Bank's Lawyer coming after me for secured mortgage debt

[karlsd]

I completed a short sale on an investment property last month. There was a primary lien holder and secondary lien holder. The primary accepted the short sale and will forgive the remaining debt, issuing a 1099 for the balance. I am dealing with this with my accountant. The secondary accepted $3,000 from the proceeds of the short sale to release their lien but will not be forgiving the remaining debt. The original debt was 32K. They accepted 3K to bring it down to 29K but they have now tacked on lawyer's fees and the debt is now 33K.

Last week I received a summons from the Lawyer to answer the accusation. I have 20 days to answer this summons with my local county court house. From my understanding I have to either acknowledge or deny this accusation. It is clear I must acknowledge it. I have since spoke to the bank’s lawyer and he made it clear that they would listen to an offer. I have also spoken to 2 different lawyers of my own:

Lawyer 1 – Stated that I should seriously consider bankruptcy as an option based on the fact that I have 30K of credit card debt and the fact that he felt that since I have not made a payment on this property for a year that my credit would already been in the tank. He suspected that my credit was in the 400-500s and if so Bankruptcy is the way to go. At his request I ran my credit. It was still high at 683. Before any of this my score was in the 750s. So it took a hit but not that much. I am awaiting a follow up from this lawyer.

Lawyer 2 – deals with bankruptcies only. He was very quick and to the point. He asked me how much money I made and once I told him, he said I was in trouble. He says they will come after me hard and I should consider bankruptcy seriously. He went over the differences between filing Chapter 7 and 13. He says that it will be hard for me to file for Chapter 7 (which will absolve me of all my debt). Filing for Chapter 7 would cost me $1,900. H also said that Chapter 13 requires more paperwork and would only absolve me of partial debt and would cost me $3,500. He also said I should try to negotiate with the bank’s lawyer and if they asked for my financials (which they will) that I shouldn’t bother and go to him and get the bankruptcy going.

I make a decent salary but my expenses exceed my income. I can prove that I am -800/month. I live off my credit cards and tax refund. Lawyer 2 didn’t seem to want to hear that. He said it doesn’t matter. The bank will not care and when they see what I make I’m in trouble.

So those are the facts. I do not want to file for bankruptcy due to what it will do to my credit. It seems as if the Bank’s lawyer is willing to listen to an offer. I asked him what would be a reasonable offer. He stated that he could not tell me but he said that the bank will take 80% of the debt (roughly $26,000) without any questions. This will not work for me.

Here are some other financial facts about me:

- I was married last year but my wife is not a party to this debt. I know they will try to get her financials involved but I will continue to deny them on this front.

- I never have more then 3-5K in the bank at any time; which is solely used for monthly bills.

- I have a Primary residence with no equity. I would have to get an appraisal to prove this. But based on recent home sales in my area I would guess that my house is worth roughly 350K. I owe 375 on my mortgage.

- I have a 401K worth 40K. But I will insist that this not be introduced or touched. Do to fees and penalties associated with early withdrawal.

- I have an annual salary of 110K but as I mentioned earlier, a combination of my primary residence bills, credit card minimums and cost of living expenses set me back approx -800/month.

- My wife (who was never a party to any of my debt) made 50K at her previous job. She has since changed careers and makes far less at the moment. She also has debt of her own. She is also still a legal resident of North Carolina. I live in NY. I am stating that she does not contribute to any of the household expenses (which is actually true).

I have 2 letters prepped. The 1st is an admission of the debt; a copy shall be sent the courthouse and to the bank’s lawyer. The 2nd is an offer letter to the Bank’s attorney. I am offering 10% of the initial debt ($3,200). I have made it clear in this letter that my attorney has advised me to file for bankruptcy if this offer is not accepted (which I may or may not do….but hoping I can avoid it)

I suspect after they receive my offer letter, they will ask for my financial and issue a counter offer. Probably something on the high end. I am really not sure what will happen from this point or how I should proceed. From what I’ve read I need to stand my ground and force them to come down and eventually accept my offer. Playing the Bankruptcy card is the key. Obviously if I go this route they get nothing, so I am hoping they will take something.

One last thing. This may or may not have any bearing. This was a rally bad loan. Interest Only adjustable. I paid it for 3.5 years and the principle never went down. I paid them on average (200/month) for 3.5 years. So I fed these guys for 3.5 years a total of approx 8K (payments ranged from 270-180….mainly on the higher end). They were also given 3K from bank #1 as part of the short sale, as you well know. So they ended up recouping around 11K of the 32K. I am not sure how this factors into anything, but I will be sure to bring it up.

Any help, advice, comments will be appreciated!

[unusualsuspect]

The 401k is untocuhable... you dont have to worry about that.

[Denita]

Have you checked your exemptions for your state? Check here: www.legalconsumer.com

One of the critical things IF you decide to file is your schedules I and J. With your income, you may not qualify for a Ch 7 - but you can not know that without knowing what your DMI (disposable monthly income) is on the allowed expenses. Check the USTrustee site for the link for your area for maximum allowed expenses. http://www.justice.gov/ust/eo/bapcpa/20090315/meanstesting.htm You may in fact qualify if you have high payments on your secured debt - that is fairly common. Your 401k is exempt. Do you have other assets? (Other retirement accounts, vehicles, etc?)

Interview several attorney's if you decide that BK is a viable option. They vary tremendously in skill and ability - it can make the difference between relief and heartache. BTDT.

Also, I am really surprised that the 2nd did not have your financials already. Here (S FL) we have to provide all the sellers financials to the lenders at the inception of the short sale negotiations and that is partly how the lender decides to accept or reject the short sale offering. Didn't you have to provide your complete financials to the lenders already?

Before you file, you may want to try to offer a low percentage lump sum payout for the second (your second letter, not your first letter). They are now unsecured debt since the property has been sold and closed in a short sale. The actual lender may in fact be a JDB. Even if it is serviced by the same servicer, it is not unusual for defaulted debt to get sold while it is in default. I have seen others that have negotiated away the second with 12% payout and a release of lien (and kept the house!), but they had already been successfully discharged from a Ch 7 and did not reaffirm the 2nd. For you, you are in better shape because there is no lien since the house is sold! They just have a judgement on you they can try to persue. I would not make it easy on them by admitting the debt because you don't know if the note and other paperwork actually got to the lender. Don't assume it is the same lender just because it is the same servicer. Make them prove everything and make it expensive for them to do so. JMO.

Edited December 31, 2009 by Denita

[karlsd]

"Also, I am really surprised that the 2nd did not have your financials already"

I am no longer dealing with the bank. The bank did have all my financials when they accepted the short sale. Now this debt has been handed over to their attorneys. And I am sure they have copies of my financials. But they have not stated that. What they have stated is that "make us an offer and we will follow up by obtaining your latest financials". Keep in mind that the short sale process started months ago, they will want updated financials.

"Before you file, you may want to try to offer a low percentage lump sum payout for the second (your second letter, not your first letter)."

that is what I am doing. Offering 10% in one lump sum

"I would not make it easy on them by admitting the debt because you don't know if the note and other paperwork actually got to the lender."

The summons included a copy of my singed contract with the bank. I do not have a choice but to admit the debt. I see no other way.

I do not plan on making this easy on them.

[Denita]

I'm sure you know this already; but the reason they ask for the financials is two-fold:

1) to see your capacity to pay (do you have the resources now or have the ability to come up with the resources in the future)

2) to know where your assets are now (account numbers, bank names & locations, etc).

If you 'look like' you have access to funds or have the ability to come up with future funds, they are less negotiable. I have run into this with short sale offerings regularly. Don't assume that the lender/JDB/CA is going to accurately read your situation either. Good luck - I hope they let it go for the 10% you are offering!

[Fedral Reserve]

I'm a little bit confused hear. If the property was sold through a "Short Sale", The 1st lien holder reached a settlement with the 2nd lien holder. That should be the end of the matter. Is there something that I am Missing here?. Could this be a JDB trying to get the balance out of you using scare tactics.

[unusualsuspect]

This is becoming more common... as 2nd lienholders are being foreclosed on and losing, they are starting to come after the borrowers.

The best way for us to help is to answer these questions:

1. Is this a primary home or investment property?

2. Is your state recourse or non-recourse?

3. The amount claiming they are owed?

As more servicers and "investors" acquire bad mortgage debt and violate the FDCPA, there's a ripe new group to be suing... (just my opinion).

[Denita]

I'm a little bit confused hear. If the property was sold through a "Short Sale", The 1st lien holder reached a settlement with the 2nd lien holder. That should be the end of the matter. Is there something that I am Missing here?. Could this be a JDB trying to get the balance out of you using scare tactics.

Actually the way it works is you negotiate the short sale with each and every lienholder. The first does not have an agreement that ties in with the second; OTOH both have to agree to the deal. There are many short sale offers that are not accepted because the second would not work with the deal on the table and wanted a large note signed at closing in order to get the deal done.

[Fedral Reserve]

Hi Denita.

If you read Karlsd first post He/She mentioned that the "Short sale" went through and the second was settled for $3,000.00. That means that they accepted the offer,so that should be the end of the matter. How can they come after Karlsd for the balance when they have already settled.

I am checking this out with some Real Estate Brokers I know. Who are consulting with their Attorneys to try and get a clear answer.

Can anyone else throw some light on this. I am in the same boat as Karlsd, but have several investment properties going through the "Short Sale " process .

[Denita]

I have been through the process quite a few times (professionally - I am a real estate broker).

I read where the property closed. IF the OP did not get it in WRITING from the second that the lien was released AND the remaining debt would not be sold, then it may very well be the remaining debt was sold to a JDB. One of the issues we are running into is that not all of the lenders are negotiating in good faith. The idea of completing the short sale, for the seller, is to get rid of the debt AND not have the note to pay at the end AND the remainder debt sold to someone else.

Unfortunately not everyone negotiates with those goals in mind. The OP would have received a letter in writing (probably via email) directly from the servicer before closing as to the exact terms of the short sale agreement. This letter would have also been provided to the title company or the closing attorney too. The OP needs to review those terms. The acceptance of the $3000 does not automatically mean the 2nd will not sell the remainder. And, in fact, this second obviously did. If it were me, I'd get an attorney on this and seek damages from the second/JDB, especially if the second did not address or specifically state they had the right to sell the remaining debt in that letter.

Also, I use an experienced attorney to negotiate the short sale to avoid this exact situation.

Edited January 3, 2010 by Denita

[Fedral Reserve]

Hi Denita

So if 2nd lien holders are selling the balance to JDB's after a short sale has been negotiated and not telling the Owner/Seller , the title company ,The 1st lien holder and the real estate agent. There must be loads of FDCPA violations and court violations they are committing.

Is there a procedure you know of for people to get this information out of the 2nd lien holder or the Title Company. I am going to write to our State Attorney General to see if this is legal or not in a "Short Sale" .

Also you have used the Acronym OP in your last post can you tell me what that stands for.

[Denita]

OP = Original Post

The title company or closing attorney follows the closing instructions that come directly from the servicer for the mortgages. The first won't accept the deal until the second has signed off, in my experience. The written instructions are specific and are agreed to by all lienholders, PMI if applicable, and the seller and the buyer (in the case of price).

If the second lienholder accepts X as the payoff and is silent on the rest of the debt, then I would think that would be a violation. In the short sales I have completed, the lienholders did not sell the debt or come after the seller at a later date. In the few that wanted a lump sum payment at closing or a note to be signed by the seller, the seller was not able to accomodate and would not sign a note, naturally. (In those specific instances the note the second mtg required was high and the seller had enough other debt that filing BK was a better solution for the seller rather than completing the short sale.)

I don't see how it can be legal to sell a debt after the second accepts the short payoff WITHOUT PRIOR EXPRESS AGREEMENT TO SELL THE DEBT, IMO. I don't know that the AG would give you a satisfactory response, but I would have an attorney after the JDB anyway for collecting on a debt that has been paid/settled.

IMO, I think the lenders do what they feel like doing unless you come back at them hard and strong. Right now it is a little like the wild west when we are negotiating, there is no attempt or even pretense for the lenders/servicers to negotiate in good faith. What the average seller has in his favor is, if the bank won't accept the short sale or comes back with unreasonable terms, then just file BK and have them get nothing. Of course, you only want to use this tack if it is viable for the individual seller.

[Fedral Reserve]

Thanks Denita.

You have been very helpful. If I get a summons from an Attorney or JDB coming after me for the balance on the 2nd (Which I am Expecting) I will post the details on here.

Regards. Fedral reserve.

[karlsd]

Answering all your questions.....

"I'm a little bit confused hear. If the property was sold through a "Short Sale", The 1st lien holder reached a settlement with the 2nd lien holder. That should be the end of the matter. Is there something that I am Missing here?. Could this be a JDB trying to get the balance out of you using scare tactics."

the 2nd agreed to $3,000 to release their lien to allow the short sale to go through. The 2nd sent me a letter stating they would accept this amount to release their lien but will NOT forgive the debt. I had to sign and agree to this document.

"1. Is this a primary home or investment property? Investment

2. Is your state recourse or non-recourse? condo in fla, i live in NY...both are non debt forgiveness states

3. The amount claiming they are owed? 33K (32 is the original loan amount, they accepted 3K from the short sale then tacked on lawyer fees)"

"If you read Karlsd first post He/She mentioned that the "Short sale" went through and the second was settled for $3,000.00. That means that they accepted the offer,so that should be the end of the matter. How can they come after Karlsd for the balance when they have already settled.

I am checking this out with some Real Estate Brokers I know. Who are consulting with their Attorneys to try and get a clear answer.

Can anyone else throw some light on this. I am in the same boat as Karlsd, but have several investment properties going through the "Short Sale " process ."

As i stated above they accepted this amount to simply release their lien. hey are not forgiving the debt.

"I read where the property closed. IF the OP did not get it in WRITING from the second that the lien was released AND the remaining debt would not be sold, then it may very well be the remaining debt was sold to a JDB."

The debt was not sold. The bank was Wells Fargo. My debt was simply handed off to their attorneys. The attorneys are acting on behalf of the bank. If I make them an offer, they will have to go back tot he bank to see if they will accept.

OK, looks like we are getting a little off track here and turning this into a short sale education seminar. With all due respect. I am facing a life impacting decision here and I am dealing with some pretty impatient, cut throat lawyers who just want to get paid and don't give much of a sh*t about my future. So I want to make sure I am taking the right path here.

The short sale is done. This is not about the short sale anymore. I now have 2 fights ahead of me. Both of which I was aware of before I pursued the short sale. The first is the 1099 I will be hit with by the primary lien holder. I am working with an accountant on this. This will be handled by claiming the investment as a capital loss and offsetting it with the 1099. I would like to keep the 1099 out of this discussion. The 2nd fight is what this post is about. I knew that the secondary lien holder would not forgive the remainder of the debt.

I want to do everything I can to avoid bankruptcy. I was told by many prior to the short sale that if I have nothing, they cant get anything. I was also told that they would be willing to negotiate an accept an offer; maybe as low as 10% of the balance. I was also told that getting money from me would cost them more money then it would be worth in terms of lawyer's fees. So here I am. On another board (copy and paste):

community.lawyers.com/forums/p/93460/443873.aspx#443873

That is my post. If your read through the replies they are all stating I should go the bankruptcy route. Now this is a lawyer site. Lawyers make money from bankruptcy. I am not saying they are wrong. I am just really surprised that they are pushing me to this prior to at least trying to negotiate with the bank.

[Denita]

Ok, you signed an agreement with Wells Fargo not releasing the remainder of the debt. Is it a note they had you sign at closing or some sort of stipulation?

I read the thread you reference. You got some good advice. BUT, if you do not want to file BK, then you can:

1) Make arrangements to pay the note monthy with Wells Fargo. If it is not a note you signed, then when you make payment arrangements they may want to have you sign a note. Most of the notes that Wells Fargo offers are ZERO INTEREST notes in your situation. Most of the time they will amortize over 10 yrs, 15 yrs or 20 yrs.

2) Or offer a lump sum payment to buy out the remainder. Don't touch your 401k if at all possible (this is exempt if you change your mind later and have to file BK, check your exemptions here: www.legalconsumer.com)

3) Or if you did NOT sign a note, but they just provided that condition of non-release in the letter to you, you might want to fight it in court. I don't know if you can use *duress* as part of your reasoning. You might want to find a NACA attorney or a good real estate attorney to give you the options rather than a BK attorney. (You know that old saying: If all you have is a hammer than everything begins to look like a nail).

I will poke around to see if something has occurred recently that would back option #3

[karlsd]

"Ok, you signed an agreement with Wells Fargo not releasing the remainder of the debt. Is it a note they had you sign at closing or some sort of stipulation?"

correct, they attached the original note as proof.

My plan was to negotiate to some # that I can pay over time. Right now my offer is 10%. I do not expect them to take it. But in the end if they agree to 10 or 15K and allow me to pay that over time I may jump on that.

[karlsd]

if they took 50% or less (16k or less) like i said I may jump on it. I would probably borrow from my 401K to get it done and pay myself back.

I spoke to my lawyer yesterday (that was Lawyer #1). He advised me to make them an offer. If i can get a do-able deal great, if not he will assist in Bancruptcy proceedings. Here is the letter I intend on sending to the Bank's Lawyer:

All comments/suggestions are appreciated........

xxxx xxxxx

1 main st

ny, ny 111111

xxx-xxx-xxx

Wells Fargo Bank, N.A.

1 Home Campus

Des Moines, IA 50328

RE: Account #: x.x.x.x.x.x

Collection letter dated Dec 02, 2009 (Consumer Credit Transaction Index # xxxx)

Dear Mr. xxxxx,

I, xxxx xxxxx, am writing this letter to show my intention to settle the delinquent account I have with Wells Fargo.

I am unable to pay the full amount of this debt do to my current financial situation. Since the purchase of this property in 2005 I have been carrying a severely negative debt to income ratio. I have only been able to survive with the assistance of revolving credit card debt, which now exceeds $30,000. The property expenses had exceeded the rental income received by -$550 per month for over 3 years and had been the leading cause of my revolving debt increases.

I fear that continuing at this pace will put me in a far worse financial situation as my creditors have reduced all of my credit limits. At the potential risk of losing my primary residence I have contacted my Attorney about my options. He has advised me to consider Bankruptcy. This option will absolve me of all of my current debt and the debt in question with Wells Fargo. It should also be noted that I am expecting to receive a 1099 from the IRS for approximately $104,000 in the next 30-60 days. Wells Fargo Home Mortgage was the Primary Lien Holder for the property and agreed on a short sale of $80,000 (they received $68,000 after closing costs). They were owed $172,000. I will now have to deal with IRS and work out a monthly payment plan to pay the 1099 tax. I am factoring in an addition $500 per month expense to address this in the near future.

Ideally I would like to avoid Bankruptcy. However there is no doubt this will be the most logical path to take if Wells Fargo Bank, N.A. does not accept my offer.

I agree to pay 10% of the initial balance of $32,385 by offering to settle this account for $3,238.50.

As part of this settlement I am making the following requests:

Any litigation is to be dropped.

My account will be shown paid in full.

All negative listings will be deleted from all three major credit bureaus.

If you accept my offer, please send written confirmation to my address listed above. Once I receive your confirmation, I will mail you a money order in the amount of $3,238.50 paid to Wells Fargo, N.A. within 3 business days.

Sincerely,

_______________________

xxxx xxxxxx