Foreclosure Hysteria: Dispelling the Myths
By Zachariah Larson

Despite government-led and lender-supported efforts to prevent foreclosures, the number of foreclosure filings hit a record high in the third quarter of 2009, according to a RealtyTrac report issued in mid-October. During that time, 937,840 homes received a foreclosure letter—whether a default notice, auction notice, or bank repossession. That means one in every 136 homes in the United States was in some stage of foreclosure, a 5 percent increase from the second quarter of 2008, and a 23 percent jump over the third quarter of 2008. Nevada continued to be the worst-hit state with one filing for every 23 households.

So far this year, lenders have taken back 623,852 homes nationwide. This number will increase substantially given the third-quarter jump in foreclosure letters being issued by lenders. The increased activity indicates that lenders may be starting to work through some of the halted foreclosure inventory caused by legislative delays, loan-modification efforts, and high volumes of distressed properties. Thus, the foreclosure crisis will probably not diminish anytime soon. The current economy and the Nevada foreclosure crisis have resulted in many law firms expanding into the practice areas of bankruptcy or loan modification. More and more, clients are seeking legal advice as to handling a possible home foreclosure. The increase in home foreclosures has resulted in a rampant need for information regarding possible solutions ranging from the outright implementation of delay tactics by delinquent homeowners struggling to keep their homes to simply getting out of debt. Often times, the homeowner will seek out information from the internet or other media sources which may or may not be accurate. This pervasive need for information has led to the creation of numerous myths and false hopes pertaining to home foreclosure avoidance strategies. Dispelling some of these myths and false hopes is the goal of this article.

Myth: Filing Chapter 7 bankruptcy will stop a foreclosure and save the house.
Truth: When foreclosure on real property is eminent, the protections afforded through bankruptcy proceedings vary depending upon the type of bankruptcy filed. Individuals will generally seek relief through either a Chapter 7 or Chapter 13 bankruptcy. In a Chapter 7, the debtor can file the petition to allow for more time to relocate before a foreclosure sale takes place and a Notice to Vacate is served. However, filing a Chapter 7 bankruptcy will not stop the foreclosure proceedings; it will only delay a foreclosure proceeding for a short time if the debtor is behind in their mortgage payments. In my experience, the delay varies widely depending upon the lender, but averages between two to six months. However, I did have one case where the debtor was not evicted for almost two years!

Myth: Filing Chapter 13 bankruptcy will allow the debtor to keep their house automatically, no matter what!
Truth: If the debtor files a Chapter 13 bankruptcy AND the Chapter 13 plan is approved by the court AND the debtor makes ALL of the payments under the plan, then the debtor can keep the house. A Chapter 13 allows the debtor to pay the pre-petition arrearages of the mortgage loan through the Chapter 13 Plan over a period of three to five years. In a Chapter 13, the debtor can also avoid any subordinate liens over and above the value of the property. For instance, if the property is valued at $200,000 and the debtor has a first lien in the amount of $230,000 and a second in the amount $60,000, then the entire second lien can be avoided within a Chapter 13. With that said, for many in this economic time, completing a Chapter 13 plan in which the debtor keeps their current home is sometimes difficult, if not impossible due to the economy, wherein debtors are constantly struggling to keep their employment or run their business at a profit. Thus, it is important to frankly discuss the realities of a debtor’s situation when determining whether or not avoiding foreclosure is in their best interest. For many, the “fresh start” accomplished through bankruptcy will be better without the burden of their current home, which may continue to drop in value depending on the economy.

Myth: The homeowner must do everything they can to save their house.
Truth: As stated above, sometimes people need to move on. Often times, a debtor looks to their attorney to give objective advice regarding their current situation and speak truthfully to the burden that attempting to keep their home may create. It may be in the debtor’s best interest to walk away. Two common ways that this is done are filing bankruptcy (discussed above) or negotiating a “deed-in-lieu,” or “short-sale.”

In some cases, a foreclosure proceeding can be avoided with a “deed-in-lieu of foreclosure” or “short-sale” negotiation. In such negotiations, the debtor and the bank agree to the terms for giving the house to the bank in a less adversarial manner. Most often, the bank will forgive some portion of the debt and proceed with a sale of the property. However, there are usually significant tax consequences associated with a “deed-in-lieu,” or “short-sale” if the debtor has ever refinanced or “cashed out” equity in their property.

When a bank accepts a deed-in-lieu of foreclosure, it involves the transfer of property, and thus the borrower needs to pay state deed taxes upon conveyance of property to the lender. Chapter 375 of the Nevada Revised Statute (NRS) gives the counties of Nevada the authority to impose Taxes on Transfers of Real Property. The deed tax in most counties in Nevada is $1.95 for each $500 of value or a fraction thereof if the value is over $100 (Clark County $.60 is added; Washoe and Churchill Counties $.10 is added). The tax is calculated on the difference between the fair market value of your property and your mortgage balance plus liens removed from the property due to the deed-in-lieu. Generally, this is a point of negotiation with the bank.

A “deed-in-lieu” or “short-sale” may also result in taxable income to the debtor on the forgiven or cancelled debt. In other words, if the bank forgives a portion of a debt, the amount that is forgiven is normally considered taxable income of the debtor. However, recent legislation has temporarily given debtors a reprieve from this income tax. Per the Mortgage Forgiveness Debt Relief Act of 2007 (applicable till the end of 2012 at time of writing this article), one need not pay tax on canceled debt resulting from a deed-in-lieu or short sale in certain circumstances. For example, the Act applies to forgiven or cancelled debt used to buy, build or substantially improve a principal residence (i.e., acquisition debt), or to refinance debt incurred for those purposes. In addition, the debt must be secured by the debtor’s home. This is known as qualified principal residence indebtedness. The maximum amount that can be treated as qualified principal residence indebtedness is $2 million, or $1 million if married filing separately. The amount of debt forgiven must be reported on a From 982 and this form must be attached to the debtor’s tax return. So, if you have a client who cashed out equity or refinanced their property, be aware of the possible tax ramifications of either a foreclosure, a deed-in-lieu, or a short-sale.

Myth: The foreclosure date is too close; there is nothing the debtor can do.
Truth: Both Chapter 7 and Chapter 13 afford one immediate benefit to the individual who is facing foreclosure; the automatic stay. The Automatic Stay (“the Stay”) becomes effective immediately upon filing the bankruptcy petition. The Stay will stop foreclosure proceedings even if the petition is filed only minutes before the pending foreclosure sale. The Stay arises by operation of law and requires no judicial action.

For example, a debtor files their petition at 9:50 a.m. with a foreclosure sale scheduled for 10:00 a.m., the Notice of Bankruptcy Filing is faxed or hand-carried to the sale location to stay the sale. (It should be emphasized that there is risk in filing on the eve of a foreclosure sale and it is in the debtor’s best interests to file at least a week or two prior to the sale to insure that proper notice is given to the trustee conducting the sale.) The Stay generally “buys” anywhere from 30 days to 90 days depending on the status of the foreclosure process and the aggressiveness of the mortgage holder. And, when a creditor lifts the stay, it doesn’t necessarily mean they will immediately proceed with a foreclosure action.

Myth: If the bank is unable to produce the original note, then they cannot proceed with a foreclosure sale.
Truth: Nevada law provides that a deed of trust is an instrument that may be used to “secure the performance of an obligation or the payment of any debt.” When a debtor defaults, the creditor beneficiary may resort to its security in a trustee’s sale as a means of satisfying that debtor’s obligation. Nevada Revised Statutes 107.080 et seq. articulates the procedures by which a non-judicial foreclosure sale may be conducted. Nevada law does not require that the beneficiary or the trustee present the original note or some other documentation to allow the nonjudicial foreclosure to proceed. See Ernestberg v. Mortgage Investors Group, 2009 WL 160241 (D. Nev. 2009); see also Enriquez v. J.P. Morgan Chase Bank, N.A., 2009 WL 160245 (D. Nev. 2009).

However, one important caveat to the aforementioned authority are cases involving foreclosures instituted by Mortgage Electronic Registration System (MERS) in a bankruptcy action. In April of 2009, bankruptcy attorney Lenard Schwartzer challenged MERS’ ability to launch foreclosure actions against debtors who could not make the payments on their homes and who had their homes being processed for foreclosure by MERS. After a hearing before all three Southern Nevada Bankruptcy Judges, it was held that a foreclosure action could be brought only by entities that physically hold the mortgage. As such, while this issue is currently being appealed, it is certain to cause delay in those cases wherein MERS is attempting to foreclose on a debtor.

The information streaming on the internet and in the media is frequently misleading, if not outright false. As the laws pertaining to foreclosures vary significantly from state to state, what may be true in one state may not be true here in Nevada. If a client, friend, or family member is facing foreclosure, please advise them to seek counsel from a reliable debt relief or bankruptcy attorney immediately.

Zachariah Larson primarily practices in the area of bankruptcy and currently is a member of National Association of Consumer Bankruptcy Attorneys. Mr. Larson also is a board member of the State Bar of Nevada Ethics and Professional Responsibility Committee, currently serves as Treasurer of the Clark County Bar Association, is currently nominated as President-Elect of the Clark County Bar Association, and is a board member of the Make-A-Wish Foundation of Southern Nevada. You can reach Zachariah Larson at 702-382-1170.

A Rewarding Reinvention in Tough Economic Times
By Elizabeth M. Sorokac

After law school, I shopped around a bit, searching for inspiration and the right fit for my budding legal career: a two-year clerkship; a mid-sized commercial-litigation firm; a boutique real-estate-transactional firm. I eventually settled in a large, established Nevada firm, practicing government affairs, zoning, and land use. I had found my calling, and I was secure—at least I thought so. In February of 2009, however, after three years with the large Nevada firm, I was laid off—a casualty of the downturn in the economy. In one short meeting, my entire life had changed; and at the time, I was sure the change was not for the better. I was upset and lost! I had no idea what I was going to do. Jobs were non-existent. A few firms were still interviewing to keep up appearances, but the job landscape was a veritable desert. With mounting bills to pay, I had to do something. I decided to open my own firm. At the time I thought I would use it to temporarily make ends meet, until the economy turned around and I could find a “real” job.

Little did I realize that this unplanned career event had given me a chance to create something of real value to both myself and to my yet unknown clients. The experience would force me to rethink my role in the legal profession and to develop a successful business model for tough economic times. In April of 2009, the Sorokac Law Office was founded on the guiding principal of providing high-quality, personalized representation at an affordable price. When my clients called or came to the office, they spoke and met with me personally. My personal attention comforted my clients and built our attorney-client relationship because they knew I would be handling their matter from start to finish. I had no choice, having no underlings to hand files off to and no one else to rely on to get the job done. Although it is burdensome at times, I have found that the personalized attention each client receives builds good will and trust in the firm.

I was also fortunate that the “bouncing around” I did earlier in my career actually benefited in the building of my new law firm. My past experience included positions with local government, small and large firms, and functioning as in-house counsel, which enables me to provide a broad range of services to a variety of clients, including large, multi-national companies, small businesses, and individuals. As a result I am able to provide representation in practice areas that draw from my past legal experiences, including real estate, government affairs and administrative law, corporate, and litigation.

The economics of a solo practice also allows me to charge a lower fee than the prevailing market rate. I operate on a “no frills” basis. The firm occupies modest, but professional, office space. I employ a part-time legal assistant who helps me with administrative matters, and I’m looking for a UNLV law student to serve as a part-time law clerk. If a matter needs additional staffing, I have relationships with talented lawyers in all of my practice areas, who will work with me on a contract basis. All of these lawyers share my value-pricing vision. With such little overhead, it is easy to cost effectively serve my clients. This philosophy of “the same quality for a lower price” is appealing to business clients these days, given that over the last two years, most businesses have been forced to do the same. This business model is a mirror of the times and has served me well as I continue to build the firm as a successful business.

This business model also gives me the flexibility to entertain alternative fee structures, such as flat fees, success fees, and monthly payments. Clients appreciate that flexibility and it provides a way to adapt to meet a client’s needs, instead of forcing the client to adapt to meet the firm’s needs. I consider the factors of each new client and new matter separately and individually. Although it takes more time, I find that individually-tailored fee agreements result in more realistic fees (that the clients can actually pay) and in fewer fee disputes.

During the past six months, I have been rewarded often by my clients and by the types of work they have hired me to perform. I have handled matters involving the complex interweaving of administrative and court deadlines and matters that were straight forward, but make you feel good about being a lawyer. I have represented the little person, the big company, and everything in between.

Some examples of the matters I have handled include: (1) representing an elected official in challenging the recall mounted against him; (2) helping a building owner obtain a permit after months of navigating a difficult administrative process; (3) assisting a property owner in gaining approvals for the remodel of an existing apartment building and the construction of nine new apartments in an area that serves seniors on fixed incomes; and (4) negotiating a lease for a local dentist who is just starting his solo dental practice.

Since the founding of the firm, I have overcome the depression of being laid-off and the many obstacles of starting a small business. I have also found great personal satisfaction in creating a successful firm and developing enduring client relationships by focusing on clients’ needs. I am confident that adhering to the firm’s guiding principles will mean a successful firm both now and in better times. While it may be ironic, for me, the economic collapse has in many ways been very rewarding.

Ms. Sorokac has been practicing in Nevada since 2001. She expresses her sincerest thanks to the many well-respected attorneys in Nevada that have provided her with mentoring and guidance in her career. She can be reached via phone at (702) 727-6258 (office), or (702) 245-5075 (cell), or via email at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it