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Protecting Your Heirs from Foreclosure

It’s an all too familiar story – couple meets, falls in love, and gets married. They buy a house, but only one spouse signs the original loan documents and thus becomes the primary borrower. Then, the primary borrower passes away. The remaining spouse (typically the widow) is unable to pay the mortgage. As a result, the house is foreclosed.

This happens to many couples in the United States, and the spouse who didn’t sign the original loan documents scrambles to keep her home and pay the mortgage.

How can you avoid this scenario from happening to you?

Mortgage Protection Insurance

Mortgage protection insurance covers your mortgage if you lose your job or become disabled. It also pays off your mortgage when you die. Whether you benefit from mortgage protection insurance really depends on your health, financial situation and what you want to happen if the worst befalls you or your partner.

Mortgage protection insurance is life insurance that pays your mortgage after a certain triggering event such as death, disability, or job loss. The cost depends on the amount of your mortgage, your age, and your health. For disability mortgage protection insurance, costs also vary depending on your occupation.

If you purchased mortgage protection insurance that pays off your mortgage after your death, the insurance company sends a check directly to your mortgage company. This leaves your heirs with your home unencumbered by the mortgage. Payments also go directly to your mortgage company if you purchased job loss or disability insurance, but it only happens for a certain time period (about a year or two). Further, there can be a waiting period before payments are finally made.

Life Insurance

While mortgage protection insurance is a type of life insurance where the proceeds can only be used to pay one’s mortgage, many believe a better option is to have regular term life insurance. With life insurance, your heirs can use the money they receive in whatever way they see fit. Moreover, whereas mortgage protection insurance typically has an age limit (around 45 or younger for a 30 year mortgage, or 60 or younger for a 15 year mortgage), no age limits exist for life insurance.  Foreclosure

Further, on direct comparison, term life insurance can be cheaper than mortgage protection insurance. If you’re healthy and have never used tobacco, you pay more for coverage with mortgage protection insurance than you would for life insurance.

Mortgage protection insurance can provide benefits to those who don’t qualify for life insurance. For example, people with poor health or a record of past medical conditions may not be eligible for life insurance. Mortgage protection insurance is less strict and, as a result, more people qualify.

Regardless, financial experts typically do not recommend any insurance that only pays for specific bills such as mortgage protection insurance.

Financing the Home

If your heirs want to keep the home but are having a tough time paying the mortgage, they could refinance the loan. Refinancing the mortgage may help you get a better rate, lengthen the term, and lower the monthly payments. This option allows heirs to stay in the house. However, this may not be an option if you have damaged credit or for some other reason you cannot qualify for a mortgage on your own.

In that case, a reverse mortgage may work. Reverse mortgages do not have credit or income requirements, but you must be at least 62 years old and your mortgage balance must be around half of the home’s value or less. The loan is called a reverse mortgage because instead of making monthly payments to a lender, the lender makes payments to the borrower, and there are no monthly principal or interest payments.

With a reverse mortgage, you are still required to pay real estate taxes, utilities, hazard and flood insurance premiums. When the home is sold or no longer used as the primary residence, the cash and interest must be repaid, and the remaining equity can be transferred to the heirs.

Shaming Banks to Quicken the Foreclosure Process

Foreclosure can damage your credit beyond repair and leave you without a home. As much as you dread foreclosure, if you fall behind on your payments, you want it to happen quickly. Why? When homeowners receive notice of foreclosure but before the sale is complete, the homeowner is stuck in limbo. Property taxes and missed mortgage payments pile up, and your credit is damaged the longer foreclosure takes.

This is what happened to one woman in Buffalo, New York. After falling ill and being no longer able to care for her house, she decided to let the bank foreclose so she could recoup some funds. Her lawyer believed the process would take only six months, but it ended up taking seven years. To help speed up the process, she teamed with her Assemblymember and started a “Shame Campaign” to publicly humiliate banks into speeding up the foreclosure process. They posted hundreds of signs in the Buffalo area that said, “Shame on you, [insert bank name here], for not completing the foreclosure process.” And it worked. After three months of the “Shame Campaign,” the bank finally finished the foreclosure process – that is, after seven years and three months.

With debtors going through such extreme measures to finalize foreclosures on their homes, it begs the question: can banks legally delay foreclosures to the detriment of the debtor?

Delaying Foreclosure

Many mortgage lenders are hesitant to complete their foreclosure actions, and they have plenty of reasons. As long as the properties are not foreclosed, they are still listed as an asset instead of bad debt on the banks’ books. Banks do this with an eye to the future: as long as the property is listed as an asset, the bank is viewed more favorably should it merge or be acquired by another company. Foreclosure Protest

There are also a lot of costs associated with foreclosure. A bank may be reluctant to foreclose because they don’t want to pay the attorney’s fees and costs required to foreclose. There are also costs to rehabilitate and repair the property if the previous delinquent owners gutted the property. The bank may also not want to take title to the property as it would have to pay for property preservation and other costs of the property. In other words, the bank would have to pay insurance, taxes and electric bills. The bank would also have to pay for the cost of evicting any holdover tenant, which can be both messy and costly.

As a result, banks may decide not to foreclose, even after they’ve initiated proceedings. Whereas suspected criminals have a constitutional right to a “speedy trial,” there is nothing that legally requires banks to foreclosure quickly. Banks can delay foreclosure as long as they want to postpone the host of costs associated with foreclosure. Shaming banks into completing foreclosures may be the only way to expedite the process.

Zombie Title

In addition to delaying foreclosure, banks may also initiate foreclosure proceedings by issuing a notice of foreclosure, then unexpectedly dismiss the foreclosure. This is known as “Zombie Title.” Zombie title is known as a right to ownership and possession of a home that remains with the debtor who believes he or she has lost the property as a result of foreclosure.

It seems inconceivable that banks can decide not to foreclose after starting the foreclosure process, but it happens more often that you would think. They often occur in low-income areas where the lender does not want to assume responsibility for the upkeep of the property and wants to save money on property taxes. If squatters occupy the property or it falls into extreme disrepair, the bank may wash its hands of the property altogether.

States with the highest numbers of zombie properties include New Jersey, New York, Florida and Illinois. These states have a high number of foreclosures because of the long foreclosure process in those states. Since the process takes so long, owners tend to abandon their property.

Since title remains in the homeowner’s name, the homeowner is legally obligated to pay debts and expenses like property taxes, maintenance on the property, and HOA dues. A homeowner may not receive notice that the bank decided to stop the foreclosure process. As a result, debts associated with the property can come back to haunt homeowners who have no idea that they are still on title and are obligated to pay such expenses.

Should Student Loans Be Dischargeable In Bankruptcy?

For many college students, three things are certain about their future: death, taxes, and years of student loan repayment. Student loan repayment is a must whether the student graduates or not. A percentage of those students will default on their student loans because of low income. If an individual couldn’t make student loan payments, should those payments be dismissed because of hardship? The Seventh Circuit of Appeals recently decided on if a graduate should have his student loans dismissed.

Tetzlaff vs. Educational Credit Management Corporation

Petitioner Mark Warren Tetzlaff is seeking to have his student loan debt discharged. Tetzlaff, 56, lives at home with his mother. He owes about $260,000 in student loan debt guaranteed by Educational Credit Management Corporation. In 2012, he filed for Chapter 7 bankruptcy. In his petition, he requested the bankruptcy courts discharge his loans because repaying the money would cause undue hardship for him.  Debt

Both the district court and the Seventh Circuit denied his request. In the original denial, the bankruptcy court found Tetzlaff’s financial situation could improve. It cited facts like:

  • His MBA
  • Being a good writer
  • His intelligence
  • Temporary family issues

In addition, the Seventh Circuit questioned whether he’d actually made a good faith effort to repay his student loans.

U.S. Bankruptcy Courts Do Allow Hardship Discharge in Chapters 7 & 13

Tetzlaff requested the undue hardship exception afford some debtors in bankruptcy proceeding. The exception does wipe out student loan debt if the debtor can show it would be too hard to make the repayment. There’s a test to determine whether the debtor does have this option. The test varies between bankruptcy courts, but many use either:

  • The Brunner Test
  • The Totality of the Circumstances Test

The Brunner Test

With Brunner, a debtor’s income is scrutinized. The poverty factor compares the debtor’s current expenses and income to the poverty level. The debtor can’t maintain a minimal standard of himself and dependents if forced to repay student loans. The second factor is persistence. The court looks at the debtor’s current finances and whether it will continue throughout the repayment period. Good faith is the last part of the test. The courts determine whether the debtor has made a good faith effort to repay student loans.

The Totality Test

Some bankruptcy courts use the totality of the circumstances test. This test looks at all the important factors in a debtor’s bankruptcy case to determine if there’s undue hardship or not. The test is more holistic, than the Brunner Test.

According to a US News article published in 2014, about 40 percent of debtors who include their student loans in bankruptcy petitions receive a favorable outcome. The petitions that received a favorable outcome had some or all of their student loan debt discharged through bankruptcy. Although the article reveals some students were able to discharge their loans, it also means that the majority of the debtors seeking student loan discharged weren’t successful.

Student loan debt is dischargeable in bankruptcy, but only under the narrowest of circumstances. This creates a problem for those denied bankruptcy relief for their student loans.

Bankruptcy Provides a Fresh Start

According to bankruptcy laws, chapter 7 or 13 provide a debtor with an opportunity to financially rebuild his or her life after a financial hardship. Whether it’s eliminating unsecured debts or saving a home, a debtor can have a fresh start if the petition is granted. For debtors with non-dischargeable student loan debt, the promise of a fresh start is stale.

The problem is that there is a 60% chance that student loan debt will survive the bankruptcy. This means whatever financial fresh start he or she had in bankruptcy is gone. A debtor faces tough consequences when defaulting on a student loan such as:

  • Loans turned over to a collection agency
  • Paying additional court costs and attorney fees
  • Wage garnishment
  • Sued for entire student loan amount
  • Federal and state income tax refunds taken to repay student loans
  • Student loan default listed on credit history for up to seven years
  • Ineligible for deferments
  • Ineligible for professional license renewals
  • Ineligible for financial aid
  • Ineligible to enlist in the U.S. Armed Forces

Potential for Fraud?

Opponents of bankruptcy reform argue that if we make it easier for a debtor to discharge student loans, bankruptcy fraud will rise. Bankruptcy fraud is to delay, defraud, or hinder the bankruptcy court and/ or creditor. Bankruptcy fraud can range from hiding assets to making false statements under oath.

There’s a chance debtors will try to defraud the bankruptcy courts or creditors to have their student loan debts discharged. However, bankruptcy fraud isn’t new. It does happen and debtors are caught. I’m sure if the law is changed, debtors will be more scrutinized before any loan debts are discharged.

Change the Bankruptcy Law to Help More Debtors

It is a moral and binding obligation to repay student loan debt no matter how much money one makes. The government and private lenders provide the loans based on getting money back in the future. It’s the only reason why a young broke college students can get thousands of dollars in cash to attend school. Lenders bank on the young broke college students graduating and making a six-figure income and repaying their six-figure debt.

However, just because a debtor may no longer have to pay loans, doesn’t mean the debtor has no obligations. In many cases, the debtor is already behind in payments and has little to no money to make student loan payments. Whether or not a debtor can afford to repay his student loan shouldn’t be based on the bankruptcy courts’ interpretation of a bright future.

We should change bankruptcy laws to allow people close to defaulting on their student loans the ability to discharge part or all of their student loans in bankruptcy.

How Banks Foreclose On a Home

The most common way for someone to buy a home is through a bank loan, also known as a mortgage. The bank fronts the homeowner money and they make monthly payments to the bank for between ten to forty years until the mortgage is paid off. Both the bank and the new homeowner expect everything to go smoothly from there, and it is great when that happens. Unfortunately, over ten to forty years things  change: the borrower may lose their job, encounter a financial crisis or countless other issues can arise.

When things go wrong, the bank forecloses on the home. This means the bank attempts to take the house back from the borrower through its rights in the contracts it entered into with the borrower. The typical mortgage contract is known as a Deed of Trust, which gives the bank the right to foreclose on the home. However, many people do not know how the foreclosure process works and both banks as well as  Foreclosurehomeowners make major mistakes in the foreclosure process, which can lead to major issues. This was seen recently when the mortgage crisis occurred, and property values plummeted, cities declared bankruptcy and crime spiked across the country.

How does foreclosure work? Each state has its own foreclosure laws. However, the foreclosure laws can be organized into two big picture foreclosure systems: (1) Judicial Foreclosure States and (2) Non-Judicial Foreclosure States. Judicial foreclosure states require that the party attempting to take the property obtains approval from a judge. A non-judicial foreclosure state does not require review or approval by a judge. As a result, non-judicial foreclosures have less oversight and are usually faster and less expensive for the foreclosing party. Not surprisingly, many of the states hit hardest by the foreclosure crisis, such as California, were non-judicial foreclosure states. Without judicial oversight, the foreclosure process is easier to abuse.

Regardless of whether a state is a judicial or non-judicial foreclosure state, a bank forecloses on a home by recording a Notice of Default. The Notice of Default alleges that the borrower has missed payments. Thereafter, if payment is not made, the Bank can sell the property at a Trustee’s Sale. Typically, a Trustee must wait between 30-90 days from the recording of a Notice of Default to schedule a Trustee’s Sale. A trustee’s sale or foreclosure sale is where the Bank sells the property at an auction, usually at a courthouse or city hall, to the highest bidder.

The Notice of Default is the triggering document and these documents were largely responsible for the mortgage crisis. When the housing bubble burst, banks recorded Notice of Defaults at a rapid pace. Many homeowners did not know their rights and abandoned their homes, which resulted in homes sitting vacant for years, also known as zombie foreclosures. Other banks simply recorded Notice of Defaults on the wrong property or listed the wrong amount owed. Due to these abuses, many states enacted what are known as Homeowner Bill of Rights, which are laws that require banks to contact borrowers before recording a Notice of Default to discuss loan modifications, repayment plans, and other options to avoid foreclosure.

In California, for example, banks must follow a detailed notice requirement prior to recording a Notice of Default. If the bank does not comply with the notice requirements, a homeowner facing foreclosure can file a lawsuit to obtain an injunction (a court order stopping foreclosure). Furthermore, if the courts grants an injunction, the homeowner can get attorney’s fees from the bank.

The foreclosure process is becoming a larger issue as regulatory laws become more complex, the housing market changes, and banks look for new ways to make a quick buck. If you receive a Notice of Default or Notice of Trustee’s Sale, you should immediately contact a real estate attorney to protect your rights as a homeowner.

“Dance Moms” Star Indicted For Bankruptcy Fraud

When a Pennsylvania bankruptcy judge channel-surfed one night, reality star Abby Lee Miller’s fame translated into possible prison time. For those who don’t know Miller, she’s a dance instructor who appeared on a reality show called “Dance Moms.” The show debuted in 2011 on Lifetime and followed young dancers as Miller taught them dance. Many people watched for the nasty things she said and the conflicts between her and mothers of dancers.

Bankruptcy Fraud is Abuse of the U.S. Bankruptcy Law

On December 3rd, 2010, Miller filed bankruptcy in a U.S. Bankruptcy Court in Pittsburgh. According to her petition, she owed more than $350,000 to creditors. Bankruptcy is a legal process which allows a person or business, called a debtor, to obtain a fresh start. There are many different types of bankruptcy. The most common ones are Chapter 7, where debtors agree to an elimination of debts in exchange for the sales of their assets. It also could involve a repayment of debtors over time, also known as Chapter 13. Abby Miller filed for Chapter 11 bankruptcy, where parts of a business are severed in order to save the rest of the company.

Regardless of the type of bankruptcy a debtor files, the first rule is honesty. In her reorganization plan, Miller honesty listed four businesses she owned:

  • Abby Lee Dance Co.
  • The Dressing Room
  • Maryen Lorraine Dance Studio
  • The Tight Spot

Her liabilities included the more than $350,000 mentioned above, a dance studio mortgage, home mortgage, taxes owed to school district and county where she resided. According to bankruptcy documents, her income was about $8,000 per month and assets totaled slightly more than $320,000. She claimed she did receive some money from her reality show, but didn’t have a contract with Collins Avenue Entertainment. Dance Mom

Approximately two years later, Judge Thomas Agresti was set to approve her bankruptcy. However, the judge saw her performance on a national television show and commercials for another show. He determined Miller may have lied to the court.

Unfortunately, Miller may have forgotten bankruptcy isn’t a “scripted” reality show. She eventually came clean about the more than $280,000 she didn’t include in the bankruptcy petition.

Federal agents claim she actually opened a separate account to hide her income. The agents also claim she advised others to keep her income quiet and hide more than $700,000 from the bankruptcy court. In October, Miller was indicted on 20 criminal counts of bankruptcy fraud. If found guilty, Miller faces five years in prison and/or a $250,000 fine for each of the 20 counts.

What Is Bankruptcy Fraud?

Bankruptcy fraud is the act or attempt to delay, hinder, or defraud either the bankruptcy court and/or creditors. Sometimes this type of fraud can turn into a criminal case like the situation Miller is involved in now. Debtors like Miller don’t realize that they can’t conceal assets from the court. The court isn’t being nosey when it wants an honest list of assets. Disclosing assets is vital for the bankruptcy court to determine what it needs to collect from the debtor and sell any of the debtor’s property to pay creditors. If the court can’t adequately determine how much money the debtor has, it can’t pay creditors and/ or eliminate debts.

Elements of Bankruptcy Fraud

Will Miller be convicted of bankruptcy fraud? She’s innocent until proven guilty. The prosecution will have to prove the following to prove her guilt:

1. The debtor made a misrepresentation

The prosecutor will have to show Miller made a misrepresentation about her assets. Allegedly Miller told the Court she did make some money from her reality show and appearances, but she received mainly publicity from them. Federal agents supposedly discovered more than $700,000 in undisclosed income. The undisclosed income carries a lot of weight when trying to prove she made misrepresentation.

2. The debtor knew the statements were false when she made them

This element points to the intent of the debtor to commit fraud. If Miller is proven guilty, prosecutors will have to show she knew she was lying at the time she claimed not to make money from the television shows. This can be proven in different ways according to the evidence. For example, she said she didn’t make money from the shows, but set up a separate bank account and had checks withheld would show she made false statements.

3. The debtor made the misrepresentation with the purpose and intent of deceiving the court or creditors

This element requires showing Miller intentionally made misleading statements to the court with the intent to deceive. In the indictment, Miller supposedly wrote an email to her accountant talking about making money so she could stay out of jail. This would point to the intent to deceive creditors. Therefore, prosecutors could prove she claimed not to make money from the reality shows and appearances to deceive creditors into believing she was paid via publicity.

4. The creditor or the court relied on the misstatements

The best way to describe this element is that creditors believed the debtor’s claim of not having money or assets. Miller allegedly told creditors she made about $8,000 per month. In reality she actually had more than $280,000 in additional income at the time she was caught by the channel-surfing bankruptcy judge. Creditors can easily claim they believed Miller and prosecutors would prove the element.

5. The creditor sustained some damage or loss because of the alleged fraud

The creditor would have been paid some or more money if told of the hidden assets. Miller’s creditors may have received money or additional property if she’d allegedly told the truth. This may be a tough one since her bankruptcy attorney claims there was no loss to her creditors because of the undisclosed funds.

Bankruptcy is Not a Scripted Reality Show

Miller isn’t the first to be accused of bankruptcy fraud. She won’t be the last. Many people want the financial freedom bankruptcy gives, but not the possibility of having assets taken. It’s certainly understandable. Creditors are looked at as greedy. Debtors are too broke to be giving property a trustee for sale. Unfortunately, there has to be give and take in bankruptcy law for the debtor to receive a fresh start.

If Miller is convicted, she can look at the bright side. There’s the possibility of a new reality series once she’s released from prison.