Last week attorney Richard Symmes had the opportunity to be on one of our favorite podcasts for real estate investing, the Seattle Investors Club Podcast. In the episode you will learn about attorney Richard Symmes’ background and experience in bankruptcy and foreclosure defense and how can bankruptcy benefit real estate investors and consumers alike moving forward. You can check out the episode here:
Can Bankruptcy Benefit Real Estate Investors and Consumers?
The answer is yes. As we talked about in the episode every real estate investor when they come across a distressed home owner should be looking to provide options to those in need. The better understanding an investor has of those tools, the better you will be able to help those in need. Those tools can consist of Chapter 7 bankruptcy, Chapter 13 Bankruptcy, Loan Modification or Foreclosure Fairness mediation.
If these options do not make sense, the best option for the homeowner might actually be selling the property so that they can have equity to move forward and the real estate investor can have the property they were seeking to rehab or hold. It’s a win/win situation if everybody is on the same page and everybody is in agreement as to what is the best options moving forward for everybody. The first step is to check out where the distressed owner is on the Washington state foreclosure timeline and offer some options from there.
How Can Foreclosure Fairness Mediation Benefit Distressed Homeowners?
In Washington State we have a law called the Foreclosure Fairness Act (FFA) (RCW 64.24.163). This act allows homeowners with loans from most big banks (smaller bank or individual lenders are exempt from the law), to apply to the state through an attorney or housing counselor for mediation. This mediation may be requested once a notice of default is received by the homeowner and up to 20 days after a trustee sale date is recorded with the county. This act also only applies to primary residence and not investment properties. Once the state has accepted the referral a mediator will be appointed and local attorneys for the bank will be notified. The goal of the mediation is to help a distressed homeowner get a modification to stay in the residence.
The best benefit of the FFA mediation is that once the mediation process is started, a homeowner cannot be foreclosed upon until the mediation process is complete. This process can last several months if not longer so it will allow the distressed homeowner to buy time to weigh their options as well as have the opportunity to be reviewed for a loan modification without living in fear of a foreclosure date or having to file for bankruptcy. If the distressed homeowner is denied a loan modification and mediation session is closed, the foreclosure process may start up again. If necessary a bankruptcy could be filed at a later date to delay a sale further.
How Can Chapter 7 Bankruptcy Benefit Distressed Homeowners?
In most cases involving distressed homeowners looking to stop a foreclosure sale, chapter 7 bankruptcy does not make the most sense. Chapter 7 bankruptcy is a start fresh, liquidation bankruptcy, although most times, debtors get to keep all their assets under a certain amount per exemption laws. The filing of the bankruptcy will stop a foreclosure sale due to the bankruptcy automatic stay, but it allows a bankruptcy trustee to liquidate assets for the benefit of creditors.
In Washington, homeowners can protect up to $125,000 of equity in a primary residence located in Washington State by utilizing the Washington State bankruptcy exemptions. If there is the potential to receive any more than that amount a bankruptcy trustee is likely to sell the property for the benefit of creditors. Distressed homeowners also need to watch out for trustee’s trying to short sell a property for the benefit of creditors if there is no equity and the mortgage is delinquent. Court have allowed trustees to “carve out” funds from the short sale for the benefit of creditors. This means the bank takes the property back, and gives money to the trustee for doing their dirty work and these funds benefit the distressed homeowners creditors.
This means that chapter 7 bankruptcy is not the best option for distressed home owners unless they have significant unsecured debt like credit cards or medical debt and they are ok with the possibility they may lose their home if the trustee wants to sell it for the benefit of their creditors. There are also other factors that may impact whether a chapter 7 makes sense or is possible and a bankruptcy attorney should be consulted prior to filing anything.
How Can Chapter 13 Bankruptcy Benefit Distressed Homeowners?
Chapter 13 bankruptcy is likely going to be the best and most tool to a distressed homeowner. A chapter 13 bankruptcy can be filed anytime prior to the actual foreclosure sale in order to stop a foreclosure sale from happening. A chapter 13 bankruptcy allows a distressed homeowner to make up payments they are behind over 5 years while also making their normal mortgage payments. Being able to afford such a plan is key if this option is going to be a viable long term plan. Filing a chapter 13 bankruptcy can also eliminate other unsecured debts as part of a case and the amount a debtor needs to pay is based on equity in assets, family size and household gross income.
If a complete chapter 13 bankruptcy case is not filed, it may be referred to as an emergency filing that consists of a distressed homeowners name, address, social security number and a list of their creditors. From here the distressed homeowner can decide to file the balance of the required bankruptcy schedules or let their case get dismissed. By filing an emergency case it can buy a distressed homeowner 30-45 days on average to figure out their next plan of action, whether that be catching up on a loan, a loan modification or selling to a third party. Filing the balance or the required bankruptcy schedules will allow a debtor to buy more time, but they will also have to start making payment to the chapter 13 bankruptcy trustee. If no payments are made or the balance of schedules are not filed a bankruptcy case can be dismissed or in the rare case, converted to a chapter 7 liquidation if a debtor has been abusing the process or is a serial bankruptcy filer. If a debtor wishes to sell a property while in a bankruptcy, it would require court approval or the dismissal of the case.
If you come across homeowners who are looking for options to stop a foreclosure sale in your real estate business, give Symmes Law Group a call at 206-682-7975 to speak to a foreclosure defense attorney and learn about how we may be able to help.