Nolo’s Bankruptcy & Foreclosure Blog

On October 6, it was announced that Countrywide Financial has agreed to the largest program ever to modify (reduce) the principal and interest of home loans as part of a lawsuit settlement with officials in 11 states. This was followed several days later by the passage of the federal bailout bill, which contains language likely to also result in widespread loan modifications. In other words, if you have defaulted on your mortgage, or are likely to default in the near future, help may be on the way.

This raises an interesting question for homeowners who are contemplating filing bankruptcy: What effect will bankruptcy have on a homeowner's ability to participate in a lender's home loan modification program? While only time will tell for sure, here are two important points to consider.

First, when you file a Chapter 7 bankruptcy (the most common kind), the title to your home technically passes to your bankruptcy estate and is "owned" by the bankruptcy trustee -- the official appointed to handle your case. Countrywide is telling its homeowners that it won't consider them eligible for a modification while a Chapter 7 bankruptcy case is pending. So filing bankruptcy might take you out of the action just at the wrong time.

Even more problematic, a Chapter 7 bankruptcy typically cancels the promissory note portion of your mortgage along with your other debt. However, even if you don't owe anything on the mortgage itself, the lender will still have a lien on the property in the amount of the mortgage, and will be entitled to foreclose on that lien. In other words, even though you don't owe anything on the mortgage after bankruptcy, you'll still have to pay on it if you want to keep your house. Confusing? You betcha.

So, what's my point? If you don't owe anything on your house after your mortgage, you won't have a mortgage to modify, and it's unlikely that the new programs will offer modifications for liens remaining after bankruptcy. The only way to avoid this result is to offer to reaffirm the mortgage as part of your bankruptcy case (that is, agree to a new mortgage) and hope the lender agrees. As part of this process you can attempt to negotiate different terms for the new mortgage that would be similar to what you would otherwise get outside of the bankruptcy process.

Bankruptcy used to be a really good remedy for people facing foreclosure. However, in the brave new world of mass mortgage modifications, bankruptcy may foreclose your ability to partake of the manna from heaven pouring forth from our nation's mortgage lenders. For this reason, if you think you might qualify to have your mortgage modified, either by Countrywide or by your lender, strongly consider holding off on your Chapter 7 bankruptcy until you know which way the mortgage modification winds are blowing. For more information on whether you might qualify to have your mortgage modified, find a non-profit HUD-certified housing counselor by calling 1 888 995-HOPE.

Effective October 1, 2008, the federal HOPE for Homeowners Act was created to help homeowners avoid foreclosure. Homeowners who qualify may be able to refinance their currently unaffordable variable rate mortgages into affordable 30-year fixed rate mortgages insured by the Federal Housing Administration (FHA), provided their lenders agree to accept the terms of this new program.

For the program to work, lenders must be willing to accept buyouts of their loans that will provide the lender with 90% or less of the current appraised value of the home. For instance, if an appraisal shows that your home is worth $200,000, your lender would have to agree to cash you out at $180,000, regardless of what you owe on the mortgage.

Not only the primary lenders, but also the holders of second or third mortgages, will have to sign off on the deal -- and there's nothing forcing them to do so. In truth, people with second and third mortgages will have trouble qualifying for a new mortgage under this program.

If you eventually hope to make some money off your home, this program is probably not for you. Homeowners who receive refinancing under the HOPE for Homeowners program will be required to share a portion of any future appreciation in home value with the federal government. In other words, if you sell or refinance your home, you may have to send some of the profits to the feds. The amount will range from 100% to 50%, depending on when the property is sold or refinanced. And if there was an additional mortgage holder in the business, he or she may also be entitled to a share of the appreciation.

Not everyone will qualify for refinancing under this program. Basically, you must be at risk of foreclosure under regulations being developed by a new regulatory agency. You will have to document your income, and it must be adequate to make the new loan affordable under standards set out in the National Housing Act. You have to be living in the house you are seeking to refinance and you can't own any other real estate. Finally, you must certify that you haven't intentionally defaulted on your mortgage or any other debt, and that you didn't furnish false information when you obtained the mortgage you seek to refinance.

To find out more about this program and whether you qualify for it, you should seek assistance from a free, HUD-certified nonprofit housing counselor. For a list of these counselors, see HUD's website at www.hud.gov (click on "Avoid Foreclosure", under the "Homes" column) or call 1-800-569-4287. You can also call 1-888-995 HOPE.

Below, you'll find the five biggest foreclosure myths. See the article "How Foreclosure Works" to learn more.

Myth #1: Foreclosure should be avoided at all costs.

The truth: In fact, foreclosure can be your friend and a better option than those frequently urged on stressed homeowners, such as short sales and deeds in lieu of. False. See the entry, "How to Walk Away From Your Home With Money in Your Pocket" for more on foreclosure without fear.

Myth #2:You should move as soon as possible once foreclosure proceedings start. Otherwise the sheriff will forcibly throw you out on the street.

The truth: Foreclosure proceedings typically take several months from the time you first receive notice of your default and the time your home is put up for sale at a public auction. Then, the new owner must follow state legal procedures to evict you, which requires at least some notice (anywhere from 3 to 30 days) and a court order.

Myth #3: When facing foreclosure, your best option is to conduct a short sale.

The truth: A short sale occurs when you convince your lender to let you sell the property for less than you owe on it. The problem is that you have to move out upon the close of escrow, and you therefore give up the opportunity to live in the house for many more months, payment free. See the Nolopedia article "Short Sales and Deeds in Lieu of Foreclosure" for more.

Myth #4: If your home is being foreclosed anyway, there is no good reason to file for bankruptcy.

The truth: If your plan is to stay in your home payment-free as long as possible, bankruptcy can delay the foreclosure auction -- and thus your ultimate move-out date -- by a number of months.

Myth #5: Your home won't be sold in foreclosure while you are negotiating with the bank.

The truth: Once foreclosure proceedings have begun, negotiations with your lender must be successful prior to the date set for the foreclosure sale. Lenders often state right up until the date of a scheduled foreclosure sale that the negotiations are on track, and then pull out at the last moment. This isn't necessarily a deliberate tactic. Rather, it may be a sign of disorganization -- the left hand not knowing what the right hand is doing.

Earlier this week, the House of Representatives shot down the Emergency Economic Stabilization Act of 2008, popularly known as "The Bailout". The Senate picked it up, passed easily after adding $100 billion and change in pork to buy some more votes from House Republicans, and the House is now expected to vote on it tomorrow (October 3). Meanwhile, despite predictions of doom and gloom by the folks pushing this bill, life and the stock market go on.

There is much to be said about this legislation from various perspectives -- political, economic, and financial -- but here I want to contradict an oft-expressed opinion: that homeowners facing foreclosure are not being helped by the bailout legislation.

The basic idea afloat out there is that absent a provision in the bill that would authorize Chapter 13 bankruptcy judges to modify residential mortgages and interest rates, the homeowners are being left high and dry. Not true. While such a bankruptcy provision would benefit a portion of the population in mortgage trouble, many more folks facing foreclosure either don't have sufficient income to propose a viable Chapter 13 plan, or just can't afford the legal fees.

While Chapter 13 can also be useful in scheduling missed payments over the course of the repayment plan, many -- if not most -- homeowners can afford to both keep their mortgage current and pay an extra amount into a repayment plan every month to pay off the arrears. Further, if missed payments are the only problem, many lenders are now amenable -- outside of bankruptcy -- to extending the loan period and tacking the missed payments on at the end.

Simply put, Chapter 13 is a relatively narrow remedy in the larger foreclosure context. The language in the failed legislation, on the other hand, would provide much broader relief to homeowners facing foreclosure. Here's why.

Under the bailout legislation, in a large number of foreclosure situations, the federal government will be involved in one way or another. That alone will be somewhat of monkey wrench in the foreclosure gears. But that's not all: All the government agency players will have to have a plan under which they will seek to keep homeowners in their home. This plan will provide a legal basis for advocates and housing counselors to push for meaningful modifications and relief from foreclosure.

While the federal agencies (and mortgage servicers, in cases where the mortgages continue to be privately owned) will have to take the impact on taxpayers into account when negotiating a mortgage workout, they will likely be willing to modify the mortgages down to the market value of the property, or even below, since the legislation prefers that mortgage workouts take place within the context of the HOPE for Homeowners Act as amended by section 124 of the Emergency Economic Stabilization Act. Further, the Government will, where appropriate, facilitate conversion of the old loan into a 30 year fixed-rate FHA insured mortgage as provided for in the HOPE for Homeowners Act.

In short, because of increased government involvement with foreclosures under a mandatory plan that encourages retention of home ownership, many more homeowners will be able to keep their homes than previously, and for those who don't qualify for help, the foreclosure machine is likely to be gummed up beyond all imagination. From my standpoint, this is a very good thing.

Earlier today, I was watching the Senate Banking Committee debate the administration's proposal to have Congress write the Secretary of the Treasury a blank $700 billion check to fix the bad mortgage debt problem and other financial market woes. As Secretary Paulson was explaining the need for such awesome power, a sidebar appeared on the screen stating that Paulson's net personal worth is $500 million.

That got me to thinking: It would be very helpful for TV public affairs shows to always put up sidebars or bubbles showing the net personal worth and annual income of their various talking heads. The same would go for TV appearances by public officials, politicians, and political shills of all stripes. I found myself wondering about the Fed chairman's net worth, and then the members of the Committee and the other "experts" assembled to support the administration's request. From there, my thoughts jumped to the TV commentators and pundits who are either super rich themselves or operate in those circles.

Why should we care about someone's wealth whose views are foisted upon us 24/7? Every time one of these well-heeled folks says something being proposed is in "our" interest, I have to wonder whose interest they are talking about. Surely Secretary Paulson's interest is not the same as mine, as my net worth is slim to none. So, when Henry Paulson, or Ben Bernanke or Nancy Pelosi or Rush Limbaugh, or John McCain advises that a course of action would be in "all our interests," I'm pretty sure they're thinking of a relatively small circle of family, friends, and associates whose net worths are way up there in the many millions. There are exceptions to this class-based viewpoint of course -- Franklin Delano Roosevelt may have been one -- but for me, it holds more truth than not.

So here's what I think about the proposed bailout. It's crystal-clear that the people who have made out big time under the current credit-debt system desperately want it to continue. And for them, the bailout is a necessity. It may be that it's a necessity for the rest of us as well, but I'm unwilling to take it on trust from the people who are pushing that line.

If I had knowledge of who had most benefited from the housing and credit bubbles, I would be better positioned to assess whose interests were being served in the proposed bailout. For now, it appears to me that the "titans of Wall Street" and the government that serves them are using the same shock-and-awe approach to this power grab as has worked so well with the American people in the past -- scare the hell out of them, and then take what you like.

This, of course, implies that this was and is an engineered crisis. And why not? Everyone in a position of responsibility repeats the mantra that these high-flying finance types are very smart people. If so, they must have seen it coming. A lot of us said-to-be less brilliant people saw the handwriting on the wall a long time ago.

Of course, a possible alternative explanation is that the Masters of the Universe (to paraphrase Tom Wolfe's Bonfire of the Vanities) are far too arrogant and completely lacking in common sense. In that case, we really ought to ignore what they say and let events take their course. It's not inconcievable that "the market" will produce a better outcome. I would like to see, however, a broad-based program to help the millions of homeowners facing foreclosure, even if a larger bailout bill never makes it out of Congress.

A couple of months before the government takeover of Freddie Mac and Fannie Mae, Congress passed a new law providing financial backing for these quasi-governmental agencies, straight out of the U.S. Treasury. The fact that they have now been taken over means very little, except that a new crop of mis-managers will take over operations at somewhat lower compensation rates.

According to a plethora of financial market pundits, the takeover will "calm financial markets" and hasten the day when real estate values can be determined with some amount of certainty. As long as prices keep falling, sales will not keep up with inventory. Undoubtedly true. However, perhaps the time has come when America really is bankrupt in deed, if not in name, and it will just take a few respected leaders (possibly a presidential candidate or two) to call out the naked emperor. In the meantime, we can expect to be treated to a series of "light at the end of the tunnel" statements by the "powers that be", all designed to calm the savage consumer beast and keep the big money in America instead of some other, more financially stable, country.

Although the real estate fiasco can be hard to understand, a brilliant article in the Sunday, September 14^th San Francisco Chronicle pulls it together about as well as anybody can. The most important point in the article is that the new housing recovery law will likely only benefit the most irresponsible of the impacted homeowners -- this because of the abililty of the lenders to pick and choose which loans they will cash out at 90% of the home's current appraised value. While this approach may help the bottom lines of the various banks that got caught shorthanded, it does little for our sense of fairness. Or, to put it another way, it makes the old saw "let no good deed go unpunished" a little less funny in the case of the millions of homeowners who have struggled to stay current on their mortgages but who will now be deprived of relief because their loans aren't bad enough to justify the lender taking a hit.

If, like many, you decide to walk away from your home, your best first step is to stop making payments and stay put. Except in a few states (mostly in the old South), you can stay in your home for a long period of time--payment-free--before you have to leave. This gives you a unique opportunity save big bucks that will help you secure new housing in the future. It also does your community a huge favor by preventing your home from sitting vacant for many months, gathering blight.

How does this work? Foreclosure proceedings typically begin after you have missed between 3 and 5 monthly payments. A few more months are likely to pass before your home comes up for sale at a foreclosure auction. If your home isn't purchased at the auction--which these days is typical--you will be able to remain until your home is put up for sale by a real estate company and you are legally evicted--all of which can take a good many more months.

Depending on your state, it can take a year or more from the time you decide to act until the time you need to once again start paying for shelter. Using this opportunity to save for the future will grease the skids when you need to find new housing, and will make it easier to live without credit, a worthwhile goal in itself.

The credit bubble is leaking furiously, as shown by skyrocketing foreclosure rates, but it hasn't popped yet. People keep borrowing more, and if they can't borrow on their home equity, they just run up the debt on their credit cards. And if people can't afford to pay their mortgage loans, you can bet they won't be able to pay down their credit cards, which generally have far steeper interest rates and penalties.

To borrow from Winston Churchill, it appears that foreclosures were not the beginning of the end of the credit crisis, but merely the end of the beginning.

Trends in earning, spending, and saving have pointed to a credit crisis for years. It may not end until an unprecedented wave of consumer and small business bankruptcies wipe away the debt that just can't be repaid. Personal bankruptcy rates are already rising -- there were 40% more in 2007 than in 2006, according to the American Bankruptcy Institute. There may come a day, not too far away, when millions of consumers will throw up their hands and walk away from their mountain of unsecured debt by declaring bankruptcy.

You can follow the credit bubble as it shifts and morphs its way through our financial institutions at http://www.federalreserve.gov/releases, where the Federal Reserve posts monthly reports that track the effects of the credit crisis on America's financial infrastructure.

If the flow of money is the fuel of American capitalism, then these reports are the fuel gauge. The Fed's unglamorous reports give us hard data on how much money is coursing through the American economy.

• Monthly G.19 Reports. These are the reports on consumer borrowing, both traditional loans (such as car loans) and "revolving debt," also known as credit cards. Each month, the Fed lists the total amount Americans have on our credit card bills. The amounts are staggering -- $968 billion in credit card debt, more than 7% higher than just last year -- and show no signs of shrinking. Read more at http://www.federalreserve.gov/releases/g19/.
• The "charge off" rate. This is the percent of loans, including credit card balances, that the lender has written off as uncollectible. The latest figures show that banks are giving up on 5.47% of the credit card amounts owed to them. This figure is the highest since the current bankruptcy law took effect, with the exception of a brief flurry of bankruptcies before the passage of the law. More information here: http://www.federalreserve.gov/releases/chargeoff/.
• The savings rate. This data shows how much Americans are saving each year. It's been hovering between zero and 2% for five years: http://research.stlouisfed.org/fred2/series/PSAVERT. For other Fed research data on personal spending, see http://www.bea.gov/national/index.htm#personal.
• The bankruptcy filing rate. This data is kept by the US court system, updated monthly and can be found here: http://www.uscourts.gov/bnkrpctystats/statistics.htm.

You can get other important numbers and information from non-governmental sources, including:

• RealtyTrac, which offers one-stop shopping for the latest foreclosure statistics and news: http://www.realtytrac.com/news-trends/index.html
• InsideARM.com, which offers an excellent, well-organized archive of timely articles on economic data affecting the debt and credit industry. The link below is for Credit Card news, but be sure to hover your cursor over the News & Analysis link for a list of other areas you can search: http://www.insidearm.com/go/tags/credit%20card.

An article titled "Lose Homes, Pay More Tax" by Jonathan Glater, published in the May 30, 2008 edition of the New York Times, accurately described a little-known oddity of our tax laws (described in the article as a "tax bomb"). If a lender forgives or writes off debt (same thing), the amount forgiven can be treated as taxable income by the IRS. So, for instance, if you have a second home (not your primary residence) and you lose it to foreclosure or even a short sale, you will be taxed on the shortfall to the lender. Fortunately, loans made to acquire or improve primary residences are excluded from this rule for tax years 2007 through 2009.

What the Times article left out -- strangely, seeing as so many bankruptcy lawyers were quoted -- is that there are two exceptions to the tax bomb. If you are insolvent at the time of the debt forgiveness, you will also be forgiven your tax liability. And, here's the kicker: If you file bankruptcy prior to the debt forgiveness (read: foreclosure) the bankruptcy will not only hold off the foreclosure (at least temporarily), but also discharge the debt, so there's nothing to forgive and no income to tax.

Insolvency can be difficult to prove after the fact, but there is no doubt about the bankruptcy exception. Although many people shy away from bankruptcy, it can be a marvelous remedy when dealing with the possibility of foreclosure. It's beyond my comprehension why that point wasn't made.

An article on Newsweek's website asserts that chapter 7 bankruptcy filings are following an upward trend, with more and more people seeking bankruptcy protection, despite recent changes to the law making it more difficult to file. Readers of this blog will know that I advocate bankruptcy as a way to avoid foreclosure; according to Newsweek, filing bankruptcy to deal with an imminent foreclosure is one of the reasons for the boom:

In some cases struggling homeowners are filing to prevent foreclosure. (A record high 243,353 homes went into foreclosure in April, according to data released on May 14 by RealtyTrac.) Squeezed by rising costs for everyday necessities like gas and groceries and unable to tap into their homes for temporary relief -- declining values have left some people owing more than their homes are worth; it's also more difficult to get home equity lines of credit or loans -- many people have turned to their credit cards "as a last resort," says Robert Lawless, a professor of law at the University of Illinois who follows bankruptcy trends.

While digging the debt hole deeper seems like it might be a good idea in the short term, filing bankruptcy now will help you avoid the costly penalties that credit card companies will saddle you with as your balance goes ever-upward. If you're thinking of filing for chapter 7 bankruptcy, be sure to visit LegalConsumer.com, my co-blogger's website, to try out his free means test calculator. The calculator can quickly tell you whether you qualify for chapter 7 bankruptcy under the changes in the law that went into effect in early 2008.

As the credit crisis continues and foreclosures continue to rise, Nolo has gathered the most relevant and helpful articles and tools for anyone facing foreclosure. There, you can find articles by me and my colleagues on everything from reducing the number and amount of mortgages on your home, to tips on how to spot the shady characters who will try and take advantage of you at a most vulnerable moment -- when you're struggling to hang on to your home. And, of course, there are answers to those nagging questions that need to be answered immediately -- like how long you can stay in your home once foreclosure notice has been given.

To find out what the law has to say about these issues and more, check out the brand new Foreclosure area on Nolo.com. Soon we'll be adding an article on foreclosure basics and an FAQ with answers to common foreclosure questions.

The subprime mortgage and credit crisis shows no sign of waning anytime soon, and if you're one of the millions being foreclosed on, panic may be quickly setting in. But just because a solution seems unreachable doesn't mean that you can't plan ahead to minimize the possibility of foreclosure or mitigate the damage if you find yourself sliding toward it.

Lately, I've been working with my colleagues at Nolo to produce useful materials that will help anyone in any stage of the foreclosure process -- from those struggling with their new jumbo loan repayments to those with an eviction notice already pasted to their front door. Here are a few of the articles I'd recommend to interested readers:

• My latest article covers the process of reducing your mortgage obligations to help you avoid foreclosure and stay in your home.


• Similarly, Ilona Bray gives you a rundown of all the ways you might be able to stay in your home and keep foreclosure at bay, as well as what to do if you discover that foreclosure is inevitable.


• A cautionary article: Don't Lose Your Home to Foreclosure "Rescue" Scammers. Many unscrupulous people are using the mortgage crisis to prey on those going through one of the most difficult times in their lives. This article gives you the tools to recognize those attempting to defraud you, and how to check up on the legitimate rescuers.


• What happens when your landlord's rental property is being foreclosed upon? Janet Portman provides the information any renter in this situation will need, including warnings about angry, law-breaking landlords and solutions for tenants who find out their new landlord is the bank.

On January 23, I wrote in this blog that people ought to use their rebate check to file bankruptcy. I pointed out that past attempts to stimulate the economy in this manner had pretty much failed, due to the fact that people used the money to pay down their debt, and that this time the loan sharks would gobble up most of the government's gifts hook, line, and sinker.

In an April 25, 2008 Associated Press article by Tom Raum, President Bush is reported to have said the money would help Americans cope with rising gasoline and food prices, as well as aid a slumping economy. According to the article, Sen Charles Schumer (D. N.Y) responded: "It's galling to think that taxpayers' stimulus checks will be lining the pockets of OPEC. The sad truth is that the average American family will spend almost their entire stimulus check on higher gas prices this year."

Let's say it like it is: George Bush (and, not so coincidentally, most of Congress) is giving their oil buddies a $150 billion tax rebate. It may be in your bank account for one brief moment, but it will quickly be recycled into the major oil companies' coffers. All of this takes place in the context of the worst housing slump since the depression, record foreclosure numbers, and a recession in many -- if not all -- states.

My earlier proposal makes even more sense now. It will help folks who really need help and will serve to make our economy stronger. Everyone with significant debt (which is just about everyone) should use his or her rebate check to file for bankruptcy. The entire process can cost as little as $600 for people who represent themselves (which many currently do, with paperwork help from paralegals and targeted legal advice from lawyers). And even if you choose to hire a lawyer to represent you, the proposed rebates will definitely give you a good start on the fees, especially if you are married.

Bankruptcy has been around since biblical times, and has long been recognized as an important component of the capitalist economy in that it restores debtors to the consumer marketplace. Specifically, bankruptcy gets rid of credit card and most other kinds of debt (exceptions are alimony and child support; most student loans; recent taxes; and debts caused by fraudulent or willful and malicious actions). Most people are solvent for the first time in years when they emerge from bankruptcy, and once again are able purchase goods and services without going into more debt.

Just imagine how the economy would hum if consumers were freed from the punishing interest rates that often creep over 30% for technical violations of credit contracts. By filing bankruptcy, people will use their government checks to improve their own balance sheet, instead of donating their money to the oil companies and the fat cats who use the large credit corporations to bleed us dry. While it's true that mass bankruptcy filings would tighten rather than loosen consumer credit, it can't get much tighter. Anyway, it's not a bad idea for us to break our national addiction to debt and learn to pay as we go.

Pretty much every bankruptcy attorney will tell you the same story: When you ask a client why he or she wants to file bankruptcy, the typical answer is, "I can't stand the phone calls." I get story after story from normally gregarious people about how they and their families are living in fear of their telephone.

Most people who fall behind on their debts feel guilty, and the debt collectors know it. They prey on that guilt in the expectation that money will somehow be found -- the children will withdraw from college, the daughter will forgo her braces, the mother will take a second job (leaving an empty house for the children to come home to). In the proud tradition of community loan sharks, it makes no difference to the collectors where the money comes from, only that it be paid.

My reaction when I hear these stories? My outer self clucks in sympathy while my inner self gets really furious at the fact that these good people have been made to feel like criminals by the real criminals: The credit card companies that charge 30% interest, trap people into over-payments and delinquencies by unfair billing practices, and raise interest rates on the basis of late payments on unrelated debts.

I also get frustrated because, of the hundreds of people I've counseled in the past several years, not one person knew that they could use a federal law known as the Fair Debt Collection Practices Act to stop collection agencies from phoning them -- and from engaging in a lot of other harassing conduct. Whether or not they decide to file for bankruptcy, these people come away from my counseling greatly empowered by a bit of information that every citizen should know at least as well as they know the pledge of allegiance.

And (drum roll, please) the information is, you can make a bill collector bug off with the following letter, properly addressed to the harassing debt collector:

Attn: [Collector],

Re: [Your name], [Account #]

Dear [Collector]: For the past three months I have received several phone calls and letters from you concerning an overdue [Creditor's name] account. This is my formal notice to you, under Title 15 United States Code Section 1692c, to cease all further communications with me except for the reasons specifically set forth in the federal law. This letter is not meant in any way to be an acknowledgment that I owe this money.

Very truly yours,

[Your name]

The Fair Debt Collection Practices Act has some enforcement teeth, including stiff fines payable to the victim, and attorneys' fees. Unfortunately, it's sometimes hard to put together a case. The best approach is to start recording your calls, which is okay as long as you tell them you are doing it. This alone may chase them off, but if they are so brazen as to continue calling you after you have told them not to, and they talk for the benefit of the recorder, you may have a good case to take to a lawyer for follow-up.

Unfortunately, the federal Fair Debt Collection Practices Act doesn't apply to the original creditor, and when creditors own their own collection agencies, as some of the big ones do, the line is gray regarding the federal law's applicability. Also, there are some collectors that aggressively push the envelope in their collection activities and frequently violate your rights under the Act. Nevertheless, many states have similar laws that do apply to the original creditor and the almost universal effect of a letter such as the one I've described above is to stop the harassment, regardless of whether it is the creditor or a collector who is making the calls.

If you're like many homeowners, your home is encumbered with a second or third mortgage (or deed of trust), and perhaps a home equity loan. Numerous articles describe you as using your home like an ATM machine. Having all these secured debts on your home is tantamount to a juggler having too many balls in the air -- at least one must fall, sooner rather than later.

If, for one reason or another, you just can't keep up, you may be able to avoid foreclosure if you pay the right loan and either blow off the rest, or at least make reduced payments. In almost every case, the right loan to stay current on will be your first mortgage or deed of trust. While I'm always hesitant to tell people to stop meeting their shelter obligations in full and on time, sometimes it's the only rational thing to do -- as wrong as it may feel to many of you. If reducing the amount you throw at your home every month will let you stay there and keep your ahead above water, at least until you can work out a better solution, I'm all for it.

How does this work? When you originally took out the loan to buy your home, you agreed to have the loan (or loans) secured by a mortgage or deed of trust (depending on the state where the property is located). (For the rest of this blog, I will use the term "mortgage" to refer to both mortgages and deeds of trust.) By recording the mortgage in your local land records office, the lender created a lien (legal claim) on the property, which can be enforced by foreclosure if the payment terms of the mortgage document aren't met. As you probably know, in foreclosure the property is sold to make good on the promissory note underlying the mortgage.

The main loan you used to buy your home is termed a "first mortgage." Why first? It's almost always recorded first and gets paid first in case of a sale. In the same manner, a second loan secured by the home is a second mortgage. For example, it's common to use a first mortgage to pay 80% of the sale price and get a second mortgage for the additional 20%. And that's not all. In the bubble years, home value appreciation supported additional loans against the home, often in the form of a home equity lines of credit. As with the first mortgage, the lender's primary remedy for a default on these additional loans is foreclosure.

For foreclosure to be an effective enforcement remedy there has to be enough equity in the home to pay off the holder of the loan being foreclosed. And if the home is sold in foreclosure, all senior lien holders (in that a first mortage is senior to a second mortgage) have to be paid off first. For that reason, until the last several years, banks wouldn't lend in the absence of good credit and a healthy chunk of equity to secure the loan. In the bubble years, however, many loans were made on the expectation that values would rise fast e