Susanne Robicsek’s post on the futility of keeping a home through bankruptcy brought to mind Professor Brent White’s paper on the use by government and financial counselors of fear and shame to keep people paying on mortgages on underwater homes.

White cites a litany of messages from apparently credable sources who chant that a foreclosure will scar your life forever onwards.  Further, these messages suggest that the law and morality require that you pay for something that no longer has value or no longer makes economic sense.

Somehow, I didn’t hear that electing to default on a mortgage was immoral when a couple of huge real estate investment companies walked from projects in New York.  Is it immoral only for individuals, but just good business for corporations?

I see my job as a bankruptcy  professional to ask the client to consider walking away.  Is the house genuinely affordable now?  Will the loan reset making it unaffordable in the future?  How much would the housing market have to appreciate just to be able to sell it for what you owe?  Do you want to take a further credit hit down the road when you need to leave this house?

Given the breadth of the current financial morass, I have doubts that what we take as gospel about the future availability of credit to those filing bankruptcy will be the rule in the future.  I doubt that credit availability will return to the norms of the past two decades anytime soon.  Who knows what the rules will be in the future?

I have to ask clients:  just what kind of financial pain are you prepared to endure in the expectation that the old rules will prevail?

The availability of parking at the BART (light rail) station has been my measure of the depth of the recession.  Lots of parking means that not very many folk are working and riding public transit to work.

On my way to Oakland bankruptcy court today, I had to park in the auxiliary parking lots.  Ah, I thought, recovery is on its way.

My partner suggested an alternative explanation: everyone in the parking lot was on their way to a job fair…..

Jonathan Ginsberg’s piece about the murky language of notices from the bankruptcy court struck a cord. In an attempt to provide notice, they sow confusion.  But my pet peeve is the client who calls up and says, literally, “I got this letter from {insert name of court or creditor, or trustee}.  What does it mean?”

I wonder if they think I’m the offspring of Carnak the Magnificent, who provided answers BEFORE reading the questions.  I’m trying to train my staff to tell them to fax me the letter in question, so I can see what they are talking about before trying to interpret it.  In my imagination, it would be much more fun just to provide random answers….

The clients in financial trouble couldn’t get the attention of their mortgage lender about the coming train wreck.  But you’re current, said the telephone representative for the lender.  So, the clients deliberately missed a payment to make their point that they needed help.

Care to guess what happened next?  Determined to remain only one payment down, they sent the next payment, and IT WAS RETURNED.  It was followed by a notice of default.

So now the clients are talking to bankruptcy counsel and are looking for ways to get the constructive attention of PNC Bank.

The would be client had millions of dollars of equity in the house at stake, yet waited til the week of the foreclosure to look for a bankruptcy lawyer.  The required case would be a Chapter 11, which is heavy on procedure.  I didn’t have the capacity to take on such a case on an emergency basis.  Neither could one of my most esteemed colleagues.

How did the homeowner get into this bind?  He’d been trying to negotiate a resolution and a modification right up to the last minute, and at the last minute, the lender said “no”.

I’d like to report that this scenario is aberrational, but it isn’t.  I am not seeing many accepted modifications or even workouts, much less ones that actually improve the homeowner’s situation.  If you are facing foreclosure, don’t bank on positive response from the bank if you envision bankruptcy as the last ditch choice.  There may no capable bankruptcy attorneys available who can turn a case around in less than a week.

Yesterday we got notice from one trustee that 5 of our confirmed Chaper 13 cases were in default and in danger of being dismissed.  Jackson Morris, a colleague up the Peninsula, sent a link to this map showing change in unemployment figures.

The default picture becomes clearer.

Several clients have asked whether they can remove personal property from their home while it’s “in foreclosure”.  Another client wanted to know what the rights of the foreclosing creditor were to come into her home before any sale was held.

Be clear:  it’s your property until there is a foreclosure sale. Your rights to the property are unchanged by any default on the mortgage payment.  Likewise, the lender is still an outsider unless and until it obtains title to the property by being the highest bidder at the foreclosure sale.

I’m fascinated by the concept of being “in foreclosure”.  It seems to be akin to being  ”in collections”.  Neither are real places, or even changes in your legal rights.  Yet laymen seem to think of them as situations in which the rules change and consequences follow. [ I have a mental image of them being dank dungeons with manacles on the wall, and cobwebs hanging from the beams.]  True, that each represents a process that may lead to a change in legal rights, or a loss of property, but they are roadways, not fixed “places.”

The foreclosure process, which by California law, takes a minimum of  four months from formal notice of default to foreclosure sale, is being drawn out these days,  by the action or inaction of the foreclosing creditor.  My assumption is that their systems simply can’t process that many foreclosures and the market can’t absorb that much bank owned property.

Which brings me to my current favorite sermon:  even if it’s inevitable that you lose the house to foreclosure, stay in the property and live payment free until there is actually a sale.  You may be astounded at how long that interval is, how very much longer than the four month legal process.

When the house is unaffordable,  homeowners often look to a short sale or deed in lieu in the belief that avoiding foreclosure means avoiding the credit score hit.  Not so.

Sharon Epperson’s bit in USAWeekend today points out that a deed in lieu or a short sale will likely be reported as “not paid as agreed.” Put another way, you don’t get any points for trying to make the lender’s life easier.

This reinforces the pitch I often make that, if losing the house is inevitable, live there as long as possible for free.  Those months without mortgage payments and property taxes may be the only return you get on your housing investment.  Don’t lose out on that “return” by leaving earlier than you have to.

I’ve launched a new web site, www.bankruptcymastery.com, dedicated to being a resource for lawyers new to the practice of consumer bankruptcy law.  I envision it as being a tool to learn, systematically, those things beyond the Code that are necessary to be an effective bankruptcy lawyer.

I’ve been mentoring an increasing group of local young lawyers, one on one, and that simply isn’t sustainable.  After all, I’m supposed to be in the business of helping my clients.

Content at bankruptcymastery.com is focused on transmitting those things I’ve learned in 30 years of doing this.  While I can’t eradicate “learning by doing” and “trial and error”, I’m going to try to offer an alternative:  teaching that is focused, available, and systematic.

If you’re a lawyer new to this practice, check it out: www.bankruptcymastery.com.  There’s a free ecourse available now, with new things in the hopper.  Join me there.

Cathy

Start the new year with a new skill set:  Chapter 13 Bankruptcy.  I’m doing a four hour class on Saturday, January 9th in Mountain View looking at the basics of Chapter 13 bankruptcy, with an emphasis on how to craft a plan that’s confirmable.

We’ll talk about the best interests of creditors test, how to do a liquidation analysis, the application of the “hanging paragraph”, Till, Kagenveama, and Smith.  Time allotted to do some hypothetical plans and discuss the results.

You veterans out there can send your new associates for a systematic introduction at Chapter 13.

Sign up is available at www.law-full.com/13workshop.html.

Seating is limited and there are only 25 places remaining.