Monday, November 18, 2013

Legal Options for Nevada Homeowners

Since October 2011 the foreclosure world in Nevada has been in upheaval, and while there are many theories as to why foreclosures stopped, why inventory dropped, and how the real estate market has changed over the past two years, what all seem to agree upon is there are tens of thousands of homeowners who are more than 90 days delinquent on their mortgage payments and at some point a foreclosure action is inevitable. Various sources have reported anywhere between 60,000 homes and 120,000 homes still in default with no pending foreclosure trustee sale on the horizon.  Ultimately these homeowners will be faced with either a judicial or non-judicial foreclosure to address the default status and likely will seek legal counsel as a result.  In the foreseeable future there are two issues every attorney should consider when meeting with a client about home loan default and possible legal options: taxes and deficiency.

Retention options:  To Keep or Not to Keep a Home?

By now everyone in Nevada is familiar with loan modifications, but there is still a gap in understanding as to how the various tiers of the Making Home Affordable (“MHA”) program works, including the most prominent Home Affordable Modification Program (“HAMP”) and the hidden variable of “who” actually owns the loan which dictates which programs a loan could be eligible. (Most servicers at present offer in internal modification that mimics one of the MHA programs if the homeowner is not eligible for HAMP) Some provisions of MHA allow for principal reduction, but it depends on who the investor is and NPV test results.  It is still rare for principal reduction to be offered, but it occurs more frequently now than it has in the past as a result of the National Mortgage Settlement. 

The servicers who agree to participate in HAMP are required to send out loss mitigation packages with HAMP request documents whenever a loan is in default, and now with the Homeowner Bill of Rights in effect in Nevada, at least 30 days prior to initiating a foreclosure, all servicers must provide homeowners with information regarding loss mitigation options regardless of whether or not the servicer participates in HAMP/MHA. See SB 321 State of Nevada 77th Legislative Session. The real challenge will be educating homeowners to open the mail and respond to the loss mitigation packages. Homeowners receive such a litany of mail after going into default they often stop opening the mail or assume the package is yet another foreclosure scam or the 15th copy of the same letter they opened the day before. 

HAMP will still be the primary loan modification program most homeowners are offered by a majority of the servicers over the next two years, especially when the parties end up in foreclosure mediation. (MHA programs expire December 31, 2015)  But there are very limited situations where the loan modification makes sense financially for the homeowners in both a long and short term setting.  While most HAMP modifications reduce the monthly payment for the homeowner, after the first five years, the interest rate adjusts up from the typical 2% in 1% increments per year till it caps at the market rate.  As the past four years have shown, redefault rates are in high percentages before the first interest rate adjustment even occurs, which means the loan modification is simply a band aide on a hemorrhaging problem: income is down, expenses & unemployment are up and nearly all homeowners are still underwater.  So long as the loan to value ratio is underwater, there is no escape hatch for a homeowner who experiences financial hardship to sell the property in satisfaction of the debt.  As the monthly payments begin to go up for homeowners under the terms of the modification, if they have not been able to increase their income or reduce their expenses, inevitably they will default on the HAMP modification creating a cyclical foreclosure wheel. 

As will be discussed below, if mortgage forgiveness is included in any loan modifications after December 31, 2013, there could be tax implications for homeowners who accept principal reduction if the Mortgage and Debt Relief Act (“MDRA”) is not extended.  So for many, the question isn’t simply will the bank let the homeowner keep the house, but should the homeowner keep the house & at what cost when looking at the totality of the circumstances..

A short sale is not typically a retention option, but there is a provision in the MHA-HAFA program that allows a non-profit to purchase a house via short sale, and then resell the property back to the former owner, but it does not apply to mortgage loans that are owned or guaranteed by Fannie Mae or Freddie Mac, insured or guaranteed by the Veterans Administration, insured or guaranteed by the Department of Agriculture’s Rural Housing Service or the Federal Housing Administration. See MHA Supplemental Directive 12-07.  The program is only allowed IF the loan is non-GSE, IF the non-profit is approved and IF the servicer AND the investor agrees to it.  As of the date of publication, this author has not been able to find an example of where a short sale closed under this HAFA exception, nor could a short sale approval from a major servicer be located that doesn’t require an arms-length affidavit.  Neither Freddie Mac nor Fannie Mae permit a short sale in this manner and according to their Servicing Guidelines, all short sales must be at an arms-length. There was fervor in the Nevada legislature this past year about a provision in SB 321 which would allow a homeowner to short sell without the requirement of “arms-length.”  And while the enrolled bill contains a provision that Nevada state law does not require a short sale to be at arms-length, it doesn’t change the policy of the vast majority of servicers and investors to require an arms-length transaction in order to approve a short sale with a waiver of deficiency.  Misrepresentations in the short sale request or failure to disclose the relationship between the buyer and seller could result in a homeowner being pursued for deficiency down the road.


Non-Retention Options:  Let it Go Now or Later?

With MDRA set to expire at the end of this year and with a strong sense the act will not be extended again, many homeowners whose foreclosure won’t be completed until 2014 or who don’t close their short sales till 2014 are going to be shocked when they receive a 1099-C for cancellation of debt and are told by their tax advisor the cancelled debt is ordinary taxable income according to the IRS.  (Since 2007, most homeowners who have walked away from their principal residence or have participated in a short sale avoided tax liability as a result of MDRA)  There may be situations where the cancelled debt will not result in tax liability despite the expiration of MDRA, such as when the debt was discharged through bankruptcy or when the homeowner was insolvent just prior to the taxable event. 

But it’s important for legal practitioners to understand a taxpayer is insolvent when their total debts exceed the total fair market value of all assets; assets include everything owned, e.g., car, house, condominium, furniture, life insurance policies, stocks, other investments, or pension and other retirement accounts.  See IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.   Insolvency does not directly translate to liquidity and state law exemptions do not factor on an insolvency worksheet.  For many union and government employed homeowners with life insurance policies and pensions, despite having measly bank accounts and exempt assets which are beyond the reach of creditors under state law, they may not be insolvent and may face tax consequences as a result of a foreclosure or short sale. 

In a situation where the homeowner has assets, an analysis must be conducted by a qualified tax professional to determine if there will be any exposure to tax liability prior to the completion of foreclosure or short sale.  If the homeowner is solvent and likely to incur substantial tax liability, the client should be evaluated for bankruptcy relief.   In Nevada, state exemptions could allow the homeowner who is solvent on paper to retain their assets while discharging the home loan debt (if they are otherwise eligible to receive a bankruptcy discharge), and avoid tax consequences since the debt is being canceled in a title 11 bankruptcy case.  If the tax analysis is not done or if the homeowner is simply unaware of the potential tax consequences, walking away from the home or agreeing to a short sale could result in financial peril.  Most tax debts are non-dischargeable so by the time most homeowners find out about the ordinary income tax treatment of cancelled debt, it’s too late to use bankruptcy protection.

Lastly, there is the matter of deficiency.  While a majority of the servicers trended towards waiver of deficiency in either a short sale or deed-in-lieu resolution in the peak of the foreclosure crisis, it is probable servicers will eventually shift back to non-waiver policies with regard to deficiency.  There have been multiple investor suits filed for improper servicing and the MHA government incentives to waive deficiency will conclude by the end of 2015 (as well as the incentive to servicers subject to the National Mortgage Settlement) Eventually a reservation of right to pursue deficiency will be a greater incentive for servicers than to simply allow the homeowners to walk away.   Any homeowner relying on trends now with regard to cancellation of debt and deficiency waiver, may in the future find themselves caught in the foreclosure wake of creditor pursuit. 

Tara D. Newberry, Esq. is the Managing Partner at Connaghan Newberry Law Firm, where she practices primarily in the areas of bankruptcy and consumer protection. She has been an appointed mediator by the Supreme Court of the State of Nevada for the Foreclosure Mediation Program since its inception in 2009, and has participated in hundreds of foreclosure mediations. 

Wednesday, February 6, 2013

Finding a Life Line: How to Handle a Client’s Debt Collector During Protracted Personal Injury litigation

As a bankruptcy attorney, I am often referred clients who have extensive medical and credit card debt from the attorney’s that are pursuing a personal injury claim on their behalf.  While it would be ideal for the injury claim to be resolved prior to filing bankruptcy, often times the debt collectors harass a client to the point that a bankruptcy case is filed out of the client’s need to end the harassment, much to the chagrin of their  PI attorney.  (If this happens, it doesn’t have to be the end of your case, I will be writing on this topic in coming additions, so in the interim contact a bankruptcy attorney before you decide to withdraw)

Terms to Understand:

Original Creditor- allegedly owed a debt (i.e credit card company, medical provider, etc.)

Debt Collector: third party who purchased the debt or is collecting on behalf of the original


So what can you do for your client to stop the collection harassment while you are trying to settle or litigate the case? 

1.     Send a Cease and Desist Letter

 As soon as you are made aware of the collection attempts, and assuming that your representation includes negotiating the alleged debt, send a cease and desist letter citing FDCPA 1692b(6) and 1692c(a)(2) and requesting that all future communications be directed to your office.  Keep in mind, if the original creditor is calling, FDCPA may not apply and the original creditor is permitted to call despite your notice, however, most will err on the side of caution and cease its collection efforts upon receipt of an attorney representation letter.  Further, if the contact is being made by a law firm or general counsel, ethics rules prevent an attorney from having direct communications with a person known to be represented by counsel (Nevada Rules of Professional Conduct 4.2.) even if FDCPA does not apply. 

Once a debt collector is notified that the debtor is represented by counsel, they cannot call or send communications directly to the debtor.  Caveat-  If the collector contacts the retained attorney and the attorney does not respond, then direct communications may resume, so be sure and respond in writing as soon as practicable if this occurs. 

In the event that future contact occurs after the cease and desist, your client will likely have an FDCPA claim against the debt collector and may be entitled to statutory or actual damages as a result.  This claim is independent from the underlying debt, so pursuit of such a claim would not affect the status of unpaid medical bills subject to the PI litigation.  More importantly, a demand for violation of FDCPA will usually result in all collection efforts promptly ceasing, which ultimately is what you and your client want.

2.     Educate Your Client

Inform your client that if a debt collector contacts them, they should write down the date and time of the call, the phone number the call came from and a summary of the conversation.  Should there be a violation, a contemporaneous record of the contact will be very important.  Have them state “I have an attorney, Her name is___, she can be reached at ____ …..”  Most often the collector will hang up as soon as the client makes this statement, if possible, the client should also tell the debt collector not to call them again and to only communicate with counsel.  IMPORTANT!  Tell your client they should never provide any personal information such as social security number, date of birth, address, etc., to anyone that calls them directly.  Often debt collectors will claim that they need to “verify” that they are speaking with the correct person, the client’s response should always be “give me your name, phone number, company name, address and facsimile number and I will have my attorney respond to your request.”  There are scammers out there that obtain delinquent debt lists with the intent of stealing identity or perpetrating some other type of fraud, so it is imperative that such information not be given over the telephone to an unsolicited caller.  This rule of thumb also makes it more difficult for debt buyers to merge accounts among similarly named individuals, despite variations in personally identifying information.

3.     Empower Your Client  “Do you owe the debt collector, or does the debt collector owe you?”

Violations of the Fair Debt Collection Practices Act provide statutory damages for each proven violation.  Calls from a pre-recorded message or an “auto-dialer” to a cell phone are violations of TCPA, which also provides for statutory damages.  If either occurs, refer your client to a consumer rights attorney immediately.  (Example of pre-recorded message to a cell phone that violates TCPA and may also violate FDCPA:  “This message is for ‘client’, if you are not’ client’ please hang up, pause… ‘client’ this is an attempt to collect a debt, contact ABC collections at…”  Example of Auto-Dialer:  Client answers the phone and there is a delay while call is transferred to an actual person, or hold music until a live person is available)  Make sure to advise your client to keep all detailed phone records, as well as a copy of any voicemail messages as such proof will be needed should litigation become necessary.

Any person recording a conversation in Nevada must inform and get the consent from the person being recorded (NRS 200.620).  Often, a debt collector may not mention that the call is being recorded, or fail to provide the disclaimer until end of the call.  Failing to notify at the very beginning of the call creates a potential cause of action under FDCPA and NRS 649.250 against a debt collector.  There are many other provisions under FDCPA and Nevada Revised Statutes that protect consumers, the above is simply a highlight of the easiest to remember and most prevalent violations.

Lastly, have your client to go to: so they can read an unbiased, layman’s explanation of what debt collectors can and cannot do.  You can also obtain client handouts for free go to:  and give them to your client at their initial consultation.    Once your client has a better understanding of debt collection and knows that violations could lead to money damages for them, they will be less fearful of the calls, and will be more inclined to wait out resolution of their case.

4.     Negotiate… But Get it In Writing

If you are nearing settlement or trial, contact the debt collector and start negotiating.  Often, they will have limited delegated authority to settle, and if you have limited funds, they will need to get their client’s permission to settle for a lesser amount.  The sooner you start negotiating the better off you will be.

Many debt collectors will refuse to provide a written offer of settlement, so draft a confirming letter as to your conversation with the debt collector and send it via mail and fax.  Give them a timeframe to respond and dispute your recitation of the discussion and do not send payment until the timeframe has expired.  If they fail to respond or dispute, it will be persuasive evidence as to the terms agreed upon and again there are provisions under FDCPA that may be triggered if the collector deviates. 

Lastly, make sure you address credit reporting since the debt is in active collection.  Some debt collectors will claim that they cannot delete reporting, but that simply is not true.  If there are claims against the collector and a “settlement” is reached, then the entire collection account can be deleted.  To get a deletion, the collector will likely want more of a payoff, so it really comes down to the client’s needs and any bad action by the debt collector.

If the above tips seem daunting, or your office just does not have the capacity to handle these types of client issues, then have a referral list for consumer rights attorneys and/or bankruptcy attorneys that would be willing to assist your client with debt defense, debt collection violations and as a last resort, bankruptcy.   As I will explain in a future article, bankruptcy is not the end of your PI case no matter which side you are on, so reach out to the bankruptcy bar, ask questions and find an attorney who can be a “life line” when these issues come up.