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student loan debt hat.jpgTonight at 10:00 p.m. the lead story on Channel 13 inTampa is about the National Association of Consumer Bankruptcy Attorneys’ survey that came out today warning of an emerging student loan debt bomb. News Reporter Jeremy Campbell interviewed me about this study and the future impact of student loan debt.

It is very difficult to discharge a student loan in bankruptcy. A debtor has to show an undue hardship that will likely persist for the majority of the repayment period (which runs from 10 to 25 years). They have to show they have minimized their expenses and maximized their income. They also have to prove they have made a good faith effort to repay. Partial discharges of debt are possible and often a favored result for both parties.

The NACBA study shows that four out of five bankruptcy attorneys say that potential clients with student loan debt have increased significantly or somewhat over the last three-four years. Approximately 95 percent determine that few student loan debtors have any chance of obtaining a discharge as a result of an undue hardship.

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short-sale seesaw.jpgBloomberg today reports that banks are offering as much as $35,000 to delinquent homeowners to sell their home in a short sale. In doing so, the banks avoid the costly foreclosure process especially when their loan documents are questionable and perhaps fraudulently prepared. I imagine we will be seeing a few of these in Florida, a judicial foreclosure state with particularly well trained and knowledgeable foreclosure defense attorneys.

JP Morgan Chase reportedly is sending out letters to borrowers offering up to $35,000. They are also offering deficiency waivers for the balance.

So open the mail – and ask your lender what move out incentives they are offering for a short sale. Perhaps you have more negotiation strength than you think. But don’t let the mortgage company get a default against you – it will both weaken your position and will allow the foreclosure to proceed against you at a faster pace eliminating your short sale opportunities.

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hurdle2.jpgDue to the particularly bad housing market in Florida, more of our bankruptcy debtors are finding themselves exceeding the debt caps in a Chapter 13 when they have severely underwater homes. When this happens, a debtor becomes ineligible for Chapter 13 relief and is required to file a more expensive and cumbersome Chapter 11 in order to keep their home. Thus, those clients who most need the relief of a Chapter 13 reorganization plan, including stripping their second mortgage and having up to 60 months to catch up on their first mortgage, are denied the relief because they exceed the amount of debt allowed in a Chapter 13. Presently, the maximum amount of secured debt allowed is $1,081,400 and $360,475 for unsecured debt. It is the unsecured debt cap that becomes a problem with large underwater second mortgages, undersecured first mortgages, combined with credit card or medical debt.

This hurdle was likely not even considered by Congress when it established the debt caps in the first place. With the enactment of the Bankruptcy Code in 1978, Chapter 13s became much more widely used as sole proprietors became eligible for the first time. Prior to the 1978 revisions only wage earners qualified. While opening up Chapter 13 relief to any with regular income (including business owners and social security recipients), Congress saw the potential for abuse and established debt caps so that sole proprietors of large businesses could not evade the more stringent and creditor-friendly requirements of a Chapter 11.

So what was intended as an expansion of the scope of Chapter 13 eligibility has inadvertently turned out to be a hindrance. The courts and trustees have taken different views of eligibility, and until the U.S. Supreme Court or Congress weighs in, uncertainty will rule. Some courts consider it jurisdictional, some consider it discretionary, and the time periods for determining the total debt varies from when the case is filed to after the creditors bar date to see what debt remains after creditors file their proofs of claim and any objections are ruled upon.

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conflict of interest.jpgWhy aren’t we seeing any legislation or rules addressing servicers’ inability and unwillingness to modify loans even when the modification is clearly in the best interest of the investor-owner of the mortgage? Florida foreclosure defense and bankruptcy attorneys see the conflict of interest daily between mortgage servicers and their own clients, why doesn’t the government?

Servicers say they are doing their utmost to help homeowners in need. I say Pinocchio. Uncle Sam has proposed HAMP, HARP and a few other programs. However, the servicers just shrug and pretend to comply, while pocketing trial payments and huge servicing fees. It is a well known fact that servicers get paid much more when a loan is in default and eventually forecloses. Until we address the conflict of interest and incentivize servicers to modify loans, nothing will change. Pinocchio is running this show.

In an interview on January 28, 2012, by CNN Your Bottom Line host Christine Romans, Chip Parker, a foreclosure defense attorney in Jacksonville, Florida states it’s definitely systematic. He describes how it’s a daily occurrence that a mortgage servicer such as Citi Mortgage or Wells Fargo will absolutely refuse to work with someone, even though a VA guideline requires it when the VA guarantees those loans.

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I speak with many clients in the Tampa Bay, Florida area who have heard of cancelled debt and 1099-C forms but they do not really understand the impact of the taxable events that occur in a short sale. An understanding of how a 1099C works in a short sale is especially important at this time of the year.

Whenever a creditor cancels or forgives debt following a debt settlment, short sale or even a foreclosure, the creditor must report the amount of the cancelled debt to the IRS on a Form 1099-C. Under Section 108 of the IRS Code, the IRS imputes the cancelled debt as additional income to you. So if you make $50,000 in annual salary, but your house was sold at a short sale where the loss to the lender was $100,000 (not an uncommon fact pattern in Florida), you will be deemed to have earned $150,000 that year or the next – depending upon whatever year the lender files the 1099-C.

There are three exceptions to this rule. First, you file bankruptcy prior to the issuance of the 1099-C. If debt is discharged in bankruptcy, it is not attributable to you as income. Even if you receive a 1099-C, you can respond by filing your own Form 982 to remove its taxability because of the bankruptcy.

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caution.jpgOur Florida clients have recently been asking me if there is a new law allowing them to reduce their mortgage balance to the value of their home. This is not accurate and I am not sure where this is coming from. My guess it may be from somewhat misleading and overly optimistic advertisement flyers that are sent to people who have a foreclosure filed against them.

In bankruptcy, specifically a Chapter 13, we can strip a second mortgage. But the court cannot require a first mortgage company on a primary home to reduce the principal balance on their home. Implying otherwise, is simply misleading and inaccurate.

There is also no federal or state law that requires a first mortgage to be reduced to the value of the home.

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modif.bmpMortgage modifications are often determined by whether the owner (not servicer) is either a participant in HAMP or a recipient of TARP bailout funds.

Here’s how to check on your lenders:

First, use our Resource page on our website to look up who likely owns your loan by doing a Fannie, Freddie or MERS lookup search.

Second, see if the owner of your loan is a HAMP or other governmental program participant.

Third, see if the owner of your loan was a recipient of TARP funds in the 2008 bailout.

If your loan passes the above tests, your lender is required to run you through a HAMP analysis (even if they would prefer a short sale). You can qualify for a HAMP modification whether or not you file bankruptcy, although you might find the success rates are higher in a bankruptcy. The Tampa Division bankruptcy courts just established a formal mediation program in October 2011 for homeowners who have experienced difficulty in obtaining mortgage modifications.
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Follow this link for a one page concise description of the Principal Paydown Plan we’ve written about in the past (to allow mortgage payments made during a Chapter 13 bankruptcy to go directly to principal thereby reducing the underwater portion of your mortgage). The idea is to encourage homeowners to keep their home because it will make good business sense to do so and help to reduce the volume of foreclosures. Please take a moment to show your support by signing a petition presently before the White House (remember the bankers have their PACS and lobbyists, while we have our clients’ support and grass roots campaigns to effect change!).

Follow these steps to sign the petition:

1) Click here to get to the petition.

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mediation.jpgThe Bankruptcy Court for the Middle District of Florida, Tampa Division, has recently implemented a mediation program for homeowners wishing to modify their first mortgages. The Orlando Division has had a similar program in place for a year or more and reports a success rate of 70%, unlike the state foreclosure mediation program which has a success rate of less than 5%. Combined with a reduction of debt in a Chapter 7 or even a stripped second mortgage in a Chapter 13, you may find keeping the house to be affordable with a modification. HAMP for instance reduces the interest rate to as little as 2%, may extend the term or carry a portion of the principal without interest to the end of the loan. If you believe that you can afford a (PITI) payment that is approximately 31% of your gross income, you may want to take advantage of this program.

Many reasons exist for the higher rates of success for mediations in bankruptcy. First and foremost, a bankruptcy filing tends to eliminate credit card, medical bills or second mortgage payments allowing for more income to be directed toward the first mortgage. Lenders attorneys have pointed to the smaller, more experienced bankruptcy mediation departments at banks or servicers that allow for better outcomes.

The Tampa Division just approved a standard fee of $1800 for their mediation program this past week payable to the debtor’s attorney in a Chapter 13 Plan (spread out over 5 yrs is $30 monthly). The cost of the mediator will be $350 for two hours split between the mortgage company and the debtor. This is the only fee that will be payable up front at the mediation.

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I’ve written previously about the Florida Legislature not renewing the designated funding for residential mortgage foreclosure cases. On July 1, 2011, most counties were forced to curtail or even shut down entire divisions when the money ran out.

In response, the Tampa judges in Hillsborough County, Florida put into place a new Administrative Order S-2011-029 setting forth new foreclosure procedures. This Order contains provisions that are intended to increase efficiency of the judiciary to stay on top of the foreclosure filings that are expected to increase the end of this year. One provision allows for the disposition of non-summary judgment motions without a hearing.

This refers mostly to the Motions to Dimiss or Motions for More Definite Statement although many motions fit this definition. A Motion to Dismiss or Motion for More Definite Statement is typically the first response to a foreclosure summons filed by foreclosure defense attorneys. The intent is to make sure that the Plaintiff’s Complaint contains sufficient allegations as to who they are and how they claim an entitlement to foreclose. The thinking is if the Plaintiff claims to have the right to foreclose, then why hide the ball? File a Complaint that properly alleges standing and attach a Note, Mortgage and documents to show the chain of transfers and default. This would eliminate unnecessary delays and discovery. The Florida Supreme Court felt the same way when in February 2010 it instituted a requirement that a Plaintiff “verify” the truth of the allegations before filing a Complaint.

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