Bankruptcy & Loan Modifications

Many homeowners have found themselves in the position of owing money on a debt which they simply can not pay back, or have been sued by someone and failed to respond to the law suit. When this happens, the Plaintiff often will attempt to collect on their judgment by putting a lien on the homeowner’s property. Many of my bankruptcy client’s have come to me with just such a situation. This becomes an issue after a consumer’s unsecured debts have been discharged in bankruptcy. The reason is simple; the homeowner has a lien against their house post bankruptcy and they do not owe any money to the lien holder.

After a Chapter 7 discharge, a debtor may avoid a judicial lien by motion to the Court. To the extent lien impairs an exemption to which the debtor otherwise would have been entitled under the Bankruptcy laws. As a result, the bankruptcy court will grant a Chapter 7 debtor’s motion seeking to avoid a judicial lien if debtor’s equity in the property is less than the amount protected under the Massachusetts Homestead Act, which currently stands at $500,000 in value for the land and building, M.G.L. c. 188 § 1, and when the creditor’s lien fully impaired the debtor’s equity in the property. In re Lyons, 355 B.R. 287 (2006).

So what is the gist of all of this legal speak? When the collateral has no value, the creditor has no claim against it because it will be treated as unsecured, and thus the debtor may discharge that lien.

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As a practicing bankruptcy attorney in Massachusetts, I been asked many questions about certain debts and assets, which people have and are concerned with prior to filing bankruptcy.   I have determined the top bankruptcy questions that I receive below:
Q: What income do I need to disclose on my bankruptcy petition?

A: The following types of income need to be reported:

1. wages, salary, tips or bonuses
2. Profit from a business
3. bank interest
4. Stock dividends
5. Royalties
6. income from realestate
7. Pensions and retirement income not part of an ERISA protected account
8. Child support or Alimony
9. Unemployment or workers compensation benefits

Q:         Will filing for bankruptcy protect me from creditors?
A:         When you file for bankruptcy, Section 362 of Title 11 provides an automatic stay. The automatic stay stops most creditors from taking any action to collect the debts you owe them unless the bankruptcy court lifts the stay and lets the creditor precede with collections.

Q: What if a creditor tries to collect after my bankruptcy?
A: If a creditor attempts to collect a debt after your bankruptcy is discharged, the creditor would be violating the law and could be held in contempt of court. The only way a creditor can come after you following your discharge is if you neglect to list the creditor on your bankruptcy forms and fail to provide notice to said creditor of your bankruptcy.

Q:         Will my creditors object to my bankruptcy filing?
A:         Although every creditor has the right to object to a bankruptcy filing, most creditors will just write off your debt, as a result of the legal fees they may incur in trying to prove their debt should survive your filing.

Q:         What’s the value of my house and car?
A:         In order to determine if certain property will be exempt under the bankruptcy law, you need to value the property at the replacement value.  This value can make the difference whether you get to keep your house or car. You should consult with a local bankruptcy attorney to find out what the maximum value of property is in your state. However, if you want to get a good idea of the market value of your property, you should look at your tax bill, which will have an accessed value.

Q: Can I file for Chapter 7 even if I make too much?
A: You may still be able to file for chapter 7 bankruptcy protection even if you make a significant amount of money. If your projected disposable income over the next five years is less than $6,000 ($100/month), you qualify under the means test exception and can file under Chapter 7.

If your disposable income falls between $6,000 and $10,000 over the next five years then you must compare your disposable income over the next five years to a percentage of your unsecured debt to determine whether any significant repayment to your creditors is possible. If your disposable income over those five years is greater than 25% of your unsecured, non-priority debts, you find yourself in the same circumstances as if you’d had more than $10,000 in disposable income. If your disposable income over a five year period is less than 25% of your unsecured, non-priority debts, you “pass” the means test.
 

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As discussed previously on this blog, Debtors in a Chapter 13 Bankruptcy, have the ability to strip a lien which is not secured by property, where the fair market value is extinguished by a first mortgage. However, the question that must be asked is whether those Debtors who do not have the disposable income to survive a chapter 13 filing, and who otherwise seek a full and complete discharge of all unsecured debt through a chapter 7 bankruptcy can likewise seek a lien strip.There are several ways a Debtor might go about such a process. The most obvious route would be to simply file a chapter 7 bankruptcy and subsequently file an adversary proceeding to strip the second mortgage. The problem with that is no Judge has ever approved such a motion, rather the case law seems to indicate that courts summarily dismiss with prejudice these motions. More specifically, courts have held that lien stripping is not an proper in an adversary proceeding, but rather should be treated through a Chapter 13 Payment Plan. The other method that seems obvious is to simply file a chapter 13 bankruptcy, seek a lien strip and then convert upon relief of said lien to a chapter 7 bankruptcy. The problem is that in many cases, the lien strip had been reversed in these cases.

According to the Bankruptcy Court for the district of Massachusetts, lien stripping does not survive conversion of case from Chapter 13 to Chapter 7, and any lien voided pursuant to Chapter 13 debtor’s ability to strip down liens is deemed revived in event of conversion. Bankr.Code, 11 U.S.C.A. §§ 348(a), 349(b)(1)(C), 506, 1307(a). In re McDonough 166 B.R. 9

Pursuant to 11 U.S.C. § 349(b)(1)(C), in the event of the dismissal of a Chapter 13 case, any lien voided is deemed revived. The same should be true if the case is converted to Chapter 7. Pursuant to § 1307(a), “[t]he debtor may convert a case under this chapter to a case under Chapter 7 of this title at any time. Any waiver of the right to convert under this subsection is unenforceable.” In the past, the weight of authority held that the satisfaction of an allowed secured claim in a Chapter 13 case survived the conversion of that case to Chapter 7. See In re Hargis, 103 B.R. 912, 915-17 (Bankr.E.D.Tenn.1989); In re Estep, 96 B.R. 87, 89-90 (Bankr.E.D.Ky.1988); In re Tunget, 96 B.R. 89, 89 (Bankr.W.D.Ky.1988). However, the United States Supreme Court held in Dewsnup v. Timm that a Chapter 7 debtor cannot use 11 U.S.C. § 506(d) to avoid a lien to the extent that the creditor’s claim exceeds the value of its collateral. Since the Dewsnup decision, courts have split on the survival of lien stripping after conversion. See In re Pickett, 151 B.R. 471 (Bankr.M.D.Tenn.1992) (secured creditor’s allowed claim was not revived upon conversion to Chapter 7); In re Murry-Hudson, 147 B.R. 960, 962-64 (Bankr.N.D.Cal.1992) (Chapter 13 debtor may hold property free and clear of liens after paying the secured portion of bifurcated lien). But see In re Gammon, 155 B.R. 15, 17-18 (W.D.Okla.1993) (debtor may not redeem collateral in Chapter 7 by payment on lien stripped down in Chapter 13 proceeding); In re Jordan, 164 B.R. 89, 90-92 (Bankr.E.D.Mo.1994) (debtor not entitled to release of automobile lien upon conversion to Chapter 7).

In view of the weight of the First Circuit, The Bankruptcy Court for the District of Massachusetts concluded that Dewsnup is not determinative of the issue and does not prohibit lien bifurcation in cases involving mortgages secured solely by principal residences of Chapter 13 debtors. Dewsnup held that section 506(d) cannot be used as a cramdown provision in Chapter 7 cases. Dewsnup makes clear that the unilateral restructuring of mortgage debt in a Chapter 7 case is improper. The Court in Dewsnup expressly limited its analysis to section 506(d) and confined its decision to the Chapter 7 case before it. It did not rule that either bifurcation or “lien-stripping” is impermissible outside of Chapter 7. See Dewsnup v. Timm, 502 U.S. at —-, 112 S.Ct. at 778. Nowhere in Dewsnup did the Court disapprove of bifurcation under section 506(a) in the context of Chapter 13 reorganization cases. In re Richards 151 b.r. 8

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CRAMMING DOWN SECURED PROPERTY PODCAST

An other very powerful tool debtors have at their disposal should they find themselves in a bankruptcy situation is the ability to pay only the value of an asset. This is particularly enticing if you have a lien against secured property such as an automobile, mortgage on income property (but not on a residence) or piece of furniture that far exceeds the value of the property. The common term for this disparagement in value vs. loan is being, “upside down”. In most cases, the value of secured property such as an automobile, boat, or furniture you are financing decreases more rapidly than the loan is being repaid.

For example, most debtors own much more on their car or truck then the value of the car or truck, should they try to sell it. Additionally, you may be able to lower the interest rate on your payments (though not on a mortgage). Many debtors have secured loans where they agreed to pay 18%-35% interest, and sometimes even more. In a Chapter 13 bankruptcy you only have to pay most secured debts at the prime rate plus 1-3%, depending on the circumstances of your case. A debtor in a chapter 13 bankruptcy has the ability to motion the bankruptcy court to lower the amount that you owe on nearly all secured debts to pay only the fair market value of that property and to discharge any amount in excess of that value.

The rub on this is that in most cases, you will be required to pay the entire present value of the secured property at a reduced interest rate, commonly referred to as “Till interest” (as a result of a Supreme Court case where one of the parties to the case was named Till). The relevant interest rate is the Prime Rate of Interest (which varies) plus a Risk Premium of 1% - 3%.

There are certain restrictions or limitations on cramming down a debt. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) places limitations on a Chapter 13 Debtor’s ability to cram down when dealing with Purchase Money Security Interests (“PMSI”). This deals with the situation when the money borrowed was used to purchase the collateral, which is the standard scenario in a car loan. If the collateral for a PMSI debt is an automobile acquired for personal use within 2 ½ (two and half) years prior to the Chapter 13 filing, the debt can not be crammed down to the value of the vehicle. However, if the collateral is not an automobile, the prohibition on strip down only applies if the PMSI debt was incurred within one (1) year prior to the bankruptcy filing.

As always, all situations relative to a strategy for bankruptcy and lien stripping should be discussed in detail with a bankruptcy attorney to understand all your avenues open to you.

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LIEN STRIPPING PODCAST 

In the present economic times many individuals are living with financial decisions causing them to hold assets, such as houses, automobiles and boats, whose values have plummeted. Individuals are living in properties whose values have dropped far below the mortgages or driving cars, which are valued at a third of the loans. Those individuals with financial difficulties are looking for assistance through the bankruptcy courts in an attempt to get out from underneath all of the debts and liens acquired, which now vastly exceed their current assets.There are two types of liens, which can be attached to an individual’s property or assets. The first is a voluntary lien, which is basically a situation where you have agreed to use the asset as collateral for a debt, i.e. mortgages and auto loans. A non-voluntary lien is one that a creditor imposes on you and that gives them the right to force you to sell the asset so that they can be paid, for example: judgments against you or tax liens. These liens are either secured or unsecured as to the asset they are attached to.

The most common issue for an individual nowadays is the situation where a homeowner who has a first and second mortgage on a primary residence is facing bankruptcy and wondering if they have the ability to save the family home. As real estate markets fall and the fair market values of the homes fall, homeowners are left with mortgages that far exceed the current fair market value of their homes. There is a process which could be of help to many in this situation and it is called “lien stripping”.

“Lien stripping” refers to the process of reducing a secured claim to the value of the underlying collateral. It uses the combined effect of 11 U.S.C.A. § 506(a) and 11 U.S.C.A. § 506(d) to bifurcate the lien into secured and unsecured. The secured lien is allowed in the amount up to the fair market value of the property at the time of the stripping. The balance of the lien, which exceeds the fair market value of the property, is now deemed unsecured.

Liens can be stripped off of the debtor’s assets in Chapter 11 or Chapter 13 when there is not enough equity in the assets. Section 506(a) and 506(d) of the Bankruptcy Code acknowledges that a lien is only a secured claim to the extent there is value in the asset to which it attaches. To the extent that the claim exceeds the value of the collateral, that portion of the lien is now unsecured. The most common application of lien stripping is the reduction of car loan liens to the present value of the vehicle however it is currently used more often with home mortgages in bankruptcy situations. Lien stripping with car loans has been limited to vehicles purchased over 910 days.

The Bankruptcy Code does permit a bankruptcy plan to “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence”. Section 1322 (b)(2). This section provides protection to the holder of a claim secured only by a lien on the debtor’s principal residence by prohibiting any modification of the terms, however the issue arose as to if this section precluded “lien stripping” of undersecured residential mortgages in the face of Bankruptcy Code section 506 which appears to permit bifurcation of undersecured mortgages and voiding of unsecured portions of the mortgage lien. At least two bankruptcy court judges sitting in Massachusetts have permitted such bifurcations, see In re Brown, 175 B.R. 129 and In re Richards, 151 B.R. 8.

In any event, there is an exception as to the lien on a principal residence lien and that is if there is a second or third lien on the same property. In this instance those liens, lien stripping is available to render them totally unsecured if the first mortgage balance equals or exceeds the value of the personal residence. The exception is only if there are two distinct mortgages on the property, not a refinancing situation. It should also be noted that the limitation of lien stripping of first mortgages only apply to personal residences, it will be allowed for a mortgage on a building used for business or renting.

As always, all situations relative to a strategy for bankruptcy and lien stripping should be discussed in detail with a bankruptcy attorney to understand all your avenues open to you.

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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)

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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.

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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

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It is permissible for a debtor to claim emotional distress damages if a creditor violates the automatic stay protection of the Bankruptcy Code. Emotional distress is classified as an “actual injury” for which a debtor may recover damages under the Bankruptcy Code’s automatic stay provision. In re Rosa, 313 B.R. 1 (Bankr. D. Mass. 2004). When awarding damages for a creditor’s willful stay violation, bankruptcy courts are well suited to determine the reasonableness of a debtor’s emotional injuries on a case-by-case basis.In Rosa the debtor was seeking an award of actual damages for the medical injury that he allegedly suffered as a result of creditor’s stay violations. The debtor bore the burden of proving that the stay violations were the cause of either his medical condition or a worsening of that condition.As suggested by the 9th Circuit:

The criteria for an award of emotional distress damages due to willful violation of automatic stay, is that the 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, 390 F.3d 1139, Bankr. L. Rep. (CCH) P 80207 (9th Cir. 2004), petition for cert. filed (U.S. May 27, 2005).

For one 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 friends, family or coworkers, to testify to “manifestations of mental anguish” and to clearly show that significant emotional harm occurred. 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).

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