Did your Bankruptcy Attorney Leave You Holding the Ball?

November 2, 2018

Have you or someone you know filed Chapter 7 Bankruptcy and Walked away from your home because that was the canned answer your attorney gave you?

It's no secret that the last five or six years have been extremely hard on the majority of people in this country.

The struggling economy and housing collapse affected millions of people in the United States. I myself was no exception and in 2006 the housing market started to slide toward the eventual collapse of 2008.

Obviously in a commission based business such as real estate that also meant a major decrease in my income. That combined with a divorce in 2006 was just a recipe for financial disaster.

Unfortunately like so many others, before I got to the point of surrendering to the fact that bankruptcy was my best option, I used up every financial pipeline l had.

Borrowing from friends and family, utilizing unsecured credit lines, leveraging other assets ect.The financial landslide that ultimately ends in bankruptcy is the most stressful and anxiety filled experience I ever had in my life.

That happening ignited an unbelievable passion in me to assist homeowners in financial distress. I was in the Real Estate industry and could not get answers for the many questions I had so I could only imagine how people not in the industry felt when they had questions about real property in a bankruptcy.

Because of the fact that this situation was so different to me and I had so much anxiety over it, I spent six months Interviewing about 30 bankruptcy attorneys. Every single one of them gave the same canned advice when it came to the home that you own when you file a Chapter 7 Bankruptcy.

Every one of them told me "just walk away".

Before I get much further into this column in what probably sounds like it's going to be an attorney bashing article, I just want to take a second and make one thing clear.

Bankruptcy law is extremely complicated and I absolutely wouldn't recommend anybody entering into that process without a good attorney. My passion that you may feel through this article comes from my personal experience and the experience that I've had working with countless distressed homeowners in the last five years.

I don't believe any of the bankruptcy attorneys give this terrible advice I am going to discuss in this article on purpose. I do however believe there is disservice on their part. In any profession you are in that you provide professional advice to people whether it's real estate, mortgage lending or a tax accountant it is your ethical responsibility to stay up to date on all of the updates concerning that industry.

It is a complete disservice to your client if you don't stay up-to-date on all the changes within that Industry. Especially when it is a life altering decision that has short term and long term financial impact on that person.

For probably the last 100 years it made sense for bankruptcy attorneys in the state of Maryland to tell clients just to walk away from a property after a Chapter 7 discharge. An attorney would file a bankruptcy petition on behalf of a client and three to four months later the client was discharged from bankruptcy.

During the time that client was in bankruptcy the attorney for the lender would file a motion to remove the mortgage from the bankruptcy so that they can proceed with foreclosure thus releasing the federal stay which prevented the lender from foreclosing on the home. By the time the bankruptcy was discharged the people usually had three or four months and the house was foreclosed on and everybody moved on with with their lives.

Then the winds of change come blowing through. By the middle of 2006 we were experiencing the end of the biggest real estate boom in the history of the country. That lead to the 2007-2012 Global Financil Crisis.

The most significant part of the financial crisis that directly affects what I'm discussing in this article is the Robo signing scandal of 2010. The scandal rocked the entire real estate industry and changed the foreclosure process forever. All of the major lenders in the United States almost immediately stop foreclosure proceedings.

Thus creating such a backlog of distressed properties that two years later we still haven't been able to get through.

When a person files a Chapter 7 bankruptcy and they receive a discharge from the court, they are discharged from the mortgage not from the house. Because I went through the bankruptcy process myself I can see how some people get confused about the situation. Going through the process you are asked several times not just by your attorney but also by the bankruptcy court and the bankruptcy trustee if you want to forfeit the house.

What you're really forfeiting is the right to for the bankruptcy court to enforce the automatic stay and stop the foreclosure process from happening. However this is where the winds of change come into play. Until the lender actually enforces their rights under the deed of trust and forecloses on that property you're still the owner of the house.

Any and all liabilities or responsibilities that come with that house are yours until the foreclosure happens, the foreclosure sale is ratified and title is taken out your name. The only exception to that is the responsibility of the mortgage that you were discharged from during the bankruptcy.

In other words when an attorney tells you after a Chapter 7 "walk away from your house it's over" that's really not the truth, it's not over till it's over and in 2012 after the Robo signing scandal it may not be over for a really long time.

Now I'm going to go back a couple years and discuss the roadblocks that I faced working with clients and also bankruptcy attorneys while assisting distressed homeowners.

In the last five years I've had the absolute pleasure of assisting countless families find a dignified solution to foreclosure through a short sale. There were many circumstances in the last five years where a client either before starting to work with me or during the process of working with me went and met with a bankruptcy attorney.

In many cases they would come back from their meeting with their attorney and tell me that their attorney advised them to file bankruptcy and you guessed it "just walk away". Because I am not licensed to practice law and give legal advise I would just say ok and withdraw the listing and call it a day.

Most of the time one of the biggest reasons attorneys would give to potential clients during their consultations as to why they should not consider a short sale but consider Chapter 7 bankruptcy is because of the potential tax liability and the fact that they could receive 1099 on the difference between what the house sold for and what was owed to the bank.

It was right around the end of 2009 or the beginning of 2010 and I would still hear this as a reason given to people to consider bankruptcy over a short sale but I started to question to myself the actual up to date knowledge of bankruptcy attorneys when it comes to real estate and the changes in the industry

Effective January 1, 2008, the "Mortgage Forgiveness Debt Relief Act of 2007," says, for those eligible, no taxes will be owed on any mortgage debt on a principal residence that is forgiven or written off as part of a short sale, foreclosure, renegotiation, bankruptcy or other such action.

One of the most common reasons people would be in a situation where they needed to short sale their home is a divorce, separation or break up of a relationship.

Because of the fact that a couple buys a house together, most likely they were qualified as a couple with both of their incomes taken into consideration, it goes without saying that when a split up happens most likely neither would be able to afford that home on their own. It is no big secret that real estate has seen a decline since the 2006 implosion.

Because of that it is not uncommon for a situation like this: A couple purchased a house from 2004 and owned it until 2010, they made all of the payments on time for 6 years and now they are getting divorced. Unfortunately the house is worth $75,000 less then what they paid for it. All of the lenders consider a divorce or break up of a relationship as one of the most acceptable reasons to do a short sale.

In many of those situations there was no extreme financial distress on either side just the fact that they could not come to an agreement as to who would stay in the house when both parties were on title and neither party could afford the mortgage payments on their own.

In situations like that when clients would meet with a bankruptcy attorney and he would give them the same old reason as to why they shouldn't short sale (The Tax Consequence) and should just do a bankruptcy I started to ask those people to go back and ask their attorney about the mortgage forgiveness debt relief act of 2007.

Keep in mind this is the end of 2009 beginning of 2010 where this has been in effect for about two years. In every single situation the people would tell me the attorney danced around the answer or had no idea what they were talking about.

My thought was why should somebody file a bankruptcy and completely obliterate their credit when the only form of distress they have is a mortgage that neither of them can afford once they split up.

Especially considering that the mortgage forgiveness debt relief act of 2007 may relieve them of the tax consequence if they successfully short sell their home? Does that make sense to you? In other words why should someone take the extreme action of bankruptcy when they're not overwhelmed with a bunch of other debt they can't afford if they were to be released from the mortgage obligation.

At some point in 2010 there was no doubt in my mind that most bankruptcy attorneys were just following the same old protocol when it comes to running people through Chapter 7.

Again I will say how important I think attorneys are to have when you're considering bankruptcy because of the extremely complicated laws involved. Through personal experience and the experience of countless clients that went through a bankruptcy I also realize how much the process itself was much like an assembly line.

The client meets with an attorney for a consultation and the attorney answers any questions they have about bankruptcy. Most attorneys do their best to get that client to sign retainer agreement right there in their first consultation. After that client finally decides to retain that attorney, the client pays the attorney and the attorney files the bankruptcy petition.

The attorney then continues to answer questions that the client may have right up until the meeting of the creditors with the bankruptcy trustee. After you leave the meeting of creditors and everything is approved for your bankruptcy to continue there is a really good chance that you won't be able to get your bankruptcy attorney on the phone or answer emails again and just like that you're at the end of the assembly line.

For those reading this that have never been through the process you may think I'm attorney bashing but for those of you that have been through this you know exactly what I'm talking about.

For the past two years there has been an increasing amount of clients that I have dealt with that filed a bankruptcy and walked away from their home on the advice of their attorney. Some of them as long as three years ago. They're people coming to me with a wide range of problems that stemmed from their bankruptcy discharge and the advice they took from their attorney to "Just Walk Away".

Fast forward a couple years and they're being sued by Condo or HOA associations, getting fines from the local counties for violations such as overgrown grass or unsightly debris on the property and things like that. Some of them are being threatened by neighbors or other people in the community where the house is because "there are rat infestations because of the unkept grass and landscaping, kids breaking into the vacant properties, squatters and more.

They end up calling the bank that originally had their mortgage to ask what's going on and why people are still calling them when they were discharged from the debt years ago and then the banks say why don't you short sell the home. Most of them are completely confused because they think, "I dont own the house, I filed Bankruptcy and my attorney told me to ..... Just walk Away". Oh how wrong they are and that is how many of them find me.

Most of the initial conversations with those particular clients are spent with me trying to explain how things work. They keep saying I don't understand my attorney told me to just walk away and me trying to explain to them that the only thing they were discharged from was the mortgage and not the property or the other responsibilities that come with that property.

My frustration with these situations came to ahead about a month ago when a former client called me that I hadn't heard from in a couple years. About three years ago I had his condo listed in Reisterstown as a short sale.

During the time we had it listed he went and spoke with a bankruptcy attorney who of course advised him that bankruptcy was his best option. He called me and notified me of this and that he wanted to withdraw the listing because his attorney had told him his best option was to file a Chapter 7 bankruptcy and you guessed it "just walk away".

He called me about a month ago to talk about the possibility of purchasing a new home. He spent the last three years working hard to reestablish his credit and saving up a little money and was ready to put his life back together and move on. In catching up about how things had been the last couple years I immediately got suspicious when he mentioned throughout the conversation innocently that from time to time he would still receive mailings "from his old condo association" but he just threw them away because he no longer owned it.

I mean after all he filed Bankruptcy, received a discharge and walked away just like his attorney told him to do.

As I hung up with him and went on to Maryland land records I had a sick feeling in my stomach because unfortunately for him I knew what I was going to find. Bank of America has never to this date foreclosed on that property.

I was further distraught when I went on to Maryland Judiciary case search only to find out that there was a $12,000 open judgment against this client for the past several years condo association dues attorneys fees and late fees.

On top of all of that is the length of time that it takes you to be able to get a mortgage after such a situation. This is yet another area that bankruptcy attorneys are not updated on and do not inform clients of. FHA guidelines for getting a mortgage require that if you file Chapter 7 bankruptcy and include a mortgage on that property that your name must be off title for that property for three years.

That means you're a three-year clock does not start ticking to be able to get a mortgage to buy a new home until the house is foreclosed on in title is taken back. Does that make sense? In other words my client here, who did exactly what his attorney told him to do 2 1/2 years ago now has a open $12,000 judgment against him and his three-year clock hasn't even started ticking yet.

Had his attorney three years ago been more up to date on the winds of change and advised his client to go through with the bankruptcy and after he got his discharge work with an experienced qualified Realtor and short sale the property not only would he not have an open $12,000 judgment against him but title would've been taken out of his name when the property was sold and transferred to the new buyer.

Instead of re=living the same anxiety and fears that he went through a couple of years ago and went to an attorney to get advice on a resolution he would now be close to a point where he could purchase another property.

The end result in this situation is we are going to attempt to short sale the property and work with Bank of America and the condo association on a settlement offer when we get a qualified buyer to purchase. That way my client can get the fresh start that he thought he was going to get 2 1/2 years ago when he paid a licensed attorney to assist him getting a fresh start and depended on his "legal advise" and up to date knowledge of the law.

The recent $25 billion settlement with all the major lenders have now more than ever made it make sense for a distressed homeowner to consider short selling their home before or even after a Bankruptcy Discharge. Many of the lenders are offering the distressed homeowner up to $35,000 to work with them and do a short sale instead of forcing them to foreclose. Keep in mind even if you've been discharged from a mortgage you're still the owner of the property until it's foreclosed on.

I just recently settled a home for another client that was discharged from a debt in 2009 and Chase Bank gave them $10,000 at the settlement table for working with them on the short sale. The home had been vacant for almost 3 years, it was an extremely distressed condition but the fact of the matter is the bank would've had to go through the foreclosure process in order to take title back.

Many of you are probably wondering why that is and the reality is because it can cost a bank up to $50,000 in the state of Maryland to foreclose on the property when you factor in attorneys fees court costs property management property preservation and everything that a bank has to do to foreclose on a property and take care of it and keep it up. Not only that but because the system is so backed up the process can take a year to year and a half for a bank to complete a foreclosure. Therefore it makes a lot more sense for a lender to have the homeowner work with them and cooperate to short sell the property and give them a seller cooperation contribution at settlement and get rid of the house now.

The bottom line is that if you're distressed homeowner in 2012 they're so many more options and things to consider than have ever been available in the history of this Country. While I am not an attorney and nothing in this column or article should be considered as legal advice my personal opinion is that "just walking away" is the absolute worst decision anyone can make when they are looking for a dignified solution to an unmanageable mortgage.

If you have any questions for me please feel free to visit my website at www.RealVolutionHomes.com or email me directly at Dan@RealvolutionHomes.com