Cram Down of First Mortgage in Chapter 13 Bankruptcy

     I have posted before about the more common strategy of stripping completely unsecured second mortgages in Chapter 13 bankruptcies to treat them as unsecured debts with the positive results in many cases that little to none of this now unsecured debt needs to be paid by debtors through their Chapter 13 plans.  There is also the less common, but very beneficial option to cram down first mortgages in Chapter 13 when the facts support it. I will not try to get too technical with code cites and case law that supports it other than it is based on the interworkings of Sections 1322(c)(2) and 1325(a)(5) of the Bankruptcy Code and for Connecticut residents In Re Latimer, 395 B. R. 304 (Bankr. W. D. N. Y. 2008) a widely respected decision in the Second Circuit which Connecticut is a part of. The term "cram down" means reducing the total amount of the mortgage debt paid thru the Chapter 13 plan. This option is available to debtors whose first mortgage debt has either matured already or matures and is payable in full during the the three to five year term of their plan. The debtor may owe a first mortgage debt well in excess of the market value of their home and this option would let them reduce the total mortgage debt due to the value of their property to be established by an appraisal. This cram down will not work for all debtors since it will depend upon the value of their property and the ability of a particular debtor to payoff this debt in equal monthly installments over the term of their plan. For example, let's take homeowners who did a mortgage modification with a short term balloon payment coming due at maturity during their plan which together with the existing mortgage debt is well in excess of the value of their property:

       Regular Mortgage Debt: $200,000.00
       Balloon Payment:               75,000.00
       Total Due:                        $275,000.00
   
      Property Market Value: $150,000.00

      Mortgage Debt reduced by $125,000.00 to $150,000.00 by cram down motion

    $150,000.00  =  $2,500.00 monthly plan payment toward mortgage for 5 year plan
         60

     In this example the $125,000.00 reduction will be treated as unsecured debt so best case scenario is  a debtor who has enough  monthly income to pay the reduced mortgage debt thru their plan with little to nothing else left to pay unsecured creditors thereby discharging unsecured claims upon completion of their plan. Another point to keep in mind is that with this cram down plan the debtor is only making their plan payments to completely pay off the mortgage debt unlike the more common Chapter 13 plans where debtors make their plan payments toward the mortgage arrearages due at time of filing combined with their regular montlhy post-petition mortgage payments going forward outside of their plans. In summary, if you have an underwater property you want to try and keep with a mortgage maturity date coming due in close to 5 years the exploration of this cram down option with an experienced bankruptcy attorney in your area is advisable.

New Bill to Allow Bankruptcy Discharge of Student Loans Submitted to Congress

     H.R. 2366, the  Discharge Student loans in Bankruptcy Act was submitted by lead Congressman John Delaney (D-MD) this month. It is heralded as a bi-partisan effort, but only one republican John Katko(R-NY) has signed on so far as a co-sponsor. It is also an ambitious proposed amendment since it completely eliminates the subsection in 11 USC 523 referencing student loans as an exception to discharge. Therefore, no more need for proof of undue hardship or time limitations applied to discharge of student loans which will be treated like any other dischargeable debt. The ability to discharge student loans will be based on the existing limitation to qualify for discharge in Bankruptcy including the Chapter 7 means test for example. Also no distinction between federally insured  and private student loans which I anticipate will incur some blowback and possible changes if this amendment  even makes it way through Congress. The need for this amendment has been well documented in the press with the student loan crisis reaching epic proportions. The question is whether a Republican controlled Congress very much beholden to a strong bank lobby will approve it. This is especially true with regard to private student loans the biggest problem for debtors since unlike federal student loans there are no payment programs in place to provide any relief to debtors.
     It may take until 2018 with the possible control of the House and/or Senate being transferred to the Democrats. Also the undpredictability of the current occupant of the White House and how long he may stay there also will come into play. The need for reform is clearly there. Will this current government take the necessary action to address it is unclear at best. I encourage anyone concerned with this issue to reach out to their Congressperson to advocate for the passage of this amendment to bring the relief needed to those debtors suffering from the burden of excessive student loan debt. This crisis affects all of us not just these debtors since it a major drag on our economy and once these debtors especially young struggling adults are freed from this debt they will be able to start families, buy homes and related items to help grow our economy for the benefit of all.

Supreme Court to Hear Case Allowing Strip-Down of Wholly Unsecured Mortgage in Chapter 7 Case

      The  United States Supreme Court granted certiorari yeterday in two of the three Chapter 7 lien-strip-off cases challenging the Eleventh Circuit decision in McNeal. Bank of Amer. v. Toledo-Cardona, No. 14-163 and Bank of Amer. v. Caulkett, No. 13-1421 (petition granted Nov. 17, 2014) (consolidated for argument) (Bank of Amer. v. Bello, No. 14-235 is still pending). In McNeal v. GMAC Mortg., 735 F.3d 1263 (11th Cir. 2012) pet. den. (May 20, 2014), the court bucked the trend to find that Dewsnup v. Timm, 502 U.S. 410 (1992), which held that a partially secured lien could not be stripped-down in chapter 7, did not apply to wholly unsecured liens. These are liens including second mortgages for which based on the value of the property there is no equity after the first lien on the property which usually in these cases is the first mortgage.  There are more than a dozen cases currently pending in the Eleventh Circuit challenging this decision, but, after an early unsuccessful attempt to bring the issue before the Supreme Court (Bank of America v. Sinkfield, No. 13-700 (cert. denied, March 31, 2014)) the issue is now on track for final resolution. Briefing should be completed by March and argument is likely to be scheduled for the last week of March, with decision projected sometime in June. 
        Currently debtors can only strip down, which means convert a secured debt to an unsecured debt, wholly unsecured liens including mortgages in Chapter 13 cases. Chapter 13 debtors depending on their income may still have to pay some of this debt of as unsecured debt in their plans. If the Supreme Court does allow this type of strip downs in Chapter 7 cases it will help many debtors who own underwater homes with wholly unsecured second mortgages. If these debtors qualify for a Chapter 7 and can still afford to pay the first mortgages on their homes they can strip down their wholly unsecured second mortgages and discharge this debt along with their other unsecured debt. This will allow more homeowners to keep their homes and obtain a better fresh start from their Chapter 7 bankruptcy filings, Stay tuned to future posts to my blog and I will let you know when this decision comes down from the court.

What is a HAFA Short Sale?

     A Home Affordable Foreclosure Alternative popularly known as a HAFA short sale can provide qualified distressed homeowners who are not able to modify their mortgages or file Chapter 13 bankruptcy to save their homes the ability to sell their homes with no deficiency and receive up to $3,000.00 in relocation funds from their lender.
     Some of the main requirements are:  
       The borrower must still occupy the property;
       The mortgage loan cannot be guaranteed by Freddie Mac or Fannie Mae;
       The mortgage was taken out prior to January 1, 2009;
       The mortgage is either past due or loan is about to go into default;
       The amount  owed on the first mortgage is equal to or less than:

              - $729,750 for a single-family home

              - $934,200 for a 2-unit property

               - $1,129,250 for a 3-unit property
              - $1,403,400 for a 4-unit property;

        There is a hardship such as a reduction of income, medical expenses or a divorce; and

        The property isn't condemned.

     An additional benefit of a HAFA short sale is up to $8,500.00 may be deducted from the reduced payoff to the first mortgage to cover subordinate mortgages and other liens. In order to be considered for a HAFA short sale a request must be submitted before December 31, 2013 and the transaction closing date must be on or before September 30, 2014. In order to receive the relocation benefits the borrower(s) must provide proof of occupancy which is usually a utility bill in the name of the borrower-occupant. If you are already in foreclosure in order to be considered for HAFA eligibility, a request for HAFA:

   Without a purchase offer – must be received greater than or equal to 60 calendar days from the foreclosure sale date or law day for Connecticut borrowers(if applicable)

     With a purchase offer – must be received greater than or equal to 7 calendar days from the foreclosure sale date or law day for Connecticut borrowers (if applicable). 

     The assistance of an experienced attorney can help borrowers satisfy the sometimes difficult requirements both substantive and bureaucratic that can make obtaining HAFA approval more difficult than it should be. Furthermore, in Connecticut a short sale is a foreclosure alternative that is an acceptable matter to be included in the court's foreclosure mediation process. This mediation process allows the borrower defendant to negotiate and obtain short sale approval while the foreclosure process is put on hold with the help and assistance of a court mediator and in many cases their own attorney who can help guide them through the process. For more information about HAFA short sales please go to the following link:  http://homeloanhelp.bankofamerica.com/en/home-affordable-foreclosure-alternatives.html.  Please do not consider my use of a link to a Bank of America HAFA site as an endorsement in any way of this particular lender since the opposite is true based on the hardships my clients have experienced in dealing with this lender. 

           

Chapter 13 Bankruptcy or Mortgage Modification What is My Best Option?

            In a perfect world every delinquent homeowner borrower would receive a timely mortgage modification from their lender which neatly fits their current financial situation to save their home. Unfortunately many homeowners who have applied for mortgage modifications have found out that the process moves incredibly slowly especially with the major lenders with the most delinquent loans. Furthermore, when and if a mortgage modification is finally offered it does not offer the relief needed for them to keep their home for the long term. One of the problems is the size of the mortgage arrearage that has accrued during the drawn out mortgage modification process. With government programs like HAMP that  generally do not provide mortgage principal balance reduction the size of these arrearages can offset the effect of  the interest rate deduction and extension of maturity date on the new monthly mortgage payment being offered to homeowners. The problem is when the mortgage arrearage is added to the current principal balance this increase in the principal balance negates the potential reduction offered by the lowered interest rate and extended maturity date. The net result is the borrower being offered a new loan with a principal balance well in excess of the current value of their home with a slightly reduced new mortgage payment. This type of modified loan does not offer any real true benefit to a delinquent homeowner borrower. Therefore, before starting the mortgage modification process with a lender a borrower needs to find out the potential modification programs available for their loan and approval timelines if at all possible. The borrower than should next consult with a bankruptcy attorney to  determine if a Chapter 13 filing is a better option for them than pursuing what may turn out to be a dead end modification.

          The best candidate for a Chapter 13 is a debtor who has suffered a temporary income setback that caused their default, but has now returned to work and said default was not directly attributable to the terms of loan itself. That is it was not an 80/20 high interest loan combination, but instead a loan with a reasonable fixed rate of interest with a monthly payment that now that the borrower is working again is a reasonable amount to pay. The borrower must also have the current ability to pay the extra monthly amount required into a Chapter 13 plan to at least bring the mortgage arrearage current upon completion of the plan. This is an extremely important point. If a borrower does not have sufficient income to fund a plan than a mortgage modification with the necessary lowering of the mortgage payment, if attainable, is the only real option they can pursue to save their home.  However, a borrower who has the current ability to fund a Chapter 13 plan needs to make an important decision. Do they risk applying for a mortgage modification only to be rejected or offered an unacceptable modification and forgo their opportunity to file a Chapter 13 later due to the increase in the mortgage arrearage making it not feasible for them to fund a Chapter 13 plan.  Realistically I have not seen delinquent homeowner borrowers demonstrate the ability to set aside the necessary monthly mortgage payments while applying for a modification to offset the increase in the mortgage arrearage to keep their ability to file Chapter 13 viable. This decision of Chapter 13 versus mortgage modification needs to be made with the advice of bankruptcy counsel who can review the debtor's financials and provide them with a realistic opinion as to the feasibility and success of filing a Chapter 13. The advantage of a Chapter 13 bankruptcy versus a mortgage modification is that the only real party in interest you have to satisfy is the Chapter 13 trustee and the debtor is not subject to the whims of the mortgage lender. If the debtor has sufficient income to support their plan as determined by debtor's counsel and provided to the Chapter 13 trustee the plan will be confirmed. Additional benefits of a Chapter 13 include the possibility of discharging some or all of a debtor's unsecured debt dependent on their assets and income. If a plan is going to include the discharge of unsecured debt wholly unsecured second mortgages can be deemed unsecured by the plan as well judgment liens which impair a debtor's homestead exemption. I have written this blog article based on my experience with debtors over the past several years since the mortgage crisis first started who after one or more years of unsuccessful attempts to obtain a mortgage modification contacted me regarding Chapter 13 as an option only to be told it was no longer feasible due to the amount of their mortgage arrearage. It is my hope that any borrower who is not too delinquent and is weighing their options will consult with a bankruptcy attorney first before blindly applying for a mortgage modification so they can make an informed decision what option best fits their situation.

What Should I file Chapter 7 or Chapter 13 Bankruptcy?

               An initial question that needs to be addressed when a consumer debtor wants to file bankruptcy is what Chapter they should file under. In practically all consumer cases Chapter 7 or Chapter 13 are the two options that may be available. Chapter 7 is usually the preferred alternative for debtors with significant unsecured debt. In Connecticut qualified debtors can file a Chapter 7 bankruptcy and have their discharge entered within sixty days of the 341 creditors meeting. This usually results in a discharge being entered less than four months from the date of filing. From that point forward the debtor’s credit will start to improve as long as they do not incur delinquent debt going forward. In most consumer cases debtors can retain their property in a Chapter 7 including even homeowners’ current with their mortgage payments by applying the appropriate exemption to said property.

Chapter 13 is a payment plan bankruptcy that is most commonly used by homeowners to save their homes from foreclosure. Homeowners who have had a disruption in their income or medical crisis causing them to default on their mortgage can file a three to five year payment plan to catch up on their mortgage and stop the loss of their home by foreclosure if they have sufficient income to fund a plan. Depending on the amount of non-exempt assets, if any, and the debtors' income and expenses a debtor may be required to pay from zero to one hundred percent of their unsecured creditors under their plan. For debtors with high unsecured debt who do not qualify for Chapter 7 due to the means test or possible asset issues Chapter 13 may be their only bankruptcy option. In their Chapter 13 they will usually be required to pay some or all of their unsecured debts over a five year period and the discharge of any debt is delayed until the completion of their plan. The Chapter 13 trustee’s goal is to maximize the recovery for creditors so the monthly plan payments may stretch the debtor’s budget thin for that five year period and it may require some belt tightening for the successful completion of their plan. Chapter 13 involves more work than a Chapter 7 and consequently the legal fees are higher. This does not mean Chapter 13 is not a good option for debtors. As indicated above it clearly serves the homeowners best who have suffered an interruption in their income and fallen behind on their mortgages allowing them stop foreclosure and catch up. For those with unsecured debt who do not qualify for Chapter 7 a Chapter 13 does provide an ordered plan to pay back this debt while stopping the accumulation of high penalty interest and late charges with the benefit of the bankruptcy stay preventing and stopping any collection litigation and any post judgment wage garnishments and bank executions. Any debt not paid through the plan is discharged including debts from unsecured creditors who fail to file proofs of claim by the court appointed deadline.  The key difference in the two Chapters is that Chapter 7 debtors’ fresh start will begin approximately four months from their filing date while Chapter 13 debtors are looking at a minimum of three years of plan payments before they can put their financial problems behind them.

                                         

No Shame If You Need to File Bankruptcy to Obtain a Fresh Start

The emotional reaction that my clients have toward filing bankruptcy is always an important consideration that I take into account during my initial consultations with them. There are very few clients that I have met with that do not possess some degree of shame or sadness due to the fact they have reached their financial bottom and need to file bankruptcy. Certainly back in 2005 when creditors were able to have the bankruptcy code rewritten in their favor there was a concentrated publicity campaign to depict all bankruptcy filers as gaming the system. The language added to the code included terms like "presumption of abuse" and "abusive filing." This initially created the mistaken belief that bankruptcy was no longer an option for most people suffering financial difficulties. A result that the creditors behind the changes to the Code were no doubt quite pleased with. Over time this misplaced belief has dissipated, however, I still see that my clients are affected by the stigma that creditors wanted to attach to bankruptcy filers. I am not advocating that anyone take a cavalier and irresponsible attitude toward their debt obligations by filing bankruptcy. My point is that if someone without the income and assets needed to pay off their debts has reached their financial bottom there is no shame obtaining a fresh start by filing bankruptcy. Understandably it may not be the option all people want to take and it is not a decision to be made lightly without proper advice and counsel. During my consultations I not only have to address the legal issues that may be involved, but help counsel clients with the emotional baggage that has built up over time and cannot be overlooked at these meetings. They made need to vent or cry and that is okay since it is all part of working through their emotions. My holistic view of a fresh start is that it is not only a financial one, but an emotional one that allows clients to move forward positively to rebuild their lives.

Removal of Judgment Liens in Bankruptcy

In many Chapter 7 bankruptcy cases where debtors are seeking to discharge their unsecured debts or Chapter 13 payment plan bankruptcy cases where debtors are paying only a portion or not any of their unsecured debt homeowners can remove existing judgment liens from their primary residences.  This lien avoidance under Section 522f of the Code allows homeowners to use their homestead exemption under Federal or State Law as necessary to obtain an order to record on the land records which effectively releases the judgment liens avoided by the order. This secured debt is therefore converted to unsecured debt just like credit card debt and can be discharged like other unsecured debt.  The fact a judgment by itself has been entered on a debt does not make it nondischargeable.  The usual formula to determine if a judgment lien can be avoided takes into consideration the value of the property and compares it against consensual liens like mortgages on the property together with the appropriate homestead exemption. If the total amount of the mortgage(s) plus the homestead exemption equal or exceed the value of the property the judgment liens can be avoided.  Therefore, in a Chapter 7 debtors can enhance their fresh start by not only discharging unsecured debt, but can remove judgment liens to increase their equity in their homes. In a Chapter 13 case the same is true contingent upon the successful completion of their Chapter 13 payment plan.