Use bankruptcy as tool to take the best advantage of the pandemic mortgage foreclosure moratorium. Get stability in an unstable environment.
Wild Foreclosure Moratorium Rollercoaster Ride
If your mortgage has qualified for the federal mortgage foreclosure moratorium, the last 11 months have been a wild ride. Since the original 60-day foreclosure moratorium in March 2020, there have been no less than 6 extensions. Most of these extensions were announced just days before the current moratorium expired. Some extended the moratorium only a few weeks, none did so for more than a couple months. Homeowners have had to endure a tremendous amount of uncertainty and stress during this chaotic process. (See HUD’s Mortgagee Letter of January 21, 2021, the Background section, for details about this recent history.)
There’s the huge uncertainty of not knowing when you’ll have to start paying your mortgage again. Even worse is not knowing how you’re going to repay the missed payments.
All this uncertainty makes financial planning impossible. Indeed, it could drive you to the brink of financial insanity!
Getting Off the Rollercoaster and onto a Stable Plan
The situation for many people is not as bad as we just made out. In practice you don’t just stop making payments on your mortgage. You enter into a forbearance agreement with your mortgage servicer. That’s an agreement for “a temporary postponement of mortgage payments granted by the lender… in lieu of forcing a property into foreclosure.” Investestopedia.
In usual circumstances persuading your mortgage servicer to enter into a forbearance agreement can be challenging. But not during this time of pandemic, assuming you have the right kind of mortgage. The CARES Act passed in March 2020 (and extended multiple times since the original deadline) required applicable mortgage servicers to provide forbearance to most homeowners financially affected by the pandemic.
What’s the right kind of mortgage? CARES applies only to federally-owned or -backed mortgages. But about 3/4s of mortgages are federally owned or backed by a federal agency or entity. These include the U.S. Department of Housing and Urban Development (HUD), U. S. Department of Agriculture (USDA Direct and USDA Guaranteed Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA), Fannie Mae (check here to see if your loan is backed by Fannie Mae) , and Freddie Mac (check here to see if your loan is backed by Freddie Mac). Also, see the U.S. Consumer Financial Protection Bureau’s How can I tell who owns my mortgage?
What Happens If You Qualify?
Assuming your mortgage qualifies, under CARES your servicer “shall… provide the [requested] forbearance.” You only need to “submit a request” and “affirm that the borrower is experiencing a financial hardship during the COVID–19 emergency.” Your servicer is not even allowed to ask for any further documentation of your financial hardship. (For example, see this FHA webpage confirming this.)
Nor can it charge any fees or penalties for the forbearance. It can’t even charge extra interest “beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract.” Finally, you don’t have to be in any particular delinquency status to qualify. CARES Section 4022 (b) and (c)(1).
How long can you not make mortgage payments?
Upon a request by a borrower for forbearance… such forbearance shall be granted for up to 180 days, and shall be extended for an additional period of up to 180 days at the request of the borrower, provided that, at the borrower’s request, either the initial or extended period of forbearance may be shortened.
Careful: under the current extension, “you must request a mortgage payment forbearance from your mortgage servicer by March 31, 2021.” (From the FHA website but applicable to all qualifying types of mortgages.)
The Bankruptcy Advantages
So how does bankruptcy fit into this forbearance picture? It can give you huge advantages in many, many circumstances.
- You’re in forbearance now. But you don’t expect to be able to afford the mortgage payments when the forbearance is over. A Chapter 7 “straight bankruptcy” can discharge all or most of your other debts, enabling you to afford your mortgage.
- After the forbearance period ends, you know that you won’t be able to catch up on the missed payments. Let’s assume that you want to keep your home. Chapter 13 “adjustment of debts” can give you much more time to catch up on those payments. You can have as much as 5 years to do so. Stretching out the catch-up payments reduces the monthly amount, making it more affordable. While you’re catching up, your lender can’t take collection or foreclosure action as long as you follow the agreed payment plan. See Sections 1322(b)(2) and 362(a)(4) and (5) of the Bankruptcy Code.
- In the same circumstances, assume you have decided to leave your home, for financial or other reasons. You just don’t want to do so any earlier than you have to. A Chapter 7 case filed at a strategically determined time can allow you to stay in the home longer. In effect, this could extend your forbearance period longer than otherwise.
- Now assume that you want to sell your home after the forbearance period ends. A Chapter 7 case could buy you a bit more time to do so before losing it to foreclosure. But a Chapter 13 case would usually buy you much more time. You would need to resume regular mortgage payments during that time. But the missed payments accumulated during the forbearance period could likely be put off until the sale of the home. Under the right circumstances this could be several years later, if you want.
- Especially if you pay your home property taxes separate from your mortgage, in the midst of all this you may have fallen behind on that. Mortgage lenders do not take kindly to you falling behind on property taxes. That’s because property taxes come ahead of the mortgage in the rights to the property. Chapter 13 also gives you up to 5 years to catch up on property taxes. During that period the taxing authority can’t foreclose on your home. Nor can your mortgage lender use you being behind on your taxes to justify its own foreclosure. (Outside of bankruptcy, your mortgage contract allows them to do so.)
- Under some circumstances Chapter 13 allows you to “strip” a junior mortgage from your home’s title. That mortgage would no longer be treated as secured against your home. You would no longer be required to pay that junior mortgage payment. Your mortgage debt would be reduced accordingly. Your home would cost less per month. You’d build future equity that much faster.
Taking Advantage of the Bankruptcy Advantages
These are just some examples of bankruptcy tools that can be used in conjunction with the current forbearance laws. Everybody’s situation is truly unique. Contact us to set up a consultation meeting and find out how you can benefit.