It’s been over six years since the financial and housing crisis began and for many families a lot has changed. Maybe you have a new job that pays less than before, maybe you have kids getting ready for college and you can’t imagine how you are going to pay for college and the second mortgage, maybe you haven’t been able to save for retirement and you’re not getting any younger or have built up credit card bills in order to keep the second mortgage current. As much as you may not want to consider bankruptcy, there is something important to consider while the value of your house is less than what you owe on your first mortgage.
Second or third mortgages, and credit cards secured by a lien on your house, may be avoided as secured claims and paid, usually on a pro rata basis, as unsecured debts in bankruptcy if the value of the house is less than the full amount of the first mortgage. In many towns throughout New Jersey, the vast majority of second and third mortgages are wholly unsecured right now and may be avoided in bankruptcy. As the housing market recovers and property values increase, that might not be so in the future.
The decline in property values as a result of the financial crisis has impacted each New Jersey town and neighborhood differently. Some towns and neighborhoods suffered deep declines in property values since 2007 and others not so much. Where I live in Bloomfield, values dropped steeply. Some houses near where I live are worth only 60% of the purchase price. For a long time it seemed like houses weren’t selling at any price. But it appears that houses are starting to sell again although the selling price is still far below where they were in 2007.
As property values rise, second and third liens may start to be partially secured again which will mean that they can’t be avoided in bankruptcy. In some cases, the second or third mortgage has been written off by the original lender and sold for scrap to a debt buyer. Even if no one is bothering you or trying to collect the junior mortgage, the lien is still there. In my opinion, people who have been struggling with second and third mortgages they can't afford in towns that have suffered big declines in property values should take a hard look at their finances and budget and consider whether they should file bankruptcy, pay their unsecured creditors as much as required under bankruptcy law through a plan, and get a fresh start. Once the value of the house is even $1 more than the first mortgage, the option of “stripping off” or converting the second mortgage to unsecured debt is lost.
While filing for bankruptcy is not something to be taken lightly, I think it is important for people who are struggling to now that bankruptcy is available and consider whether it might be right for the financial health of your family. In order to have a meaningful consultation with an attorney you will need to have copies of your most recent income tax return, the last six months of pay receipts, copies of your recent bills and your credit card and mortgage statements and your bank statements. The attorney may ask you to obtain an appraisal of your home from a licensed appraiser.
Homeowners who are struggling with debt and having trouble making ends meet should contact a bankruptcy attorney to see if there is a plan that might help. It’s especially important to contact a bankruptcy attorney BEFORE you use any money from your retirement saving or college savings accounts to make mortgage or other debt payments. If you are in foreclosure, make sure you call an attorney BEFORE the sheriff’s sale takes place.
Lately I have been seeing more and more “WE BUY HOUSES” signs around New Jersey and thought it might be time for a reminder about avoiding foreclosure rescue scams or if it’s too late to avoid them to talk about a reasonably new law that will help New Jersey homeowners fight back.
Foreclosure and mortgage default are scary. Rebecca and I have spoken to hundreds of people who were behind on their mortgages or facing foreclosure over the past several years and every one of
them was scared and confused. Many were isolated and trying not to let anyone else know they were in difficulty. This makes even the smartest and most sophisticated people vulnerable to scams.
Being scared in a scary situation is nothing to be ashamed of.
In June 2012, a new law took effect in New Jersey to help homeowners who are targets or victims of foreclosure rescue scams. The law is called the “Foreclosure Rescue Fraud Prevention Act”. The proper citation to the law is NJSA 46:10B-53 to 68. The full text of the law is available on the NJ Judiciary website as an attachment to a memo sent to New Jersey Judges after the law passed. http://www.judiciary.state.nj.us/legis/P.L.%202011,%20c.146%20(A-359)%20-%20The%20Foreclosure%20Rescue%20Fraud%20Prevention%20Act.pdf. In signing the law Gov. Christie recognized that the foreclosure and mortgage default present families with very painful choices.
Rules for licensing foreclosure consultants were proposed in May 2013 and should be enacted soon.
Here is a link to the proposed rules: http://www.state.nj.us/dobi/proposed/prn13_73.pdf.
The Foreclosure Rescue Fraud Prevention Act applies to sales or sale leasebacks of distressed properties. Distressed properties are one to four family owner occupied houses in which there is a pending foreclosure or the mortgage is 90 days or more behind on payments. The law covers solicitations and transactions by people and companies who offer to prevent or
postpone a foreclosure, assist the homeowner to redeem the property or to help improve or prevent the deterioration of the homeowner’s credit score and other services detailed in the law itself.
Some are transactions in which the “purchaser” allows the homeowner to stay in the house and buy it back later. The homeowner often believes that this is a way to save the home, but in my experience it’s a sure way to lose the equity the homeowner has built up over the years. Many of the victims of this sort of scam are elderly or have older mortgages which they have been paying on for many years before falling into default. This type of offer is typically only made to people who have over $75,000
in equity in their homes. The law calls this a “distressed property conditional conveyance”. If someone is offering you a deal like this, you should call an experienced consumer attorney or bankruptcy attorney right away. It means that even though you are behind on your mortgage or in
foreclosure you may have equity, or some value stored in your home and there might be a better way for you to either keep the house or sell it and get enough money to start over in a new home.
Sometimes a reverse mortgage is a good option in a situation like this and sometimes a chapter 13 bankruptcy is a better way to save or sell the home.
WEDNESDAY, APRIL 17, 2013 LAST UPDATED: THURSDAY APRIL 18, 2013, 8:01 AM
BY KATHLEEN LYNN
Margaret Jurow, a lawyer with Legal Services of New Jersey who works with homeowners facing foreclosure, said many of her clients don't even have bank accounts, so cashing the check was their only option.