Some Hurricane Survivors Face Tough Mortgage Decisions

Jeanette A. Tucker, Merrill, Thomas A.  |  10/20/2005 8:11:53 PM

News Release Distributed 10/20/05

Recent hurricanes may have obliterated your house, your job and likely even the property values in your area – leaving you with the feeling that the only things still intact are your mortgage and other debts.

That’s the feeling many hurricane survivors are facing, according to LSU AgCenter family economist Dr. Jeanette Tucker.

"What’s a homeowner to do?" is the question a multitude of hurricane survivors are asking, Tucker says.

Although many mortgage companies are offering homeowners all sorts of breaks for the time being – such as deferring payments, waiving late fees or not reporting delinquent accounts to credit agencies – payments will come due at some point, Tucker stresses.

"In cases where homes have been destroyed, insurance proceeds go first to paying off the mortgage," Tucker says. "But with recent mortgage loan trends including refinancing and second mortgages, those proceeds may not be enough to satisfy the homeowners’ debt."

A sale of the property also may be insufficient to repay the debt, particularly if property values have dropped as a result of the storms and their aftermath.

"In the months following other devastating hurricanes, mortgage brokers have been lenient with homeowners, as they are today," Tucker says. "But after six to nine months, mortgage companies have become more aggressive, often threatening foreclosure."

Given the unprecedented scope of the recent disasters, it is difficult to predict what mortgage bankers will do if faced with high numbers of distressed homeowners and abandoned properties, the LSU AgCenter family financial expert says. But she also points out that industry leaders suggest lenders may be willing to negotiate deals with homeowners.

"Foreclosures, usually a lender’s last and least desirable resort, can be avoided if a homeowner sells the house and pays off the loan or loans," Tucker explains. "But in the likely scenario that the sales price is insufficient to cover the owner’s debt, the lender can sue the homeowner for the difference."

Another option is for the homeowner to negotiate a "short sale" with the lender, according to Tucker.

"In this option, the lender would forgive any remaining debt after the property sells," she explains. "Normally, forgiven debt is treated as taxable income to the homeowner. But lawmakers have included a provision in Katrina relief legislation that would treat forgiven debt, including mortgage and credit card debt, as tax free."

Delinquent payments, home foreclosures and bankruptcy can inflict great damage to a homeowner’s credit score. Regardless, the multiple financial strains on some storm survivors are anticipated to push some financially responsible families into bankruptcy, Tucker predicts.

"New bankruptcy laws, designed to curb abusive bankruptcy filings, went into effect this week (Oct. 17)," Tucker points out. "Now, legislation has been introduced in both the House and Senate to protect hurricane survivors from the new, more stringent law."

Although this legislation has yet to pass Congress or be enacted, some of the provisions that would be provided by the pending pending legislation include:

–Allowing storm victims to file under the old bankruptcy law through Oct. 17, 2006, a year after the new law went into effect.

–Modifying the law’s "means test" so that disaster relief payments aren’t counted as income.

–Forbidding courts to automatically convert bankruptcy cases from Chapter 7 to Chapter 13.

–Waiving the new provision that requires credit counseling before bankruptcies can be filed.

–Allowing courts to extend paperwork filing deadlines.

–Striking provisions that make it easier for landlords to evict tenants during bankruptcy proceedings, which would ensure that storm victims who can’t pay rent as a result of the disaster aren’t evicted.

Both the American Bar Association and the American Bankruptcy Institute have numerous lawyers who have volunteered to help hurricane victims on a pro bono basis. To get help, Tucker says to check the American Bar Association Web site at www.abanet.org or call (800) 310-7029. Consumers also can check the Louisiana Bar Association Web site at www.LawHelp.org.

In addition, anyone can visit the American Bankruptcy Institute’s Web site www.abiworld.org to contact volunteer attorneys for help with bankruptcy issues.

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Contact: Jeanette Tucker at (225) 578-5398 or jtucker@agcenter.lsu.edu
Editor: Tom Merrill at (225) 578-2263 or tmerrill@agcenter.lsu.edu

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