|Katherine:||Hello everyone and thank you so much for joining us here on This Needs to Be Said radio. Our friend, Attorney Drescher, has joined us again and today he’s going to talk about real estate bankruptcy. And I’m not sure what that means. That’s why you and I are tuning in to take notes. So get your pen and paper out because class is in session.
Welcome back to This Needs to Be Said, Attorney Drescher. How are you?
|Ron Drescher:||I’m doing well but I hate to have everybody take notes. They can just listen and check my website or your website later.|
|Katherine:||The teacher has spoken. Pay attention. Pens down. So you’re talking about real estate bankruptcy. Give me a definition in layman’s terms. What does that mean for me or could mean for me?|
|Ron Drescher:||That could mean a lot of things. What it means today is if you’re in a situation where you can’t pay the mortgage or you have fallen behind on the mortgage, these days lenders offer you lots of alternatives that we call Loss Mitigation Alternatives. But what most people think of is loan modifications or short sales or deeds in lieu of foreclosure.|
|Katherine:||I’ve heard of those.|
|Ron Drescher:||And so I want to talk to you about how those fit in with bankruptcy and a dash of a very scary concept in tax law that also plays into everything. So you can decide, which of these make the best sense and when to do them.
I want to branch out into two … There are two different roads to go down. One is the road you go down if you want to keep your home and the other is the road to go down if you’d just as soon not keep your home.
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|Ron Drescher:||So let’s go down the road where you would just as soon not keep your home.|
|Ron Drescher:||And if you don’t want to keep your home, the routine thing, the normal thing is sell the house, pay down the … get a buyer. Pay the mortgage off. If you have any spare money you get to keep it and you get to move on with your life. But that’s not the kind of situation we’re talking about. The kind of situation we’re talking about is you can’t sell it for enough to pay off the mortgage. When that happens, you’re looking at two different alternatives.
You’re looking at a deed in lieu of foreclosure or a short sale. In lieu of foreclosure happens when you are just going to say to the lender, “Here. Take the property back. Take the home back and relieve me of the debt.” And frequently, they will agree to do that.
The alternative is a short sale where you say to the lender, “Okay, look, I’m going to sell the property for less than what I owe you and you’ll agree to let that sale go through and then whatever is left on the mortgage, you’ll either forgive or we’ll work out something to pay it back.” Those are the two options if you don’t want to keep the house. Now the problem with both of those options is, first of all, if you have to pay the money back, that’s … I don’t know, I guess it depends. If you only have to pay back a small amount of money and you can afford it, a short sale is a great option for you and you don’t have to consider bankruptcy.
But let’s say that’s not your situation and let’s say you’re going to sell the house for way less than the mortgage pay off. Then you may really want to consider a bankruptcy because that gets rid of that deficiency. Some people say to me, “Wait a second, if I can do a short sale, and the lender will forgive the difference between what I sell it for and what the mortgage is, isn’t that great? Doesn’t that mean I don’t have to file bankruptcy?”
Well, my concern in that situation is a pretty nasty tax concept called Discharge of Indebtedness Income. And that’s a very, in my opinion, mean-spirited provision of the tax code.
|Katherine:||Now what does that mean in layman’s terms, Attorney Drescher?|
|Ron Drescher:||Alright, what that means is if a creditor says, “You don’t owe me this money,” the IRS will say, “Well, you have to pay tax on the amount of money that that creditor said you didn’t have to pay anymore.” You discharged the indebtedness and now you have to pay tax on it, which is a terrible thing. Because-|
|Katherine:||You discharge … Let me make sure I understand because I’m listening-|
|Katherine:||I owed money I was able to discharge it through bankruptcy, is that what you’re saying?|
|Ron Drescher:||No, not through bankruptcy.|
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|Katherine:||Okay, but my agreement with the lender, I made an agreement with them to discharge it and then I pay … Am I following right?|
|Ron Drescher:||Yes, you are following exactly right.|
|Katherine:||Okay, so I make an agreement with them on what … we’re going to wipe the slate clean and I don’t owe you, but I’ve got to pay taxes on what I owe you. So what if it’s $100,000 or $50,000 or $20,000?|
|Ron Drescher:||That’s right.|
|Katherine:||That’s a lot of tax. Whatever it is.|
|Ron Drescher:||That’s a lot of money. And it really defeats the purpose. And for a while, during the time immediately after the real estate crisis, Congress was passing laws that said well if you have money that was on a home loan that was forgiven, you’re not going to have to pay taxes on that money. So it won’t apply to your principle residence, but they haven’t renewed that law and under the new tax law, nobody knows if they’re going to. In fact, the last couple of years, before the new administration came in, they didn’t renew that law until the very end of the year. So you didn’t know if they were going to report that discharge debt to the IRS and that you would have to pay tax on it. So it’s a very nasty gotcha that could happen if you do a short sale or deed in lieu of foreclosure and you get forgiven that debt.
But there’s a huge, huge exception to that rule, which is that if you discharge the debt in bankruptcy, you don’t pay tax on it. So because otherwise, bankruptcy would be a terrible thing. So you don’t pay tax on debt that is discharged in bankruptcy. So here’s the rule, instead of doing a short sale, do a bankruptcy first then do the short sale. Now you might say to me, “Why bother with the short sale if you discharged the debt? Just let the lender take the property back and let them foreclose.”
That is not a terrible strategy, by the way, but if you’re going to want to get into another home, sooner rather than later, and believe it or not most people who let go of their homes, they do. They want to get into another home that they’re going to be able to afford this time. They don’t want to make the same mistake this time that they made last time. They want to be a little bit smarter about it but they do want to get into another home. When you apply for a loan for the new home, they’re going to want to know how long it’s been since you owned a home that was your primary residence and if it’s been less than two years, you’re not going to get that loan.
So it makes sense for you to continue to try to do that short sale, not so you can be relieved of the debt but so you can get out from the house so that that two year time period starts ticking sooner.
|Katherine:||Okay, I see.|
|Ron Drescher:||So if you want to get into another house after a house that you’re in rapidly declines in value, you can’t afford to pay the mortgage, the right thing to do is file bankruptcy first, then try to do the deed in lieu of foreclosure or the short sale. That’s very important because that way you protect all your bases. So that’s the first half.
Does that all make sense to you so far?
|Katherine:||Yes, and I was able to follow along and maybe this has nothing to do with the topic, specifically, but if I … I want to back up to something you said earlier, if I have made an agreement with the company that I owe money to, the mortgage company and they said, “Okay, we’re going to wipe the slate clean, but you’re going to have to pay taxes.” Why was that a good idea? I mean this person is in the financial situation, how would them paying taxes on what is owed better? Or why was that even factored in?|
|Ron Drescher:||You mean why does that law exist?|
|Ron Drescher:||You know, it doesn’t really make sense, but you know what? It doesn’t make sense that people who really can’t afford it pay a lot more, a lot higher interest rates than the people who can afford it. It’s one of those non-intuitive laws that you just have to know is out there.
So now we’re going to go down the other road, and the other road is the loan modification road, what you need to do if you want to try to keep your house. This is another potential gotcha because what you’re going to do is you’re in default under that home loan. And that’s another thing, they won’t give you a loan modification unless you’re in default for at least 90 days. Because they might say, “Well, listen, you’re paying it as agreed, why should I give you relief from the loan?” So you have to fall behind. Sometimes people call that a strategic default but in my experience it’s just that people are really suffering hardship and they just can’t afford to make the mortgage payments.
So you’re behind. So, let’s say you’re behind 90 days. The lender is going to start foreclosure on that property. So depending on the state you’re living in, it could take a year, it could take nine months, it could take 60 days. In the meantime, you are applying to that lender to get a loan modification and what the loan modification will do, amongst some other things, is going to take all the money that you owe on that loan, all the arrears, and it’s going to add it to the principle balance. So that you’re starting from scratch but with a slightly higher loan and they’ll give you the best interest rate they can and hopefully that’s going to make it possible for you to stay in your home.
Now, the problem is … And that’s a great outcome. And that is a desired outcome and if you can do it, you should do it and not file bankruptcy. The problem is that while my clients are applying for these loan modifications to cure the default, the lender is moving forward with the foreclosure process. So there’s a two prong approach. There’s the foreclosure approach and the loan modification approach. And the left hand almost never knows what the right hand is doing.
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|Ron Drescher:||So as a result, people are calling the loan servicing line, they’re on the phone to the lender all the time and the lender says, “Yep, we’ve got your application, we’ve got all the documents. Everything looks good and we’re just going to send it to underwriting to consider it.” In the meantime, they’re getting a notice from the lawyer for the lender that says we’re going to foreclose on your house in 10 days. And you know what? A lot of my clients disregard that notice because they think that they’re going to get that loan modification and it’s going to be all right.
But once they go through with the foreclosure sale, that loan modification is gone. It’s dead. They’re going to close that file and you’ll never have a chance to get a loan modification and you’ve lost the house.
|Ron Drescher:||Yes, that’s right. So what you need to do, you need to pay very close attention to what’s going on with that foreclosure. What you need to do is you need to file that Chapter 13 to stop that foreclosure. Then while you’re in the 13, you’re going to try to get that loan modification. You get that loan modification, they approve it then you’ve got a few options. One option is, depending upon the rest of your debt situation, you can convert to a Chapter Seven and just discharge all of your other debt. Another option is if you don’t have a lot of other debt problems and your only real problem was this mortgage, you get that modification, you make the trial payments, the modification becomes fixed, you dismiss your Chapter 13 case.
A third option is, depending upon what other kind of debt you have, you stay in Chapter 13 and you just go ahead and you move forward with all the benefits that Chapter 13 offers. And that’s a discussion for a different time. You know, Chapter Seven or Chapter 13, that’s a different option but if you’re going to be going forward with a loan modification, you need to be prepared to file that Chapter 13. And even though you’re in a Chapter 13, the lender will still consider your loan modification application.
If they deny the loan modification, you’re not necessarily totally out of luck, because Chapter 13 does give you the opportunity to catch up and pay that defaulted loan amount over the life of your plan with is 36-60 months, but a lot of times my clients really can’t afford that. So a loan modification is a better alternative for them than a Chapter 13, but sometimes a Chapter 13 is your last best chance of holding on to that house.
|Katherine:||Okay, okay. It’s always good to talk with you. I’m trying to soak it up and I want to know … People want to contact you to get their specific situation heard, give me a summary of what you shared here today. I know we have options but are you suggesting that one may be better than the other? Or what? Because if I do one thing that doesn’t benefit me, you shared that that could mess me up, period. I won’t ever be able … Was it a loan modification? A mortgage-|
|Ron Drescher:||Well, you want to decide going in, do I want to keep this house or do I want to get out from under this house. That’s your first question and that’s not a legal question. That’s your life. I mean, a lot of people take heroic measures to try to hold on to their homes and many, many times it’s just not worth it. It’s so expensive and it just cripples the rest of their life to try to hold on to, and a lot of people recognize that and they say, “Okay, I’m not going to take those heroic measures, I’m going to try to get out from under that house.”|
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|Ron Drescher:||And that’s a financial consideration that you make regardless of bankruptcy. What I’m saying is once you make that decision, do the bankruptcy first. And then proceed with either the short sale or deed in lieu of foreclosure, if you want to let go of the house. Or you proceed with the loan modification if you want to stay in the house. But do the bankruptcy to protect yourself from things like from the foreclosure or from that really nasty tax law.|
|Katherine:||Okay, alright. Well that clears it up because I know it’s how you do it. It’s not necessarily what you do. It’s the order in which you do it. So you need a strategy it sounds like.|
|Ron Drescher:||Yes, that’s right. Timing is everything.|
|Katherine:||Alright, well, Attorney Drescher, you were here to help people who are in need of putting together a strategy to reset their lives. And when you were talking about the real estate, you talked about a primary residence so this sounds like this could be for someone who has, maybe rental properties?|
|Ron Drescher:||Rental properties are a different discussion completely.|
|Katherine:||Oh, okay. Alright. Wanted to clarify. Because you talked about a principle residence so I wanted to know if that meant multiple properties.|
|Ron Drescher:||Yeah, just the principle residence.|
|Ron Drescher:||That’s right.|
|Katherine:||Alright. Well tell people how to get in touch with you outside of This Needs to Be Said so they can talk with you about their individual situation because we know that one size does not fit all. And they can find out what strategy they need to get their lives back on track.|
|Ron Drescher:||You know what? The best thing to do is contact us on our website, www.drescherlaw.com, D-R-E-S-C-H-E-R-L-A-W dot com. Gives you a link to call. Or you know what? You can order my book. We have a book, File Bankruptcy and Get Rich that has over 1,500 copies in print and feel free to contact us to try to get a copy of that. I think that’s a great way to get in touch with us.|
|Katherine:||Awesome. What’s your website?|
|Katherine:||Drescherlaw.com. Thank you so much, Attorney Drescher, and until next time, have a wonderful day and thank you for sharing your knowledge again with the This Needs to Be Said audience.|
|Ron Drescher:||Wonderful. Thank you. It’s always great to be here.|
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