Strategic default is not enough!

May 31st, 2011 by Edmund Urban III

A hot topic in the news is the increasing use of strategic default to avoid Mortgage debts. More and more people who cannot make their mortgage payments are simply walking away from their properties and not paying their mortgages. What the news articles are not always covering is the topic of the liability for the remaining debt after the foreclosure.  Simply allowing the bank to take the property doesn’t stop them from collecting on the note.  There are a few options available to an attorney that do a better job than strategic default, and I’ll discuss them below.

Strategic Default
Strategic Default is the decision to stop paying a mortgage after weighing the consequences.  A common example of strategic default is a property-owner who has lost a tenant, but cannot sell the property in today’s market.  This property-owner may weigh the consequences of negative credit. stop making payments, and allow the property to eventually be foreclosed on.  While this allows the property-owner to stop making payments, they can face serious bills if this is all they do.

First, the Strategic Default does not eliminate the property-owner’s  liability for the remainder of the mortgage due.  To give a hypothetical, imagine a property-owner who owes $100,000 on a property.  When the bank eventually forecloses, the foreclosure judge will order a sale at auction of the property.  Since this is an auction of a foreclosure property, the auction may only bring in 60% of what the property is worth.  If the property was worth $100,000 and the owner owed $100,000, but the auction only brought in $60,000, then there is a $40,000 difference.  When the foreclosure is finished, and the property is deeded to the bank, the owner might be stuck with a $40,000 deficiency bill owed to the bank!  The bank could then take that bill and collect, freezing bank accounts and garnishing paychecks.

Second, the Strategic Default does not eliminate the property-owner’s liability for the safety of the property.  The owner has the responsibility to keep the building up to code.  If a property falls below code, or becomes a threat to public safety, then the city or village the property is in will have the option to sue the owner, imposing fines and fees for failure to make repairs.  This is because the deed for the property will remain in the owner’s name until the foreclosure is concluded and the deed is transferred by order of the foreclosure judge.

In either of these situations, simply walking away from the property by strategic default leaves a owner open to serious bills and fines, and the potential of substantial collections.  A property-owner would do better to consider the options of Bankruptcy or a Consent Decree.

Bankruptcy
As I discussed before, a Bankruptcy can eliminate the liability of a homeowner for all the charges relating to their mortgage.  This would include the deficiency bill I mentioned above.  If an owner decides to pursue a strategic default and then files a Bankruptcy then the Mortgage Company cannot pursue collections other than an in-rem foreclosure to change the name on the deed.  However, because the  deed does not transfer immediately, Bankruptcy is most appropriate when the owner needs to stop making payments but wants to keep living in the property.

Consent Decree
For owners who want to abandon the property immediately, a Consent Decree may be the best option.  When the owner is served with papers (which in Illinois is only the start of the 8 month foreclosure process) the homeowner can negotiate a consent decree, settling the foreclosure case out of court.  Usually done by attorneys, consent decrees shorten the foreclosure process and are controlled by the Illinois Code of Civil Procedure. If these agreements are properly negotiated, then they will quickly eliminate the issue of the deficiency judgment, and transfer the deed faster than the other methods.

So, if you are considering a Strategic Default, consult with the real estate attorneys and bankruptcy attorneys of Urban & Burt before you stop making your payments.  We can review your situation and craft a solution that is best for you. We can advise you about the necessary steps to release real estate you no longer want to pay for.

Discharge in a Chapter 7 Bankruptcy

May 24th, 2011 by Edmund Urban III

Recent questions by a client and a motion in one of our cases has led to some talk about the Discharge in a Chapter 7 Bankruptcy.  The Discharge is the whole point of the Bankruptcy process, and any questions should be referred to an attorney.  Most debts are discharged, but there are some exceptions.  This post is going to briefly explain the discharge, its nature, and its limits.

Upon completion of your Chapter 7 Bankruptcy the court issues an order erasing your debts.  This is the Discharge. In technical terms the Discharge is a permanent injunction that prohibits collection of debts by any of your creditors.  Creditors are ordered not to contact you, to file a lawsuit concerning the debt, to garnish wages, or to otherwise collect on the debt against you.  Actions prohibited include phone calls, reporting to the credit bureaus, and selling the debt to collectors.  The Discharge is intended to allow you to have a new financial start.

However, as I pointed out in an earlier post, some aspects of some debts are not discharged.  If you own a house or a car then the creditor still has the right to take the house or the car if you fall behind.  Specifically, in the case of Illinois mortgages, a mortgage can be discharged, and then if you miss payments then the mortgage company can sue the homeowner for the deed to the property, which is called an in-rem foreclosure.  You might not owe any money, but you still should make the payments if you want to keep your home.

Some debts are not discharged at all.  The Bankruptcy code provides that the following debts are not discharged:

  • Most taxes (and tax loans)
  • Domestic Support Obligations
  • Student Loans
  • 401(k) loans
  • Criminal Fines, tickets, tollway fines, DUI related penalties or judgments

Additionally, the Bankruptcy Court can hold hearings on certain debts, or even certain portions of debts, and determine if they are discharged or not.  Sometimes the court will decide that it would be unjust to eliminate a debt, and then the court will issue an order exempting the debt from the discharge. This can happen with fraudulent debts, or new debts. One of our skilled bankruptcy attorneys can determine ahead of time if that is an issue for you.

Finally, many clients are concerned that they may have missed a debt when they file their case.  Fortunately the courts have provided coverage for debts which are missed because of accident or oversight.  The Bankruptcy Courts insist that when you file you make a good effort to include all of your debts. But if, through no fault of your own, a debt is missed from your list of creditors then that debt is still discharged.  An attorney can send a letter to the creditor, informing them of the bankruptcy and from that time on the Discharge applies to that debt.

Remember, this is only a summary of the Discharge.  The laws are actually very complex, and advice from an attorney is recommended.  If you are a debtor and you want to file Bankruptcy, Urban & Burt can determine if your debts can be discharged. Additionally, if you are a creditor, and you think you have a debt that might be not discharged, we can review the situation and help you preserve your debt.  Our firm is experienced in debtors rights and creditors rights and can help you.

Why You Should Always Have an Attorney File Your Papers

March 15th, 2011 by Patrick Shifley

Legal writing is a highly refined skill, taught extensively at law schools.  If you need something filed in court you should always have an attorney write it and file it for you.  Legal writing is so demanding that even lawyers sometimes make mistakes.  Here are two recent stories about attorneys that made mistakes when writing their documents:

- Attorney Reprimanded for Failure to Ellipsis.
One of the most detail oriented skills an attorney is trained in is proper legal citation and quotation.  Whenever an attorney argues a point in writing he should refer to previous decisions by the same court, or by a higher court, to show that what he is asking for complies with the law.  Attorneys also have to refer to the prior actions and statements of the court in the same case.  The problem is mastering how to use those citations and quotes and to properly show their context, original location, and intent. A Massachusetts lawyer recently omitted ellipses from his quotes and has been reprimanded for his failure.  The lawyer made edits to a quote, omitting some of the text from the original.  He should have used an ellipsis, that sometimes seen dot-dot-dot (…) that indicates that something is missing.  This lawyer failed to do so and is now being reprimanded in writing by his disciplinary committee.

- Attorney’s Brief Criticized for “Rambling”
Another skill attorneys are taught is brevity.  Legal writing should be short, effective, and to the point.  Courts often are overwhelmed with the case load and paperwork they are given.  In order to keep the load flowing judges often set page lengths, word lengths, margin widths, and allowed font types. Most attorneys are aware of these limitations or know where they can find the rules each individual judge will want them to follow.  In the 7th Appellate Circuit (the federal appeals court including Chicago) an attorney recently filed an excessively long, “rambling” brief.  The rule required briefs to be less than 14,000 words, but the attorney filed a brief over the limit.  The Appellate Court issued a scathing opinion, pointing out that the brief was not only too long, but that it was without merit.  This written criticism by some of the country’s most respected judges will become a part of the permanent public record.  The opinion of the judges specifically cautions that future violations of the limits may result in immediate dismissal.

Pro-se Document 10 Times too Long. (A personal anecdote.)
One of the first legal jobs I had while in law school was to edit documents written by pro-se litigants.  I was once presented with a 100 page document that was repetitive, rambling, and poorly formatted.  After a few hours I had it down to 11 pages.  When I presented it to the partner managing the case he managed to shave off another couple of pages.  After our revisions the document was powerful, concise, and something a judge would be able to read.  If we had not made them, the case could have been lost just for bad writing.

So:  if you have any kind of legal papers you want filed or reviewed: Call Urban & Burt.  Our senior attorneys have decades of experience in legal writing.  We can make certain that whatever you file will be short, to the point, and effective.

How Bankrupcty works with Foreclosure

February 18th, 2011 by Patrick Shifley

A client I will call Paul called in today, and he was confused by a part of his bankruptcy that confuses a lot of our clients.  Paul filed Chapter 7 Bankruptcy with the intent to surrender a piece of real estate he no longer wanted.  Paul is most of the way through his Chapter 7 and a recent letter from his bank had him confused.  I reassured Paul that the Bank wasn’t trying to collect any more money and explained his situation.

Like most of us, when Paul bought his home he signed two different pieces of paper: a NOTE and a MORTGAGE. The note was Paul’s promise to pay, and the mortgage was Paul’s promise to give the bank the deed.  When Paul decided he didn’t want to keep his home in his bankruptcy he was attempting to discharge his note. The mortgage remains, and Paul will still have to give the bank the deed.

When Paul’s Bankruptcy concludes, and he is granted his discharge, the bank will look at Paul’s payment history and decide when it is appropriate to act on the mortgage. Eventually the bank will file a special kind of foreclosure, an “in rem” or property only foreclosure, to take the deed to the house.  This is required under Illinois law, and takes place in the same court as regular foreclosure and takes the same amount of time.  Paul will have at least 8 months after being served to move out of the home.  During this time the bank may add charges to the balance of the mortgage, but Paul will never be liable to pay on those charges.

In the end Paul felt better. He will have to wait some time for the process to complete, but he can walk away from the house any time he wants, and he has more than ample time to find a new place to live. Confusing letters from the bank are not going to end up with him being charged any money.

If you have any question about your financial situation, or need advice about foreclosure and bankrupcty, consult with my firm. Find us at www.urbanburt.com.

A man who acts as his own attorney has a fool for a client. – (Abraham Lincoln)

February 17th, 2011 by Edmund Urban III

In Judge Cox’s Bankruptcy court room this morning I saw a bankruptcy case dismissed for missing one of the hurdles bankruptcy presents to the inexperienced. Judge Cox rightly informed the debtor his only option was to file again. No refund will be issued and he is out $299 in lost filing fees.

The mistake this debtor made is pretty common. Looking to save attorney’s fees this gentleman filed a bankruptcy ‘pro-se’ or without an attorney. His petition was filed and the case was opened. Unfortunately he had failed to take an accredited credit counseling class.

§ 521(b)(1) of the Bankruptcy Code provides this absolute requirement for people filing bankruptcy: file a certificate from an approved non-profit credit counseling agency. The certificate must also be dated before your date of filing. If you take the class after you file your case will still be dismissed. Finally, you have to file the certificate of credit counseling within the 14 days after you open your case.

This morning Judge Cox asked the gentleman if he had an attorney, which he did not. Then she asked him if he had taken credit counseling before he filed. Judge Cox was plainly unhappy to hear that he had not, and that she had to dismiss the case. Now if this man wants Bankruptcy protection he will have to refile, costing him another $299 for his Chapter 7.

This is a mistake no good attorney will make, but it is frequently made by the pro-se filer. Considering the cost of a filing fee ($299) it is not a painless mistake either. If you are considering filing a bankruptcy, please consider meeting with one of my firm’s skilled attorneys first. Find us at www.urbanburt.com.