A chapter 13 debtor proposes a plan to pay creditors over a period of time. Their creditors may include credit cards and utilities, and as in most cases I deal with, prepetition mortgage arrears. In some cases, debtors simply make a monthly payment to the chapter 13 trustee over the life of the plan. In others, debtors propose plans that provide for gradual increases in monthly payments (what might be referred to as a “step plan”). Other proposals might include monthly payments, with the last payment being a large balloon. That final balloon payment might be paid by the sale of an asset or a refinancing of property. However, a recent Massachusetts Bankruptcy Court decision says that this practice is no longer permissible since BAPCPA. The decision is on its way to the Bankruptcy Appellate Panel and debtors and practitioners should follow it closely.

Continue reading "Did Congress Pop the Balloon?" »

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There has been so much written about BAPCPA and the creditors who practically wrote the law and got it passed. While I cannot doubt that creditors – such as the good folks at MBNA (which was bought out by Bank of America), paid their lobbyists millions of dollars for years to get the Bankruptcy Code changed, a recent case perhaps rightly suggested that lenders had good reason to seek a change in the law. The case, decided in February, came out of the Northern District of Alabama.

The husband and wife debtors filed their case in October 2006. It was the wife’s seventh bankruptcy case (no that’s not a typo....that's 7) and the husband’s fifth (and again, not a typo....that's 5). As the October filing was their second case within a year, they filed a motion to seek an extension of the automatic stay. Since 2005, if a debtor has had a case pending within the year prior to the case being filed, the stay expires 30 days unless the court orders otherwise. The hearing of the motion must be held within the 30 day period. The debtors needed the stay to prevent a foreclosure on their home.

Continue reading "Poster Children for Bankruptcy Reform" »

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There are many reports of struggling homeowners “walking away” from their properties. If you own a condominium, shares in a cooperative or a lot or home in a housing association (which I’ll refer to here as “real estate”) and you’re contemplating walking away and bankruptcy, an amendment to the Bankruptcy Code may influence many of your decisions.

Prior to the passage of the 2005 Act, if a bankruptcy debtor wanted to surrender their real estate, they could simply “walk away.” Real estate owners who owed dues or assessments to condo association, homeowners associations or cooperative corporations could simply include those claims in a Chapter 7 discharge or exclude them in a Chapter 13 plan. In addition, owners who did not reside or who had rent paying tenants in the property they intended to surrender were not responsible for post-petition condo fees and assessments. But that has changed.

By the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Section 523(a)(16) (“Exceptions to Discharge”) was amended. Instead of limiting the discharge of fees and assessments only to those debtors who had tenants or who were not residing in the dwellings, Congress limited it to debtors who have a “legal, equitable or possessory ownership interest” in the real estate.

Simply because a homeowner expresses an intention to surrender the home in their bankruptcy case does not mean that they will still not be the “legal, equitable or possessory” owner of the property. Condo owners who move out into a rental and file bankruptcy prior to any foreclosure are going to be responsible for post-petition condo fees and assessments. Whether the debtor lives in the property is no longer a consideration thanks to the 2005 amendments.

Prepetition condo fees and assessments still fall under the discharge. What’s changed is the responsibility for post-petition fees and assessments while the home is still in the debtor’s name. People who are considering bankruptcy protection as well as surrendering their property should be sure to carefully plan the date of their filing and/or their moving out with their attorney. The last thing any financially strapped debtor needs is to be paying rent on a new dwelling and trying to rebuild their financial house, all while paying the condo fees and assessments on a home the bank has not yet taken by foreclosure.

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A recent Massachusetts Bankruptcy Court decision set forth the standard that the majority of Federal Circuits have adopted: a bankruptcy debtor may avoid a wholly unsecured lien on the home.

The case involved a debtor who claimed their home was worth $370,000. The balance of the first mortgage was approximately $ 376,000, and a second mortgage, held by American Home, had a balance of approximately $95,000. In the Chapter 13 plan, the debtor proposed to pay American Home as an unsecured creditor as a “result of ‘cram down of unsecured claim on second mortgagee on Debtor’s principal residence.” The debtor also field a Motion to Determine Secured Status under Section 506(a). (Despite adequate and proper notice, American Home did not challenge the debtor’s expressed intentions.)

Even though the Bankruptcy Code expressly prohibits modification of mortgages on a debtor’s primary residence under Section 1322(b)(2), the Court found that Chapter 13 plans may avoid liens on a debtor’s residence that are wholly unsecured. As this view appears to have been adopted in other districts, the Bankruptcy Court ruled in favor of the debtor, and allowed the debtor’s motion seeking a determination that American Home’s mortgage was unsecured.

For Massachusetts homeowners contemplating bankruptcy and looking at declining property values, this decision is welcome news.

In re Pelosi, Chapter 13 case no. 07-16820 (February 21, 2008).

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Transferring real estate while contemplating bankruptcy can raise some issues. But transferring real estate after the bankruptcy case has been filed without the permission of the bankruptcy court is a big “no no.” And as a debtor in learned in a February 11 Bankruptcy Court ruling out of Worcester, it can raises some serious problems. In his case, a denial of his discharge.

The chapter 7 debtor filed the case on May 18, 2007. He owned his home along with his mother. According to his bankruptcy schedules, he valued the home at approximately $315,000 and with a mortgage of about $263,000. A mere 7 days later, the debtor transferred his interest in the home to his mother and father for $1.00. The debtor’s parents paid off the outstanding mortgages, as well as some other bills at closing.

Debtor attempted to argue that there was no equity in the home and that the appraisal should not be considered as “completely accurate”. However, the appraisal was dated 8 days prior to the case being filed, and it was an appraisal commissioned by the debtor himself. Notwithstanding this creative position, the debtor never produced any evidence demonstrating that the property would be appraised at another value (i.e., by submitted evidence of another appraisal, or of some substantive defect with the appraisal submitted).

The trustee contended that the property had equity and that the debtor intended to “hinder, delay or defraud” the creditors, the trustee and the bankruptcy estate by transferring it out of his name. Because of that not only should the debtor’s discharge be denied, but the transaction should be avoided (or set aside).

Continue reading "Unauthorized Post Petition Transfer Leads to Denial of Discharge" »

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The United States Trustee has filed suit in the US Bankruptcy Court in Atlanta seeking sanctions against Countrywide Home Loans. From the New York Times:

“Countrywide’s failure to ensure the accuracy of its pleadings and accounts in this case is not an isolated incident,” Donald F. Walton, the trustee for the Atlanta region, wrote in a brief. “In recent years, Countrywide and its representatives have been sanctioned for filing inaccurate pleadings and other similar abuses within the bankruptcy system.”

In addition to a litany of other abuses, it is alleged that Countrywide accepted payments on a mortgage that had already been paid in full (the mortgage company had issued a "satisfaction of mortgage" acknowledgment).

I recall Countrywide commercials where some delightful spokesperson would proclaim: "Countrywide says YES!." According to a statement from Countrywide, they are not commenting on the pending litigation.

News of the suit is also reported in The Sydney Morning Herald.

You may have missed...
Is Countrywide Fabricating Evidence?
The US Trustee v. Countrywide

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According to a study released by the Georgetown Law Center, “there would be ‘no or little’ impact on home-mortgage interest rates if Congress moves ahead with pending legislation -- H.R. 3609, The Emergency Home Ownership and Mortgage Equity Protection Act of 2007) and Senate (S.2136, The Helping Families Save Their Homes in Bankruptcy Act of 2007) – designed to ease the U.S. mortgage foreclosure crisis by allowing modifications in bankruptcy proceedings.”

The study was conducted by Adam J. Levitin, Associate Law Professor at the Georgetown University Law Center and Joshua Goodman, Ph.D. in Economics candidate at Columbia University. It is entitled “The Effect of Bankruptcy Strip-Down on Mortgage Interest Rates.” From today’s press release:

There is no empirical evidence that supports a conclusion that permitting either strip-down or other forms of modification of principal home mortgage loans in bankruptcy would have more than a minor impact on mortgage interest rates or on home ownership rates. As there is significant evidence that mortgage interest rate markets are indifferent to bankruptcy modification risk, we conclude that permitting unlimited strip-down would have no or little effect overall on mortgage interest rates

Addressing MBA claims that mortgage interest rates will shoot up if Congress acts to address the mortgage foreclosure crisis, the Levitin/Goodman study concludes: “… statistically there is a zero percent chance that the MBA’s 150 basis point claim is correct. All empirical and market observational data indicates that that MBA’s claim of an effective 150-200 basis point increase from allowing strip-down is groundless. The empirical evidence indicates that there is unlikely to be anything more than a de minimis effect on interest rates as a result of permitting bankruptcy modification.

The Levitin/Goodman study continues: “The Mortgage Bankers Association (MBA) has claimed that permitting modification of mortgages in bankruptcy will result in an effective 200 basis point increase in interest rates on single-family owner-occupied properties… Our research on current mortgage interest rate spreads among different property types disproves the MBA’s claim. …More recent MBA press releases have claimed only an increase of 150 basis points, without explaining the 50 basis point decline from the 200 basis point figure featured in Congressional testimony.

Commenting on the study findings, Levitin said: “The overwhelming thrust of the historical analysis is that the effect of permitting strip-down on mortgage interest rates would be either nonexistent or quite small — nothing near the range suggested by the Mortgage Bankers Association. We explain the lack of market sensitivity to strip-down risk by reference to two sets of consumer bankruptcy data, one from 2001 and one from 2007, both of which suggests that lenders’ losses in strip-down would be extremely limited both in scope and magnitude and often total less than those they would incur in foreclosure.

The study findings indicate that the nature of the pending U.S. House and Senate bills make it even less likely that there will be interest-rate implications if Congress acts: “First, to the extent our findings are used as a guide for predicting the impact of pending legislation, it is important to note that both our current and historical data analysis is of the impact of an unlimited strip-down regime on certain property types. The proposed legislation in the House (H.R. 3609 with the Conyers-Chabot Compromise Amendment) and the Senate (S. 2136) do not propose such an unlimited regime for single-family principal residence mortgages. Instead, both bills would impose a variety of limitations on modification. Both bills would impose eligibility requirements in the form of a strict means test, limiting relief to those homeowners whose income is insufficient, after deducting modest living expenses allowed by the IRS, to cover their mortgage obligations. Both bills would also limit relief to subprime and nontraditional mortgage products. Moreover, for interest rate modifications, both the House and Senate bills set a floor for modifications of the market rate for 30-year conforming mortgages plus a risk-premium. The House bill would further limit relief to mortgages made between January 1, 2007 and its effective date, and has a seven-year sunset provision. Because of these proposed limitations, the pending legislation would likely have an even smaller impact than the unlimited strip-down regime we tested in our study.

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The Mortgage Bankers Association which represents the real estate finance industry is apparently not pleased with a report by the Center for Responsible Lending which urges reforms to the US Bankruptcy Code. According to David Kittle, the Chairman Elect of the MBA:

Policymakers should ignore this report as it is more rhetoric than fact. Bankruptcy reform is not the answer for consumers having trouble making their mortgage payments. It will drive up the cost of credit in the form of higher rates, larger down payments and greater closing costs.

Further, bankruptcy is a logistical and financial nightmare for consumers. Filing for bankruptcy is expensive and approximately two-thirds of all bankruptcy plans fail. Nobody should be holding it out as a better alternative to working with your lender to try to find a mutually agreeable resolution.

But the CRL is responding with a report that shows that voluntary loan modification fall short. You'll find a link to the PDF report, and the statistics here.

As for Kittle’s comments, I have no idea where the uncited reference to “two-thirds of all bankruptcy plans fail.” Where does that factoid come from? There are lots of reasons why bankruptcy cases fail, but there is no magical statistic that I am aware of. That's flat-out misleading. And as for a "nightmare", oh come on now. While none of my clients want to be in bankruptcy, they would rather keep their home and put food on the table, than live with the proposed "resolutions" offered by their lender.

And unfortunately, for Mr. Kittle, the sad news is that for an increasing number of homeowners, filing bankruptcy is the better alternative to working “with your lender.” The fact is, some lenders are unwilling (or for their own reasons unable) to “work” with a homeowner. When there can be no “mutually agreeable resolution”, bankruptcy is the better alternative. And until lenders start getting serious about modifications, and about their lending practices that got the country into this mess, that alternative will only appear better and better.

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The Dow has dropped 10 percent since January 1.

Some of the victims of the sub-prime mortgage mess are bigger than a bread box, have more than two legs and are very innocent.

Ohioans are wondering the government is to blame for the sub-prime foreclosure mess. Canadians are wondering if the housing storm will creep over the border. According to one report, forecasts are mixed.

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Today’s New York Times is reporting that Countrywide Financial “fabricated documents related to the bankruptcy case of a Pennsylvania homeowner.” Apparently, the documents were letters addressed to the homeowner claiming that $4,700 was owed. Countrywide’s local counsel told the bankruptcy court that the letters were “recreated.”

“These letters are a smoking gun that something is not right in Denmark,” Judge [Thomas P.] Agresti said in a Dec. 20 hearing in Pittsburgh.

Read more here.

For an interesting take on this, please check out Tanta's entry early this morning over at Calculated Risk: "Turns Out Judges Don't Like 'Efficient' Servicers.'"

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The foreclosure crisis sweeping the nation is also sending some mortgage companies into financial ruin, leaving many folks caught in the middle. Last week the Federal Trade Commission issued a new publication giving consumers advice on what to do if their mortgage company files bankruptcy.

The PDF of "How to Manage Your Mortgage If Your Lender Closes or Files for Bankruptcy" can be found here. There is also information how to obtain the publication by mail.

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When I come across something that I think might help readers answer this question, I be sure and post it here.

Read more at MSNBC.

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In an interesting case involving an attorney’s mistake (and fortunately, it was not mine), a chapter 7 debtor will obtain a “clean” discharge. The case involved a debtor who in 1995 purchased her home under a state program which helped low and moderate income families to own their homes purchased at a market discount. Under this program, the local town or city would provide the housing subsidy. The local town or city would then retain certain rights, such as a right to a portion of net sale proceeds, first refusal and assent to refinancing. These rights were spelled out in a deed rider which was attached to the deed and recorded at the local registry.

In 2005, the debtor sold her home to a buyer. The buyer used the bank’s attorney, and did not retain one for herself. The debtor also did not hire an attorney. The closing attorney handled all aspects of the closing, including issuing a report that noted that the title to the condo was “clean.” The term “clean” however, meant free from any lien or encumbrance other than the first mortgage. The closing attorney missed the deed rider and the rights of the municipality.

Continue reading "The $70K Attorney's Error and a Debtor's Discharge" »

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When a bankruptcy petition is filed under Chapter 7, an estate is created. Unless the property is otherwise exempt, all of the debtor’s property belongs to the estate. The Chapter 7 Trustee is then required to sell the property to pay creditors. In a recent case, a debtor was a sole trustee of a real estate trust and the real estate was owned in the name of the realty trust. But in this case, Massachusetts Bankruptcy Judge Robert Somma held that the property belonged to the debtor’s Chapter 7 estate.

The case involved property in Malden. The trust was created by the debtor and the declaration of trust provided that: “This instrument [the declaration of trust] may be amended at any time by a written instrument signed by the trustees and acknowledged by one or more of them.” It also provided that the trustee could terminate the trust at any time. If he elected to terminate the trust, he was obligated to disburse the trust property to the beneficiaries (included other family members, but not the debtor).

Continue reading "Mass. Bankruptcy Judge Rules Trust Property Is Chapter 7 Estate Property" »

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The Boston Herald reports this morning:

The number of Massachusetts people filing for Chapter 13 personal bankruptcy jumped to 2,187 during the first half of 2007, up 85 percent over the previous year and up 78 percent during the same period in 2004, prior to when the U.S. bankruptcy system was overhauled in 2005.

The number of Chapter 7 liquidation filings also more than doubled to 4,251 during the first half of the year, compared to the year-ago period, according to preliminary data from the U.S. Bankruptcy Court’s Massachusetts District.

Read more here

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When someone asks you where you reside, the answer is usually easy. But when someone asks you where you are domiciled, the answer might not be the same. A recent Massachusetts bankruptcy court decision determined that a debtor who claimed Massachusetts was only a temporary home could not use the Massachusetts homestead statute to protect property in Michigan where he was domiciled.

The debtor sought to shield from creditors approximately $30,000 in equity in the Michigan property. The Massachusetts homestead statute (subject to certain limitations) protects up to $500,000 in equity in a debtor’s residence. The Chapter 7 Trustee objected to the claimed exemption. He argued that at the creditor’s meeting, the debtor admitted that he had not occupied the Michigan property and had lived in Massachusetts for several years. Because he did not reside in the property, the Chapter 7 Trustee argued that the debtor could not use the exemption.

Debtor claimed that the property had been in the family for generations and is acquired it in 1988. He lived in the property for approximately 10 years until he moved to Massachusetts to take care of his ailing grandmother. He viewed the move to Massachusetts as temporary. While here, he continued to maintain the property and visited it once per year. He did not rent it out. In December, debtor’s grandmother died and he argued that he intended to return to the property.

Debtor argued that he could only use the Massachusetts homestead exemption because he resided in Massachusetts prior to filing. He argued that while the homestead statute does not expressly state whether a home must be located in Massachusetts in order for the statute to apply, he is entitled to use that exemption. He resided in Massachusetts when he recorded his homestead declaration. The Trustee then claimed that based on the debtor’s responses to his objections, the debtor resided in Michigan at the time of the filing, and therefore, the Debtor must choose between the federal or Michigan exemptions, not Massachusetts.

Continue reading "Homestead Update: Domicile v. Residence" »

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This month, a ruling in a Chapter 13 case, the US Bankruptcy Court struggled with the issue of whether a bankruptcy debtor can retain their homestead rights if they have moved out of the home. Based on these interesting facts, the Bankruptcy Court ruled that the Debtors’ interests were protected.

The Facts
The Debtors were having difficulty making their monthly mortgage payments and opted to avoid foreclosure by placing their home on the market. They bought their home in 1998 and in 2000, they acquired their homestead by recording the required Declaration of Homestead at the local Registry of Deeds. By 2005, the Debtors found a buyer and had signed a purchase and sale agreement.

Continue reading "Leaving Home and Keeping the Homestead: A Look at Homestead Termination in Massachusetts" »

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Among the delightful changes BAPCPA (the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005)made to the Bankruptcy Code was the “cap” on homestead exemptions. In Massachusetts, a homeowner can keep up to $500,000 in equity in their primary residence from the reach of creditors. BAPCPA capped homesteads to $125,000 if the “interest” in the residence was acquired within 1215 days of the filing of the bankruptcy petition. In two recent cases, Massachusetts homeowners found their homestead exemptions capped. Massachusetts homeowners thinking of filing bankruptcy need to keep reading.

Continue reading "The Sting of the Homestead Cap" »

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