Home Prices take a dive in 2010 - short sales, deeds in lieu and deficiency judgments

It is hard to believe that between 1950 and 2008; home prices rarely climbed less than an average of 8% return.  In some years there might be no appreciation and in other years, double digit gains. The figures are hard to pin down, but if we can believe it, between 2009 and 2010 home prices in Chicago dropped 20%.  Think about it.  It's crazy.  We've been told for years that these investments can't fail and the prices never go down.  Do you remember the phrase - "better get in now before prices go up".  The failed housing market or bubble burst has ruined realtors, loan officers and most importantly home owners who could barely afford and really weren't qualified to buy a home.



Right now most experts believe foreclosure filings will peak in 2012 and decline thereafter.  Most experts are calling for another 15% drop in prices in this year with a flat period for many years thereafter.  What is troubling is the similarity between the great depression and our present situation.  Many people are chronically unemployed with no unemployment benefits and our government is surprisingly silent.

For our firm, we are seeing far less Chapter 7 bankruptcies where people are coming in with fees.  We think it is because people are heavily in debt, without income and just wanting to clean things up before they head back to work.  For most people it means waiting to file a Chapter 7 until just after you have been at a job for about 4 months.  This is about the lag time between starting a new job and garnishments catching up to you.

For people looking to avoid a bankruptcy but wanting to get out of their property, a short sale can be great.  The problem traditionally has been that lenders intentionally stalled to cause failures and force foreclosures.  Now, lenders are softening up as they find they can be more profitable in a short sale.  One thing you may have noticed,  nothing involved is done to benefit the borrower or preserve creditworthiness or home ownership - this is strictly an attempt to improve profitability.

A deed in lieu of foreclosure is where a borrower asks the lender to take back the property by allowing the owner to sign over the over property via deed and avoid having the bank file foreclosure.  In the old days, the property would often be sold by the bank at a price high enough to pay off the mortgage and the borrower simply walked away from a house he or she didn't want.  Today,  lenders won't even consider a deed in lieu unless you have failed to sell your home (for any price) for six months or sometimes a little less.   Often times, someone will buy the house as a short sale instead of having the bank take the house back through a deed in lieu.

What's disturbing is that most borrowers face a deficiency judgment.... so what's this.  Well basically it's like a credit card debt that often is $80,000 or more and most lenders SELL IT at 2 cents on the dollar to a collection agency that sues the borrower and garnishes their wages forever.  Does this sound bad?  Yes.  Unfortunately, this is exactly what is sending many good families into bankruptcy and I can't think of a way that my clients can avoid it.

I'm on disability - should I file?

When a debtor comes into my office and has income of between $500 and $1600 on disability, I generally discourage an immediate bankruptcy.  The reason being that disability income is exempt from most forms of garnishment except repayment of overpayment to the social security administration.


Ordinarily, most of these debtors come in with less than $10,000 in debt.  However, it typically causes problems in their lives with harassment from creditors and sometimes difficulty getting hired in certain part time jobs.  I generally recommend taking a slow methodical approach as there are usually no garnishments that threaten to take income.


Generally, most debtors on disability income will get their bankruptcies done by pro bono attorneys or legal assistance foundations.

In the last several years, I did have one client who paid his legal fees over a period of a year and filed bankruptcy through our office.  He had a rather high disability payment and partial union pension after having been severely injured in a crane accident.  In this case, the bankruptcy provided an incredible improvement in the utility of his life with the removal of harassment from creditors.  However, this situation is more the exception than the rule with most disability income debtors going through legal assistance foundations.

When Should I file a bankruptcy?

Generally people should file a bankruptcy immediately if possible to avoid further damage to their credit, stop lawsuits and eliminate harassing phone calls and solicitations.  However, the time to file can change when the following situations arise.

1.  Home Mortgage Modification.  Generally speaking, you should wait to file a bankruptcy after the modification has become permanent.  It is a good idea to wait until the modification is delivered to you in  writing.  However, if a lender is delaying a decision on a modification or has withdrawn a trial modification then the time to file a bankruptcy is now.  Oftentimes after a trial modification has failed, the next step is a Chapter 13 bankruptcy which allows a debtor to command debt relief instead of requesting it from a lender.  The only downside being that a Chapter 13 requires adequate income to afford the Chapter 13 Plan.


2.  Foreclosure not started or not completed where a deficiency judgment is unknown.  In a situation where a debtor is filing a bankruptcy for no other reason than to get rid of the liability on a deficiency judgment in foreclosure, often times it is good to wait to see if the deficiency judgment is actually entered and whether the creditor pursues collection.  Bottom line - if it is beneficial to wait and see if a bankruptcy is necessary - than wait - however, what is you become ineligible for a Chapter 7 bankruptcy while waiting or you have unnecessary stress while waiting to file bankruptcy.  The key is case by case, however, the old rule of thumb which is to file now is usually good except for special circumstances such as these.

3.  Recently a debtor came into my office with about $60,000 in credit card debt and two lawsuit filed.  He asked whether he need to file now and was worried about having enough time to get his legal fees together prior to filing.  Basically in this case, you file shortly before the garnishment actions start from the lawsuits.  The best time to file is several days before any citation order is entered.

Great Depression Real Estate Values

In 1933 the housing market bottomed out.  Your could get a mortgage for about 4% and housing values fell to as little as 25% of the 1929 boom prices due to foreclosures and a simple lack of demand for homes.

In 2006, a condo which sold for $140,000 can be sold for $50,000.  This over 50% reduction in real estate values couldn't even be conceived of during the housing boom.

The good news is that this is allowing most Chapter 13 Debtors to get rid of their second mortgages.  The bad news is that for many of us we have lost a lot of equity in our homes.

The really important thing to remember is that whether you are selling a home in a real estate closing or filing a bankruptcy - 2011 is not an ordinary time and extraordinary if not surprising things are happening.

For basic values on real estate - I recommend trying zillow.com

 For realistic values that are rock solid I recommend a licensed appraiser such as Sara Chambers at PF Appraisal (pfappraisal.com).  Oftentimes, asking a realtor for a recommendation is a good place to start.

Unemployment Drops - So do benefits for the unemployed!

WSJ posted today that unemployment fell but no jobs were created.  This means that people lost their unemployment benefits and did not get rehired.  A bad result and an indication that the economy is staying very cold.  The difference between the unemployment of the great depression and today is simply how they calculate it.  We might be at 25% unemployment and wouldn't know it because people fall off of the rolls.  

The U.S. economy added few jobs in January, even as the unemployment rate fell to its lowest level since April 2009, in a mixed report that points to a gradually improving market for workers. Nonfarm payrolls rose by 36,000 last month as private-sector employers added 50,000 jobs, the Labor Department said Friday. The December number was revised to show an increase of 121,000 jobs from a previous estimate of 103,000.

The unemployment rate, which is obtained from a separate household survey, fell to 9.0% last month. About 13.86 million people who would like to work can't get a job; Wall Street Journal - 2/4/2011

Bankruptcy Courts Re-Open

The Blizzard of 2011 only shut down the courts for one day. Court is in full swing for February 3, 2011.

Chapter 13 Filings are increasing

It seems like everyday that we are seeing more Chapter 13 filings.  I think the reason for this is that in many cases, the up front fees are $309 and right now people just don't have the money to file bankruptcy.  More and more it seems like our economy is really in bad shape and people simply are "gutted out" and have nothing left.  I like what a 13 does for people  - it gets debt under control and then provides a plan for people to have long term financial success with significant debt reduction.  In the last several months, I have been successful in stripping off three very tricky second mortgages.  Most recently, a condominium was valued at only 40% of what it was purchased for in the early 2000's.  Clearly, Chapter 13 filings will be strong in 2011 as we look for a flat economy with anemic job hiring and declining wages.