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A blog post here last month discussed the growing wave of lawsuits by lenders for the balance of mortgage loans left over from foreclosures (and in some cases short sales), known legally as lawsuits for the recovery of "deficiencies."

As discussed, in most foreclosures the lender bids only a part of his loan to win the collateral (the house) at the auction. In most jurisdictions, including Virginia, Maryland and the District of Columbia, the balance will still be owing and the lender has a right to sue the signer of the mortgage for that balance, and many are beginning to do just that.

So you had a foreclosure on your house a few years ago. How do you know if there is still a balance owing and whether you may be facing a lawsuit? The bad news is, unless the value of the house was more than the loan, you are probably owing something, since lenders will only bid a part of the loan, especially if the house is devalued, and that is the case for houses bought during the peak of the market, around 2007, before the crash.

One way to check is to look at your credit report. See if the lender (or its successor) is on the report and whether it is reporting a balance. (Note that this is not foolproof. We have seen instances where no debt was reported, but there was a balance owing.) You can get a free credit report once a year at www.AnnualCreditReport.com.

You can also get clues from the way the lender reported the foreclosure to IRS in the year following the foreclosure. If you got a Form 1099-A, box #4 labeled "fair market value of the property" is generally the amount the lender bid to win the auction. If that amount is less than the amount in box #2 "balance of principal outstanding," you probably have a deficiency.

If you got a Form 1099-C, and here is possible good news, the lender cancelled the debt, for tax reporting purposes. And some courts have held that reporting by the lender to IRS as proof the lender forgave the debt.

If you're facing this problem, or worry that you may be facing it, call us and we'll discuss your options.

By John Clark
Jefferson County, Alabama, which became the largest municipality to file for bankruptcy in U.S. history, has filed a plan to cut $1.2 billion in debt, according to a report from Bloomberg News.
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And if the bankruptcy plan is approved by a judge, sources expect Jefferson County to exit bankruptcy and continue on its path to financial health within a matter of weeks.
Jefferson County Looks to Exit Bankruptcy
According to reports, the county’s financial troubles were primarily the result of misguided loans purchased by municipal authorities in an effort to revamp its outdated sewer system.
After the recession struck in 2007, and the county’s revenues dried up, it started defaulting on billions of dollars in loans. Sources report that the county owes roughly $4.2 billion in unpaid debt.
But under the terms of the proposed bankruptcy plan, Jefferson County will only have to pay a fraction of its debt. Sources note that this would mark the first time Americans holding municipal debt would be forced to take a loss on their investments.
Sources report that the county will not have to make full repayments on any of its $3 billion worth of sewer debt, which will allow the area of roughly 300,000 residents to exit bankruptcy with a great deal of hope for its future.
According to David Carrington, the Jefferson County commissioner, the proposed plan “solves both of the problems that prompted the commission to file the largest Chapter 9 bankruptcy case.”
Sources indicate that Carrington is referring to the sewer debt, which is the biggest financial albatross around the county’s neck, and other, more routine bonds that have been backed by taxes.
Bondholders and Banks Stand to Lose Under Bankruptcy Plan
While bondholders will likely take a significant loss under the proposed bankruptcy plan, financial institutions stand to lose a considerable amount of money, as well.
Sources say JPMorgan Chase, which owns a large amount of sewer debt, will only collect 31 percent of Jefferson County’s unpaid debt. Seven hedge funds also expect to lose a lot of money due to the county’s bankruptcy filing.
If the bankruptcy court in Birmingham, Alabama, approves the deal, it would end a year and a half of legal tussles between Jefferson County and its angry creditors.
But the deal has yet to be finalized. Sources expect U.S. Bankruptcy Judge Thomas Bennett to officially rule on the proposal in November. In the interim, Bennett wants to give junior creditors an opportunity to offer their own input, sources say.

In the last couple of weeks, I wrote about how certain debt buyers, like Midland Funding LLC, buy debt from creditors in bulk and then prey on debtors for money even if they cannot prove their case at trial.

It looks like California is going to enact laws beginning January 1, 2014 to help protect consumers from these unsavory practices by bulk debt purchasers.

Titled the Fair Debt Buying Practices Act, California SB 233 passed in the Assembly and Senate on an unanimous vote in favor. The measure now goes to California Governor Jerry Brown for his signature.  Its provisions would take place on January 1, 2014.  I see no reason why Governor Brown will not sign the bill. 

Here are some of the highlights of the bill:

1. Debt buyers must have in their possession proof that they are the sole owner of the debt, the account balance at charge off, date of default or last payment, name and address of both the creditor and debtor, and a complete chain of title on the account if bought and sold multiple times.
2. If the debt is legally too old to file a lawsuit, but still can be reported to the credit bureaus, the debt buyer must use the following language in its first written communication:

“The law limits how long you can be sued on a debt. Because of the age of your debt, we will not sue you for it. If you do not pay the debt, [insert name of debt buyer] may [continue to] report it to the credit reporting agencies as unpaid for as long as the law permits this reporting.”3.  If the debt is older than both the statute of limitations and credit bureau reporting, the    following must be included in the letter:“The law limits how long you can be sued on a debt. Because of the age of your debt, we will not sue you for it, and we will not report it to any credit reporting agency.”This should be a helpful law.  I estimate 85% of the people receiving a letter with one of these admonitions should be smart enough to tell the creditor to go away.  What do you think?

Ken Jorgensen, California Attorneywww.fresnobankruptcylawgroup.com
Photo credit: http://www.flickr.com/photos/headingtonmedia/

Written by: Robert DeMarco
In the Beginning – Code of Hammurabi
The concept of debt relief, in a very general way, is traceable to the Code of Hammurabi (c. 1795 – 1750 B.C.). King Hammurabi united all of Mesopotamia and ruled for forty-three years in Babylon. The Code of Hammurabi is one of the best preserved legal documents and fairly reflects the social structure of Babylon during Hammurabi’s rule. The Code contains two hundred eighty-two laws.
The Code of Hammurabi was harsh; providing for the imprisonment of debtors who are unable to satisfy their obligations. Code of Hammurabi Translated by L.W. King. with Commentary from Charles F. Horne and Claude Hermann Walter Johns, Law 115, Encyclopaedia Britannica (11th ed., 1910) (“If any one have a claim for corn or money upon another and imprison him; if the prisoner die in prison a natural death, the case shall go no further.”); Levinthal, Louis Edward, The Early History of Bankruptcy Law, 66 U. Pa. L. Rev. 223, 230 (1918). The Code was not, however, without mercy. The honest debtor also had the option of selling himself and or family members into slavery, for a period of no more than three years, in an effort to satisfy the obligation. Code of Hammurabi, Law 117 (“If any one fail to meet a claim for debt, and sell himself, his wife, his son, and daughter for money or give them away to forced labor: they shall work for three years in the house of the man who bought them, or the proprietor, and in the fourth year they shall be set free.”); see also, Early History, 237. Yet as harsh as this remedy was, the Roman debtor faired much worse. Early History, 231-232.
DATED: July 3, 2013
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