Dubiln Packard

How To Get A Loan Modification

by

How To Get A Loan Modification

How To Get A Loan ModificationTrying to get a loan modification can be very frustrating.

So many people we talk to tell us they have been trying for months to get a loan modification…only to get the runaround from their lender.

But First, What Is A Loan Modification?

A loan modification is changing the terms of your existing loan with your existing lender.  By the way, it is not a “re-modification.”  What terms?  First, if you are behind on your payments – we call those missed payments the “arrears” – you have to catch up.  In a loan modification, the arrears are added to the principal balance.  Then, you get a new – hopefully lower – interest rate and then the number of years is reset to zero and now you have a new 30 or 40 year loan with a new principal balance and a new internet rate.  Hopefully, all of that translates into a new monthly payment you can afford.

That last part is important.  “…you can afford.”  If you can’t afford to make the payments, you won’t qualify for a loan modification. If you want to find out if you qualify for a loan modification, read our post: Do I Qualify For A Home Loan Modification?

How Do You Know If You Can Afford The Monthly Payments?

There is a simple rule of thumb to help you know right away whether or not you will qualify for a loan modification.  Take your gross monthly income and multiply by 0.30.  That’s 30% of your monthly gross income.  That number is where your lender likes to see your monthly payment. If you are self-employed, there are special considerations. If you want to find out if you qualify for a loan modification if you’re self-employed, read our post: Will I Qualify For A Modification If I Am Self-Employed? 

If I Don’t Qualify, Where Can I Get More Income?

  1. Get a second job.
  2. Rent out a room.
  3. Get your kids to contribute.

Ok, I Think I Can Qualify.  Now What?

All of the banks use pretty much the same forms.  Go to your bank’s website and search for the form.  Or, you can contact your bank directly and have them send you the package of forms. Complete the forms and attach all of the documents requested by the bank.

The Biggest Reason People Don’t Get Loan Modifications.

The single biggest reason people don’t get a loan modification is: they don’t submit all of the documents requested.  You must submit all of the documents requested.

Be Patient:

It may take 3-6 months of calls, faxes, emails, letters etc. to get help before you get relief.

Good Luck!

 

by

Don’t Use Your 401(k) or IRA to pay bills!!

don't use 401(k) to pay billsYou may think your loss or reduction of income is only temporary – and hopefully you are right.  But there are better ways to handle bills than to use your 401(k) or IRA.  Don’t do it.

 

This is really a lesson in waiting too long for help.

So many people over the last several years, mostly people in their late 40’s or early 50’s, come to me for help with a foreclosure or wanting more information about seeking the help of bankruptcy after struggling for a couple of years to make ends meet during times of unemployment or underemployment.  In many of those situations, particularly with families where one or both wage earners had decent jobs and had accumulated a nice amount of retirement savings, using a 401(k) or IRA to pay bills can be extremely painful.

I Had A Great Job and Have Years Of Experience.  I’ll Find Something Just Like I Had Before. In today’s world of employment, the skills necessary to compete have changed drastically and seemingly overnight.  Many people in their late 40’s and 50’s, although they have tons of experience in their careers and have been paid well for it, find they just are not what employers today are looking for.  But, it takes sending hundreds of resumes and going on some interviews to find this out.  In the meantime, because you have been trained to do the right thing, you may make some bad choices in trying to pay bills during this period of time.

I Want To Do The Right Thing.  The right thing means taking care of yourself and your family now and in the future.  You worked hard to save for retirement and if you are in your 40’s or 50’s, it is going to be next to impossible to replace the savings you had if you use it to pay bills that can be handled a better way.  Bills are coming due and you want to make payments.  In fact, many people will put everyday expenses on high interest credit cards, even open one or two new accounts to tap into even more credit.  Others will use savings to pay the mortgage and then to pay the credit card bills.  And, some, after savings are depleted will raid their retirement savings to make ends meet.

Why Not To Use Your 401(k) or IRA to pay bills!!

Retirement savings is protected in bankruptcy.  Yes, I know, you are not thinking about bankruptcy right now and never want to, but bankruptcy is one of the most-used tools for people to recover from a loss of income and save a home from foreclosure.

Focus on the Secured Debts Not Unsecured Debts.  You should distinguish between secured and unsecured debts.  Secured debts debts whose payments are secured by your assets such as your home.  Unsecured debts mean the creditor has no recourse other than money to be paid.  You should make careful use of this distinction and focus on your secured debts.

Paying Credit Cards is The Wrong Choice.  Credit card debt is unsecured debt and in a bankruptcy, unsecured creditors get paid very little or perhaps nothig.  This means you can better use your now limited resources to save your home from foreclosure rather than keep your credit cards current and the phone ringing from debt collectors.

Don’t Pay Your Second Mortgage.  I hear it all the time from a family in foreclosure on their first mortgage, “I have been paying my second mortgage.”  It very well may be the case that your second mortgage can be reduced or eliminated while still saving your home from foreclosure.  In a Chapter 13 bankruptcy, it may be possible to “strip” a second mortgage turning it into an unsecured debt and then paying little or nothing toward it.  Sometimes, this is the difference between getting a loan modification and not getting one.

There are severe penalties to taking early withdrawals from your 401(k) and IRA.

To make matters worse, if you do choose to use your 401(k) or IRA to pay bills, there are severe penalties to pay when you do your taxes that year.  So, not only are you paying bills you may not need to, and you are losing the savings you worked so hard for in the first place, now you have to pay a big penalty when you take an early distribution from your 401(k) or IRA. And, don’t forget you now have to pay income tax in the funds you are withdrawing since it was put into the account ta-free at that time.

Know Your Rights Before You Use Your 401(k) and IRA to pay bills.

Do the best you can do with the resources you have but do not use your retirement savings.  The government protects your retirement savings because it recognizes the difficulty you are going to have in the future if you deplete it now.  As you can see here, there are a number of things you may not have known about your retirement savings. Given the protections available to you, the heavy IRS penalties and tax consequences, and perhaps most importantly, your ability to replace the retirement savings later, using your 401(k) or IRA to pay bills is a very wrong thing to do.

 

by

Do I Have To Pay Income Tax After A Principal Reduction?

pay tax after a principal reductionPrincipal reduction is the Holy Grail of loan modifications but they are just so hard to get. If you are lucky enough to have principal reduction included as part of a loan modification, you may have to pay income tax on the amount of the principal reduction. Here’s Why….

 

Do You Have To Pay Income Tax After A Principal Reduction?

Just like a homeowner has to pay income tax on the amount of debt that was forgiven after a short sale, the same applies when the lender reduces the amount of the debt owed through a loan modification that includes a principal reduction.

IRS Publication 4681 provides all of the details.

The IRS treats cancelled or forgiven debt as income.  There are some exceptions.  For example: if you are insolvent or if you file for bankruptcy.  These are the two most common exceptions that apply to people in foreclosure. You may need the assistance of your tax preparer or accountant but take a look at IRS Publication 4681 which provides guidance on canceled debts.

Principal Reduction is Cancelled Debt.

In Publication 4681, the IRS clearly considers principal reduction as cancelled debt.  If you were given a loan that has a principal balance of say $400,000 and the lender agrees to modify your loan to a balance of $300,000, the lender cancelled $100,000 worth of debt and you may owe tax on that amount.

There may be an exception that applies to you.

Insolvency.  In Publication 4681, the IRS provides: Do not include a canceled debt in income to the extent that you were insolvent immediately before the cancellation. You were insolvent immediately before the cancellation to the extent that the total of all of your liabilities was more than the fair market value (FMV) of all of your assets immediately before the cancellation. For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account). Liabilities include: The entire amount of recourse debts, the amount of nonrecourse debt that is not in excess of the FMV of the property that is security for the debt, and, the amount of nonrecourse debt in excess of the FMV of the property subject to the nonrecourse debt to the extent nonrecourse debt in excess of the FMV of the property subject to the debt is forgiven.

Bankruptcy. In Publication 4681, the IRS provides: Debt canceled in a title 11 bankruptcy case is not included in your income. A title 11 bank- ruptcy case is a case under title 11 of the United States Code (including all chapters in title 11 such as chapters 7, 11, and 13), but only if the debtor is under the jurisdiction of the court and the cancellation of the debt is granted by the court or occurs as a result of a plan approved by the court.

Knowing where you stand with the IRS and whether or not you are going to have to pay income tax after a principal reduction is an important part of understanding your options when in foreclosure or trying to obtain a mortgage loan modification.

 

by

Do I Have To Pay Tax After A Short Sale?

do i have to pay tax after a short saleGreat! You did a short sale and now your mortgage lender sent you a 1099C to pay income tax on the amount of the loan that was not paid at the sale.  What? Do you have to pay tax after a short sale?

Answer: maybe.

The IRS treats forgiven or cancelled debts as income.  Under IRS rules, the lender is required to notify the IRS and to send you a form 1099C which may obligate you the pay income tax on the forgiven amount when you prepare your taxes for the year of the short sale.  Let’s say you had a home mortgage loan where  you owed $350,000 and the lender approved a short sale for $250,000.  In approving the sale, the lender is also agreeing to take $250,000 (less expenses) as full payment on the loan.  That means $100,000 of the loan is forgiven.  The IRS looks at this forgiveness as income and wants you to pay tax on it.

There Are Exceptions That May Apply To You.

Waiver By Congress. Up until December 2014, Congress provided a waiver of the tax given the high number of home owners that were losing their homes after the financial crisis of 2008 but that law hasn’t been renewed at this point.  You may want to check to see if Congress has renewed the waiver but at this point, it does not appear likely.

IRS Rules.  You may need the help of your tax preparer or accountant but here’s what the IRS has to say about forgiven or cancelled debts.  In IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, the IRS explains the federal tax treatment of canceled debts in certain situations. In short, if you are Insolvent in the eyes of the IRS, you do not have to pay the tax.

Insolvency. If you are insolvent according to the IRS just before the debt was cancelled, this exception may apply to you.

In Publication 4681, the IRS provides: Do not include a canceled debt in income to the extent that you were insolvent immediately before the cancellation. You were insolvent immediately before the cancellation to the extent that the total of all of your liabilities was more than the fair market value (FMV) of all of your assets immediately before the cancellation. For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account). Liabilities include: The entire amount of recourse debts, the amount of nonrecourse debt that is not in excess of the FMV of the property that is security for the debt, and, the amount of nonrecourse debt in excess of the FMV of the property subject to the nonrecourse debt to the extent nonrecourse debt in excess of the FMV of the property subject to the debt is forgiven.

A special note if you have retirement savings: 401(k)s and IRAs count toward your assets.  Please note that in the above guideline, the IRS does not exclude retirement savings from your assets.  This may prevent some people from qualifying for this exception. If you do have retirement savings, it is important to know that that retirement savings is exempt from assets in bankruptcy so in this case, bankruptcy may be a better option for you in that it saves you the tax and preserves your retirement savings.

Bankruptcy.  If you file for bankruptcy, whether chapter 7 or chapter 13, the bankruptcy exception may apply to you.

In Publication 4681, the IRS provides: Debt canceled in a title 11 bankruptcy case is not included in your income. A title 11 bank- ruptcy case is a case under title 11 of the United States Code (including all chapters in title 11 such as chapters 7, 11, and 13), but only if the debtor is under the jurisdiction of the court and the cancellation of the debt is granted by the court or occurs as a result of a plan approved by the court.

There may be other exceptions that apply to you but these are the two that apply to most people.

This IRS rule also applies in the rare event the amount you owe is reduced as part of a loan modification or if the lender simply cancels your loan as sometimes happens with second mortgage loans when the lender realizes the value of the homes has dropped significantly.  You can read more about that here.

 

by

Foreclosure Time Line In New Jersey

foreclosure time lineHow Long Does It Take in New Jersey to process a residential foreclosure action from start to finish?

The foreclosure time line in New Jersey has a number of variables depending on how the borrower reacts to each step along the way.  New Jersey’s Fair Foreclosure Act specifies, albeit indirectly, the minimum time frames necessary to process a residential foreclosure action in New Jersey.  At minimum, a un-contested residential foreclosure action can take as little as 169 days or, at maximum, as long as 200 days. This assumes the borrower is not working with an attorney and either did not file an Answer to the Complaint or filed what would be deemed a “non-contesting” Answer.

There are a number of basic steps to processing a foreclosure action in New Jersey.

Step One: Assuming default has occurred, the lender or its attorney must first notify the borrower that it is in default and that it has a right to cure that default 30 days prior to filing a Complaint in Court.

Step Two: File a Complaint with the Court, serve the Complaint on the borrower along with a Summons notifying the borrower that it has 35 days to file an Answer.

Step Three: assuming no Answer is not filed, the lender will ask the Court to enter a Default Judgment.  This usually takes about 30 days.

Step Four: Notice to the borrower that it intends to file for entry of final judgment providing the borrower with 14 days to notify the lender that it has a good faith ability to cure within 45 days.

Step Five: Lender files it proofs to enter Final Judgment.  This usually take 30 days.

Step Six: Final Judgment is entered and a Sheriff Sale is scheduled, borrower notified and the sale date is advertised in the official newspapers for four consecutive weeks.  28 days.

Step Seven: Sheriff Sale is completed.

Step Eight: Right to redeem expires and deed is transferred to buyer. 14 days

Total 181 days.  This is the minimum.

If your case proceeds as an un-contested action, 181 days is the shortest amount of time to fully process a residential foreclosure action in New Jersey but often it takes longer than this 181 days.

Bank Delays In Hopes of an Improved Real Estate Market.

Banks, particularly in a situation where the value of the property may not be as much as the amount of the loan, will delay a foreclosure in the hopes that the value of the property will increase over time.  In the meantime, they don’t aggressively process the case after the default judgment is obtained. There is a risk on the part of the lender, if either the Court or the borrower believes the lender is not in good faith processing the case, that the case might be dismissed for lack of prosecution.

Backlogs Can Add More Time.

Both lender attorneys and courts have been very backlogged with the large number of cases in process since the financial and housing crisis of 2008.  It has been typical for foreclosure cases to take as long as 1000 days to process through the courts simply because of the large number of cases that have to be processed.

Optional steps that can prolong the process.

There are a couple of instances in the above steps where the borrower can add some time.

Optional Step One: In Step Three above, file an Answer within the 35 days provide for in the Summons.  Although the Court may deem your Answer as “non-contesting” without a hearing, it may allow your case to proceed as “contested” if you file an Answer that raises certain facts about the loan. In such a situation a case management hearing will be held and the case will be schedule for a trial. It is very typical in this situation, though, that the lender will file a Motion For Summary Judgment challenging your Answer and have it deemed “non-contesting” and send it back to the foreclosure division for processing in the normal course.  This entire process could however add a minimum of 30 days to the process and often longer.

Optional Step Two: In Step Four above, the borrower could notify the lender that it has the ability to cure.  This could add 31 days to the process.

Optional Step Three: A borrower is entitled to two 2-week adjournment of the Sheriff sale for any or no reason.  This could add an additional 30 days to the process.

Optional Step Four: Even though the property may have been sold at a Sheriff sale and you the borrower and homeowner have been ordered to vacate the property.  If you don’t, the new owner will have to evict you as if you are a tenant at the property.  This could add at minimum 14 days to the process but often adds 30 to 90 days if the judge believes you really need time to find a new home to move to.

Litigation As An Option.

Everything discussed above assumes you have not hired an attorney and do not have a valid defense to the foreclosure action.  After consulting with an attorney, you may determine that it is to your benefit to contest the foreclosure action and fight back.  This changes everything above.  The time frames for a contest action are subject to much variation but more than likely would be much longer than the time frames set forth above.

Practically Speaking What Are the Time Frames I Can Expect?

Generally in New Jersey, we have been seeing cases take 18 to 36 months and sometime much longer than that if the lender simply does not process the case.  However, backlogs have been reduced quite a bit as of this date in mid-2015 and I just saw a case yesterday that went from Complaint to Sheriff sale in less than 12 months.

Every case is different.