Hello, I was working on a couple of assignments pertaining to bankruptcy filings and researching the new guidelines when I came across something potentially very scary.
One action that can prevent someone from being eligible to file for Chapter 7 bankruptcy protection is “lying to creditors about income or assets on an application.” Does this mean that borrowers, especially the walking wounded subprime ones, could be denied relief because their loan applications will almost certainly not reflect their real incomes?!
If true, the implications are scary. Even if the lender in question (a secured creditor, after all) didn’t raise the issue, could a different, perhaps unsecured creditor–retaining the right to continue pursuit of arrearages? If so we haven’t even begun to smell the stink these loans are going to cause — and fresh air may be a long time coming…
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Hmmmmmmmmmm…though I wonder if a lender would have the guts to draw that card in today’s environment.
@KC- Against a real estate investor, sure. Against a homeowner, probably not. WOW does that stink.
@Gina- Good find. The State Of Ohio Came in today and took all the stated and no doc files with them at my company’s office. I had 9 in 2 years (15% of total production). Most were Realtors who were giving up sunny day projections I am real curious who’s gonna hold the bag.
Gina,
Help out the legal layman here!
I am hearing you say that a BK cram down may not be applicable for the overzealous stated income mortgage applicant if the lender can prove they lied about income on the loan application. In that case I say bravo, they should not have signed the 1003. I understand they may have been given poor guidance by a self serving mortgage hack, they still signed in denial of reality.
Are you suggesting that if the same borrower filled out a credit card application, one that requested income and they lied again, the creditor can block the debt from being included in any BK action? If so, I again say bravo!
I know it sound harsh but society needs to come to it’s senses and this may be the wake up call to instigate change. BK laws are federally regulated, correct?
I’m not saying that this should or should not happen, and not passing judgment here. If I were another creditor, unsecured, who was getting burned because someone got into an in-considered mortgage and the resulting high payment on the mortgage left them unable to pay me you bet I’d force the issue.
I don’t know that most mortgage lenders would be willing to force the issue because they are secured creditors and most people doing a Chapter 7 (85% of all bankruptcies) wouldn’t have anything left for a deficiency satisfaction anyway. But an unsecured creditor has everything to gain and nothing to lose.
I would do anything I could to thwart a BK if I were in their shoes; I just don’t know how the blowback from this will hurt or benefit the economy / society in general — if the courts get tied up and proceedings dragged out, for example, those with automatic stays might be able to live in their homes rent-free for a long time while foreclosure actions are stalled. Creditors may have a hard time getting the stays lifted if courts are bogged down.
Fascinating research, Gina. You’re going to send me to the books on that one. I can certainly see the attorney for the lender who bought the crap loan arguing that, yet, there comes a point where they’ve got to say “why bother”. I can’t imagine the lenders really want to take back any more property and have to sell it. It’ll be interesting to see out that one plays out.
It’s not the lenders I’m saying may put up the fuss. If a debtor lies on ANY application there is no Chapter 7. If I were a NON-MORTGAGE, UNSECURED creditor who would most likely collect zip if a Chapter 7 were allowed I’d want to verify that the mortgage loan application had no um, falsies. And if it did I would push the court to disallow the filing on the grounds that the debtor lied on an application. It wouldn’t necessarily have to be MY application, it just has to be AN application. And the system grinds to a halt while all creditors and bankruptcy trustees scrutinize the mortgage apps of all filers…..
My guess is that it would be up to the judge, which would mean it would be different for each case. I can’t imagine that a judge would want to connect two unrelated events in an effort to deny bankruptcy eligibility.
“I’m not saying that this should or should not happen, and not passing judgment here.”
I think that may have been me passing judgment…lol.
Great post and interesting conversations.
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