Homeowner told to file for bankruptcy by their attorney... was it the right choice???

I just want to run this pass the Short Sale Specialist Network and see if you guys have the same response that I had. Now mine you I do not know all the particulars because it was not my clients. This was a story I ran across in our local newspaper, but in my opinion it was very distrubing. Here is the short version. A homeowner in Virginia Beach, VA purchased a home with his wife for $195,000. Took out a second which brought the principal up to 212,000. 2 years later he loss his job and got a divorce. He put the home on the market for sale via short sale at $185,000 being the market value. I know the area so that sounds about right. He recieved an offer for $180,000. The bank approved the short sale, but per the article, the second would not waive the deficiency judgement and wanted the right to pursue the $28,000 deficiency. Now I dont know if a promissory note was offered or not as the article did not say but I believe this is what the $28,000 claim was. Anyway, his attorney told him not to agree to it and to file bankruptcy. He ended up filing bankruptcy and still losing his home to foreclosure. Double whammy! I believe he was ill-advised by his attorney. The pursuit of defeciency could have probably been waived or negotaited into a affordable promissory note. Either way I dont think bankruptcy was the right call in this situation. Thats why it is important to work with Short Sale Specialist when needing to avoid foreclosure. What do you think???

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Comment by Michele Steeber on June 6, 2010 at 2:26pm
Hi Charles, I am not an attorney, but with my title background I will comment with what I know. The second CAN be wiped out in a BK but the first will file a Petition for A Stay to remove the first from the BK. The courts will most likely approve the Stay and now, the first is free to start foreclosure proceedings. In the event this persons house was foreclosed on and the second did have the right to a defiency judgement (in California no def Judgement if purchase money deeds of trusts), the second can and will pursue the seller. If the amount is sizeable it could make sense to BK but then work out a loan mod with the first. Most homeowners do not want to sign a promissory note. It really becomes a personal choice for the seller, but I do agree that these attorneys need to tell their clients that BK does NOT stop the first from foreclosing. This can be a very complicated and touchy subject with no easy fix.
Comment by Julie Vrigian CSSG, CSSP on June 6, 2010 at 1:40pm
I couldn't agree more with Barbara. I am seeing the same thing here in L.V. with attorney's promoting B.K. heavily.

I believe that if you have developed a level of trust by educating the homeowners on all their options, they will be able to make the best decision. I have even written a guide for homeowners on their options when facing foreclosure.

I hate to see anyone, be it an attorney or a realtor doing what is best for them and not for the individual that is trusting them for advice.
Comment by Barbara Pedersen on June 6, 2010 at 1:02pm
Yes, Julie. Absolutely. I agree that there are situations when the bankruptcy is the best solution, especially with excessive other debt. However, I am talking about the tendency I have noticed that an attorney is offering bankruptcy as the solution for everything. All I am saying is: explain to your client all the options and consequences of each, advise wisely, and let them choose the best solution for them, not for you.
Comment by Julie Vrigian CSSG, CSSP on June 6, 2010 at 12:53pm
I am not an attorney, however, I do work with a couple of very good B.K. attorneys in situations where it makes sense. If the seller had a significant amount of debt in addition to the home, it might be the best solution to file a chapter 7 and put the house into it. That would ensure that the seller would not have to pay any deficiency. However, it wouldn't make sense if the attorney let it go to foreclosure.
Do you know if the house was put into the b.k.?
Comment by Vanessa Calhoun on June 4, 2010 at 3:15pm
By the way, I'm not an attorney...nor do I play one on t.v. :)
Comment by Vanessa Calhoun on June 4, 2010 at 3:14pm
Wow! I do see this happening a lot, whenever the second wants a promissory note. I think that the Sellers are taking a position of "well, I'll file for bankruptcy and they'll get nothing", but they truly don't understand or realize the damage that they're doing to their entire financial future. It's kind of a "cut off your nose to spite your face" situation.
Comment by Charles H. Lewis III on June 4, 2010 at 12:38pm
Thanks Barbara! As stated in the article the homeowner still did not avoid the foreclosure so Im not understanding why he would have been advised to file bankruptcy. Also, he had a ready and willing buyer and what I believe to be a reasonable offer. Some people forget that even though we are in tough times they still made agreements when taking out mortgages and when a bank allows a short sale they are doing homeowners a favor, like it or not. Thats how I advise my clients! Many homeowners think bankruptcy will save their home when sometimes it cause even more problems and unfortnately I have noticed, like you many attorneys, telling clients to file for bankruptcy.
Comment by Barbara Pedersen on June 4, 2010 at 12:12pm
Charles, excellent post. Since I do not know the details neither am I an attorney I cannot comment on this particular case.
However, this brings to light a much broader issue. For at least 2 years I have been noticing that the attorneys offer their clients bankruptcy as the solution for every situation.
It is extremely disturbing.
I have seen cases where homeowners had only one mortgage, small deficiency that could be dealt with, no other significant debt, and still were advised by their attorney to file for bankruptcy.
No, wait... I even witnessed how an attorney convinced a young guy with only 20K of credit card debt, no house, no other liabilities, to file for bankruptcy. I could not believe my eyes (ears rather). This attorney ruined his client's life for the next 10 years right before my eyes.

Anyway, these are now so complicated cases, so many factors come into play, which maybe don't matter right now but might matter in the years to come, that the borrower must be given the whole big picture. After all it is his life that is going to be impacted.
I have had many clients who chose to repay the negotiated deficiency on the 2nd because they wanted to avoid foreclosure or bankruptcy on their credit report. But they were told they could!
The borrower has to be told by an ethical professional all the options: foreclosure, short sale, bankruptcy, and all the ramifications of each. Ultimately it will be his choice based on an informed decision.
I wonder what you guys think because this has been genuinely bothering me for quite some time.
Thank you Charles for a great question!

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