Foreclosure & Repossession
Cram down or strip off– a way to surface after being underwater
Many people have homes that are “underwater”, ie the mortgage balances are more than the home is worth. Under certain circumstances, in a Chapter 13 bankruptcy, relief is available through a “cram-down” or a “strip-off”. A cram-down is where you get the Court to reduce the lien to the amount of equity available for it. For example if the first mortgage is $150,000.00 and the house is worth $160,000.00, there is only $10,000.00 in equity for the second mortgage. If the second mortgage is more than this, it can be crammed down to the $10,000.00, in Chapter 13.
There are, however, two big catches. First, you cannot do this if the second mortgage is secured only by your residence. You have to have given some other collateral as well. This could happen where the second mortgage was given in support of a business loan also secured by the assets of a business.
Secondly, if you do the cram down, you have to pay off the reduced balance through your Chapter 13 plan. However, once you do that, you have only the first mortgage.
Cram down is usually not available for most homeowners. But a “strip-off” can be. A strip-off is where there is ZERO equity for the second mortgage (ie the value of the house equals or exceeds the first mortgage). Many courts, including those in New Jersey, will allow this. The result is that the stripped off junior mortgage becomes an unsecured debt, treated the same as credit cards or other unsecured debt. And at the end of the plan, the second mortgage can be discharged.
Either way, the result is a court-ordered “mortgage modification” that can help beleaguered homeowners get back on track.
These are options that deserve careful consideration, and assistance of a qualified bankruptcy attorney. They also require careful consideration of your long term and short term financies and objectives.
NJ Supreme Court to borrowers: don’t sleep on your rights when faced with foreclosure
In late February 2012, the New Jersey Supreme Court came down with a major decision in US Bank NA v Guillaume. While the ruling addressed important legal issues, its history and result shows why homeowners facing judicial foreclosure cannot assume that a possible mortgage modification will make their problems go away. The Guillaumes, it turned out, had some valid defenses to the foreclosure Complaint when it was served upon them. Instead of filing an Answer raising those defenses, they went to a housing counsellor and tried for a loan modification, which was eventually denied. During the eight months while that request was pending, the foreclosure process marched on. The lender filed a motion for entry of judgment of foreclosure, and gave the Guillaumes the required notice they were doing so. Still the Guillaumes ignored the process. Six months after that motion was filed a judgment was entered against them. Again, they asked for a loan modification. About a month later they received notice of a sheriff’s sale. Only then did they hire an attorney who sought to set aside the judgment of foreclosure and asserted various defenses. That request was denied. Eventually the issues got to the Supreme Court which held in essence that the Guillaumes had slept on their rights and had lost the right to defend the foreclosure.
This is a pattern of denial that we see too often. While the defenses to a foreclosure are limited, they do exist, but the time to seek legal advice is at the start of the process not the end. Too often also, people think that their chances of getting a loan modification are better than they are. No matter what the situation, it does not get better over time. The best time to assess the options available and to work towards a suitable outcome is right away. Whether the solution is bankruptcy, or a vigorous foreclosure defense, or some other option, a foreclosure should be a wake-up call.
An object lesson for creditors: Countrywide Home Loans hit with $85000.00 in legal fees for violation of the automatic stay
On February 22, 2012, Judge Kaplan in the US Bankruptcy Court for the District of New Jersey hit Countrywide with an $85,000.00 tax bill for attempting to collect prepetition mortgage escrow deficiencies from debtors in Chapter 13 bankruptcies. In re Rodriguez, case no. 07-24687. The decision highlights the importance for all creditors not to “shoot first and ask questions later”. Doing so, as Countrywide learned, can be expensive.
In this case, Countrywide claimed it was entitled to add to the post-bankruptcy mortgage payments an amount to pay back pre-bankruptcy shortfalls in the debtor’s escrow account. The debtors claimed this was an unlawful attempt to collect a pre-petition debt, and that the deficiency amount should have been included instead in Countrywide’s claim which would be paid in the bankruptcy. The debtors originally claimed that Countrywide was violating the “automatic stay” that renders illegal any attempt after a bankruptcy is filed to collect a debt that pre-existed that filing. The question went all the way to the Third Circuit Court of Appeals which ruled that Countrywide was wrong.
Under section 362(k) of the Bankruptcy Code, an individual who suffers any actual injury from a wilful violation of the automatic stay may seek damages, punitive damages and counsel fees. A violation is wilful so long was the collection effort was intentional and made by someone who knew about the bankruptcy. The Third Circuit sent the case back to Judge Kaplan to determine whether Countrywide wilfully violated the automatic stay and what damages the debtors were entitled to.
Here Judge Kaplan found that Countrywide wilfully violated the automatic stay because it proceeded, without seeking permission from the bankruptcy court, to demand payment of escrow monies after receiving notice of the bankruptcy filing. He hit Countrywide with payment of all the resulting counsel fees incurred by the debtors as they fought the issue up to the Third Circuit. Since Countrywide chose to litigate the issues, Judge Kaplan found, they should not be faulted for defending their rights.
This case underscores important lessons for any creditor receiving notice of a bankruptcy:
1. Get qualified legal advice right away;
2. Do not attempt to collect the debt except through the bankruptcy court process, without first seeking permission and authority to do so. When in doubt, err on the side of caution.
Steven R. Neuner has over 29 years of experience helping creditors, trustees and debtors protect their rights in bankruptcy court. For more information about these and related topics, see our website at http://www.nv-njlaw.com.