Bankruptcy Articles & Blog

In these tough times, bankruptcy protection is a tool used by not only many debtors and businesses, but now cities and towns who can meet their financial obligations.  Early this summer, the town of Vallejo California filed for bankruptcy to protect its assets from creditors.  It would appear that the town overextended its credit, similar to the way many small businesses do the same.  The town reported it did not have the ability to pay for services it renders.

With declining tax revenues and increasing labor costs the town is squarely staring at over $16 million in debt.  By filing, the town will be able to take advantage of the automatic stay put in place, in much the same way, consumers use the stay.  Creditors will be unable to file suit or attempt to collect debts, while the town comes up with a plan to pay off its creditors; Home owners often file in order to stay a foreclosure.

What this filing signifies to me is that we are in a truly new era of financial difficulty, one that now affects not only consumers and business, but also the very government services we all depend upon.

A short sale, also called a distress sale, is when the homeowner’s property has been devalued below the mortgage leaving a shortage between the current market value of the property and the present mortgage on the property held by the lender. Homeowners owe the difference between the mortgage balance and the discounted amount as a result of the short sale, which is referred to as the debt shortage.A short sale would generally benefit the lender because the lender avoids the expenses and hassle of seizing a delinquent customer’s property. In addition, lenders realize that they could lose money if the borrower’s home is auctioned in a foreclosure proceeding.

To decide whether or not to do a short sale, lenders look at various factors. Those factors are:

1. Whether the seller is deserving of a break.
2. Whether it would be cheaper to simply repossess and sell.
3. How many other properties the lender has in default.
4. Whether there are cosigners on the mortgage who can be held responsible for the balance covered on the mortgage.

Even when borrowers engage in a legitimate short sale, there is no guarantee of success. It’s difficult to have an agreement where the interests of all parties are satisfied. One has to take into account the interests of the lender, homeowner, agent, buyer and investor who held the mortgage. Also, if the husband and wife were divorcing, then both would have to agree to have a short sale.With regard to managing a short sale, it’s important that sellers review loan documents with an attorney to make an informed decision.

Pursuant to the U.S. Bankruptcy code, subsequent to a debtor filing a chapter 7 or 13 bankruptcy, they are unable to obtain another discharge of unsecured debt for 8 years. As such, many debtors believe they have no way out of new debt incurred. This could not be further from the truth. There is substantial statutory and case law that suggests a right to negotiate in good faith with creditors. Moreover, creditors must partake in the interactive process.It has long been held that if a creditor has no agreement for acceleration of an entire obligation upon default, the creditor may not accelerate a debt unless the debtor’s default rises to the status of an anticipatory repudiation. See, e.g., Sheet Metal Workers Local No. 76 Credit Union v. Hufnagle, 295 N.W.2d 259, 29 U.C.C. Rep. Serv. 1087 (Minn. 1980).

The Uniform Commercial Code (“UCC”) § 1-309 provides that a term allowing an acceleration of payment or performance or additional collateral at will, or when the creditor or the creditor’s successor in interest deems himself insecure, and language of similar import, will be construed to mean that the creditor has the power to do so only if he in good faith believes that the prospect of payment or performance is impaired. Section 1 - 309 has been increasingly applied to real estate transactions. See generally Greenwald v. Columbus Bank & Trust Co., 228 Ga. App. 527, 492 S.E.2d 248, 34 U.C.C. Rep. Serv. 2d 547 (1997) (good faith itself does not give rise to an action).

Section 201 of the Bankruptcy Reform Act can be construed as a model to require creditor’s to negotiate in good faith with debtor’s prior to filing any legal action to collect the debt. It would have amended Section 201 proposes to allow a bankruptcy judge to reduce a creditor’s claim by up to 20% if the creditor had “unreasonably refused to negotiate a reasonable alternative repayment schedule.

Perhaps the most relevant and significant factor pointing to a strong suggestion if not requirement for creditor’s negotiating with debtors stems from litigation itself. At a clerk or magistrate’s session in small claims court prior to appearing before a judge, the magistrate will almost always offer free mediation services provided by the court, and in many cases go so far as to require the Plaintiff and Defendant to attend a non-binding mediation session prior to appearing before the District Court Judge.

The gist of the forgoing would seem to indicate that a debtor is not without recourse even if they have filed for bankruptcy and obtained a discharge on unsecured debt within the past eight (8) years. In many case, it may be a good idea to still speak with a bankruptcy attorney or credit counselor to garner assistance in proposing a workout plan with one’s creditors.

The U.S. real estate boom of the past ten years has seen homeownership rise from 65% to 69%. Unfortunately with the market cooling the value of real estate is plummeting leaving homeowners holding mortgages that greatly out value the real estate they presently hold. There is now something that can help.The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 to assist homeowners who are in such a predicament. Normally, a homeowner, in an attempt to avoid foreclosure would modify their current mortgages, that is, “short sell” the property, or deed their home in lieu of foreclosure back to the bank holding the lien on the property. Such remedies often leave the homeowner with a debt for property no longer in their possession. In most situations the lender would forgive the homeowner’s debt either in part or full. Unfortunately this left the homeowner facing an additional and in most cases, undischargable financial difficulty, the IRS. That debt which is so graciously forgiven by the lender is now recognized as taxable income by the IRS. The homeowner receives a tax bill for the forgiven amount for money forgiven and never truly received.

The Mortgage Forgiveness Debt Relief Act is designed to exclude such debt forgiveness on the principal residence if the balance of the loan was less than $2 million for a debtor’s primary domicile. The act only applies to that debt which was forgiven in the 2007, 2008 or 2009 tax years. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a short sale or foreclosure, may qualify for this relief. The requirements are that the debt must have been used to buy, build or substantially improve the taxpayer’s principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.

What does this mean to the homeowner in trouble? Everything. There is now another option available to them, which will not lead them from one financial frying pan to the other. Prior to the Act, homeowners would attempt to negotiate with the lender not to forgive the deficit in the loan but to file suit against them. This was the strategy in the reasoning that a judgment lien is dischargeable under a Chapter 7 or Chapter 13 bankruptcy were IRS liens are not. IRS tax liens remain through the bankruptcy filing and distribution and the homeowner would end up with the lien coming out on the other side of the bankruptcy. Leaving them in the same predicament of owing money on income never actually received.

The Act will not extend to other forgiven debt such as those on second homes, income or rental property, business property, credit cards or car loans. In those instances the filing of a Chapter 7 or Chapter 13 bankruptcy might be in the homeowner’s best interest depending on the financial situation he is presently in. The homeowner should always consult with an attorney regarding what strategy would be in their best interest.

Emotional damages qualify as “actual damages” under the Bankruptcy Code provision authorizing recovery of actual damages for the willful violation of automatic stay. Fleet Mortg. Group, Inc. v. Kaneb, 196 F.3d 265, 35 Bankr. Ct. Dec. (CRR) 45, Bankr. L. Rep. (CCH) ¶78044 (1st Cir. 1999).”Actual damages,” such as may be recovered by any individual injured by willful violation of automatic stay, include damages for emotional distress. In re Dawson, 390 F.3d 1139, Bankr. L. Rep. (CCH) P 80207 (9th Cir. 2004), petition for cert. filed (U.S. May 27, 2005).

To be entitled to award of emotional distress damages for willful violation of automatic stay, an individual must: (1) suffer significant harm; (2) clearly establish that significant harm; and (3) demonstrate a causal connection between that harm and violation of automatic stay. In re Dawson.

Though pecuniary loss is not prerequisite to recovery of emotional distress damages for willful violation of automatic stay, not every willful stay violation merits compensation for emotional distress, In re Dawson. For individual to recover emotional distress damages for willful violation of automatic stay, he must clearly establish that he has suffered significant emotional harm, such as by presenting corroborating medical evidence or by presenting non-experts, such as family members, friends or coworkers, to testify to manifestations of mental anguish and to clearly establish that significant emotional harm occurred. ID.

Damages for emotional distress are recoverable for willful automatic stay violations; while claims for fleeting or trivial emotional distress are not compensable, an individual who suffers significant harm and demonstrates a causal connection between the harm and the violation of the automatic stay is entitled to be compensated. 11 U.S.C.A. § 362(k). Green Tree Servicing, LLC v. Taylor, 369 B.R. 282, Bankr. L. Rep. (CCH) P 80901 (S.D. W. Va. 2007)

In these economic times the percentage of foreclosures in America is on the rise. The homeowner who is facing foreclosure of their primary residence has several options in an attempt to avoid foreclosure. They can negotiate with the lender in an attempt to refinance the loan, get a short sale approved or deed the residence back to the lender in lieu of foreclosure. If the lender is unwilling to negotiate with the homeowner or their representative then there are options of filing a Chapter 13 bankruptcy or a reverse mortgage if the property in jeopardy is an investment property. Even with all of these options at the disposal of the homeowner there still must be a determination by the homeowner of if they indeed wish to save the home from foreclosure or to just allow it to be foreclosed on.Once foreclosure becomes evident, first and foremost the homeowner must make the determination if they in fact want to try to keep the home, if they are financially able to save the home or if it would be more feasible to allow the home to go into foreclosure. Most homeowners attempt to avoid foreclosure due to the misconception that they will save their credit rating if their home is not foreclosed on. Unfortunately this is not correct. Once the homeowner has missed four continuance payments on the mortgage their credit report will already reflect in a negative manner equal to a foreclosure. If the homeowner’s only reasoning for saving the home is to save their credit rating they are already hindered. Most homeowners want to save their home because they need a place to live and need assistance to get out of a situation which millions of American have gotten themselves into.

If the homeowner wants to avoid foreclosure and it is not too late in the process, the auctioneer is not at the front door, then the homeowner can open a line of negotiations with the lender in an attempt to refinance the existing loan. The lender will look at the homeowner’s credit rating at the time of the negotiations – are there any other bills outstanding, are they in any other financial distress – and if there is equity in the home (approximately 25-30%). In addition the lender will look to the amount of time the homeowner has gone without making a mortgage payment. Sometimes the refinancing will be as simple as moving from an ARM loan to a fixed mortgage rate or if there is a FHA loan involved the homeowner could qualify for a partial claim. A partial claim is when the loan is brought current and a lien is placed on the property for the outstanding amount owed until the property is sold or refinanced. Normally, with most negotiations a forbearance agreement is used by the lender in which the homeowner is allowed to delay or reduce payments for a short period of time with the understanding that another option will be used at the close of the time to bring your account to a current status. It is a temporary cease of any and all legal action against the homeowner until a plan of action is determined. This step of refinancing to avoid foreclosure must be used early on in the process. The homeowner must move quickly once a Notice of Default is initiated.

If the homeowner has made the determination that they will not be able to keep the property there are a couple of options that they can attempt to negotiation with the lender. The first is a short sale. A short sale is when the homeowner’s property has been de-valued below the mortgage leaving a shortage between what the current market value of the property and the present mortgage on the property held by the lender. With the lenders agreement the homeowner can sell the property for the fair market value and the deficiency in the mortgage is then considered unsecured. At this junction, the lender can either go after the homeowner for the rest of the unsecured debt through either filing suit themselves or selling the note to another to collect the debt for them. The lender could also forgive the debt altogether. When the debt is forgiven the homeowner is taxed on the amount forgiven as the amount is considered income to the homeowner. The recently passed 2007 Mortgage Forgiveness Debt Relief Act provides non-recognition of the income, which would otherwise be includable. Of course the forgiveness of the shortage of the mortgage is up to the lender. If the lender refuses to forgive the shortage the homeowner has the option to have the short sale of the home and then file a Chapter 7 bankruptcy which would discharge all outstanding debt that the homeowner has including the shortage on the mortgage which had become an unsecured debt upon the short sale.

Another option for the homeowner if they are not going to keep the home is a deed in lieu of foreclosure. The lender again must approve this process and in which the homeowner basically deeds the home over to the lender in satisfaction for the loan in full. In this situation the homeowner will not have the shortage as described in the short sale however the lender will now own the property. This is sometimes a more difficult negotiation for the homeowner to the lender. The key to this in the negotiation is to relate to the lender the expense they are saving from going through the foreclosure against the fact that the property could be sold in the near future. Unfortunately a deed in lieu of a foreclosure can only be perfected when there is no second or junior lien holder on the property.

Unfortunately, in most circumstances the homeowner has waited too long and the time for negotiation is long past when they walk through the attorney’s door for help. In most cases the homeowner has already received the Notice of Default, several demanding letters and the letter that foreclosure is eminent. In this situation the homeowner who wants to keep their property or at least get some breathing room in order to decide what to do has the option of filing a Chapter 13 bankruptcy in order to avoid foreclosure. The Chapter 13 gives immediate protection in the form of an automatic stay. An automatic stay stops all foreclosure processing immediately upon the filing of the Chapter 13. The homeowner will then have an opportunity to make a repayment plan with the lender in which the lender would receive 100% of the missed payments over 36-60 months. Of course the debtor must stay current with all mortgage obligations at the same time as paying back the default. In addition the Chapter 13 will allow the debtor to look at their entire financial situation and any unsecured debt that they have such as credit cards, medical bills, judgments or personal loans can be repaid at a small percentage of the total amount owed within that same 36-60 month pay back period. This would allow the debtor to have more disposable income. Depending on the type of property being foreclosed on and the debtor’s situation, a Chapter 13 bankruptcy could also make available such actions like a “cram down” of the mortgage if the market value of the property is far below the present mortgage. These should be discussed with your attorney, as each situation is different.

These economic times have left many Americans in dire situations in which they must make decision they never thought they would have to, like whether to keep their home or not. When someone finds himself or herself in such a situation the key to survival is not to ignore it. All of the letters and notices from the lender should be red flags to the homeowner to find help. The best help that they could find is a professional early on in the process to guide them and help with the best possible avenue for them to avoid foreclosure.

The stigma of filing bankruptcy has stopped many debtors who rightfully and propably necessarily need to file bankruptcy. The truth of the matter is that filing bankruptcy is a right granted to all Americans by Congress and as such, is a protected right. As a protected right, it is illegal to discriminate against debtors as employees pursuant to both Massachusetts law, MGL 151B, and Federal Law (Civil Rights Act and Bankruptcy Code). More specifically, 11 U.S.C.A § 525(b) provides, “No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt.

Read the full bankruptcy article here: http://www.goldsteinandclegglaw.com/Employment_Law_Blog/?p=34

It is my contention that certain Massachusetts laws regulating foreclosure of homes do not meet the standard set by the due process clause of the 14th and 5th Amendment of the Untied States Constitution. More specifically, M.G.L. 244 § 2 is so narrowly tailored that a bank conducting a foreclosure by entry is not required to even provide actual or personal notice to the owners of the property. As a matter of fact, the law is written in such a way as to state all a foreclosing bank needs to do is draft a certificate and file it in the local registry of deeds. The bank never has to so much as send a letter or even place a phone call to the homeowner or any junior lien holders letting them know that the bank intends to foreclose on the home.

By this logic, a home owner or junior lien holder has no way to reasonably know of its right of redemption with out proper notice. The law would seem to create the duty for a junior lien holder to constantly monitor all of its debtors filings at each and every registry of deed where the creditor holds liens. As such, to hold that no personal notice is required to be provided to a holder of a right of redemption is be not only prejudicial, but also unjust and unfair with in the meaning of the Due Process Clause of the United States Constitution.

It would appear that the Massachusetts foreclosure by entry law allows a senior lien holders to withhold notice in an attempt to limit a junior lien holders ability to effectuate its legal rights.

If one files for bankruptcy, the trustee may have to sell the debtor’s home in order to allow the debtor pay off his debts. This applies no matter if the home is freehold or leasehold and whether it is solely or jointly owned. The trustee will sell your home if doing so would be the only way to release money to your creditors. Further, the case In re Perroncello, 170 B.R. 189 (1994) holds that, according to Bankruptcy Code, the trustee sells the real estate for face value as opposed to fair market value, the full cash and fair cash value as the price an owner willing, but not under any compulsion, to sell ought to receive from one willing to buy.

11 U.S.C.A. §363 (b) (1) states that a trustee, after a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate.

If the debtor owns the house he lives in, it transfers to the trustee along with his other assets. The trustee would take title to the house and have the house appraised for sale. The trustee then has the authority over determining the price that the house would sell for, and the debtor would not have a say in this determination.