Bankruptcy & Loan Modifications

Prior to analyzing what your rights may be in your property, and what duties you may owe to your creditors, it is important to distinguish between the types of debt you may have incurred. Many debtors incur large unsecured debt, which stems from any obligation to pay back a debt, but where no physical asset can be seized for failure to pay. The other type of debt, which is more important when considering if a creditor can take something away from you comes in the form of secured debt.What is Secured Debt? Secured debt is a debt that is backed by collateral. If you fail to pay your debt, then the creditor who issued the loan can take back the property or collateral and sell it.

The next obvious question would be, how does a lender secure a debt and protect its investment? Section 550(b) of the Bankruptcy Code protects a secured lender from a claim of fraudulent transfer. A secured lender who is a subsequent good faith transferee of the buyer that takes for value and without knowledge of the void ability of the sale is protected.

If you have obtained a mortgage on a home in Massachusetts, then most likely you have entered into an obligation to payback a secured debt. That is, if you fail to pay your mortgage, you could loose your home.

MORTGAGE RIGHTS:

The following is a short discussion on the various types of mortgages in Massachusetts that are protected as secured debt:

• Purchase Money Mortgage- A purchase money mortgage is given by a buyer of a property to the seller or a third party in order to finance all or part of the purchase. M.G.L. c. 93 § 70. It takes priority over previous judgment liens and certain other liens attaching to the land through the buyer, which protects the lender from having to search for such liens and therefore encourages purchase money financing.
• Leashold Mortgage- A “leasehold mortgage” is a mortgage given by a tenant on its leasehold estate, which assigns the lessee’s rights under a lease as security to the lender. See M.G.L. c. 184, § 9 (“A conveyance by a tenant for life or years . . . shall pass to the grantee all the estate which such tenant can lawfully convey.”). Massachusetts banks and credit unions are authorized to lend on the security of certain leasehold estates. See M.G.L. c. 167E, § 1A; M.G.L. c. 171, § 65. A leasehold mortgage may also be made by an assignment of the lease for security.
• Non recourse Mortgage- A non recourse clause states that there is no personal liability for the debt secured. This is typically used in large commercial real estate transactions. This is often used when the real estate is owned by a limited partnership, in order to receive tax benefits.
• Gratuitous Mortgage- There is support in Massachusetts case law for the proposition that a mortgage given without any consideration, i.e., a gratuitous mortgage, is invalid and can be canceled by a court. Broderick v. Broderick, 325 Mass. 579, 582–83 (1950); Dow v. Poore, 272 Mass. 223, 226 (1930);
• Mortgage for Future Advances- The problem with mortgages for future advances is the lack of notice to creditors, who then may find their leins subordinate to future advances. Subsequent Advances to Protect the Mortgagee’s Interest- when the mortgagee is advanced funds for payment of taxes, liens, necessary repairs, or improvements to the property in order to protect its interest.
• Dragnet Clause- Provides that the mortgage will secure all other obligations of the mortgagor to the mortgagee whether they exist or subsequently arise.
• Open End Mortgage- The home equity loan

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