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.

One of the mysteries of the universe (well, sorta) was answered for me this month when the UST’s office wanted to adjust the taxes incurred on the B-22 for taxes as they were projected to be in the future.

My position has been that current income is the only part of the means test calculation that was determined by looking backward.  By statute, Congress defined “current monthly income” to be backward looking. (Conclude what you will about Congress.)  Expenses remained forward looking.

So, if the debtor expected to surrender real estate and lose the interest deduction, their taxes should be calculated, not on what they might owe this year, when they still had the deduction, but looking forward to their tax obligation post surrender of the property.

Others have wondered whether the taxes ought to travel with the income in the look back period.  At some level, that’s logical, since it defines how much income the debtor has that is disposable, in the broadest sense.  [If you've followed my views on the means test, you will know that any argument about the means test based on logic is per se faulty!]

In my recent case, the UST stated clearly that taxes were a forward looking expense. Of course in my case, where I had increased the tax burden to reflect the fact that in 09 the debtors had not paid all of the mortgage interest due and would therefore have a smaller deduction than in past years, the UST wanted to look further forward to years in which they would be paying mortgage interest as it came due.

You had to know that any little victory would be diluted by the UST’s world view, didn’t you?

Remember the maxim that all politics are local?  All of bankruptcy law is local, too, despite the fact that it’s federal law, since bankruptcy looks to state law to determine property rights.  What happens to those property rights in bankruptcy is a matter of federal law.

My friend David Leibowitz’s statement that in a community property state, one spouse is liable for the debts of the other is,  at best, misleading under California community property law.  David practices in Wisconsin.

In California, the community property is liable for the debts of either spouse.  Property acquired during marriage is presumed to be community property, but the spouses can agree to the contrary.

The non contracting spouse has no personal liability for the spouse’s debts:  a creditor with a judgment against the spouse cannot reach the other’s separate property.

Further, in California, there is no liability for garden variety debts of the other spouse once the marriage ends:   your spouse’s debts don’t follow you after the marriage unless the judment of dissolution so provides.

My word picture in trying to explain community property and community claims to clients is that from a creditor’s perspective, the marriage really involves three entities:  two spouses and the community property:  a menage a trois, sanctioned by the law<g>.

The other point to draw here is that even input from a highly capable lawyer such as David, while accurate about the law of the state in which he practices, is not fully applicable in other states.  You cannot “research” your legal questions on the internet and get information that can be reliably applied to your situation.  That’s what lawyers are for, and why we have licenses from the state in which we practice.

A family of three in San Mateo County needs $63,871 a year to meet its basic living needs at a minimal level, according to research by the  Center for Women’s Welfare.

CWW developed the Self Sufficiency Standard to measure the income necessary to meet minimal living standards more precisely that the federal poverty standard whose methodology is five decades old.

What struck me as a bankruptcy lawyer is the sense among bankruptcy trustees and creditors that someone making nearly $64,000 a year would be solidly middle class and reasonably comfortable.  Not so, according to this research.

Part of the problem may be as well that the family with that level of income may also think that it should entitle them to live better than just meeting their needs at a minimal level.  Hence, overspending.

Or, one of my observations over time is that access to credit has helped families mask the fact that they can’t really afford to live a comfortable, middle class life in the San Francisco Bay Area.

Save January 9, 2010 (can you believe that date?) for a workshop on Chapter 13 basics, with an emphasis on drafting Chapter 13 plans.

We’ll gather at the Computer History Museum (101 and Shoreline) in Mountain View at 9:30 for a four hour exploration of Chapter 13.  The room will be set up to allow use of your laptop;  I expect to have several hypotheticals where computer or calculator would be handy.

Cost will be $250;  4 hours of MCLE credit has been applied for.

Sign up on line at www.law-full.com/13workshop.html.  Space is limited to 45 participants.

A bipartisan group of Representatives is planning to offer an amendment to the Wall Street reform bill being debated on December 9th that would allow bankruptcy judges to approve changes to mortgages on the family home.

Currently, lenders are protected from plan terms that change the terms of loans secured by personal residences.  Judges can approve plans that modify secured debts on investment property, vacation homes, and commercial buildings, but not on the most important asset an individual has.

The amendment is identical to H.R. 1106, which passed the House last fall and was defeated by banking interests in the Senate.  Well, banks are now profitable, the foreclosure contagion is spreading to prime loans, and the voluntary mortgage modification programs are laughably ineffective.

Nearly 8% of American home loans are delinquent, and 25 percent of homes are underwater.  Without mortgage modification, I advise many clients to walk away from homes where the debt towers above the present value of the houses.

If some courage and vision can be found in Congress, maybe I’ll have another solution to offer.  Contact your representatives and ask them to support the Conyers-Turner-Lofgren-Marshall amendment to H.R. 4173.  Find your representative and their contact information.

Homeowners should be walking away from underwater houses in droves, according to the analysis of University of Arizona law professor Brent White.  And they shouldn’t feel guilty about it either.

White’s argument is that until  borrowers make clear headed economic, rather than emotional, decisions about paying for underwater houses, the banks will not be moved to modify mortgages.  And of course, the statistics that are coming out about the number of mortgages actually, permanently modified are laughable:  something like 1700 mortgages modified in a country where 8% of mortgages are delinquent.

So, is a contract to repay money a moral commitment, or is it a promise made with economic consequences for breaking it?  Look at the example of professional sports coaches:  coach has a five year contract, team doesn’t perform, and owner fires coach after two years.  Coach has a right to damages for the remaining three years of the contract.

Does anyone think the team owner has done something immoral?  Rather, he has chosen to pay the price of breaking a legally enforceable promise to pay the coach for five years.

It is the scale of the impact that adoption of White’s view of home loans that has provoked a stern, finger wagging response from lenders and Fannie Mae.  White terms the campaign by banks, government and media to brand voluntary default as immoral as “social control”.

White’s 50+ page paper is available online.