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.

I Need to File Chapter 7 Bankruptcy When Should I File?

     The premise of this post is that the debtors in question need to file Chapter 7 bankruptcy to discharge their debts and focuses only on the timing of their bankruptcy filings. Also this post refers to the Means Test which is a qualification test and potential roadblock to filing Chapter 7 which is explained in more detail in prior posts on this Blog. The following are some common scenarios based on my experience with past clients with explanations of the appropriate filing times.

     1) Engaged Persons:

           

              A) In a situation where only one of the two future spouses has debt problems filing Chapter 7 before the marriage will be appropriate especially if the combined income of the married couple will put them over the household median and make the filing subject to the means test.  Important to remember once married even if only one spouse files the non-filing spouse's income is included in the means test. There also is the clear advantage of having the future spouse obtain the fresh start from their debts before their marriage thereby eliminating any turmoil these debts may cause between spouses.

             B) Where both parties need to file Chapter 7 it will make sense for them to file as individuals before their marriage if their individual incomes are below the household median for the means test and above if combined. If the combined incomes will not put the married couple above the median income than filing after marriage will likely make more sense as long as their monthly combined net income less their joint expenses does not leave them with too much excess income. One main reason is that they can file together as a married couple thereby eliminating the fees and expenses of two individual filings. Filing together also holds true if one future spouse due to their income cannot file individually under means test, but will qualify together with spouse who may have low income or children that will increase household size so they will avoid means test filing as married couple.

           

      2) Foreclosure Scenarios:

                A) Debtor wants to delay foreclosure and prolong stay in home. Under this scenario as long as there are no other pressing needs to file right away, for example a pending wage execution, delaying the filing till right before a foreclosure auction or on the debtor's law day if there is a judgment of strict foreclosure will maximize the additional delay bankruptcy can provide.

               B)  In a situation where the debtor is already out of the property and not interested in delaying foreclosure best to wait if possible till after title passes via the foreclosure thereby debtor's ownership interest in property terminated prior to bankruptcy along with any liabilities as property owner.           

    3)  Other Scenarios:

             A) Expecting parents may need to wait for the birth of their child to increase their household   size to bring their income below the household median to avoid the means test. There also are the increased expenses of a new born baby that in some cases will eliminate any problematic excess monthly income to qualify for Chapter 7 filing.

            B) Debtor needs to file asap. These situations include where the debtor has:

                 i) Pending Wage execution they want to stop;

                   ii) Pending Bank execution they want to reverse: 

                   iii) Pending judgment they want to avoid;

                   iv) Future income increase means test issue;                                          

                   v)  Need emergency filing to stop auction/law day;and

                   vi) Been worn down by creditor harassment

       

    The above scenarios are just some of the examples I can provide as to appropriate bankruptcy timing. One of my next posts will deal with debtors and divorce including timing and filing issues that are unique to couples at all stages of the divorce process.

       


   

How to Avoid Unwanted Surprises at Chapter 7 Bankruptcy Creditor Meetings?

            It continues to surprise and dismay me what I observe at creditors meetings in Connecticut while I wait for my clients' cases to be called. This is not meant to be an attack on my fellow consumer bankruptcy attorneys in this state most of which are diligent and thorough in the protection of their clients' interests. However, there is a minority which I have noted over the years are less thorough to the detriment of their clients. Case in point recently I was at a creditors meeting where an elderly woman debtor was being questioned by the Chapter 7 trustee. It was clear the debtor’s attorney was meeting the debtor for the first time at this meeting and based on the interchange between the debtor, trustee and this attorney she had little to no prior knowledge what was listed on the debtor's petition and schedules. As has been described before in this blog there are limited bankruptcy exemptions available for a debtor's property which controls what they can keep and what the trustee may take to sell for the benefit of creditors. At this creditors meeting it became clear the debtor's personal property schedules did not match some financial documents she provided to the trustee prior to the meeting. In fact, the debtor at the time of her filing had twice the amount listed in both her bank account and brokerage account more than her wild card exemption. In my view, this error is inexcusable and avoidable. Also, when questioned about other items of value she disclosed she had an indeterminate number of gold coins not listed on her schedules, but could not provide any real details to the trustee requiring further investigation. These errors and omissions makes me question how thorough an investigation was done by the debtor’s law firm prior to filing. Did they just have her complete a bankruptcy questionnaire with no follow-up or questioning by an attorney? Does the debtor’s law firm routinely let their staff meet with clients for the execution of their bankruptcy petition and schedules? Some debtors are more sophisticated than others and this elderly woman clearly needed some extra guidance to help her. I felt particularly bad for her since she indicated to the trustee she had been withdrawing funds monthly from her brokerage account to live off of and now she will have to turn over a good portion of these funds to the trustee. This all could have been avoided with a thorough and diligent pre-filing review of her assets by her lawyer.

        Does this failure rise to the level of malpractice or an ethical violation? Both may be true, but that is not the point of this post. My concern is the proper handling by bankruptcy lawyers of client intakes and filings to avoid these types of surprises. The unfortunate consequences described in my example could have been avoided first by a careful examination of the financial documents provided by the debtor and not filing without verification of all asset values at time of filing. This is a basic and extremely important duty of any bankruptcy attorney. Also, I personally never rely on a client's self-completed worksheet no matter how financially sophisticated they may be. I personally go over and have the clients answer every question with me pre-filing with follow up documentation provided as needed. Based on my experience I know what a trustee will focus at a creditors meeting and ask the same questions. It is during these client conferences that the debtor will disclose a collectible like the above debtor's gold coins, a payment to an insider creditor within the past year, the fact they received an interest in their parent's home for estate planning purposes etc. All problematic issues which could affect their ability to file or in many cases the timing of their filing which likely was the case in my example above. If her attorney had done his job she could have used her liquid funds to live off of till her assets reached a level where she could exempt what she had. Instead her bankruptcy was filed prematurely to her detriment. I advocate a hands-on approach as a bankruptcy attorney and counsel against delegating too much responsibility to staff or the client/debtor to avoid surprises at creditors meetings.

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.

FANNIE MAE and FREDDIE MAC Announce New Mortgage Modification Program for 2017 as HAMP Expires

          Fannie Mae and Freddie Mac in January, 2017 will begin a program to aid homeowners who are behind on their mortgage payments, the companies announced December 14, 2016.
The Flex Modification loan program replaces a the HAMP foreclosure-prevention policy that's set to expire at the end of this year. HAMP was enacted to help distressed homeowner due to the mortgage crisis that started in 2007-2008. Loan servicers have until October, 2017 to start the program.
The new loan modification guidelines are expected to increase the population of homeowners eligible for lower monthly payments, short sales and other alternatives to foreclosure, according to Fannie Mae.
        "We believe the program is flexible to adjust for regional and even local differences in housing," said Bill Cleary, vice president of Fannie Mae's single-family servicing policy. "It provides the greatest amount of assistance to those areas in need." HAMP, was adopted in 2008 as millions of homeowners fell behind on their payments. Over time, more than 1 million trial mortgage modifications were started . Many ended in new defaults, but eight years after the collapse, nearly 360,000 borrowers are still in the program and continue to make payments on their modified loans, according to the Federal Housing Finance Agency. The statistics show the higher percentage of successful modification involved the ones that decreased monthly mortgage payments the most.

        The goal, with HAMP and its replacement, is to prevent foreclosures and preserve homeownership and limit losses to taxpayers, which stand behind the mortgages guaranteed by Fannie and Freddie. In  general the costs to modify a loan are less than to foreclose one and take possession of  delinquent borrowers homes.

       "By avoiding the high costs associated with foreclosures, the Flex Modification will result in significant savings for the Enterprises and taxpayers," FHFA Deputy Director Sandra Thompson said in a written statement. "And it will provide borrowers who face permanent hardships with a sustainable modification." This is good news for both borrowners, lenders and taxpayers that meaningful mortgage modifications will still be an option after Decemeber 31, 2016.

Do I Need to Reaffirm my Car Loan if I File Chapter 7 Bankruptcy in Connecticut?

       In 2005 in an attempt to favor auto loan lenders Section 362 of  the bankruptcy code was amended to make redemption or reaffirmation of auto loans a necessary requirement for debtors filing Chapter 7 for those debtors that want to retain their cars. Suffice it to say redemption which means payment in full of the auto loan at time of filing is not a realistic option so the focus of this post is on the reaffirmation requirement. Before this amendment the preferred and common approach to auto loans for cars intended to be kept post-filing was the retain and pay approach. In order to discuss this approach I need to first make the distinction between the effect of the discharge of a secured debt versus an unsecured debt. It is relatively easy to understand the discharge of an unsecured debt like a credit card. Upon the successful completion of the Chapter 7 the debtor's obligation to pay this credit card debt is terminated. For a secured debt like a car loan it is not as simple to understand. It is true that the actual debt is discharged, but the security agreement survives the bankruptcy requiring the debtor to continue to pay the monthly payment in order to keep the car. If the debtor takes the retain and pay approach without reaffirmation they continue to pay, but can stop paying at any time and surrender the car without any deficiency due. This is clearly the preferred approach in most cases where debtors' budgets are tight if not negative at  the time of filing and the fact that cars generally after a few years depreciate quickly resulting in loan balances in excess of these cars' values. This is especially the case with debtors who have high interest rate car loans when they file bankruptcy which is quite common. Reaffirmation of an auto loan leaves the debtor in the same position prior to filing with the auto loan debt not discharged and reported on their credit report. In order to reaffirm under the current code the auto loan payment cannot impose an undue hardship on the debtor. In other words the debtor's budget must show they can afford it at time of filing and debtor's bankruptcy counsel must affirm this fact with the filing of the reaffirmation agreement for court approval. Herein lies the problem of this requirement as indicated above many debtors' budgets do not show they can afford their car payments not to mention the fact many of their cars are not worth what they owe. They're not eligible to reaffirm due to the code's hardship requirement. Also it is clearly not in their best interests anyways to reaffirm a debt on a car that is currently underwater. In Connecticut as well as other states throughout the country this placed debtors in a very difficult position since in almost all cases debtors at the time of filing do not want to surrender their cars that they need to get to work and live their lives. Despite the fact their budgets may show they may not be able to afford their auto loans they do what they have to do to keep their cars.
       I am pleased to tell Connecticut debtors that our legislature enacted a solution to the problem created by the 2005 amendment to Section 362 of the Bankruptcy Code which allows debtors to continue to use the preferred retain and pay approach and still keep their cars. In 2009  the Connecticut legislature repealed and replaced Section 36a-785 of the Connecticut General Statutes with a provision that specifically states the filing of bankruptcy in itself does not constitute a default under the terms of an auto loan security agreement. The practical effect of this new statute was that car loan lenders could not refuse to continue to receive loan payments from Chapter 7 debtors despite the fact they did not reaffirm their car loans. Therefore, the loans that are being paid are not in default and auto loan lenders are not able to take any action to repossess these vehicles. This change essentially restored the right to retain and pay without reaffirmation for Connecticut Chapter 7 debtors and was accepted by auto loan lenders once they were educated by debtors' attorneys like myself as to this new Connecticut statute. In conclusion, the answer to the question posed as the title to this post is no! Furthermore, when considering reaffirmation of a car loan where you may have equity in your car you need to review in depth with your attorney the advantages and disadvantages before going forward with reaffirmation.

How Long Can I Stay in My Home After a Foreclosure Starts in Connecticut?

     Connecticut is a judicial foreclosure state so a foreclosures action is commenced with the service of a foreclosure summons and complaint on the borrower(s)/homeowner(s).  This means that although you may have had  many conversations with a mortgage lender's collection and/or loss mitigation department in which you have been told you are in a foreclosure this really means you are in pre-foreclosure status until you are actually served with this foreclosure writ. Therefore, the time frame discussed in this post as to the time you have left to stay in your home starts with the actual commencement of the foreclosure action not bank employee statements you are in foreclosure. The time that you have left in your home depends on what actions you take after the service of the foreclosure writ. In Connecticut the foreclosure writ includes an application for foreclosure mediation with a court mediator which is described in more detail in prior posts to this blog. Generally speaking homeowners who reside in 1 up to 4 family homes who are signatories to the note secured by the mortgage being foreclosed are eligible for court mediation. You can apply for mediation either pro se or with the help of an attorney which I recommend if your goal is to obtain a loan modification. The statute governing mediation  provides you with the right to stay in mediation up to eight months and can be extended if the lender agrees or you can prove to the court you have the right to extend based on the current status of your loan modification negotiations with your lender. Foreclosure mediation is one way to extend your stay in your home and may ultimately result in your keeping your home if you receive an acceptable loan modification. At a minimum based on my experience for most clients I have represented whether they receive an acceptable modification or not the mediation process does take eight months and sometimes longer.
      While you are in mediation the foreclosure action is stayed and cannot proceed further so the bank cannot file default motions creating the need to file defensive pleadings. When mediation is terminated for defendants who do not go forward with  loan modifications there is still an opportunity to buy more time to reside in their homes. This also holds true in situations where a defendant does not pursue mediation at the onset of the foreclosure action. As indicated above foreclosure is a judicial process in Connecticut and a defendant has the right file an answer and special defenses to the foreclosure action. Banks are sloppy and makes mistakes at times which lead to facts which support the filing of these defensive pleadings. These pleadings are not necessarily designed to result in a defendant's verdict's at trial which is extremely difficult to do if the action is based on delinquent payments of a validly executed note and mortgage. What these defensive pleadings do provide is more time in your home and the delay of the foreclosure action. On average at a minimum I  have found that these pleadings provide an additional 9 months to a year before the completion of the foreclosure. In some cases I have seen foreclosures delayed years. Of course one caveat to add here is that during this period the debt due continues to accumulate and if there is a deficiency due than in some cases a Chapter 7 bankruptcy filing may be needed which can further extend time in your home usually by about 2 months, however, the existence of a deficiency does not mandate a Chapter 7 filing by itself and each case is unique. Especially in cases where there is no other debt issues since I have not seen banks be very aggressive in pursuing deficiencies in this state. This could change and like all of what I have been discussing the help of an experienced foreclosure defense and bankruptcy attorney is critical to properly protect your interests.
     In conclusion, whether using foreclosure mediation and/or defensive pleadings Connecticut homeowners can buy significant time in their homes after the start of a foreclosure action. If your goal is to stay in your home as long as you can you should contact an experienced foreclosure defense attorney to help you accomplish this.