The government's programs to help stop the foreclosure crisis were probably started with the best of intention. Good intentions, however, can not cover for economic ignorance and an unwillingness to face the facts of the housing market. Prices are declining and more people are facing foreclosure due to the poor lending decisions created by cheap easy money and the erosion of lending standards.

As well, many of the government's programs suffer from the same problems. Unfortunately, with each failure, the programs are not canceled. Instead, they are further funded, grow bigger, change names, or a similar plan with only superficial changes is layered on top of the old one. The old plan loses steam, while the next one, almost identical to all previous ones, is announced with far greater optimism than is deserved.

But the problems are never solved. Voluntary participation, unaccountability, lack of responsibility to do anything by the lenders or servicing companies, lack of penalties for not complying with the regulations, and all the power given to the banks are just a few of these problems. They have been the same complaints from consumer advocates and homeowners from the very first plan put in place by the government.

Servicing companies and lenders, for instance, have almost all of the negotiating power that borrowers do not have. When lenders are given the choice of participating in the voluntary government programs, compliance is often lacking and few resources are dedicated to meaningful loss mitigation efforts. The lender decides how much to participate in the plan and has all of the financial power.

The government programs, mandatory or voluntary, also impose few rules for compliance. While servicers have some responsibilities to negotiate with homeowners, the level of participation is often very lacking. Borrowers who have ever tried to communicate with a bank know how frustrating it is when the bank loses faxes numerous times and never returns phone calls, all to be turned down at the last second.

Even if the bank does absolutely nothing to help the borrowers, whether required to or not, how can the lender be held accountable? Unfortunately, it is only in the courts that the consumers can state their claims, and many borrowers try to negotiate for a loan modification or other solution in order to avoid going to court. Especially in nonjudicial states, going to court to enforce a potential negotiation plan may not make sense.

Court-mandated negotiations have also failed to materialize as a widespread solution to foreclosure, as the banks have been able to block legislation that would allow bankruptcy judges to modify the terms of first mortgages or reduce balances. Some states and certain courts, however, have begun to scrutinize foreclosure cases more carefully, which may work out in homeowners' favor more often.

Unfortunately, the problems associated with the government's programs to avoid foreclosure have far outweighed any benefits to the small number of borrowers who have received assistance. Three hundred billion dollars to help one borrower, as was the case with the Hope for Homeowners program, probably helped create more foreclosures than the one it fixed. The only real question is if more regulation and legislation is what is needed to fix the programs.

When the government gets involved in a particular segment of the market, it often creates distortion and waste, as well as providing services that may not be needed or desired by the target markets. Also, since there is no incentive to maximize returns or keep costs down, the programs can cost far more than the benefits they bring to one group or another. And worst of all, funding such central planning schemes is always involuntary.

The government's programs over the past few years to stop the foreclosure crisis have all been excellent examples of bad ideas with overly optimistic promises that soon failed. Many of these programs were designed to assist borrowers in negotiating with their lenders for loan modification plans or other solutions. While no homeowner was given the choice to fund the plans or not, the programs encouraged only voluntary participation by lenders.

No wonder they all failed. Homeowners and consumers in general were forced to pay hundreds of millions or billions of dollars to fund programs to stop foreclosure, while the lenders and mortgage servicing companies did not have to participate in actually offering assistance. More resources were diverted from the people who were struggling with their bills in order to pay bureaucrats to encourage lenders not to take advantage of borrowers.

All the while, the banks were also taking hundreds of billions of dollars in free handouts as their reward for taking advantage of borrowers. Blackmail and threats to destroy the economy if they did not receive one bailout after another convinced lawmakers to reward the banking industry for its moral hazard and poor lending decisions. As a consolation prize, homeowners facing foreclosure got robbed more and were shown a few half-hearted modification programs.

HOPE NOW, Project Lifeline, Hope for Homeowners, bankruptcy cram-down provisions -- all have failed to affect the high foreclosure rates and falling home values in any meaningful way. And even if the programs had not existed at all or had been funded at twice the level they were, very little would have changed. The fact that so many players in the real estate industry took advantage of the cheap money from the Federal Reserve now means that a correction will have to happen.

Now the newest program is the Obama administration's Making Home Affordable Modification Program (HAMP). Although this latest plan requires participation by some lenders and servicing companies, it is still facing some of the other problems which plagued earlier plans. There is little oversight, no accountability, and evasion of obligations under the plan by the mortgage servicers.

Can one more government program, department, or regulatory agency really save the country from an economic crisis caused by too much government involvement? Or are all these programs just excuses to give the feds and the banks more control over the economy while pretending to solve problems? Do we keep spending trillions of dollars to rewards the banks and hundreds of millions to help homeowners?

Homeowners facing foreclosure often receive the lawsuit paperwork in the mail and take either of two actions which will not help them escape the situation. Some frantically begin calling the lender or servicing company, attempting to work out a solution so that they can keep the home. Others will simply put the paperwork aside, not even opening the envelope and just hope for the best.

While calling the bank to begin negotiating for a loan modification, repayment plan, or other solution to foreclosure is a good idea, it should not be done at the expense of answering the lawsuit. The bank will have no problem opening discussions with the borrowers, all the while proceeding with the legal action and having the house sold. If the negotiations fail, the homeowners can be swiftly evicted.

This can occur because, if the borrowers do not answer the lawsuit or mount any kind of legal defense, the bank will obtain a default judgment. At that point, the bank can request that the home be auctioned off by the county at a sheriff sale. Although the bank can also cancel any sheriff sale, it will be very difficult for the homeowners to reopen the case and begin defending the home after the judgment has been entered.

Thus, it the homeowners do not provide an answer to the foreclosure lawsuit, the bank will file a motion for default judgment against them. The judge will usually grant this, since the borrowers' failure to file an answer is treated as if they do not disagree with anything the bank has claimed in the complaint. While it is usually a case of the borrowers not being aware of how the court system really works, the judge will usually feel that the owners have been given their day in court and passed on the chance.

Homeowners are also worried about having to pay something to file an answer to a lawsuit. In almost all cases, they will not have to pay anything to the lender during the lawsuit, even if there is a judgment for foreclosure. The home will be scheduled for a sheriff sale, at which time the house will be sold to pay off the judgment and any other liens. Usually, though, homes do not sell for the total amount owed, as there are few buyers, but this is one of the risks lenders take when making loans.

After the sheriff sale will be the eviction process. If the former owners have already left the house, the eviction will not really affect them. But if they are trying to remain there for as long as possible after foreclosure, the borrowers should make sure to keep on top of the process so they know when to move out. Calling the county sheriff is usually the best idea to find out when a lock-out will be performed on a particular property.

In almost all cases, homeowners should respond to the foreclosure lawsuit or contact an attorney to help them do this. If only to delay the final order of judgment against the home for a few months, the rewards can be much greater than any risks. Showing the bank that a real defense will be mounted to foreclosure can also persuade the lender to begin negotiating for other solutions to help the borrowers save their home.

Homeowners should keep in mind that the bank or mortgage servicer they are dealing with is 100% able to stop the foreclosure whenever they want. Especially if the borrowers are in a judicial foreclosure state, where it is required the bank begin a lawsuit to take the home back, if the lender/individual drops the case, the foreclosure will stop immediately.

Before doing anything at all, though, homeowners need to decide if the home is worth keeping. Many people today are fighting to save houses they can not afford in the long run. If borrowers are fighting for such a home, they are ultimately going to lose anyway. It may be better to cut their losses and move on. This is the same for those homeowners who are fighting to save a home that is worth less than the mortgage. Just negotiate a short sale or deed in lieu and move on with life.

If you have decided to keep your home, then keep reading.

Since you are dealing with an individual, you need to to come to an agreement with him or her that will allow you to repay the arrears and get caught up on your payments. If you were with a traditional lender, a loan modification would be your best option to save the home. But there are no rules/laws forcing anyone to grant you a modification.

Your very first option should be to try and come up with the amount you are behind. In many cases, you can raise this money with odd jobs, personal loans from relatives, and by selling unused items. I would start by getting donations from relatives, church, and social groups and having a garage sale to sell as much stuff as possible. Don't worry about your personal belongings, as you can replace them once you are back on your feet again.

You should also be cutting your expenses to a minimum. Get rid of cable TV and stop shopping for anything. Wear old clothes if necessary and eat the food in your house, rather than going out to eat or buying new stuff at the grocery store. Just keep the necessities that are required to keep your family healthy and don't do anything that would cost you your job.

During this time, you need to be negotiating with the mortgage holder to stop the foreclosure. You will need to negotiate a repayment plan that is more favorable than him taking the home away. Another good idea is to find out the current value of the home. There is a very good chance that you are currently paying more than the home is worth. If they realize this, it may be an incentive to keep you in the home. You ideally want to arrange a repayment plan that allows you to make your normal mortgage payment, along with extra to pay off the arrears.

If you can not afford this right now, you need to have a plan that will allow you to make these payments in the very near future. My guess is that you have had issues making payments on time in the past and this is why they are unwilling to help you now. I only say this because most lenders do not want to take a home away. It a huge expense and a lot of work for the average lender. They must have a good reason for wanting to take the home back. Regardless of the reason, you need to convince them that you will make all your future payments on time. Showing them proof of this, such as a second job, would help them believe you.

If you fail to raise the money and the lender is unwilling to cooperate, then you need to take a more drastic step. This will involve getting an attorney and using the threat of legal action to force them into a repayment plan. This action could also be used to buy enough time to raise the money needed to pay the arrears.

To start, you will need to gather as much information about the case as possible, such as the original loan docs and the appraisal. Some people hang on to these records or you may have to contact the broker and appraiser who worked on the case originally. No one is required to turn these documents over to you, so you'll have to be nice and use a little social engineering to get what you want. You will be trying to prove that you are a victim of predatory lending, so don't expect your current lender to hand over any evidence.

A “forensic loan audit” might be a good thing to pay for at this time. They cost about $250 and will reveal any problems when you originally got your loan. Once you are armed with this information, you can go to the lender and use the threat of a lawsuit as a negotiating tactic. Showing proof that you are, in fact, a victim should be enough for them to want to keep the case out of court.

If the lender still refuses to negotiate with you, your last hope would be to take the case to court. I would highly recommend hiring an attorney for this, but it is possible to do it on your own. Once you get this far in the process, you'll need more info to continue, so either ask for more help or get an attorney who specializes in lender fraud.

One of the businesses that have been booming despite (or because of) the current economic downturn is cleaning out foreclosed homes. When banks purchase homes at auction, they usually begin eviction proceedings. After the eviction has been completed, any items remaining in the property will be thrown away. The lender or the county, depending on how evictions work locally, hire private companies to haul away the belongings.

Depending on how many foreclosures are affecting an area, this can be a significant source of income for small business owners in the real estate market. There is probably not a ton of money in cleaning out abandoned foreclosed homes, but the work might be pretty steady with a large inventory of homes that need to be cleaned out, and more coming on the market every week.

People looking to break into this type of market should contact either two places:

The first organization to contact is the county sheriff's department in the area that the business will be working in. The sheriff is responsible for carrying out eviction orders after foreclosure, changing locks, and cleaning out homes. Except for bringing the guns to intimidate people into leaving, the other services are usually contracted out -- sheriffs do not usually work as locksmiths or house cleaners. Others starting a new business may be able to do the cleaning by contracting with the county government.

Second, the cleaning business can try to contact the banks that purchase the foreclosures at the auction and attempt to get a contract with them to clean the homes. When banks purchase homes at auction, they hire local real estate brokers to list and sell the properties. It would not be out of the ordinary for them to hire a cleaning agency to clear out all the remaining property and keep the house in decent condition while it is empty.

The business will have at least a couple of concerns going either way. If they work for the government, the pay may be lower, as it is coming from a government with a decreasing tax base. And who knows how much red tape the business will have to cross to be a contractor with the county -- or if there is already a politically-connected company doing this work. With the bank, it just might not be interested in hiring a small company and spending even more money on homes it has already lost to foreclosure.

But there might be some counties and some banks that will be open to these types of services. As with all businesses, some people will see the value, and others will pass on the opportunity. Cleaning out foreclosed homes is a growing business, but like all real estate related businesses, it is all local. There will always be more money to make performing these services in areas with a large population, high foreclosure rate, and with government or banks open to hiring such companies.

A number of homeowners exist in a kind of legal limbo between being renters and having a mortgage. They are not renting under a lease agreement, but they have not bought the property and obtained a mortgage. As well, they do not own the home they are living in outright. Instead, they have an agreement with the actual owner of the property under a land installment sales contract.

These contracts, also known as installment land contracts, land sale contracts, long-term land contracts, bonds for deed, or contracts for deed, are simply alternatives to a mortgage or deed of trust. The buyers take possession of the property and make monthly installment payments to the seller. These monthly payments consist of principal and interest, and at the end of the contract, the buyers will own the property outright.

While it sounds quite a bit like a standard mortgage, there are some important differences between a mortgage and a land installment contract. First, the seller is also the financier of the purchase, and the seller retains title to the property for as long as the contract is in place. It is only after the buyers have paid on the contract for the required period of time that they are granted full ownership rights.

The buyers, though, have more responsibility than with a rental agreement, and also more ownership rights. In the typical contract for deed, the buyer is viewed as the equitable owner of the property, is given full possession, and is required to maintain the house. The buyers, then, have rights to do anything to the property they want, as long as it does not interfere with the security interest of the seller.

Land installment contracts also usually allow sellers to avoid the standard foreclosure process if there is a default. Because the buyers do not have title to the home, the sellers may be able to use a process called forfeiture. This allows the seller to forfeit the contract, take back possession of the home, and retain all of the principal and interest payments made to date as rent or damages.

If a land installment sales contract is forfeited, the buyers may then be treated as tenants of the property. And if they are not paying as agreed on the contract, the seller will be able to bring an eviction action against them. However, as in almost all real estate related issues, the exact function and treatment of these types of contracts depend heavily on the state laws and how detailed the statute are in regards to them.

Some states have extremely detailed treatments of land sale contracts, regulating how they are to be terminated, forfeited, or foreclosed in the event of a default. Courts, as well, may require that all such agreements be terminated through the state foreclosure process, including the right of the buyers to defend any abusive actions in court and to have the property sold at a county sheriff sale.

Many states now require some notice to be given to the buyers of the default and impending legal proceedings, just as in the foreclosure of a mortgage. Buyers are also to be given a reasonable time to cure the default and have the contract reinstated. There are also redemption rights in some states which give former owners the ability to pay off the defaulted amount for land contracts that have been foreclosed.

Forfeiture of land installment sales contracts actually seems to be reducing in popularity. It is viewed as quite unfair for buyers to make payments on an agreement for a period of time and, upon default, to lose all rights to the property and not be given a full foreclosure process to defend their home. There is now even broad agreement that a contract for deed creates a mortgage on the property.

Although relatively few homeowners now use a contract for deed, it may become a more popular method of financing homes as credit stays tight for the average borrower. These agreements can be made between private individuals without the involvement of a larger bank or investment firm, and terms can often be more lenient than with a mortgage. Buyers and sellers should be aware of the drawbacks and benefits of such contracts.

When foreclosure happens, many homeowners simply go into hiding for months at a time. A few weeks before the property is auctioned off by the county, they decide to look into options to save the home. But by this time, unfortunately, it may be far too late, or the only good option presented to the borrowers comes from a foreclosure rescue scam. In the end, the borrowers lose even more money.

Thus, it is almost always better to begin fighting foreclosure as early in the process as possible. Even before they have missed a monthly payment, homeowners should contact the bank and inform it of any pending financial hardship. Forbearance plans may be available to lower the mortgage bill, while other monthly expenses can also be negotiated down or eliminated completely. Timing is the most important factor in preventing foreclosure.

But for the borrowers who are already in foreclosure, the further along in the process it gets, the fewer options will be available. A repayment plan may be feasible if only a few payments are missed, but can be too expensive otherwise. A loan modification may be an option early in the delinquency, but after numerous payments have gone delinquent, the chances of obtaining an affordable plan begin to drop dramatically.

Even defending the foreclosure in court presents problems for the homeowners. What, exactly, are they looking for from the court process? If the goal is to save the home, any defense should take into account a reasonable solution to foreclosure that will give the homeowners an affordable payment. Without an affordable payment plan, there is little reason to attempt to keep the property.

This is the case for homeowners defending a foreclosure case or attempting to fight a foreclosure scam company. If there is no reasonable plan to save the home and make payments to the appropriate party, then there is little reason to attempt to hold onto it. There are other goals that may be pursued in the courts in order to fight a wrongful foreclosure or hold a scam operation accountable.

Another reason to bring such a case into court is for the homeowners to obtain money they lost due to a breach of some duty or violation of a law by the lender, servicer, or foreclosure rescue operation. Money damages may be awarded for such violations, and money and equity lost due to a scam can often be won through a judgment in the courts. Numerous courts have awarded homeowners significant damages from foreclosure scams.

Finally, another good reason to resolve foreclosure issues in court is to deter abuse and fraud. Companies that take advantage of homeowners by providing false or blank documents or changing terms at the last second without the borrowers' knowledge should be taken out of business. While the courts are not always the best forum in which to hold banks or politically-connected companies accountable, they do offer one more option for homeowners.

It is vitally important for homeowners to keep in mind their goals when they defend a foreclosure in court or bring a case against a lender or scam company. Without doing this, they can find themselves back in a bad situation, agreeing to make payments on a plan that they simply can not afford. This is another reason borrowers should carefully evaluate their financial situations before moving ahead with any plan to stop foreclosure.

Homeowners who are behind in mortgage payments often make one mistake that, if not made, would allow them many more months to recover financially before losing their home. This mistake is when borrowers move out of their home before they are legally required to do so. And now, with the steep rise in the foreclosure rate over the past few years, there are even more reasons to stay put as long as possible.

Of course, a small number of homeowners realize the financial advantages of delaying the final move into a new apartment or rental house for as long as they can. Every month without a mortgage or rent payment is extra money that can be used to pay off other bills, keep on top of car payments, or simply save up for a security deposit or emergency fund. And as long as they still have legal rights to remain, there is no reason to move just yet.

Some homeowners even go to great lengths to get even more time from the bank to stay in their home. They do whatever they can to apply for solutions to foreclosure, request postponements of a sheriff sale, and defend the lawsuit in court for months. Finally, they file bankruptcy to drag the process out even longer. In many cases, this can result in months or years of living rent and mortgage free.

A far greater number of homeowners, though, fall behind on their monthly bills, listen to the lender's threats of foreclosure, and simply move out of their house. The property sits abandoned while the banks takes it through the legal foreclosure process, and then it sits abandoned while the bank hires a local Realtor to sell the home. In the meantime, if falls into disrepair and becomes a victim of squatters or people stripping the property of anything of value.

However, now that banks have so many foreclosures on their books, many foreclosure auctions are simply being postponed for no apparent reason. While more homeowners than ever are applying for assistance, even more sheriff sales are being delayed. In addition, lenders are often incompetent enough to proceed with a public auction of a home even if the borrowers are negotiating for a loan modification or other plan.

This indicates that the banks are voluntarily postponing some sheriff auctions in order to avoid having to declare the loans as losses and then declaring the properties as assets at their true market values. Banks have gotten away for years with overestimating values of homes in order to inflate the values of the loans on the properties and the securities made up of these mortgage debts.

A sheriff sale, though, has the result of voiding out all of these fraudulent financial calculations. The property is auctioned off for a very small amount, and the rest of the loan is written off as a loss. Then, the bank must take possession of the house if there are no third-party buyers and declare the fair value of the home on its balance sheet. This can be quite a bit less than the appraisal stated it to be at the time the loan was originated.

Thus, banks are avoiding this problem of living in reality by postponing sale dates with ease. Even if no one is living in the property, there can be a delay in the sale -- all the bank has to do is contact its local attorneys, who contact the court and sheriffs department to cancel the sale and reschedule it for the next month.

This is a new development in the foreclosure crisis that more homeowners should take advantage of. Banks do not want to own these properties, and they sure do not want to declare them at their true market values. With a little bit of effort, borrowers may be able to have the sale delayed for a quarter of a year or more, just because there is such a huge backlog of properties in some stage of foreclosure.

For mortgage lenders, there is every incentive to negotiate with homeowners for a mortgage modification or other solution that will prevent foreclosure. Thus, the very few number of borrowers who end up receiving any help should surprise everyone. If banks and servicers have so many reasons to offer loss mitigation options to homeowners, why do so few of them end up with a reasonable plan to save their homes?

In many cases, the pooling and servicing agreements (PSA) that cover mortgage securities and the servicing of payments require companies administering loans to engage in loss mitigation. Furthermore, the negotiations have to be meaningful, as foreclosure of the property should only be used as a last resort and should be avoided unless there really are no other options. But servicers often engage in entirely worthless negotiations.

In fact, a large and increasing number of loans are covered by such requirements to engage in meaningful negotiations with borrowers in default. The following is a list of mortgages that should be mitigated:

• FHA loans
• Fannie Mae and Freddie Mac loans
• Loans where mitigation is required under the PSA
• Lenders which took bailout money under the Financial Stability Act

The fact that so few homeowners end up with any reasonable solution to repay their loans, even when they are financial able to do so, indicates that servicing companies are either negligent or malicious in continuing to pursue foreclosure in some cases.

Banks and servicing companies also change the guidelines for a completed loss mitigation package from week to week, it seems. There is always someone else who has to be sent the paperwork, a new fax number for the loss mitigation department, a lawyer who has to be contacted for updated numbers, and so on. What homeowners go through just to ensure their package of personal financial documents has been received by the lender is often an exercise in patience and frustration.

It is not just homeowners that become frustrated at the process. Even judges and regulatory authorities are hearing more often about cases in which banks drag their feet, never return phone calls, refuse to offer solutions, and simply proceed with the foreclosure. This is despite many security or servicing agreements requiring loss mitigation, and banks receiving money from the government to do modifications.

With all of the money that has gone to the banks, supposedly to provide foreclosure help and stabilize markets, it is astounding that there is such a high level of incompetence in working with borrowers. If the problem all along has been a weak housing market and too many foreclosures, the simple act of providing loan modification plans to borrowers who can pay back their loans should be relatively easy to accomplish.

Of course, not every homeowner will qualify for a modification, repayment plan, short sale, or other reasonable solution, but every homeowner should be given the opportunity to explore options. If foreclosure is considered a last resort to satisfy a mortgage loan, and servicers are required to negotiate with borrowers, then the cases of lost paperwork or confusing guidelines should be far fewer.

Many homeowners do not want to move out of their property, even after a foreclosure lawsuit, judgment, and sheriff sale. Despite having six months to a year to live mortgage free, some borrowers are just not financially able to move when required by the courts and the purchaser at the auction. In these cases, the lender, which usually buys the home at the sale, will begin the eviction process.

Few homeowners, though, know exactly what the eviction process entails after the foreclosure has been completed. Many of them simply believe that the court will have the home sold, and a few days later, the county sheriff will show up unannounced to throw all of the people and belongings out into the street, changing the locks in the process. However, this is not how the typical eviction goes.

If the borrowers are successful in their attempts to set aside the sale, then there will be no eviction at all. In the vast majority of cases, though, once the auction has been conducted, it will have to be confirmed. Upon the confirmation of the sale, the former owners become tenants, and their rights to keep possession of the home terminate. If there is a redemption period under state foreclosure law, this will have to be passed before eviction can proceed.

Homeowners still remaining in the property after the confirmation and redemption period will have an eviction action brought against them by the purchaser. The steps of this process are determined by state law, as with many other aspects of the entire foreclosure.

It is important for former homeowners to research how their state treats occupants remaining after a foreclosure. Some states use the same procedures that are used to evict tenants from rental properties. Others, though, have special treatment for people living in a foreclosed home.

In either case, though, the lender or purchaser at auction must follow the correct procedures to evict the former owners. If the new owner attempts to use an eviction process that is not appropriate for former owners of a foreclosed property, the action may be thrown out of court until the correct steps are followed.

There have been several court cases decided against lenders that attempted to bring the wrong type of action against former homeowners. If there is a specific state statute that requires foreclosure victims to be treated differently in eviction proceedings, then any other type of legal action brought against the former borrowers should be defended. This can buy valuable time for the former homeowners to save up more money or look for a new place to rent.

Unfortunately, there are not many actions that former owners can take to save their home when it is this late. Even if irregularities in the conduct of the sale or predatory lending or other issues are discovered, it is unlikely the borrowers will get their home back. While they may be able to obtain monetary damages, or delay the eviction by a month or two, once the process has gone to the eviction stage, it is almost inevitable that the home will be lost.

When homeowners face foreclosure on a property they are renting out, tenants often begin to worry about the status of their home. Will the landlord be able to avoid foreclosure? Should the tenants stop paying rent? Will the new owner at the auction evict them, or will the purchaser honor the lease agreement? Unfortunately, many of these questions exist due to differences in the treatment of tenants under state law.

Many times, the first action a purchaser at a foreclosure auction takes is to begin the process of evicting former owners or tenants, whether this action is legal or not. In many cases, although it is not legal, the new owners will pursue this anyway in their effort to take possession of the property as quickly as possible. If this happens, it is usually up to the tenants to assert their rights under the lease.

Much of the confusion rests on two related issues. The first is that tenants' rights after a foreclosure are defined under state law, and each state will treat the issue slightly differently. Another issue is that tenants are the group most forgotten about in all of the efforts and discussion to help homeowners stop foreclosure. Protecting the rights of the renter is far down the list of priorities for most politicians attempting to help homeowners save their homes.

Tenants in different situations will have different rights. State law plays a large role, as does the nature of the lease itself. For instance, a lease that was entered into before the mortgage was placed on the property will usually survive a foreclosure. The lease existed before the mortgage was entered into, while the mortgage was in default, and during the foreclosure process. A purchaser at auction will not receive a greater interest in the property than existed before the mortgage.

There are two different views on the much more common issue of a lease entered into after a mortgage is executed. The majority opinion is that a lease will survive foreclosure if the lender is on notice that the tenancy exists. The exception to this rule is if the foreclosing lender makes the tenants are party to the foreclosure lawsuit; in this case, the lease may be exterminated after the foreclosure is completed.

Another view on this issue is that the foreclosure terminates the lease whether or not the tenants are made a party to the foreclosure lawsuit. In cases of nonjudicial foreclosure through a power of sale clause, most courts have held that the foreclosure extinguishes the tenants' rights in the property under the lease agreement. This gives tenants very few rights to defend their interest in the home.

One issue that homeowners, lenders, and tenants need to be aware of is that of the notice requirement mentioned above. If the lender has notice of the lease agreement, either actual or constructive, and does not include the tenants in the foreclosure proceedings, the lease will most likely survive the foreclosure auction. This makes the notice extremely important for tenants, foreclosing lenders, and purchasers at auction.

A number of different documents or actions can provide notice to the lender of the lease agreement. A recorded lease provides notice, for example. Also, if it should be apparent that tenants are living in the property, the lender may have the responsibility of investigating to determine the tenants' claims. An apartment building or property with more than one unit may also provide notice just by the nature of the building itself.

Homeowners are usually somewhat lacking in their efforts to help tenants deal with the foreclosure process. This often leaves renters on their own to figure out how to respond, and many end up not paying rent and being evicted quickly after a foreclosure auction. Unfortunately, this is often the worst possible scenario, and may not even be legal. But too few tenants know their rights after the home they are renting is foreclosed.

In 2009, the Congress and the Obama administration revealed their newest plan to help families save their homes from foreclosure by encouraging mortgage modifications. This plan, called the Home Affordable Modification Program (HAMP) was designed to create broad guidelines for the mortgage industry on modifying loans, as well as provide incentives to lenders and services to offer modifications.

Participation in the HAMP plan, as with most of the other federal foreclosure help programs, is voluntary for most servicing companies and lenders. Many of the largest servicers, though, have signed agreements to engage in the program. Companies that received funds from the government under the Financial Stability Plan are also required to participate in the program, along with Fannie Mae and Freddie Mac.

One of the main benefits of the program to homeowners is that it essentially requires participating mortgage servicing companies to review the eligibility of homeowners for a loan modification before being able to conduct a sheriff sale. In fact, servicers participating in the HAMP plan should not even begin the process of foreclosure until the review has been complete and the borrowers have been determined to be ineligible for a modification.

Loss mitigation efforts are required under the plan, and the guidelines for loss mitigation are similar to those required for FHA loans. In cases of default of an FHA loan, the servicer is supposed to negotiate with borrowers for an alternative to losing the home. The same is true with the new HAMP program, as both plans are designed to help homeowners remain in their properties at affordable rates.

Due to this program, there are a few new defenses to foreclosure that homeowners may raise due to a lender or servicing company's failure to comply with the requirements of the program.

For instance, if a servicing company participates in the Home Affordable Modification Program but does not review a borrower's financial material to determine whether a modification will make sense for the investor and the homeowners, the foreclosure should not be allowed to move ahead. The failure to comply with the guidelines of HAMP before foreclosing may mean that the homeowners are not even in default of the mortgage contract.

Also, the Congress, in the regulation itself, has declared the HAMP guidelines to be "standard industry practice for purposes of all Federal and State laws." This means that a lender's failure to comply with standard industry practice should create a defense to foreclosure that homeowners can raise in court. Unless prohibited by the pooling and servicing agreement itself, lenders are now required to follow HAMP guidelines.

Thus, because of the new regulation that the Obama administration has put into effect for the residential mortgage servicing industry, homeowners may have additional opportunities to qualify for a loan modification or defend their property from foreclosure. Although many of the government foreclosure assistance programs have failed to deliver so far, it is possible that borrowers can use these laws in self-defense, if not actually to qualify for workout solutions to save their homes.

Homeowners who sell their homes through a short sale are often very concerned about the tax implications of the sale. The bank, by forgiving a portion of the debt, is then responsible for reporting the forgiven amount to the IRS as income to the borrowers. At tax time, the former homeowners are responsible for including this amount in their gross income and then paying taxes on it.

Thus, there is a strong possibility that homeowners who sell their home for less than what they owe on it will have to pay thousands of dollars out of pocket in order to cover the tax bill on the short sale. They thought they were losing the home but avoiding having to make an expensive payment to the lender. In the end, though, they lose the home and still have to make a large payment to the IRS.

Homeowners, though, may be able to avoid this situation if they fall under a couple of exemptions, or the amount of debt forgiven is classified a certain way.

For instance, if the borrowers are insolvent prior to the discharge of the debt. The amount that can be excluded from their income is that amount up to the extent of their insolvency. As an example, f the borrowers have $10,000 in assets and $18,000 in liabilities, they are insolvent by $8,000. Debt can be forgiven up to $8,000 before they would have to report it as income to the IRS. But any amount over $8,000 forgiven would have to be reported and taxes would have to be paid on.

There is also an exemption for debts that are discharged through the bankruptcy process. There is no limit to this exemption from income, as homeowners can exclude an unlimited amount of discharged debt if it has gone through bankruptcy. The only stipulations are that the borrowers be under the supervision of the bankruptcy court, and the court grants the discharge of the debt.

Foreclosed homeowners may also be able to have the debt forgiven as interest and other fees, which do not count as income. Only forgiven principal would be considered forgiven debt, so if the borrowers and bank agree that the amount not collected due to the short sale consists mostly of fees and interest, there may be no income due to the sale of the property. This exclusion, however, may be affected if the borrowers took a tax deduction for interest in previous years.

There are a number of tax issues that homeowners should be aware of when they are considering whether or not to go through with a short sale. Although they may end up with a 1099-C form at the end of the year showing a large amount of forgiven debt, this does not mean that they have to pay taxes on all of that income, depending on their financial situation.

Despite some tax issues, a short sale still remains a viable solution to foreclosure. In fact, the government has even loosened some of the rules on income due to short sales, as well as providing other incentives for lenders to consider alternatives to foreclosing on a home. With more foreclosures will come more attempts to help borrowers reduce the financial burdens that come with owning or losing a home.

In some cases of foreclosure, there may be enough instances of misconduct by the lender to show that the entire process constitutes a wrongful foreclosure. Many states even have common law regarding this issue, as well as a cause of action specifically for "wrongful foreclosure." Although the claim has not been popular in recent history, homeowners may be able to use this claim after losing their home.

When extreme circumstances affect the process of taking the home back, homeowners may have a better case to make for wrongful foreclosure. Instances of mortgage servicing abuse, for instance, have been used in the past as a complete defense to foreclosure. When notices are not given to borrowers or the servicing company refuses to negotiate for an alternative solution to foreclosure, there may be a defense to the entire action.

When homeowners are unable to get through to the lender to negotiate for a loan modification or other solution, claims of wrongful foreclosure may be raised. Many different types of mortgage contracts (FHA, for instance) require some sort of preforeclosure meetings or negotiation, and courts have held that foreclosure is such a harsh remedy that it should be relied upon as a last resort.

However, many banks are notoriously difficult to communicate with, often calling homeowners dozens of times a day, but with no real resolution to the problem even if the borrowers answer and want to negotiate. Collection calls rarely turn into productive discussions of alternatives to paying back all of the arrears at once, entering into an expensive repayment plan, or losing the home to foreclosure.

When borrowers are unable to get through to someone authorized to make a decision about their account, and the foreclosure process keeps moving through the courts, there may be a case for wrongful foreclosure. Homeowners may want to resolve the situation, but no good alternative is considered by the bank beyond lawsuits or the sale of the property at a county auction.

A wrongful foreclosure claim may also be raised in instances where the lender or servicing company has added excessive late fees, interest charges, home inspection fees, appraisal charges, improper escrow advances, forced placed insurance, and other charges. Lenders will add these fees in order to create a small default on a property with substantial amounts of equity, and then to eat up any remaining equity between the time of default and the sheriff sale.

Homeowners should be aware that there is relatively little recent case law on the claim of wrongful foreclosure; however, depending on the circumstances, it may be worth raising it as part of a defense to foreclosure. As always, state statutes and laws will affect how much this claim is worth pursuing, so it may be in the best interests of the borrowers to speak with a knowledgeable attorney.

Homeowners are often worried that the foreclosure process will never end. The bank will sue them, publish their personal financial problems in the newspaper, take their home back, evict them, and then sue them again for any deficiency from auctioning the property. With the anticipation of a deficiency judgment, borrowers may feel like they will never be able to restart their lives and move on after foreclosure.

However, this is most often simply not the case. The potential for a deficiency judgment, while it exists, can be microscopically small. For a variety of reasons, banks do not pursue homeowners after foreclosure, even if there is a deficiency. As well, there are numerous state and local statutes and court decisions that place limits on how much money a bank can even obtain from this type of lawsuit.

First of all, many lenders decide not to sue for a deficiency judgment because they know that homeowners are unlikely to have any other assets with which to pay the debt. Most borrowers default on their home due to financial hardships such as a job loss or major medical expense. It is probably safe to assume that families in this position do not have the income or assets to pay a judgment for tens of thousands of dollars.

In many cases, the bank, in order to obtain such a judgment, will have to spend several hundred or thousand dollars out of its own pocket. Court fees must be paid if another lawsuit is to be brought into court, and attorney costs will be paid out of pocket by the bank to proceed with the deficiency lawsuit. After losing so much money from the foreclosure and auction of the home, banks most often cut their losses instead of look for a deficiency.

State statutes regarding deficiency judgments also come into play and can dramatically affect how much the bank is able to sue for or recover from the former homeowners. However, borrowers should also be aware that most anti-deficiency judgment statutes apply only to purchase-money mortgages, and second mortgages or refinances may not be affected by these particular laws.

In fact, some states have simply banned deficiency judgments against borrowers when the foreclosure was done nonjudicially through a power of sale clause in a deed of trust. Borrowers in these states can be completely safe from being sued after foreclosure. Although the nonjudicial process affords the fewest legal protections during the foreclosure, it may offer the best chance of avoiding being sued again after the auction.

Other states place restrictions on how much a lender can recover from a deficiency by limiting the amount of the judgment. This is done by giving borrowers a credit for the "fair value" of the property. The fair value is determined by figuring out what the property is actually worth, and this will most often be defined by the statute itself. It may not mean the sales price at auction or the market value of the home, so it is important to read to the state law on the issue.

Another restriction that has been placed on banks seeking deficiency judgments is strict time frames in which the judgment can be initiated. If banks were able to wait years before suing the former owners, it may be nearly impossible for the family to get on with its financial life. Instead of having borrowers live with the threat of a lawsuit, states have decided that deficiency judgment suits must be pursued almost immediately after foreclosure, or the opportunity to do so is eliminated.

Lenders may also have procedural restrictions placed on their ability to sue borrowers after foreclosure. In some cases, the bank may have to provide additional notices to the owners informing them of the intent to seek a deficiency judgment. As well, the bank may be required to seek a determination of deficiency in the original lawsuit, rather than bring a lawsuit seeking the judgment after the sheriff sale has been conducted.

Many of these restrictions may come into play at the same time, while banks will run into one after another in other foreclosures. These limitations and additional requirements, along with the likeliness of never being able to collect on the judgment, ensure that the majority of homeowners are safe from being sued for a deficiency. While it is not impossible to be sued by the bank, the legal hurdles to overcome in pursuing this lawsuit make it somewhat rare in the world of foreclosures.

Too many homeowners who have already lost their homes are looking for one final chance to get them back. They have contacted nearly every loss mitigation company, nonprofit organization, and government agency in the country, all of which have informed them that they do not qualify for any plan currently available to help them get their properties back after a foreclosure already been completed.

Is this true? Is there really no hope for borrowers whose homes have been sold and the auction has been confirmed? In most cases, this is not true, as there are still some remedies available after a foreclosure where a sale can be reversed and the owners given back ownership of their house. One of the main problems is that few companies or foreclosure specialists know about these last resort methods.

However, homeowners should be aware that these methods to get a home back after foreclosure may be very difficult to pull off. They should not be relied upon as the first option to stop foreclosure, as it can be much easier to qualify for a refinance, loan modification, or repayment plan. For the borrowers looking for one final opportunity, or those just trying to delay eviction for as long as possible, though, challenging the sale may be worth considering.

There are a number of grounds on which a foreclosure auction can be set aside, just as there are numerous claims to bring up in defending the lawsuit in the first place. In most cases, homeowners will have to bring their claims into the local court and attempt to have the sale reversed before they are evicted or the house falls into disrepair. The different types of claims that homeowners can bring into court are discussed more below.

The first way to challenge a trustee sale is based on irregularity in the conduct of the auction itself. This is often due to a lender or trustee not following the correct notice requirements to have a house sold through the auction process. Material violations of notice requirements may be enough to set aside the sale, although small technical violations may be ignored by the court unless they adversely affect the foreclosure or have the possibility of encouraging fewer bids or lower bids.

The inadequacy of the sales price may also be grounds to set aside a foreclosure auction, although the common definition of "inadequate" has been taken to mean shocking the conscience of the court. Courts in many different areas have either set aside or refused to set aside foreclosure auctions due to low sale prices at auction. It may be wholly dependent on the judge in the case to decide whether or not to reverse the sale.

For instance, some courts have decided cases such as these:

• $875 for a property with $27,000 in equity was not set aside
• $2,000 for a property worth $18,000 was set aside
• $10,304 for a property worth $57,500 was set aside

Thus, it may be very difficult to determine whether a price at auction is inadequate without bringing the issue into court.

An inadequate price coupled with irregularity in the conduct of the sale may make an even stronger case for the court to set aside the auction. Courts have decided over time that the lower the price of the property, the more any technical or minor irregularity or procedural violation will be taken into account. This may give homeowners strong motivation to challenge their trustee sale.

A final reason to set aside a sale may be an inadequate price plus unfairness to the borrowers. The definitions of "inadequate" and "unfair" will have to be fought out in court, but properties which sell for far less than they are worth may be a sign of bad faith on the part of the lender, which has a duty to obtain the highest price possible for a property it auctions. Especially if the lender turns around and sells the home for more soon after the sheriff sale, unfairness may be determined.

Homeowners who are relying on such defenses to save their home, however, may find themselves disappointed in the end. The further along the process their home goes, the more difficult it will be to hold onto it and get another chance to make on-time payments. These challenges to a sheriff sale may be successful, or they may not be. But they should be considered one of the last resorts after everything else has been tried, but before moving out of the house completely.

As home values keep dropping yet property taxes keep increasing, tax foreclosure sales will become more common. Some homeowners experiencing double-digit percentage increases in their yearly tax burden, even as they are working fewer hours or taking pay cuts will inevitably come to realize that they can no longer afford to keep up with monthly housing costs that never go down.

Thus, tax sales will become more common throughout the country, especially in areas where the local government grew the most out of proportion to the surrounding community. The tax foreclosure and sale process, while similar to a regular foreclosure, also has a number of differences that make it both easier and more difficult to keep the house. Borrowers should be aware of how their local government can take their home.

Once a tax bill becomes due and is unpaid, it becomes a lien on the homeowner's property. Typically, the lien is imposed on the first day of the year after the property tax is assessed by the county. Under statutes in many states, tax liens are given priority status over any other lien, including first mortgages. In order to protect their first mortgage lien, lenders require that property tax be paid through an escrow account.

Sometimes it is the lender or servicing company itself that drives the property to a tax foreclosure sale. Whether due to incompetence or malice, tax payments are sometimes lost, applied to the wrong account, or simply held in the escrow account and never paid to the county. Other times, it is the county itself that misapplied the payment or received the tax but did not credit it to the homeowner's account.

This makes the entire process more complicated, as there may be several extra parties involved in a tax foreclosure than in a regular foreclosure due to the default of a mortgage contract. The borrowers pay into an escrow account administered by the servicing company. The servicing company holds onto these funds until the tax is due, at which time it forwards the money to pay the bill to the taxing authority. It is then the taxing authority's job to apply the payment. With all of the players involved, mistakes are inevitable.

Also, if a home is in foreclosure due to nonpayment of the mortgage, and there is an escrow account that is unpaid, the lender will most often pay the property taxes in order to prevent a lien from being placed on the house. But the amounts that the lender pays to keep the taxes up to date will most definitely be charged to the borrowers. They will be counted as part of the arrears if the homeowners with to cure the default.

Tax sales, which will be examined in a future article, also differ from the normal foreclosure process in that the bidder at auction usually only needs to pay the delinquent taxes to take over the property. Instead of paying close to the fair market value or bidding through a competitive auction, homes can be sold for as little as a few thousand dollars in unpaid taxes.

Buyers of tax foreclosures may also have to wait much longer to evict the former owners than if the house was foreclosed due to default on a mortgage. Local or state statutes may give homeowners up to a year to come up with the money to pay the taxes plus any costs and penalties and keep their home. The bidders will have to surrender their claim to the property and try again on another house.

Tax foreclosure issues will also usually be resolved outside of the court first. If the property owners want to dispute the assessment, how much they owe, or any payment amounts, they will most likely have to go through an administrative process, filing appeals or other paperwork with the county. The courts may be the final venue to decide any disputes, but homeowners may not be able to take their case into court right away. They have to go through the correct bureaucratic channels first, which makes defending the tax sale more difficult.

Tax sales, while not as prevalent as regular foreclosure auctions, may become a larger issue for homeowners as falling property values make it less worthwhile to keep paying on a home where local taxes keep increasing. In the end, counties may end up with nothing more than neighborhoods of abandoned homes generating no tax revenue at all and actually costing the community in terms of upkeep and further lowered property values.

Happy Labor Day!

From everyone at ForeclosureFish

Although the main focus of the foreclosure crisis has been on residential homes and, increasingly, on commercial property, there is a large segment of the market that is covered by manufactured homes. Close to eighteen million people live in manufactured homes. The target market for many of these properties are people with low income who are otherwise unable to afford a single family house.

When these homeowners default on the home, there are a number of differences between the process of foreclosure used on a residential property and the process used to take back a manufactured home. State law may affect the creditor's rights to a far greater extent, depending on what type of property the home is considered, where it is located, and what ownership rights the owners have on the land.

For instance, in many cases, individuals that own a manufactured home end up with two creditors if they borrow money to purchase the home. They will be paying the loan for the manufactured home, as well as on a lease or rental agreement for the land that is being used. Depending on if the owners default on the land agreement, or the home loan, different rights can apply.

Manufactured homes may be treated as personal property when they are purchased. Ownership is transferred through a certificate of title as if a car or other automobile was being sold. Creditors, in the case of a default, would be able to repossess the property, but would not have to go through a formal foreclosure procedure according to state foreclosure laws.

Other states, however, consider manufactured homes real property, and ownership is transferred through a deed recorded with the county recorder or clerk's office. If the homeowners default on their loan, the creditor would have to go through the foreclosure process according to the laws of the state, either by filing a lawsuit (judicial) or providing the property public notices (nonjudicial).

To complicate matters further, though, state laws treat manufactured homes very differently in some circumstances. Many state statutes allow for the conversion of a manufactured home from personal property to real property. And how the home is treated may be different in terms of the credit transaction. Manufactured homes, even if treated as personal property, are usually taxed in similar ways as real estate by local authorities.

Courts also play a role in determining whether property is real or personal when it comes to manufactured homes, especially if there is a question of foreclosure or repossession. This usually revolves around the issue of fixtures -- is the home so attached to the surrounding property that that it has to be considered a part of the real estate? If so, it will most likely be considered real property for the issue of default.

A big factor when it comes to the default on a loan of a manufactured home is whether it is treated as real property by any other type of state statute. For instance, if the home is sold under a certificate of title (personal property), but is taxed by the local government as real estate, courts will be more likely to consider it real property because of how it has been treated by other state actions. How the home was transferred in the past will be taken into account, but how it is currently treated may be more important.

The most important reason to determine if a manufactured home is real or personal is due to how the collection process will proceed in the event of default. The federal Uniform Commercial Code will generally be followed if it is treated as personal property, while state foreclosure laws will be used in the case of real estate. Homeowners may have an easier time defending the home depending on the applicable law.

Future articles will go into more depth as to the differences among states in how they treat manufactured homes, as well as how conversions are treated in different areas. Despite the large number of people living in these types of residences, the information on foreclosure or repossession of manufactured homes seems to be sorely lacking. But these homeowners need to be aware of the issues affecting their houses in the event they face a financial hardship and default.

Homeowners are often worried about further collection attempts after a foreclosure has been completed. After losing their homes, they worry about seeing their car repossessed, bank accounts levied, or wages garnished. But in most cases, there is little chance of a deficiency judgment or future collection attempts due to the numerous obstacles in the path of the bank.

This is the factor that most borrowers do not consider when worrying about the possibility of a deficiency judgment. It is often not in the bank's interest to spend its time and resources pursuing previous foreclosure victims who found it difficult to pay back their original loans. It costs money and takes time to hire attorneys and proceed with another lawsuit in the court system, and there is little incentive to do so against defendants who proved they do not have the financial ability to pay a judgment.

There are at least five considerations that banks have to take into account before they proceed with suing and attempting to collect on a deficiency judgment. These considerations are as follows:

• Does the law allow a deficiency judgment?
• Was there a deficiency at the sheriff sale?
• What is the fair market value of the home?
• Is there a reason to expect the borrowers can pay?
• Is the judgment likely to be discharged?

These five issues are discussed in more depth in the paragraphs following.

The first consideration homeowners have to take into account is, does their state allow deficiency judgments after foreclosure? They should immediately look up their state foreclosure laws to find out if this is even a possibility, let alone probably. If they are not allowed, then there is no danger of garnishment. If yes, other factors will have to be met before collection efforts can resume.

Second, if the state allows a deficiency judgment, was there actually a deficiency at the sheriff sale? A deficiency is when the house sells for less than what the borrowers owe on it. If they owe $140,000 and the property is auctioned for $130,000, there is a $10,000 deficiency. Unfortunately, due to rapidly declining home values, many foreclosure auctions end with a deficiency.

Third, what is the fair market value of the home? Many courts will allow a deficiency judgment only for up to the actual value of the house. Using the example in the previous paragraph, if the house auctioned for $130,000 and the homeowners owed $140,000, but the fair market value is $135,000, courts may limit the deficiency to a maximum of $5,000. That is the fair market value ($135k) minus the sales price at auction ($130k).

Fourth, if the state allows a deficiency and there is one that is above the fair market value of the home, what gives the lender the incentive to go after the judgment? Many lenders will not bother with a deficiency judgment because they know that homeowners in foreclosure are strapped for cash. It costs more in attorney fees and court costs than the lender will ever be able to recover from most borrowers, so what is their incentive to sue for a deficiency?

The final consideration when examining the possibility of wage garnishment for a debt after foreclosure is that deficiency judgments are dischargeable in bankruptcy. If the bank gets a judgment against borrowers and tries to garnish wages, the former owners can file a Chapter 7 and have it eliminated, if they meet the other requirements for a Chapter 7 bankruptcy. So even in the worst case scenario, homeowners might be able to avoid wage garnishment.

Thus, unless many of these considerations work out in favor of the bank, there is little chance of a deficiency judgment. This does not mean that there are no such judgments, as some states allow the request for a deficiency to be included in the original lawsuit. However, it does mean that many lenders have decided not to pursue homeowners after the foreclosure is over and the home sold, regardless of whether the bank was completely paid back by the auction or not.

The Fair Debt Collection Practices Act (FDCPA) was originally designed to protect debtors against abusive actions taken by collection agencies when they are pursuing a debt. There are numerous violations that may cause penalties against the debt collector to be paid to the borrowers or applied to the balance of the account. Two of the most important are prohibitions regarding communications with third parties and harassment of debtors.

Throughout the history of the FDCPA, court cases have been defining what is and is not a violation of the Act. Collection agencies and collection lawyers are the types of business that receive the most complaints by consumers though the Federal Trade Commission. The two most common complaints the FTC receives regarding collectors involve claims of harassment and collection agencies pursuing more than is really due.

A number of recent decisions in court cases have helped flesh out some of the issues regarding harassment and collectors contacting third parties (such as a borrower's brother or coworker). In many cases, debtors that just defend against such actions can uncover numerous violations of the law by collection agencies. The borrowers may owe the money, but if the collector can not prove it owns the debt or has broken the law, its claims to recover may suffer severely.

In terms of communications with third parties in the collection of an account, debt collectors are not allowed to leave messages with family members of the debtor and request that they be conveyed through the third party to the borrowers. Failing to leave required notices may also be considered a violation of the Fair Debt Collection Practices Act.

Debt collection companies and lawyers must also protect borrower information when sending letters in the mail. One court found that a collector violated the FDCPA when it sent a letter to debtors with a window envelope where anyone could see information about the debt being referred to, including the creditor and the account number.

As well, debt collectors are not allowed to discuss or sell borrower information to nonaffiliated third parties. Collection agencies may not be allowed to make even more money from taking the personal information of debtors and selling them to marketing partners, poor credit card partners, transfer credit card partners, and others. This would be a clear action of communicating with third parties while collecting a debt.

Harassment is also a huge complaint of borrowers against collection agencies, as mentioned above. Collectors may call at all hours of the day, at work, home, on cell phones, and to family members of the debtor. While they are required to cease such communications if informed by the borrowers, collection agencies have been known to keep pursuing debts in violation of such laws. Repeated rude, threatening phone calls have been found to be a violation of the FDCPA.

For example, one collection agency actually had its agents visit a borrower's home to deliver lawsuit papers and shout outside in a loud voice. They repeatedly yelled the debtor's name and shouted things like "you need to get your ass out here and open your gate now," and "you need to come out and get these legal papers now." One court has found this behavior to be a violation of the prohibition against harassment.

Debtors should also watch out for collection agencies attempting to get them to admit things both the borrowers and debt collector know to be untrue. Even though the collector's own records showed that a payment had been made, it attempted, though the court discovery process, to get the borrowers to admit it had not been made. The court found this behavior to be abusive, unfair, and an unconscionable practice which violated the FDCPA.

Collection agencies use a lot of devious tactics to pursue debts that they do not even really own. They seem to rely on harassment, deception, and embarrassing borrowers to extract money to keep them quiet. But once they come across a borrower willing to pursue the issue and challenge the debt and the collection practices in court, debt collectors are often found to be in violation of federal lending laws. If the debts they are collecting are legitimate, why is it so difficult for these companies and lawyers to follow a few simple laws?

One tool of the credit card companies has always been to force consumers into unfair arbitration proceedings, where very little is done to help strapped borrowers get back on top of debts. While most people who were involved in such negotiations had a feeling they horribly biased against the consumers, the full extent of the corruption of the process has finally come out in a recent court settlement.

The attorney general for the state of Minnesota recently sued the National Arbitration Forum (NAF), alleging deception and bias in their treatment of credit consumers. Amazingly, the NAF agreed to cease all consumer arbitrations nationwide beginning July 24, 2009, which will effect huge numbers of credit card companies and borrowers. Millions of credit agreements name NAF as the company to handle any arbitration.

The reason for the National Arbitration Forum ceasing operations is that it was found to have been biased in its business dealings, and had failed to disclose these biases. Corporations controlled by a hedge fund ended up owning part of NAF and a national collection agency that used NAF in lawsuits against borrowers. NAF and the debt collector, Mann Bracken, failed to disclose this relationship to consumers.

The Minnesota attorney general's complaint alleges that the collectors had filed 125,000 collection attempts with the National Arbitration Forum in 2006, while neither party ever disclosed the relationship between the two companies. And this is after NAF had represented itself, according to the attorney general's complaint, as "independent, operates like an impartial court system, and is not affiliated with any party."

Obviously, NAF and Mann Bracken were closely affiliated, owned by the same corporations through the hedge fund, and using their business relationship to sue consumers and then throw the cases into arbitration proceedings. In fact, the complaint further alleges that NAF worked with credit card companies to persuade them to include mandatory arbitration clauses in cardholder agreements. In many cases, NAF was appointed the arbitrator in these contracts.

Now that the National Arbitration Forum has ceased administering consumer arbitration proceedings, all of these former contracts are now invalid as written. A further development is that, due to the NAF complaint, the American Arbitration Association has also decided to cease handling collection actions against borrowers. This will be their decision until appropriate standards are developed.

For the present time, it seems that mandatory arbitration clauses in credit card agreements may be worthless. While it is no surprise to consumers that have been forced into the system that it is totally biased in favor of debt collectors, the Minnesota attorney general's investigation has proved that companies can work together to gain interests in arbitrators and collection agencies and hide these affiliations from consumers.

How many credit card borrowers were pressured to agree to unfair repayment plans or were forced into bankruptcy due to the corrupt practices of the National Arbitration Forum and its affiliated credit card and collection companies? Out of 125,000 complaints that Mann Bracken filed with NAF, how many ended up fairly? It may be safe to assume, based on the claims raised in the AG lawsuit, that none of the arbitrations ended up fairly for borrowers.