Homeowners Underwater in Central Florida

Article provided by Lewis & Monroe, PLLC
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Brief Overview of Loan Modifications, Short Sales, Bankruptcy and Other Remedies to Avoid Foreclosure

As the mortgage crisis has unfolded across the United States, Central Florida has had the unfortunate distinction of leading the nation in home foreclosures. Many Central Florida homeowners are considered "underwater" on their mortgages because the amount they owe in mortgage debt is now more than the property is worth. For these homeowners, navigating the muddy waters of legal options available to save their homes from foreclosure can be confusing. Couple that with the alarming complexity of mortgage servicing, mortgage securitization, loan modification and taxation and avoiding foreclosure may seem to be an insurmountable task to any homeowner.

Loan Modifications

Homeowners may choose from loan modifications, short sales, bankruptcy or other remedies to avoid foreclosure depending on where they are in the foreclosure process. Each homeowner has his or her own unique financial circumstance which will likely contribute to the attractiveness of using one method over another.

Loan modifications may include interest rate reductions or freezes, extension of the mortgage term or payback period, or both. Loan modifications may also include additions of delinquent payments and fees to loan balances, reductions of principal or deferrals of principle. Under President Obama's Making Home Affordable plan relief is available to homeowners on their principal residence through either a refinance or modification of the mortgage. See, www.makinghomeaffordable.gov. Mortgage owners and servicers have an incentive to help homeowners stay in their homes, but as the barrage of Central Florida home foreclosures has escalated, many homeowners attempting to modify their mortgages have faced long waits, lost paperwork, inability to speak with the right representative and other bureaucratic hurdles.

The Helping Families Save Their Homes Act of 2009 signed into law on May 20, 2009 by President Obama expanded the reach of the Making Home Affordable program to more homeowners. It provides safe harbor for mortgage servicers and increases the flow of credit to lenders, as well as, establishes accountability for all lenders receiving government incentives in exchange for their participation in the Making Home Affordable program.

Short Sales

Homeowners facing foreclosure who cannot save their homes through loan modification may try another alternative: a short sale. In a short sale, the homeowner may attempt to sell the home before the home is sold through the foreclosure process for less than what is owed on it, hence the name "short sale." Short sales, generally, need to be approved by the lender or lenders. If the mortgage is covered by private mortgage insurance (PMI), the insurance company will also likely need to approve the sale. Homeowners may identify potential buyers either by themselves or through a real estate professional.

If the bank or mortgage holder approves the short sale, the homeowner must consider any tax consequences that may result from the sale. Since the offer price is less than the amount the homeowner owes on the mortgage, the homeowner may be forgiven the remainder of the debt. Forgiveness or discharge of the debt must be reported by the mortgage holder to the IRS. The homeowner will receive notification of this amount via a 1099 form reflecting "regular" income to the homeowner. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. However, homeowners should contact an accounting professional to be certain they qualify for the exclusion. Of course, the homeowner may not receive an acceptable offer or the bank might not approve a short sale, and the homeowner will need to keep listing the home or consider other alternatives.


In some cases, neither a loan modification nor a short sale is a viable option. Some homeowners may turn to bankruptcy. Bankruptcy has traditionally been the remedy for consumers facing large debts, including unpaid mortgages. Most individuals pursue bankruptcy using either Chapter 7 or Chapter 13 of the United States Bankruptcy Code. In these extraordinarily difficult economic times, record numbers of consumers and business owners are turning to bankruptcy to get a fresh start.

Chapter 7 bankruptcy, sometimes referred to as liquidation, is a way for consumers to erase almost all of the debts they have. In Central Florida, homeowners generally can choose to keep their homes if they are up-to-date on their mortgage or can choose to surrender their home if they are simply too far behind with their payments or too underwater with the mortgage. Homeowners may also be able to keep their automobiles and their household goods through the use of the Central Florida exemptions in a Chapter 7. However, certain debts, such as student loans and recent tax delinquencies, are not dischargeable in a bankruptcy solution. Once the Chapter 7 bankruptcy is discharged, all of the debts listed in the petition will be discharged, and the petitioner can begin working to rebuild finances and credit.

One common myth about bankruptcy is that it is almost impossible to qualify to file since the bankruptcy code change of 2005. Under the 2005 changes, a Chapter 7 petitioner must pass a "means" test based on income and debts, unless most of their debt falls under a limited definition of "non-consumer" debt. The "means" test compares the income of the potential petitioner to that of a standard set for the geographical area. Chapter 7 petitioners must have less income than the standard after considering their debts and the size of their family. With the high unemployment levels, many more individuals are qualifying for Chapter 7 in spite of the "means" test limitation.

While it has indeed become more difficult to qualify for a Chapter 7, Chapter 13 is generally available to those not qualifying for Chapter 7. In fact, Chapter 13, or reorganization of debt, is sometimes a better choice for the homeowner seeking to file bankruptcy. Chapter 13 can save homes by providing for any mortgage arrearages to be paid up-to-date over a period of 3 to 5 years. Chapter 13 also, in some circumstances, allows for second mortgages to be stripped away leaving the homeowner with only the first mortgage to pay. Stripping the second mortgage many times gets the homeowner considerably closer to owing what the home is worth in today's market. Filing bankruptcy, whether Chapter 13 or Chapter 7, can include complex issues. Homeowners are encouraged to contact a knowledgeable bankruptcy attorney prior to filing their petition.

Other remedies for Distressed Homeowners

Given the loose standards involved in some real estate transactions during the housing boom, some homeowners may want to verify whether they have legal claims stemming from their mortgage origination or real estate transaction. Laws such as the Truth in Lending Act and the Real Estate Settlement Procedures Act may provide remedies for these homeowners.

In addition, as unscrupulous characters have begun to prey on desperate homeowners, offering to help in loan modifications, short sales or other rescues, the Central Florida Legislature enacted the Foreclosure Rescue Fraud Prevention Act in 2007 to curtail fraudulent activity. If you have questions about your options to avoid foreclosure or are concerned that you may have been defrauded during a real estate transaction or loan modification, contact a knowledgeable attorney.