Having “The Talk” With Bankruptcy Clients

Are you prepared to boldly go where no outsider has gone before and challenge the client about keeping the house?

It seems as taboo a subject as  the mechanics of sex, but  we as bankruptcy lawyers should be saying openly that maybe keeping the house is not the right route.

We  like to deliver for our clients just what they tell us they want.  But more and more,  I think an effective bankruptcy lawyer should be doing some math, in public, in a threesome, and demonstrating the cost of home ownership.

This can be a delicate conversation because culturally we have invested huge emotional capital in “HOME”.  We’ve been told it’s the mark of a healthy community and of membership in the middle class.  Here in California, for certain, we’ve been told it’s the path to riches.  Too often, it seems a haven for a family that is already stressed:  one more change just seems insupportable.

I have two math tricks I perform for clients:  one is to take the total of the loan balances and run them through an online mortgage amortization calculator.  I use today’s best interest rate and a 30 or even 40 year amortization.  When the computer produces a number, I ask the clients if they can image paying that amount each month for the next 30 to 40 years.  With the residue of exotic, interest only, pick a payment mortgages, they have often not considered what the monthy cost of the mortgage will be over the life of the loan.  If they are approaching retirement, the prospect is often even more daunting.

The other trick is pencil and paper:  I add up the mortgage payment and monthly property tax burden, along with any HOA dues and compare the total to the cost of renting housing.  Generally there is a difference of  thousands of dollars.  What could you do with those savings?  Save for retirement and live more comfortably as well?  Fund your children’s college education? Sleep at night?

For those with underwater property who still see the house as an investment, I sketch out for those just how much the real estate market would have to improve before they could sell the house for just what they owe today. Even the most optimistic seldom think a recovery of that magnitude is likely soon.

The dynamics of couples are interesting on this issue.  Often, one will have started to have doubts that the financial burden of a highly mortgaged house is worth the effort.  Having me, as the outsider, present the case for walking away takes the discussion outside the tensions and habits of the spouses and validates the idea that giving up on this house is worth considering.

My pitch continues to suggest that if they are going to take the credit hit that a bankruptcy entails, why delay confronting reality about the sustainability of the house purchase.  To walk from the house a couple of years from now just slams a credit record that may be recovering.

I’m not always persuasive on the subject, but I sleep better at night, knowing I got clients to at least consider their housing options.

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  • Ed

    For clients with underwater houses they insist on keeping, I say this:

    Imagine I am a realtor. You and I are walking down the street when we see your house. I say to you: This house is worth (current fair market value), but I’m going to sell it to you for (current mortgage balance), would you buy it?

    Most see the financial reality and say no.

    But there are some who don’t and obsess about “all the money they have invested”and don’t rant to “lose”.

    • CathyMoran

      And you have to reply: and how much more money do you want to lose waiting for values to recover?

      That’s assuming that the debt service plus taxes is more than the cost of renting.