Moral bankruptcy?

Monday, June 28, 2010
By Paul Martin

Financially struggling homeowners say they’re just being shrewd when they file for Chapter 7 to escape a mortgage

By Mary Ellen Podmolik
ChicagoTribune.com

Cash-strapped, jobless and denied a loan modification, Del Phillips faced the same straits as millions of homeowners who risk losing their homes to mortgage lenders.

Some have struggled unsuccessfully to keep their homes, and others have just walked away. Phillips decided he wanted revenge and was willing to ruin his credit record for it.

When a short sale didn’t work out as planned, the 32-year-old Chicagoan opted for Chapter 7 bankruptcy liquidation, a move that will leave Phillips with little except for the scant possessions in his one-bedroom condo. It also will leave his lender, Chase, with little except for, eventually, a condo that has lost value. Meanwhile, Phillips continues to live there, mortgage-free.

“I don’t feel shameful for what I’ve done,” Phillips said. “I’ve gotten past being shameful.”

Phillips’ move may seem an extreme riff on the difficult decisions homeowners make to unburden themselves of debt owed on properties that have lost substantial value. Lawyers and housing counselors say, however, that personal bankruptcy filings are becoming more commonplace as debt-holders seek sums due them, particularly on second “piggyback” mortgages used to buy homes.

“It’s a big trend,” said Dan Lindsey, a supervisory attorney at the Legal Assistance Foundation of Metropolitan Chicago. “Banks are having a hard enough time dealing with the first mortgages. The second (mortgages), there’s no equity there to collect so they’re being charged off and sold to debt buyers and rearing their ugly heads later. It’s a drastic last resort to file Chapter 7, but in some cases it’s appropriate.”

Phillips bought the one-bedroom condo, tucked into a Lakeview courtyard building, in May 2007 for $212,500, securing a first mortgage of $159,375 and a $53,125 second note, both from Chase Bank, according to county records. In January 2009, he lost his public affairs job, began drawing on his savings and, in April 2009, after the government began its Home Affordable Modification Program, applied for a mortgage loan modification from Chase.

Customer service representatives with Chase, he said, told him to keep paying the monthly mortgage of about $1,400 while he awaited a decision on his application. In September, the still-unemployed Phillips was turned down for a modification because, as the letter stated, his hardship “is not of a permanent nature.”

Phillips decided to stop paying the mortgage and try to sell his condo in a short sale, in which a homeowner sells the property, with the lender’s approval, for less than the amount owed on the mortgage. A short sale typically does not tarnish an individual’s credit history as much as a foreclosure.

Short sales have been portrayed as a salve in the housing crisis, although lenders have been slow to approve them. In Phillips’ case, though, an approval for the offer on his condo came with a catch. Chase notified Phillips that it would still have the legal right to pursue him at a later date for the approximately $54,000 owed on the second mortgage.

“A short sale may satisfy the first lien, but the customer could still be responsible for the second lien,” said a spokesman for Chase, while declining to discuss Phillips specifically.

Phillips sought help from Neighborhood Housing Services of Chicago Inc., a federal government-approved counseling agency, which broached the idea of filing personal bankruptcy.

“(Phillips) did everything right. He had good credit, and then he lost his job,” said Michael van Zalingen, director of homeownership services for Neighborhood Housing Services. “If your lender isn’t interested in helping you, or the only thing you qualify for hurts your household, I don’t think you have any moral obligation to stay bound in that mortgage or paying to that company when it no longer makes economic sense for you.”

Phillips bristled at the bankruptcy suggestion, but after consulting with an attorney, in late February he filed for Chapter 7 bankruptcy, not the Chapter 13 that would have negotiated his debts, including those with Chase.

“My other option was to say I’ll roll the dice with the bank,” Phillips said. “Will they really come after me? I wouldn’t put it past the bank industry to do that. It’s going to kill me to pay a bank for a house I no longer owned. I was, like, there’s no way I’m going to pay the bank another dime.”

Lawyers say they are hearing about more instances of mortgage lenders selling the delinquent second loans used to buy homes during the industry’s heyday to third parties that are then pursuing debtors.

“He’s not outside the norm,” said Stephen Cleary, a Chicago attorney and board member of the Northwest Side Housing Center. “He can now sleep at night. The mental anguish has been relieved.”

For the year ended March 31, personal bankruptcy filings nationwide rose 28 percent, to almost 1.5 million cases, according to the administrative office of the U.S. Courts.

Still unemployed, Phillips says he wishes he had back the more than $12,000 he paid toward his mortgage while he sought a loan modification that never materialized. For now, he’s using part of his jobless benefits to pay his condo association fees while he looks for a job and considers moving out of state. Late last month he was served with a loan default notice by Chase, and Phillips estimates he’ll be able to stay in his condo seven more months while the foreclosure action works its way through the courts.

“I’m not a deadbeat,” Phillips said. “I’ve had to be very shrewd, like most business people. … I’m looking out for my best interests, and this is my best interests.”

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