How do you sell your home in a Bankruptcy

November 29th, 2009, 9:22 am

There are two main chapters (or types) of Bankruptcy that Consumers typically file. Chapter 7 (liquidation) and Chapter 13 (reorganization). In order to sell your property in either of these, the bankruptcy court must not have an interest in the property or give permission to effectuate a sale. Under the Federal bankruptcy law, as soon as you file for bankruptcy, all of your legal and equitable interests become assets of the bankruptcy estate and as a result, is administered or managed by the Bankruptcy Court Trustee. What this means in plain English is that all of things you thought you owned, are temporarily owned by the bankruptcy court, unless those assets have been exempted in order to ensure a fresh start.In Massachusetts and most other states, the Debtor will attend a hearing called a “Meeting of Creditors” where the Trustee will ask questions about the Debtor’s property and then decide if he or she will abandon those assets. At that point, the abandoned assets are no longer property of the estate.

With respect to a Chapter 7 bankruptcy, as soon as the Trustee abandons his or her interest in the property, you are free to sell the home. If time is of the essence, your bankruptcy attorney can file a motion with the court requesting the Trustee abandon the property, but your attorney must demonstrate the sale will fail unless it is effectuated before your case is discharged, which is typically less then 60 after the Meeting of Creditors.

When determining if you can sell your home in a Chapter 13, the issues become significantly more complex due to the length of time a case is open, usually three to five years, and the nature of reorganization and the repayment plan.

As in a Chapter 7 case, the Debtor’s property remains the property of the bankruptcy estate, including the Debtor’s house or condo. The big difference is that the chapter 13 trustee shall have no responsibility regarding the use or maintenance of property of the estate, such as the Debtor’s home. As such, the trustee will have an interest in a home sale, and the debtor must obtain a Bankruptcy Court order approving the sale.

When drafting a motion to present to the court to allow a sale, the motion needs to assert the sale price, disclose the amounts of all liens and mortgages being paid off, and list payments to any professionals such as attorneys and real estate agents. The motion must be served on all parties who may have an interest in the sale, and if anyone files an objection within the 20-day deadline, the court will schedule a hearing on the motion. These motions are fairly common, and when they are done correctly, the court usually grants the motion without requiring a hearing.

Filed under Debt Negotiation, Bankruptcy, Post Petition Protection, short sale · Comments

PROBLEMS WITH LIEN STRIPPING IN A CHAPTER 7 BANKRUPTCY

December 20th, 2008, 11:44 am

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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Short Refinancing

November 22nd, 2008, 9:30 pm

Listen to a Podcast on Short Refinancing

A hybrid tool that is generally used to avoid foreclosure is a called a short finance. This term refers to both refinancing and modifying a loan, while discharging the value of debt, which makes a homeowner “upside down”. This tool allows homeowners to refinance their loans, but with some of the debt forgiven. Essentially, if a mortgage on a home exceeds the fair market value of that home, homeowners can now though their attorney negotiate with the lien holder to forgive the debt in excess of what a home could reasonably sell for in today’s market.

Short Sale refinancing is similar to stripping a lien. The difference is that in lien stripping, the entire loan can be discharged, but only if the fair market value of a senior lien “eats up” the value of the secured property. Through a short sale refinance program, a homeowner can partially strip a lien, whether or not there is another lien senior to it.

For example: You owe $225,000 on a condominium that you purchased at the peak of the real estate market in 2001. Over the course of seven years, you have paid off $10,000 in principal. As such, the current value of your principal is $215,000. Subsequently, home values have declined by 15%, and your home is now worth $190,000. The rate on your subprime mortgage has increased, and you can’t afford the higher payments. Rather then foreclosing, the mortgage company agrees to discharge $25,000 of the debt and refinances the mortgage for $190,000 for the next 30 years. This is a loan you can afford as a result of forgiveness of debt coupled extending the time to pay the loan.

Filed under Debt Negotiation, Foreclosure, short sale, Loan Modification · 1 Comment

Why Mortgage Companies Consider Short sales

August 29th, 2008, 10:26 am

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.

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Mortgage Forgiveness Relief Act of 2007

August 21st, 2008, 12:54 pm

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.

Filed under Debt Negotiation, Foreclosure, short sale · 1 Comment

Avoiding Foreclosure

August 12th, 2008, 11:47 am

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.

Filed under Bankruptcy, Foreclosure, Post Petition Protection, Automatic Stay, short sale · 2 Comments