Black and Buono Blog

...by Anthony Buono

A strategic default in terms of home ownership is the decision by a homeowner to stop making mortgage payments (to default) on their debt despite having the financial ability to make the payments.

This is particularly associated with residential mortgages.  It usually occurs after a substantial drop in the house's price when the debt owed is much greater than the value of the property, meaning negative equity or underwater, and is expected to remain so for the foreseeable future.

Homeowners who walk away in strategic defaults are not necessarily the ones most 'underwater.'

Credit scores are designed to predict the risk of default. But when it comes to strategic default -- which is when people who can afford to pay their mortgages don't, usually because their homes are worth less than their loans -- analysts have noticed a reverse phenomenon: Good credit scores can indicate a higher likelihood that a homeowner will voluntarily bail on a home loan.

Today, somewhere around one in three mortgage defaults is strategic.

"People who make the decision to strategically default tend to be more savvy," said Andrew Jennings, the chief analytics officer for Fair Isaac, the company that created the leading FICO credit score. "Most of the people who walk away from a mortgage are saying, 'This is not a contract that makes sense anymore.'"

FICO analysts looked at a population of borrowers who started out current on all their bills but wound up 90 days or more behind on their mortgages.

The people who stayed current on their other bills but stopped paying their mortgages had better initial credit scores and lower credit balances, and were less likely to have gone over their limits -- all signs of responsible money management.

Intriguingly, one factor that wasn't a strong predictor of strategic default was how far "underwater" these homeowners were. What mattered far more was the future trajectory of home prices.

Another point: research indicated that 40% of strategic defaulters lived in "recourse" states, where they could face lawsuits over debts that remained after foreclosure. It's not clear whether defaulters didn't understand the risks or whether they had bet that their lenders wouldn't come after them.

“We feel that people take this action without fully understanding the consequences," Jennings said. The message coming from them is that if enough people take this action, there is no way the banks are going to come after us, and even if they do, we can declare bankruptcy."

Strategic default dumps the traditional "payment hierarchy" on its head. In the past, lenders could count on people skipping other payments first before they reneged on their mortgages. And, the trend seems to be growing. A study at the University of Chicago found that 35% of mortgage defaults in the U.S. were strategic in September 2010, compared with 26% in March 2009.

If you're thinking about skipping out on your mortgage, here's what you need to keep in mind:

• The foreclosure process varies by state and by lender. Don't count on other people's experiences to predict your own.
• Your risk varies. Some states prohibit lenders from suing you for mortgage balances you owe on a primary residence. Massachusetts is NOT one of those states.  Massachusetts allows the lawsuits. Before you stop paying, talk to a bankruptcy attorney who is familiar with the credit and real-estate laws in your state as well as industry practices.
• Understand what a foreclosure does to your credit. The higher your credit scores, the longer they will take to heal.

Recourse basically means that the lender can come after you (has recourse against you) if your house sold at auction or through a short sale for less than the amount owed the lender.

Original article on MSN money

...by Anthony Buono

Personal bankruptcy filings have risen to their highest levels since bankruptcy reform legislation was enacted in 2005, spurred by widespread job losses, underemployment and a stagnant real estate market.

The bankruptcy epidemic has affected a wide variety of households, from people in their prime earning years who are struggling after layoffs to retirees who are no longer able to pay their mortgages.

In Massachusetts, the total number of Chapter 7 and Chapter 13 personal bankruptcy filings rose to nearly 23,000 last year, up 16 percent from 2009. Nationally, personal bankruptcy filings rose 9 percent over the same time.

A 33-year-old administrator at a residential treatment facility for at-risk teens had never fell behind on his bills. But the purchase of a condo in Abington during the height of the real estate bubble proved to be disastrous for him.

He bought the condo in 2005 with a friend as an investment and short-term living arrangement, using an interest-only mortgage that became an adjustable rate mortgage after five years.

As the economy lurched into recession, both took pay cuts and David’s roommate lost his job. Hoping to force the lender to modify the loan, the pair stopped paying the mortgage for nearly three years. They finally settled on a short sale, a process that left them with a $90,000 debt. “Unfortunately, like a lot of people we ended up with a mortgage that was set up for failure,” he said.

The bankruptcy epidemic has cut across all circles, but what’s changing is the demographics, local bankruptcy lawyers say.

For the first time, we’re seeing a great deal of elderly people in bankruptcy, before 2007, we didn’t.

One lawyer recalled a woman nearing her 90th birthday who begged him to take her case so that she could pass on a clean estate to her family.

Many retirees filing for bankruptcy are people who are too old to return to work, but facing increases in adjustable-rate mortgage payments.

While job loss remains the biggest trigger for a bankruptcy filing, the second-biggest category is people entering retirement.

Their income is greatly reduced and they can no longer afford credit card payments and in some cases their car payments.

There has also been an increase in higher-income clients seeking bankruptcy because of job loss or reduced income.

Bankruptcy cases fell sharply in 2005 after enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act. The federal law was intended to curb abuse and fraud of the bankruptcy process by debtors and force more debtors to pay back their creditors.

It did so by making it harder to file for Chapter 7 bankruptcy, a straight liquidation process, as opposed to Chapter 13, in which the debtor is required to pay back at least some of the debt over a three- to five-year period.
Under the new bankruptcy laws, debtors who make more than the local median income are required to file for Chapter 13.

The law also imposed new requirements on debtors and their attorneys. Debtors are required to take credit counseling and financial management courses before their case can be discharged by the court.

Lawyers, for their part, are now required to verify their clients’ financial statements and assets. That has created more paperwork and increased attorneys’ fees. A typical Chapter 7 case, which takes approximately three months to make its way through the courts, costs a consumer $1,000 to $2,500, Nielson said. Chapter 13 cases are capped at $3,500 unless the court approves additional expenses.

But what the new law has failed to address is the root cause of many bankruptcy filings: loose credit standards that enabled borrowers to obtain bigger mortgages and credit lines than they can afford.

Although bankruptcy filings linger on a person’s credit report for 7 to 10 years, they can take steps to rebuild their credit.

One method is a secured credit card, in which a debtor deposits money as collateral to serve as the credit line. That enables them to establish a history of payments.

Original Article - Patriot Ledger

...By Anthony Buono

One of the most common New Year’s Resolutions, other than health and fitness, is financial. It is the New Year, and one of your resolutions may be to get out of debt or at least decrease your debt. Many Americans overspent during the holidays,  as this is a holiday tradition in many American households. In fact, Finance or budget is the topic of a goal most people make. Some want to reach a certain target like making their first million; others make the resolution to get out of the debt trap, or others want to make a sound financial plan so that their earning matches the spending.

But it can be really difficult to stick to a budget, or a resolution. Try hard to stick to your New Year’s Resolution in 2011. Do something different this year so you will follow through on your resolutions.  Resolve to write down your resolutions, resolve to review them to see how you are doing, and resolve to not spend money at the next store sale. Do not make excuses to spend money unnecessarily, and always put your budget in a place where you will see it often. Perhaps give yourself a weekly allowance, and do not exceed that amount.

Keep in mind, "A fool and his money are easily parted." --Proverb

...By Anthony Buono

The large majority of bankruptcy filings from senior citizens stem from credit card debt.

Only 7 percent of all bankruptcy cases filed in the U.S. between 1991 and 2007 were entered by people aged 65 and older, however, the demographic was the fastest-growing age group observed in a new study from the University of Michigan Law School. About two-thirds of these elderly consumers were forced to file for protection because their credit card debt was unmanageable; their debt was roughly 50 percent higher than it was for bankrupted consumers in other age groups.

There were a number of causes for these filings, the most common being senior citizens' reliance on credit cards to pay for medical expenses as their incomes decreased and became fixed, the report said. In addition, others had to deal with the death of a spouse who provided a secondary income.

In recent months, fewer Americans filed for bankruptcy as a result of insurmountable credit card debt. Fewer filings may signal improvement in the economy and rising consumer confidence.

...By Anthony Bruno

The holiday season is here, Christmas is a week away. Everyone is celebrating and many are over indulging. It seems like the office parties, Yankee swaps, and holiday shopping are never ending. Be careful not to let your expenses get out of hand and land you in holiday debt.

Once January arrives, many discover they have thousands of dollars in credit card debt and no way to pay it off. One of the best ways to erase debt at the holidays is by paying cash for all of your holiday purchases. Every year at the holidays, Americans over-spend on credit cards.

We buy gifts for family, friends and co-workers. In addition to all these gifts, parties also cause holiday debt. In this last week before Christmas, when many do all their shopping and party preparations, make a commitment to not use credit cards. If it is too late, now that Christmas is a week away, plan on committing to all cash next year. Plan to use cash for everything holiday, not just the gifts.

Many fool themselves into thinking that the only thing that gets them into trouble is buying gifts, but the following list can all lead to holiday debt.

• Presents
• Christmas tree
• Holiday lights and decorations for the house
• New holiday outfits.
• Food for the holiday meal and for the potluck parties you attend

Please give yourself a gift this holiday season, make a New Year resolution to eliminate credit card debt. Use cash and not your credit cards.

... by Kiley Black

In today’s economic climate, we have heard quite a bit about short sales of homes. There are many questions concerning Massachusetts short sales, namely what are they, and how do you qualify. The banks approve short sales for two reasons. The seller must face a hardship, such as loss of job, divorce or death and the bank must agree to accept less than they are owed for the loan.

A short sale in real estate is not always a relaxing or timely transaction.

There are many ways to lose a home but signing away your ownership in a way that ruins your credit and embarrasses you and your family is one of the hardest. For owners who can no longer afford to make their mortgage payments, there are alternatives to bankruptcy or foreclosure. One of those options is called a "short sale."
However, many home buyers do not understand the short sale process, so they are impatient waiting for short sale approval. Confused buyers are looking for direction, and not all buyers’ agents are well versed in the short sale process. It is important to understand the process if you intend to buy or sell a home through a short sale. But it is equally important to surround yourself with people who know the process as well.

When banks agree to do a short sale, it means the bank is accepting less than the total amount due. Not all banks or mortgage brokers will accept short sales, especially if it would make more financial sense to foreclose; additionally, not all sellers and properties qualify for short sales.

If you are considering buying a short sale, there could be drawbacks. For your protection, we suggest that all borrowers:

• Obtain legal advice from a knowledgeable real estate lawyer
• Call an accountant to discuss the tax ramifications of a short sale
• Check for liens on the property to ensure you are not responsible for any outstanding debts once you close on the property.

By Kiley Black

There is no doubt that in our community, many people are suffering from the problems of debt. Many homeowners are experiencing a cash crisis. With credit cards up to their limits and income not meeting the needs of home expenses, many are wondering how to survive the holidays. Credit counseling services may be what is needed to get a handle on your future. Believe it or not, a lawyer who specializes in debt management credit counseling may be able to help you. This is done through direct negotiations with creditors; assisting small businesses with commercial debt restructuring, and assisting individuals with credit card debt.

In today's economic climate, a growing number of us are suffering from negative ratings in our credit file such as delinquent payments, judgments, collections, foreclosures, and bankruptcies. Obviously this prevents us from obtaining new credit when we need it most. Black and Buono works hard to assist individuals and small businesses in avoiding filing for bankruptcy relief whenever circumstances permit. Our firm strives to assist the over-extended individual with compassion, professionalism and experience. Financial strain truly adds stress to your life and your marriage and family. Find assistance before too much of a toll is taken on your health, your life and your family.

... by Kiley Black

Mortgage rates are at an all time low making this a perfect time to refinance your home. Many home owners feel that they cannot refinance because of their credit score or because there is a lack of equity in their home. Many also believe that it is not worth it to refinance their home. This is not always the case.

Mortgage refinance may be the fastest way to repair your bad credit. Lenders may be harder on you because of bad credit, but refinancing is still very possible and may be the fastest route to credit repair. Most likely you will have to use a subprime lender, and subprime loans are only a temporary fix. A real estate attorney can help you find a reputable subprime lender. You need to be diligent with your mortgage payments to fix your credit record. Realize that if you have poor credit, it is very possible to re-establish good credit with the right bad credit repair. Essentially, you need to learn from your mistakes and punctually pay every bill.

Often, home owners adopt the route of refinancing their home mortgage, by consolidating all of their debt. In particular, if they are holding credit card debts whose interest rates tend to be costlier than home mortgage rates, they might look to consolidate credit card debt with their mortgage.  There is an advantage to this; the overall payout rate tends to be lower than if these debts were to be repaid individually. However, this does draw out the payout duration. For many, this is still a better scenario making the payments more manageable and bringing those payments more in line with current earnings.

A lawyer who does credit counseling can refer you to many people within their network who can help you through the refinancing process and can offer advice to you when considering what would work best for you and your credit score.