I took yet another short sale class yesterday. The first short sale class I took two years ago focused on explaining what a short sale is, and over the years content has evolved to how to close short sales, along with all kinds of tips, tricks, and tools.
Yesterday’s class was an eye-opener. The title was “Keeping Your Home & Reducing Your Principal Balance”. In reality, it was more about bankruptcy.
I’m going to share the notes I took in class. Hopefully, they will contain enough detail to be helpful. If not, call or email, and I’ll clarify my notes the best I can.
The Current Situation
- About 40,000 listings in Arizona
- About 8,000 REO’s (lender owned properties)
- About 17,000 Short Sales
Tens of thousands of property owners are facing the decision of how to deal with under secured properties and mortgage liabilities.
- Loan modification
- Short sale
Banks typically start with reducing interest. If they can’t get the payment down low enough, then they look at term, extending to up to 40 years. Rarely will they ever do a principal reduction.
Deficiency liability after foreclosure in Arizona
Pretty good anti-deficiency statutes protecting home owners in Arizona.
- Qualifying property (residence, < 2 1/2 acres, utilized as single or 2-family dwelling)
- Qualifying loan (purchase money, not a line of credit, not refinance)
- House has to transfer hands, via trustee sale, short sale
Second lien holder still has the right to go after the deficiency if first forecloses.
Arizona doesn’t require home owner to be living in the property, like many other states.
Usually no tax liability, because of the Mortgage Relief Act, which expires at end of 2012.
Benefits of short sale vs. foreclosure
- Public record notice (foreclosure could impact future employment)
- Credit scoring (about the same)
- Future home loans (much faster with short sale)
- Waiver of deficiency liability
- Market effect
- Bankruptcy effect – automatic stay
Using bankruptcy as an option
- All deficiency liability is gone.
- Tax liability can be wiped out. Timing is important.
- Gives the property owner more time in the property and legal protection, to continue loan mod process.
- Reduction of principal balances on secured personal property
- Eliminating junior liens on real or personal property
- Gives honest debtors a “fresh start”
- What bankruptcy can do: eliminate unsecured debt (credit card, medical bills, deficiency claims), usually allows you to keep the personal property, protect retirement accounts, stop creditor harassment, can delay a foreclosure possibly giving more time to work out loan modification
- What bankruptcy cannot do: discharge child or spousal support, fines, recent tax dept, debt incurred by fraud or fiduciary capacity, student loans
Types of bankruptcy
- Chapter 7 – quick and dirty, least expensive, fastest, in AZ about 80%. Two ways to qualify: 1) income level and 2) predominately business debt. For businesses or personal. Cannot affect the rights against real property (but can eliminate personal liability.)
- Chapter 13 – wage earner or payment plan bankruptcy. To qualify you have to be able to propose a feasible payment plan in 3 or 5 years, and you have to be below debt limits. Primarily for individuals, not businesses.
- Chapter 11 – better for huge companies. Very complex. Must qualify based on ability to fund part of reorganization. Good potential for investors to reduce principal balances on investment properties.
Depends on on income and expenses, assets and liabilities, goals.
Timing is everything in a bankruptcy.
The sooner a person explores their options, the more options they have.
Effects of Bankruptcy
- Credit score – see below
- Ability to secure credit – can actually get right after bankruptcy
- Employment – bankruptcy code prohibits employers from discrimination, except it job applies to ??? (could be an issue if working in the banking industry)
- Stigma – changing because of the current environment
- Moral – everyone has to decide for themselves
- Mental / emotional – pretty much positive from his perspective and experience
Credit score impact
The following chart was shared showing what estimated credit score consequences are for various scenarios:
|Max out credit cards
|30 day delinquency
|Short sale / Foreclosure
Ballpark costs to file bankruptcy in Arizona
- Chapter 7 – $2000-2300, as low as $1695.
- Chapter 13 – $3500-4000. Lien strip adds $700
- Chapter 11 – $15,000.
Short sales, foreclosures, and bankruptcy have become much more common place, and the stigma that is associated with it it lessoning.
Sometimes best option is to do nothing. Wait it out and see what happens.
This class was taught by Kenneth L Neeley, Esq. of Neely Law Firm, PLC. He has a web site, a blog, and shared the following information about costs:
- Free 45 minute bankruptcy consultation.
- Strategic default consultation. 1 hour. $200.
- Short sale consultations. $200.
Please call Mr. Neeley first to confirm that these services and fees are correct.