Tennessee Bankruptcy Lawyer Blog

The Tennessean is reporting today that Bank of America is pledging to help certain struggling homeowners avoid foreclosure. However, whether or not this help will be available to many Tennessee homeowners is yet to be determined because the BoA offer is very limited. The New York Times is also reporting on a new BoA initiative, which appears to be the same program. Unfortunately, there are significant differences in the information in the two articles.

According to the Tennessean, the BoA program is limited to those homeowners who (1) owe at least 20% more than the current value of their homes, (2) have a subprime or "exotic adjustable rate" mortgage, and (3) are at least two months behind on their mortgage payments. But according to the New York Times, the BoA program is by invitation only and BoA is only inviting borrowers who received subprime or other "high risk" loans from Countrywide. The New York Times also reports that BoA's terms of the offer is significantly more limited than what is reported in the Tennessean article.

Regardless of which report is correct, if you qualify, the BoA offer is significant. It appears they are offering to reduce the principal balance owed on the mortgage by as much as 30%. So far, most of the mortgage modifications that have occurred have only reduced interest rates or extended payments. But under the BoA offer, a homeowner could actually owe less on the mortgage balance (at least at some point). That's great news for BoA customers that qualify.

However, many Tennessee homeowners have not seen the 20% or more drop in their home values that the Tennessean reports is part of BoA's criteria for the offer. As a result, I am not sure how many Tennesseans will qualify for this offer. More importantly, mortgage modifications have (at least in many cases) been more of a nightmare than a blessing. The fact that BoA is making the offer is wonderful, but if you qualify and start working on a modification with BoA, make sure that BoA also stops any foreclosure proceedings during the negotiation process.

My practice is based in Williamson County, so it came as no surprise to me to see this article in the Tennessean. The article focuses on Fairview in western Williamson County and states that foreclosures are lower than in other mid-state areas, such as Antioch, LaVergne, and North Nashville. However, although the actual foreclosure rates are lower, it appears that the percentage of homeowners who are more than 90 days behind on mortgage payments is about the same as those areas that have been harder hit by foreclosures.

What does that say for Williamson County in the near future? Are we going to see a big increase in foreclosures in Williamson County? I don't know. But, if you are one of those who has fallen behind on the mortgage payments, please read my entries on this issue here and here.

Although most of my Tennessee bankruptcy clients tell me they are not terribly concerned about their credit ratings, most of them eventually get around to asking about how the bankruptcy will affect their credit scores. This question is particularly important when it comes to issues related to renting apartments or replacing a vehicle in the first year or two after filing.

One of my clients asked in the very first meeting if it would be possible to rent an apartment if she had to move shortly after filing bankruptcy. Her job situation made the possibility of having to move a significant issue. However, she had been told by a local real estate agent that the bankruptcy would make getting a new apartment almost impossible. However, that agent must have missed this recent article in the Tennessean.

This article highlights an issue that I think most people overlook when talking about post-bankruptcy credit. That issue is that I don't think the old rules apply any more. The old addage was that, within a couple of years after bankruptcy (assuming you paid all your expenses on time post-bankruptcy), you would be able to get a mortgage. In fact, just a year or two ago, you could get a new credit card fairly easily right after the bankruptcy discharge. However, in today's tight credit market, I really don't think those "rules of thumb" apply anymore. Who really knows what mortgage lenders will be doing in a year or two from now? Who knows how credit card companies will judge credit histories in a year or two? Right now, it doesn't look good, but things could be vastly different in a couple of years.

On the other hand, the Tennessean article points out that there may still be some good news for bankruptcy filers. According to the article, the number of renters is actually dropping. Although it might seem that with many people losing their homes to foreclosure that there would be more renters, not less, the fact is that people are moving back in with their parents, finding roommates, or doing other things that are actually reducing the number of renters. As a result, filing for bankruptcy may not be that big of a problem if you are looking to rent.

The main point is that worrying about your credit rating should be secondary to fixing your debt problem. Having a strong balance sheet (ie: debt to income) may make things better for you a year or two down the road. But I don't think anyone can tell us with an certainty what effect filing bankruptcy will have on your ability to get credit post-bankruptcy. Rather than concern yourself with the credit score, focus on fixing the problem.

Divorces have some awful consequences for both parties, but one issue that is becoming all to familiar in my bankruptcy practice is having an ex-spouse file for bankruptcy before refinancing the marital home. The typical situation looks like this:

• a couple divorces with one ex-spouse keeping the home, but both parties' names are on the mortgage;
• the ex-spouse moving out of the home quit claim deeds his or her ownership in the home to the other ex-spouse;
• the ex-spouse keeping the home promises (either in the MDA or otherwise) to refinance the house;
• the ex-spouse doesn't refinance or is unable to refinance;
• the ex-spouse runs into financial trouble (i.e., late mortgage payments, job loss, etc.); and
• the ex-spouse ends up filing for bankruptcy.

After all that, the ex-spouse who moved out of the house has the missed mortgage payments show up on his or her credit report or, worse, the ex-spouse who kept the house turns it over to the mortgage company during the bankruptcy. The worst part is that the innocent ex-spouse not longer has any ownership interest in the house, thanks to the quit claim deed.

However do you avoid this? First, don't sign a quit claim deed until the mortgage is refinanced. Your divorce attorney should be able to put this provision into the divorce decree. Second, make sure there is a deadline for the ex-spouse to refinance. If the ex-spouse cannot refinance, maybe you require the house to be sold (obviously, this might be a problem if your children still need to live in this house). Regardless of how this happens, you do not want to be facing credit problems (or worse, your own bankruptcy to avoid being on the hook for the mortgage) if your ex-spouse doesn't or can't refinance the mortgage. That quit claim deed only waives your ownership in the house. It does NOT mean that you are no longer liable for the mortgage. Sure, the divorce decree may say your ex-spouse will be solely responsible for the mortgage, but the mortgage company is not required to let you off the hook. Just make sure your name gets off the mortgage as soon as possible.

A report from the credit bureau TransUnion says that the number of homeowners who have fallen behind by at least 60 days increased for the 12th straight quarter in the 4th quarter of 2009. The percentage of homeowners who were 60 or more days behind on mortgage payments was 6.89%, up from 4.58% for the 4th quarter of 2008. That is a 50% increase from 2008 to 2009. So, the question is, what are these people going to do?

Obviously, if the late mortgage payments were caused by some short-term bump in the road and they have the ability to catch up the payments, that is the best alternative. But most people do not get 60 days behind on the mortgage unless there is a major problem. If that major problem has resulted in becoming 60 or more days late, they need to be looking into bankruptcy quickly. If they want to save the home, their options have become limited by waiting so long. To catch up the past due amount and still keep the home, they will likely need to file a Chapter 13 and include the past due amounts in their Chapter 13 payment plans. But this also assumes that they can still afford the home.

If they cannot afford the home or are already looking to move, Chapter 7 may still be the best option. To keep the home under a Chapter 7, they must be current on the mortgage. So, waiting until they are 60 or more days late probably prevents them from saving the house through Chapter 7. However, the Chapter 7 can eliminate any deficiency judgment if the home is foreclosed (and it will be foreclosed if the mortgage isn't caught up soon). That would allow these homeowners to walk away from the home without having to pay the mortgage payments or any deficiency judgment. The biggest issue, though, is making sure the bankruptcy is filed before the foreclosure happens.

I have written before on not waiting too long to start the process. Being a bankruptcy attorney in Tennessee, I continue to see clients who have simply waited too long and this new report just confirms that. If you are falling behind on your mortgage, you need to start making decisions on what to do about it. Just hoping that things will get better may eliminate your options, particularly if you are trying to keep the house.