate a short sale with your bank, try to give the keys back to your bank “in lieu of the deed”, try a loan modification, or take a chapter 13 or 7?

I’ll be commenting on these options later on. But, I hope you see the point, pulling your head out of the hole sooner will give you better options.
 

I found the following video a good bang for the buck:

Hope this helps somebody.

Do not use any credit cards after initiating a consultation with your bankruptcy attorney or once you have decided to file for bankruptcy. If your statement shows charges or cash advances for the months preceding filing bankruptcy, the credit card company may file an adversary complaint alleging that you incurred recent charges with fraudulent intent and without the intent and/or ability to repay these debts.

Great news! On March 5, the House approved the cramdown bill in a 234 - 191 vote.

You don’t have to wait to file for bankruptcy to enjoy the fruits of this bill —from now on, you can negotiate your loan modification with your mortgage servicer with a dramatically improved leverage, which will reach its full potential when it’s passed into law. It shouldn’t be long, both the House and Senate bills were initiated simultaneously.

So, call your senator to ask him to make bill S61 a law: (202) 224 - 3121.

After The Senate approves the “mortgage cramdown” bill, bankruptcy judges will have the discretion to lower mortgage payments to save borrowers from losing their homes. On March 4, in related news, the government launched the Homeowner Stability and Affordability Plan, which also requires lenders who take these funds to comply with the same bankruptcy guidelines.

“Cramdown” is the simple term for allowing bankruptcy courts to modify mortgage terms in Chapter 13 filings. See HR 1106 for the full House version. S 61 is the companion version in the Senate. Respective sponsors are John Conyers and Dick Durbin. It basically means that the court can order lenders to accept less in interest and/or principal relative to the amount owed by a debtor on a primary mortgage that is part of a bankruptcy filing.

Unemployed borrowers with first mortgage loans owned and serviced by CitiMortgage, who are late 2 payments, will be allowed to pay reduced mortgage payments for three months, with the average required payment for most qualifying customers pegged at $500 a month. If after these three months they are not employed, Citi execs state they are willing to continue workout solutions.

It’s a great start, and a great example for other lenders to follow.

For the rest, if you feel that the weight of your iron-debt-ball is getting to heavy, consider applying for a loan modification or to refinance your mortgage —just make sure you do it with the mortgage servicer of your debt — not the collector, nor the collection agency, nor any scam you may be offered out there. You’ll find the name and telephone number of your loan servicer in your monthly mortgage payment coupon book.

In short, the bill has a three pronged approach to make your mortgage payments on your primary residence more affordable:

• If you’re suffering from reduced income, it encourages the lender to bring your monthly payments down to a 31% of your income before taxes.
• Also, if you’re feeling the pain due to loss of house value, or having difficulties in meeting the usual 20% equity requirement to refinance your mortgage, lenders will refinance your loan as long as the debt does not exceed 105% of the market value of the property —that’s 25% over the usual 80% cap.
• Finally, the program gives you incentives to stay current on your debt: up to $1,000 yearly for up to 5 years. The lender also gets a $500 incentive to keep you current.

Let’s illustrate this plan with a couple of examples from the Support at Homeowner Affordability and Stability Plan:

Family A: Access to Refinancing

In 2006, Family A took a 30-year fixed rate mortgage of $207,000 on a house worth $260,000 at the time. (The family put just over 20% down.) They received a Fannie Mae conforming loan with an interest rate of 6.50%.

Today, Family A has about $200,000 remaining on their mortgage but their home value has fallen 15 percent to $221,000.

Their “loan-to-value” ratio is now 90%, making them ineligible for a Fannie Mae refinancing.

Under the Refinancing Plan: Family A can refinance to a rate of 5.16%. This would reduce their annual payments by nearly $2,350.

Family C: Eligible for Homeowner Stability Initiative

In 2006, Family C took out a 30-year subprime mortgage of $220,000, on a house worth $230,000 at the time (they put less than 5% down). Their mortgage broker – Mom & Pop Mortgage – sold their loan to Investment Bank. The interest rate on their mortgage is 7.5%.

Today, Family C has $214,016 remaining on their mortgage but their home value has fallen -18% to $189,000. Also, in November, one parent in Family C was moved from full-time to part-time work, causing a significant negative shock to their income.

Their loan is now 113% the value of their home, making them “underwater” and unable to sell their house.

Meanwhile, their monthly mortgage payment is $1,538 and their monthly income has fallen to $3,650, meaning the ratio of their monthly mortgage debt to income is 42%.

Under the Homeowner Stability Initiative: Family C can get a government sponsored modification that – for five years – will reduce their mortgage payment by $406 a month. After those five years, Family C’s mortgage payment will adjust upward at a moderate, phased-in level.

Once you call your lender, he will ask you to fill and fax a Financial Statement form, fill it at their website, or ask you directly on the telephone for all your income and expense data, as well, as the market value of your home —you can use your property’s tax bill value.

Before you make the call, I suggest you gather all your bills and sources of income, and write them down —take advantage of the Budget section, that’s what it’s for. Then, do a little number crunching to get a feel of where you stand. Have in mind, that you also have to be capable of paying the new loan. In any case, you’ll be needing these documents later on to support your request.

Update, March 4: Federal officials clarified the definition of who is “at risk,” defining it as those: suffering serious hardships, declines in income or increase in expenses; facing an interest rate hike; having high mortgage debt compared to income; owing more than their house is worth, or demonstrating other reasons for being close to default.

To participate in the loan modification plan, borrowers must:

• have obtained their mortgage before Jan. 1, 2009;
• have a primary mortgage of less than $729,500;
• live in the property;
• fully document their income by providing tax returns and pay stubs;
• sign a statement of financial hardship; and
• go for counseling if their total household debt—including auto loans, credit cards and alimony—totals more than 55% of their income.

The modification program will be in effect until the end of 2012, but loans can only be adjusted once.

Before you make any calls, make sure you have a clear plan of what you will be asking-offering in regards to your debt. Be prepared to take notes. The date and time, company name, employee’s name or ID are all important.

First, let’s review the personal loan and credit card case.

This is the moment to review your personal loan or credit card statement. You might want to add the total interest payments for the year, to show how good a client you are. If you’re not assertive, consider asking a relative or a friend to make the call. If your request meets objections —which it will—, ask for a supervisor or account manager, be persistent, persistent, persistent.

Make sure you call the owner of your debt, which in most cases will be the bank and not the collection agency. Dealing with the collector will be difficult and any request will have to finally be approved by the creditor —save yourself the time and aggravation.

Do you know who the original owner of the debt is?

• If you do, call them and ask for the status of the account —you’re sure to find out if they are still the owners of the account.
• If you don’t, then call the collector to ask him to fax you a debt verification letter —you can ask them for this information during your call, but don’t trust their word if they assure you that they own of the debt.

When you reach out to your card company, be sure to have your credit card number available:

• Bank of America, (800) 500-5306.
• Capital One, (866) 929-5303.
• Chase, (800) 432-3117 or (302) 594-8200
• Discover Card, (866) 567-1660.
• FIA Card Services, (888) 635-0776.
• Citi, (866) 936-4814.
• Citi, the issuer of your Sears Card®, (866) 532-9532.
• Citi, the issuer of The Home Depot® Credit Card, (866) 532-9689.
• Citi, the issuer of your Macy’s Credit Card, (866) 785-1079.
• Citi, the issuer of your retail and gas cards, (866) 683-0924.

So, after much preparation and several attempts at finding the right person, you have finally touched the heart of one of the bank’s representatives, who seems to understand your situation, and you have both reached an agreement: you’re interest rate is lowered, your penalties are revoked, you’ve settled your credit card balance for 50%...

Take the opportunity to ask them to clear your credit report blemishes with a paid in full statement. Items such as 60 days late, paid charge off, charged off settled for less are derogatory and should be erased from your credit report, if possible. This is your chance, the original creditor can have these erased, finish your negotiation on the right foot.

You should now ask for a letter of confirmation of the agreement —a fax copy is OK as long as it has the company logo and a signature. Let them know that you cannot make any payments until you receive this letter confirming your agreement.

Finally, do not ever forget that you are negotiating, there are no rules engraved in stone; specially now, when bankruptcy law is changing, new incentive laws are being published to help families in distress, and banks are staying afloat with our tax money.

If you’re after a mortgage loan modification or to refinance, to take advantage of the recent incentives, you have to contact your loan servicer, whose telephone number is on your payment coupon book.

In any case, here is the list for the major lenders:

ABM AMRO Mortgage, 800-783-8900
AmTrust Bank (fka Ohio Savings Bank), 888-696-4444
Beneficial, 800-333-5848
Charter One, 800-234-6002
Chase, 800-446-8939
CitiFinancial Mortgage, 800-753-3673
Citimortgage, 800-283-7918
Countrywide, 800-262-4218
Fifth Third Bank, 800-375-1745 Option 3
First Merit Bank, 888-728-9931
GMAC Mortgage, 800-850-4622
HSBC Mortgage, 800-338-6441
Huntington National Bank, 800-323-4695
Key Bank, 800-422-2442
LaSalle National Bank, 800-783-8900
Metlife. Fill their e-form here.
Mortgage Electronic Registration Systems, 888-679-6377
National City, 800-367-9305, Ext. 53221
Ocwen Federal Bank, 800-746-2936
Option One, 866-711-1962
Popular Mortgage Servicing, Inc., 800-383-2292
Saxon, 800-665-7367
Select Portfolio Servicing, 888-818-6032
SkyBank 800-290-3359
Third Federal Savings, 888-844-7333
US Bank, 800-365-7900
Wachovia Bank of Delaware, 866-642-8608
Washington Mutual, 866-926-8937
Wells Fargo Home Mortgage, 1-800-416-1472
Wells Fargo Financial, 1-800-874-8901

This is the moment, if you haven’t already done so, to gather all your bills and sources of income, pay stubs as well as tax returns. Think of this step as if you were gathering the documentation for a mortgage loan application —it’s what the lender will ask from you. You’ll also need to prepare an affidavit hardship letter, explaining your particular situation.

One word of caution: lender loan origination fees are not specified in the ruling, so it may be a source of abuse.

Finally, do not ever forget that you are negotiating, there are no rules engraved in stone; especially now, when bankruptcy law is changing, new incentive laws are being published to help families in distress, and banks are staying afloat with our tax money.
 

Title 18 of the United States Code, the criminal and penal code of the federal government of the United States, under section 2511 paragraph 2 (d), states the following:

It shall not be unlawful under this chapter for a person not acting under color of law to intercept a wire, oral, or electronic communication where such person is a party to the communication or where one of the parties to the communication has given prior consent to such interception unless such communication is intercepted for the purpose of committing any criminal or tortious act in violation of the Constitution or laws of the United States or of any State.

In other words, under Federal law, you are allowed to record any conversation where you are one of the parties.

And, although 12 states (California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, Pennsylvania and Washington) require both parties to agree, I strongly suggest:

• To start any conversation with collectors by asking them where they’re calling from —because most calls are interstate calls, and your recordings will be covered by Federal law.
• Next, it’s polite to let them know that you will be recording their call, and ask their consent if deemed necessary. You’ll be happy that you did, it sets the tone for a more professional conversation —they will respect you more, and shy away from pulling any fast ones on you.

So, get your automatic call recorder at your closest Radio Shack, Best Buy, or order it through the web. It’ll be one more useful weapon in your arsenal.

If we step back for a moment, we have to understand that each individual’s situation is unique. And, I’m not just saying this for the sake of repeating the obvious, but, because it is at the core of this question. At least, I can see the following factors weighing heavily on this decision:

• Your property value (and your spouse’s, if filing jointly).

  In both, chapters 7 and 13, the total value of your assets is the measure of what you will have to pay your creditors, minus your exemptions. In the former case through liquidation and in the latter, although you keep your property, it is nevertheless the stick that measures your debt responsibility.

  For example, if you have very little bankruptcy equity (none or even negative) on your real estate property a chapter 7 filing would discharge most, if not all, of your debt, both secured (your mortgage) and unsecured (credit card, medical bills, attorneys fees, personal loans…). Interestingly, if you can afford to pay the mortgage, you have the option to keep the house because you would be covered by homestead exemption limits.

• Where you (and your spouse) have lived for the last 24 months.

  Bankruptcy exemption limits vary from state to state. Most states allow a homestead protection, to keep your personal effects, work tools to a certain limit, 75% of your wages, social security benefits, your pension, unemployment and welfare benefits, worker’s compensation and insurance benefits, —and if filing jointly, to duplicate the total value of your exemptions.

  If the total bankruptcy equity you have in your home is covered by, or less than, your homestead protection, the chapter 7 trustee will allow you to keep your house as long as you make your mortgage payments.

  The trustee has the power to revoke recent activity that is detrimental to your creditors, such as recent sales to relatives. But, buying a car which may have an umbrella under the exemption limits may rescue some idle funds in your savings account.

• Your income (plus your spouse’s, if filing jointly).

  No more Chapter 7 for high income debtors. Bankruptcy law allows you to file under chapter 7 only if you meet the salary means test, or that your average monthly salary —for the last 6 months— is less than the median income for your state.

  If you’re suffering from a job layoff, waiting a few months may lower your monthly average enough to allow you to meet the means test requirements for a chapter 7 bankruptcy.

Bottom line, you’ll have to crunch some numbers to find out when to file and which filing will wipe off as much of the debts as possible while retaining title to most of your property.

The Federal Fair Debt Collection Practices Act, 15 U.S.C. 1692, requires debt collectors to treat you fairly and prohibits certain methods of debt collection. The remedies provided by the Act include damages and attorneys fees up to $500,000 or 1% of the total Net Worth of the Collection Agency, whichever is less.

To begin with, the Act requires collectors to send you a written notice that includes, among other things, the amount of the debt, the name of the creditor to whom the debt is owed, and a statement that, if within thirty days of receiving the notice the consumer disputes the debt in writing, the collector will obtain verification of the debt and mail it to the consumer.

In other words, collectors have to first notify you the details of the debt in writing, if not, they are violating the law. Let them know.

After receiving this first notice in writing, consider disputing the alleged debt to obtain the documents that verify their claim. Do not delay —you only have 30 days to answer with a certified letter with receipt-request, before losing your rights.

Then, collectors have the obligation to send you a second letter verifying the debt. The creditor has the burden of the proof to produce the documents that serve to attest that you owe this debt, and it is a well known fact, that unscrupulous collectors have a tendency to inflate the final debt amount with unsupported penalties and fees. The collector has to provide the original contracts where you agreed to these penalties and fees.

The Act further expressly prohibits the following practices:

• Harassment

  Debt collectors may not harass, oppress, or abuse you or any third parties they contact. For example, debt collectors may not:

  • Use threats of violence or harm;
  • Publish a list of consumers who refuse to pay their debts (except to a credit bureau);
  • Use obscene or profane language; or repeatedly use the telephone to annoy someone;
  • Call you before 8:00 AM and after 9:00 PM;
  • Call you at work, if your employer forbids these contacts;
  • Reveal alleged debt to third parties.

• False statements

  Debt collectors may not use any false or misleading statements when collecting a debt. For example, debt collectors may not:

  • Falsely imply that they are attorneys or government representatives;
  • Falsely imply that you have committed a crime;
  • Falsely represent that they operate or work for a credit bureau;
  • Misrepresent the amount of your debt;
  • Indicate that papers being sent to you are legal forms when they are not; or
  • Indicate that papers being sent to you are not legal forms when they are.

You might want to take a look at some additional protections and advice provided by the the FTC in their Fair Debt Collection brochure.

So, what do you do if you’re being annoyed by collectors?

Send them a certified letter - receipt requested, asking them to stop contacting you.

There are a couple of things that you should be aware of in order to be able to stand on higher ground while negotiating:

• Time is on your side, the longer it takes to renegotiate your debt, the better off you are. For instance, the original creditor will sell its debt at a couple of pennies on the dollar to debt collectors after a few months. Hence, collectors will be willing to settle for much less than the original creditor. Consider also, that if you are planning to file for bankruptcy due to diminished earnings —job layoff—, the means test on your income is computed on your last 6 months, so it’s in your best interest to hold your filing till the 6 month period is met.
• Keep a record of the times and what the collector said during their calls, as well as any other form of communication —it may well be worth the effort, if you decide later on to sue the collector for violations to the 15 U.S.C. 1692.
• If the collector persists in harassing you, consider not supplying information requests —nor acknowledging the debt.
• You might counter by letting them know that they have not complied with the law by neither providing you with a written debt notice nor the required verification of the debt letter, if you disputed the debt. You have the right to refuse collection from someone that has not proved to you that he is the rightful owner of the debt and that the alleged amounts are the correct ones.

Bottom line, don’t panic, collectors prey on your emotions, time is on your side, you can stop their harassment.

• an experienced bankruptcy attorney's help, as it does most of the time,


• or the less expensive credit counseling services from the DOJ U.S. Trustee Program list of approved CCCS, exclusively.

But you can still make lemonade out of lemons. A prospective bankruptcy filing gives you powerful negotiating leverage, creditors could lose much with the court's judgment, so it's a good opportunity to negotiate with your creditors —use your unfiled bankruptcy wisely to settle for better terms, which could also deem filing for bankruptcy unnecessary.

• How to File for Chapter 7 Bankruptcy
  By Elias, Renauer and Leonard.
  ISBN 978-1413308976



• Chapter 13 Bankruptcy: Repay Your Debts
  By S Elias
  ISBN 978-1413308556