Dear Leon, 

I have a bloated, interest-only loan on my home. (I purchased my home in home in Los Angeles around February 2007). I am totally ’upside down’ and I can no longer afford to make the payments. 

For the past few years, I have been juggling my work and flying back and forth to the east coast to care for a family member with Alzheimer’s. Now my reserves are almost wiped out and I am seriously struggling to make my first and second mortgage payments. In spite of rumors that the housing market is on the verge of making a comeback, for me, the odds of that happening are not worth betting on. 

I am completely overwhelmed – trying to do the right thing while maintaining my excellent credit. However, I am at my wits’ end and need guidance. Should I do a short sale, let my home go into foreclosure, try to get a loan modification, or try some other option? 

I have no other debt beside my car, and I managed to pay off my recent credit card debt with my 2012 tax return.

Can you help? 

Thanks, Monica  

Dear Monica,

Caring for a loved one plus mortgage troubles is overwhelming. No wonder you feel at your wits’ end. I would feel the same way.

Here are some of your options.

Loan Modification

I suggest that you first seek a loan modification. The big banks have become much more lenient. You have nothing to lose by trying.

You can get information on the federal Making Home Affordable programs, which include loan modifications, on Nolo’s Government Foreclosure Prevention Programs topic page.  You may also be able to negotiate a modification directly with your lender/servicer.

If you can’t get a worthwhile modification, you may have several other ways to go. But before you quit paying your mortgages, decide what your highest priority is: to dump the house or protect your credit? People rarely can do both, but you can still try.

Short Sale

If you can’t get an acceptable loan modification, you might want to consider a short sale. If you go this route, I suggest you keep both of your mortgage loans current. By doing so, the adverse impact to your credit will be minimal or none.  But before you negotiate a short sale, check with a good CPA to find out if there is a tax bite waiting to get you after the sale.

Unfortunately, your lender may not agree to a short sale unless you are behind on your mortgage payment. In fact, most real estate agents will advise you to stop paying your mortgage to increase your chance of getting the lender’s approval of the short sale. Of course, when you stop making mortgage payments, your credit will take a hit. You’ll have to decide whether short selling is worth the damage to your credit.

Letting Your Home Go Through Foreclosure

If you can’t get a short sale approved and you plan to let your home go through foreclosure, you might be on the hook for the balance remaining on the second mortgage. I would advise meeting with a local bankruptcy specialist right away for basic advice. Bankruptcy can wipe out your liability for any deficiency. In some cases, you won’t be liable for a deficiency anyway, which would mean a bankruptcy wouldn’t be necessary. A good bankruptcy attorney can tell you whether you’ll be on the hook for the second mortgage or not.

Here’s how this all works:

If you stop paying your mortgages, your first mortgage lender will eventually foreclose on your home. If your second mortgage is a home equity loan, the second mortgage lender can sue you for the loan balance. This is where bankruptcy comes in – you may be able to wipe out your liability for the loan balance in bankruptcy.

To learn more about short sales, loan modifications, and other options to avoid foreclosure, visit Nolo’s Alternatives to Foreclosure section.

However, in California, if your second mortgage is a purchase money loan (meaning you got the loan to buy the home), the lender can’t sue you for a deficiency balance. In this scenario, you wouldn’t need to file for bankruptcy after the foreclosure. Of course, either way, you would sacrifice your credit. But, you would probably get to live in your house payment-free for six months or more while the foreclosure proceeds.

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer. 

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Revised Bankruptcy Forms

The forms that have been revised include:

• Voluntary Petition
• Schedule C — Property Claimed as Exempt
• Schedule E — Creditors Holding Unsecured Priority Claims
• Statement of Financial Affairs
• Proof of Claim
• Statement of Currently Monthly Income and Means Test Calculator (the Chapter 7 Means Test)
• Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (the Means Test for Chapter 13)

There are a few others that changed as well. You can find all of the revised forms on the website of the United States Courts at www.uscourts.gov/FormsAndFees/Forms/BankruptcyForms.aspx.

To learn about each of the above-mentioned forms, visit out Completing the Bankruptcy Forms topic area.

(To learn more about the time it takes for a foreclosure to complete, visit our Foreclosure Timelines topic page.)

The Top Five

According to recent data from RealtyTrac, the five states in which foreclosure takes the longest period of time to complete are:

• New York — foreclosures take an average of  1,049 days (just under three years)
• New Jersey — foreclosures take an average of 1,002 days
• Florida — it takes 893 days on average to complete a foreclosure
• Hawaii — the foreclosure process in Hawaii takes on average 824 days
• Illinois —  foreclosures take an average of 720 days to complete

Why the Long Timelines?

In addition to banks wading through a backlog of foreclosures, factors that contribute to a long completion process include:

• the process the state uses (judicial foreclosures take longer than nonjudicial foreclosures)
• whether the state has protections for homeowners (like mandatory mediation) that prolong the process, and
• whether the lender or servicer is subject to heightened mortgage servicing standards (for example, because it’s part of the  national mortgage settlement).

Longer Is Usually Better

For most homeowners, the longer it takes for the foreclosure to finish, the better. It’s often advantageous to have extra time to:

• try to refinance of your mortgage under the government’s Home Affordable Refinance Program (HARP) (the deadline to apply was recently extended to December 31, 2015)
• negotiate an alternative to foreclosure, or
• live in your home without making a payment before the foreclosure is completed. (To learn more, see How Foreclosure Can Save You Money.)

When a Long Timeline Is Not Helpful

If, on the other hand, you have made other living arrangements and are eager to move out, a long foreclosure timeline could have some downsides. You need to keep tabs on the process to make sure the process actually comes to completion, otherwise you could become the victim of a zombie foreclosure.

To learn more about foreclosure timelines, check out Nolo Network Author Amy Loftsgordon‘s article States With Long Foreclosure Timelines.

Night of the Living Dead

There are a number of  issues that have been haunting homeowners in foreclosure for quite some time– like foreclosure consultant scams and mortgage service industry abuses.  But the newest kid on the block, a zombie foreclosure, can strike when you least expect it.

(Learn about foreclosure scams and mortgage servicer abuses.)

What Is a Zombie Foreclosure?

A zombie foreclosure occurs when a mortgage servicer starts the foreclosure process, the homeowner moves out (thinking he or she will soon lose the home), and then the foreclosure stalls, or is cancelled.

According to Nolo’s new article on zombie foreclosures, a zombie foreclosure can cause major problems for an unsuspecting homeowner, including:

• being on the hook for property taxes
• getting sued by your homeowners assocation for assessments that you continue to be liable for
• fines because your home falls into disrepair and violates housing codes and  ordinances (and even face jail time in some instances if you don’t meet repair deadlines), or
• a bill from your local government for yard maintenance, repairs, trash removal, and/or graffiti scrubbing.

According to Nolo Network author Amy Loftsgordon, the best way to prevent a zombie foreclosure?  Stay in your home through the entire foreclosure process and wait for an official notice to vacate before moving out.

Learn more about zombie foreclosures and other reasons to stay in your home during foreclosure in Nolo’s Foreclosure: Should You Stay or Go? topic area.

The Current Law

Right now, a private student loan lender can sue a student who is delinquent on loans. After getting a judgment, the lender can garnish up to 25% of the former student’s wages (or less in some instances). For details, see California Wage Garnishment Limits.

(To learn how wage garnishment works, see Nolo’s Wage Garnishment topic area.)

Which Loans Would Be Subject to the Wage Garnishment Ban? 

If the bill becomes law, it would not affect the ability of the federal government to garnish wages for the collection of federal student loans. Federal loans are those that are made or guaranteed by the federal government. Examples include Stafford Loans, Direct Loans, and PLUS Loans. Private student loans are those made by private lenders, not the government. (To find out if your loans are federal or private, see Nolo’s article What’s the Difference Between Private and Federal Student Loans?)

If you are struggling under a mound of student loan debt, visit our Student Loan Debt area for articles on government repayment plans and other ways to handle the debt.

Random Bankruptcy Audits

The Bankruptcy Code permits the U.S. Trustee’s office to randomly select  a certain number of Chapter 7 and Chapter 13 cases each year for audit.  The U.S. Trustee’s office could randomly audit up to one out of every 1,000 Chapter 7 or Chapter 13 cases filed, and at a minimum at least one out of 250 cases in each federal judicial district.

Bankruptcy law also allows the U.S. Trustee to audit cases with red flags — those with unusual income or expenditures.

The U.S. Trustee would identify the cases to be audited, and then send them to independent audit firms to conduct the audits. The firms were to look for material misstatements or other evidence of fraud. To learn more about these audits, see Nolo’s article What Is a Bankruptcy Audit?

What Now?

The vast majority of bankruptcy filers do not lie or commit fraud in their bankruptcy cases. For those that do, they are likely to be caught by the bankruptcy trustee assigned to their cases. The case trustees look for  red flags on the petition and schedules and will inquire or investigate further if anything looks fishy.

(If you are struggling to make your mortgage payment, visit Nolo’s Foreclosure Center.)

What Is HARP?

HARP is part of the federal government’s Making Home Affordable Program. It allows homeowners with Fannie Mae and Freddie Mac mortgages to refinance their underwater home mortgages if they meet certain criteria. Requirements include:

• the mortgage must be owned or guaranteed by Fannie Mae or Freddie Mac on or before May 31, 2009
• the homeowner is current on mortgage payments, and
• the loan-to-value ratio must be greater than 80%.

What Does a HARP Refinance Do?

If you qualify for HARP, you may be able to refinance (even if your home has lost value) and get a mortgage with a lower interest rate, a lower monthly payment, a fixed-rate, or a shorter mortgage term.

To learn more about HARP requirements and how to apply see Nolo’s article The Home Affordable Refinance Program (HARP2).

How Does the Homestead Work in Bankruptcy?

If you file for Chapter 7 bankruptcy in Ohio, the homestead exemption allows you to protect a certain amount of equity in your property. If you have a significant amount of equity in your home that is not protected, the bankruptcy trustee can sell your home and use the unprotected equity (called nonexempt equity) to repay your unsecured creditors.

(To learn more about how the homestead exemption works, see Nolo’s article The Homestead Exemption in Bankruptcy.)

What Does the Ohio Homestead Exemption Increase Mean?

Now that the Ohio homestead exemption protects a significantly larger amount of home equity, if you file for bankruptcy and have equity in your home, you are more likely to be able to keep it.

Example (old law). Let’s say your home is worth $450,000 and the principal balance on your mortgage is $350,000. In this scenario, your home equity would be $100,000. Under the old Ohio exemption ($21,625), you’d have almost $80,00o of unprotected equity. The bankruptcy trustee would sell your home, pay off your mortgage, pay you $21,625, and divide the rest among your unsecured creditors.

Example (new law). In the same scenario, the Ohio homestead exemption ($132,900) would protect the entire amount of your $100,000 equity.  You would keep your home in Chapter 7 bankruptcy.

Other Ohio Exemption Increases

Ohio increased the amount of other exemptions as well. For example, the motor vehicle exemption increased from $3,450 to $3,675.

To find all of the Ohio exemptions amounts, see Nolo’s article Ohio Bankruptcy Exemptions.

Here’s what this all means.

FDCPA Lawsuits

The FDCPA is a federal law that prohibits debt collectors from using unfair, deceptive and harassing tactics while collecting debts. If you bring a FDCPA lawsuit and win, you can get damages as well as recover attorney fees, court costs, and other costs of bringing the lawsuit.

(Learn more about FDCPA lawsuits in Nolo’s Illegal Debt Collection Practices area.)

When the Plaintiff Loses a FDCPA Lawsuit

But what happens if you bring a FDCPA lawsuit and lose?  Can the defendant collect attorneys fees and costs against you?

The FDCPA makes clear that if the plaintiff brought the lawsuit in bad faith, or with the purpose of harassment, then the defendant debt collector can recover attorneys fees and costs.

However, a separate federal law, Federal Rule of Civil Procedure 54(d)(1) allows the court to award to a prevailing defendant (that is, a defendant that successfully defends the the case) the costs it incurred in bringing the lawsuit.

The question for the U.S. Supreme Court in this case was whether the FDCPA’s requirement that the defendant prove bad faith meant that FRCP 54(d)(1) did not apply.

Prevailing FDCPA Defendants Can Be Awarded Costs

The Court ruled that a court may award costs to a prevailing defendant under FRCP 54(d)(1). However, keep in mind:

• the key word is may; the court doesn’t have to award costs and might not if it finds the plaintiff is indigent
• this opinion applies to costs only; in order to get attorneys fees, the defendant must still prove that the action was brought in bad faith, and
• costs can be more than just the court filing fee; costs may include deposition costs and other things associated with the lawsuit.

You can read the full opinion here:  Marx v. General Revenue Corp.

These amounts are adjusted every three years based  on the Consumer Price Index. This round of changes increased all of the numbers by 6.3%. The next adjustment will occur on April 1, 2016.

Here are some highlights:

Higher Means Test Thresholds

The increased numbers make it easier for people to pass the means test and qualify for  Chapter 7 bankruptcy.

Federal Exemptions

The federal bankruptcy homestead exemption amount increased from $21, 625 to $22,975.

The federal motor vehicle exemption amount increased from $3,450 to $3,675.

All other federal exemption amounts increased.

Debt Limits to File for Chapter 13 Bankruptcy

The debt limit for eligibility for Chapter 13 bankruptcy increased. You can now qualify for Chapter 13 if your secured debts are below $1,149, 525 (previously it was $1,081,400) and your unsecured debts are below $383,175 (previously it was $360,475).

Increased Limit for Recent Credit Card Charges That are Nondischargeable 

If you have charged more than $650 in luxury goods within 90 days of your bankruptcy filing or taken out more than $925 in cash advances within 70 days of your bankruptcy filing, those charges will be presumed to be nondischargeable (meaning you will not be able to get rid of them in bankruptcy). These limits were increased from $600 and $875 respectively.

(Learn more in Recent Luxury Purchases and Cash Advances in Bankruptcy.)

A list of the dollar amount adjustments can be found n the the Federal Register.