How creditors in bankruptcy can lose out by “sleeping on their rights”

At recent bankruptcy conference I attended, we reviewed a lot of recent cases. These all reinforce something I have told many people over the years: when faced with a bankruptcy of someone who owes you money, delay and inaction can be a costly mistake.

Some examples: A mortgage creditor who failed to object to a modified Chapter 13 bankruptcy plan that gave the homeowners two years to sell their home and a similar period to sell their business equipment (also part of the bank’s collateral) lost the right to later seek permission to foreclose on the home through a motion for stay relief. It made no difference that before the modified plan was confirmed by the bankruptcy court, the debtors had agreed that the bank could have stay relief if they failed to meet certain payment obligations. The later approval of the modified plan controlled.

In another case, the bank had an Assignment of Rents on the debtor’s rental property that gave it the right, if the bank served notice of default, to collect the rents directly from the tenants. Although the debtors defaulted, the bank did nothing, and the debtors continued to collect the rent (while not paying the bank). The bankruptcy trustee stepped in to try to get the rents back. The court said no because the rents belonged to the bank IF they asked for them.

I had another case recently where a landlord who was owed rent by a tenant in Chapter 13 did nothing for the first few months when the tenant seemed to be resuming payment (but not paying the past due amounts which were supposed to be paid bakc under the Chapter 13 Plan). The deadline for the landlord to file a proof of claim passed without the landlord filing a claim. The debtor stopped paying rents. The landlord has probably forfeited its right to get paid anything on its back rents owed when the bankruptcy was filed.

There are many other examples I could provide. The takeaway for creditors is to start acting as soon as you learn of a bankruptcy filing, especially in Chapter 11 and Chapter 13 cases. When in doubt file a proof of claim and stay on top of what is happening. Pay attention to all notices and deadlines in them. Most importantly, creditors need to find out what the bankruptcy means for them and  develop a plan of action.

With over 30 years of experience representing creditors, trustees and debtors, we are able to help with timely and cost effective advice.

 

How a Chapter 20 bankruptcy can help save a home from foreclosure after a Chapter 7 discharge

You were drowning in debt. Your home had two mortgages that together were more than the house was worth. You were falling behind on both trying to stay ahead of your creditors. A Chapter 7 bankruptcy discharged the credit card and other unsecured debt making things easier.

But you are still behind on those mortgages and a foreclosure is underway or threatened.

A Chapter 20 might work. Chapter 20 (7+ 13) is a Chapter 13 bankruptcy after a Chapter 7 discharge. The purpose is not to get a second discharge but to be given 3 to 5 years to catch up on that mortgage and maybe save your home. Not all courts will let you do this, but the trend in New Jersey is to allow a Chapter 20 if it serves a legitimate rehabilitative purpose. The process can be tricky though.

First, you need to have disposable income (ie money left over after paying basic living expenses). Usually, this is because after your Chapter 7 filing, you got a job or your income increased substantially.

Second, you cannot have more than $383,175 in non-contingent liquidated unsecured debt. This can include the amount of any shortfall between a mortgage balance and the value of the real estate net of prior mortgages.

But here is what is possible. First, if you are behind on mortgage payments and no Sheriff Sale has taken place, you can take up to 5 years to bring the loan current, providing you start paying again on time once the new bankruptcy is filed, and do not miss payments.

Under certain circumstances, you can “strip off” [ie remove] a second or third mortgage if the value of the home is less than the first mortgage or second mortgage that is ahead of the one you want to get rid off. If this is successful, the stripped-off mortgage is removed from the home.

An open question is whether in a Chapter 20 the stripped off mortgage results in a new payment obligation which has to be dealt with in the plan. After all, the personal payment obligation was discharged in the Chapter 7. But a New Jersey court has held that in a Chapter 20 strip-off, the mortgage debt is converted to a new payment obligation. (This was the subject of a previous article, If the stripped off mortgage balance is too large, at least one court in New Jersey has held that it can result in disqualification for Chapter 13 relief.

It is always better if possible to file a Chapter 13 first rather than a Chapter 20. But if there were good reasons that was not possible, a Chapter 20 can be a viable option for many people to save their home.

At Neuner and Ventura LLP, we have the experience needed to help people in financial trouble take back control of their life. If we can help, please feel free to call us at (856) 596-2828.

How Chapter 13 Really Works When You Are Behind on a Mortgage

Using a Chapter 13 Bankruptcy Filing to Restructure Your Mortgage

If you are in arrears on your house payments, a Chapter 13 bankruptcy reorganization filing can help you get your financial situation under control while simultaneously putting a stop to the seemingly endless calls, letters and threats of legal action from your mortgage lender. When you file for protection under Chapter 13, an automatic stay immediately goes into effect, preventing your lender from calling, writing or taking legal action to collect on the mortgage debt. At the same time, you can negotiate new terms to your mortgage loan so that your payments are within your means.

How It Works

In a Chapter 13 bankruptcy petition, you work with your creditors to put together an acceptable reorganization plan, whereby you agree to repay your creditors over a three-to-five-year period. In most instances, however, the amount due on your mortgage cannot be repaid in this period of time. Instead, what you will do is work out a new payment plan that is within your means during the bankruptcy period. Ideally, when you complete the Chapter 13 process, all or most of your other debts will be eliminated and discharged. You will then be able to afford your mortgage payment, and may even enter into an agreement to pay your home off in a shorter period of time.

You don’t need to worry that your mortgage lender will demand an unreasonable payment from you during the bankruptcy period. A bankruptcy “levels the playing field” and gives you and your lawyer the ability to counter unreasonable positions taken by secured creditors. This is the point when a good lawyer will help your creditors understand that smaller payments that you can afford are better than larger ones that you cannot.

Contact Neuner & Ventura, LLP

Let us help you take back control of your life! We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every new potential bankruptcy client. (We do, however, reserve the right to charge a fee to review any work done by another attorney). For an appointment, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. Evening and weekend appointments are available upon request
Representing Clients across South Jersey

New Jersey foreclosures and loan modifications: improving and moving faster, but for how long

I just moderated a seminar for lawyers on the current state of foreclosures and loan modifications. The latest intelligence is that new foreclosure filings in New Jersey are moving from the filing of the Complaint to Sheriff’s Sale in 6 to 12 months. This is a far cry from the three-years-plus that was the accepted situation 6 months ago. The reasons are several. First, due to a 2011 temporary moratorium on filing and processing of foreclosures by six major mortgage loan services, the backlog of pending cases has been largely reduced. Second, the Superior Court foreclosure processing unit has add staff to deal with the workload. Third, the Court has set up electronic filing systems for foreclosures, that make it simpler and easily for court personnel to process new filings.

How long the current relatively fast processing of foreclosures  will continue is uncertain. Currently, there are 60,000 to 100,000 pending cases. Many, we are told, are older cases stalled by new documentation requirements for entry of a foreclosure judgment. And several sources has told us that there is a potential avalanche of other foreclosures waiting to be filed. Some believe that when this hits, we will be back to a three or even four year delay from start to finish.

Several unknowns still exist. Are lenders more willing to modify mortgage loans? The best answer is, it depends on who holds the loan. (Remember that almost all these mortgages are held by investor trusts. The “lender” is really only a loan servicer hired by the trustee). There are new state programs to help homeowners keep their homes. But many sources report instances of ridiculous and inconsistent treatment by lender representatives who process loan modification programs. It is still a long and uncertain road. Seeking Professional help, either through legal counsel, a HUD-qualified housing counselor, or one of the reputable sources who prepare the applications, is a wise move.

We are seeing more instances in which substantial reductions in loan balances are being offered by lenders. This is a hopeful sign as well.

Stay tuned. It is still wild and woolly out there.

Foreclosure Advice

Judgments have life after bankruptcy, a New Jersey Court rules

We recently posted a discussion of Gaskill v Citi Mortgage, a September 2012 decision by the New Jersey Appellate Division where it denied an application to cancel a judgment under a New Jersey statute allowing that relief any time more than 12 months after a bankruptcy discharge. There is another point the court made: even though the personal obligation underlying a judgment may be discharged and uncollectible against the debtor personally, the judgment creditor can continue to levy on the residence and try to have it sold at Sheriff sale,  for another year! At first this sounds surprising, (how can they collect against my house a debt I do not have to pay?) but on this point, the court got it right. As we will see, this is a problem that can be easily prevented.

The reason is that a judgment in New Jersey becomes a lien on real estate until it is satisfied or removed. A bankruptcy discharge does neither. In most cases, the judgment creditor does not bother trying to have the Sheriff levy and sell post bankruptcy. The reason is simple: most houses have no equity or substantial mortgages. Any money from a Sheriff sale on a judgment must first satisfy the existing taxes and mortgages, and few houses have enough equity to risk the sale price being too low to leave anything for the judgment holder.

Happily, if the homeowner is in a position to keep their home after bankruptcy, there is an easy solution. The Bankruptcy Code has a provision for homeowners to “avoid” a judgment lien to the extent it “impairs an exemption”. In most cases this is the case. [There is a seemingly complicated formula, found at 11 USC 522(f)]. For our clients who want to keep their home and have judgments this is an option. The additional cost of these motions (which are rarely challenged) is worth the peace of mind. The result is a federal court order removing the judgment as a valid lien right away.

This little wrinkle is just one of the many “gotchas” that can lie in wait for the unsuspecting and poorly advised debtor. As in so much more in life, when it comes to hiring the right bankruptcy lawyer, “penny-wise is pound-foolish”. The small extra cost to have it done right is worth it.

Mortgage Foreclosure attorneys in New Jersey will be busy as mortgage foreclosures are up and climbing

Bloomberg News reports that New Jersey has now passed Nevada and is #2 behind only Florida in the number of loans in serious default. (Bloomberg, Sept. 18, 2012 “New Jersey Housing Suffers as Defaults Exceed Nevada: Mortgages).  As we have reported, a lot of existing foreclosures were put on hold until the courts sorted out new requirements to protect against “robo-signing”.  We hear that atop the large number of pending cases,  a flood of new cases expected to be filed in the next few months. Right now, Bloomberg reports, there are 60,000 pending open foreclosures, with borrowers who have not made a payment in the past 934 days, according to Lender Processing Services Inc.

This is going to be good news for mortgage foreclosure attorneys, both those who file these suits and those who defend. Those who want to keep their homes will need the help of experienced counsel. We still believe many mortgage lenders are going to have problems if challenged in meeting their burden of proving that the plaintiff in foreclosure actually holds the mortgage with the right to sue. Other defenses may be available.

As we have reported elsewhere, the loan modification process has been disorganized and uneven. But for those who want to keep their homes, a Chapter 13 Bankruptcy may provide help in a variety of ways. (see our other blog posts on this). Mortgage lenders, if acting rationally, would be making deals. But few who have dealt with process have good things to report about how it is being handled. Many have horror stories.

In the meantime, we can expect the long delays (about 3 years) from start to finish of a foreclosure will keep many defaulting homeowners in their homes, giving them a much-needed break and opportunity to settle other debts. Clearly, the foreclosure system is not helping lenders.

According to Bloomberg, the “shadow inventory” of foreclosed properties is still increasing in the Northeast. They report that the hidden supply of homes dwarfs the “visible inventory” of homes for sale.

By all accounts, this mess is not getting better. We have suggested some of the reasons for the logjam in other blog posts. But eventually it will all get resolved. It just shouldn’t take so long. This situation is not helping our economy.

For more information, please see our other blog posts. Steven Neuner is available to assist borrowers with defending foreclosures or seeking other solutions.

Foreclosure Advice

Short sales and modifications- the system is not working, still…

I read with fascination this New York Times article detailing a horror story where a mortgage loan servicer approved a short sale and after the closing reneged, sending back the agreed upon sale proceeds. http://www.nytimes.com/2012/09/16/business/a-florida-condo-sale-and-a-markets-dysfunction-fair-game.html?_r=1 I wish I could report that this is an isolated incident. In fact, what I have seen and what I am hearing is that mortgage servicers who deal with loan modifications and short sales are too often disorganized, dysfunctional or worse. Example: a mortgage modification with substantial principal reduction is sent to borrowers who then sign all the papers and send them back via overnight mail, with proof of delivery. They go to bankruptcy court and get court approval, on notice to the lender. The lender claims they never got the papers. They send letters making spurious claims that conditions are not met. They send threatening default letters, even though payments are being made. Even when the papers are all re-signed and re-sent using THEIR FedEx envelope, they claim they never got the papers.

Anyone who does much of this work has similar stories.

Why this happens is anyone’s guess. The suggestion is that the loan modification process ought to be taken out of the hands of the lenders or servicers, and put in the hands of a single agency that applies consistent standards. The agency is already in place: the bankruptcy courts. The authority can be limited to existing mortgages in default, so that new mortgage lending is not affected.

The New Jersey Bankruptcy Court already has a voluntary Loss Mitigation process in place, where all the documents are uploaded to an independent web portal, so there is never any claim or question about what was sent and received or when because it is all there for all the participants to see. And the process requires a designated single contact person with authority.

All we need to do is give the Court the authority to restructure the mortgage in Chapter 13. This is not that different from the court’s existing work. The lender/investors would see more income. More borrowers would be able and willing to save their homes. Less foreclosed or unsold inventory. Who are the losers? Servicers whose contracts pay them per loan, even for those in default. And all those companies and professionals who do foreclosures.

Until we have a rational, efficient and predictable system to deal with defaults on securitized loans, the current mess will continue.

By the way, as an historical aside, we had something similar in the late 1980’s with massive Savings and Loan closures. The solution there was to give their assets to the Resolution Trust Corporation which by all accounts did an efficient job of liquidation and recovery.

Overview of Short Sales

Moving out of your home could deprive you of protections under the New Jersey Fair Foreclosure Act

New Jersey’s Fair Foreclosure Act [“the FFA”]  gives homeowners various protections and rights in the event of foreclosure. These include the right to a 30 day “Notice of Intent to Foreclose” so that they can bring the loan current before a foreclosure is started. Also included is the right to notice and a further opportunity to cure the arrears before the lender applies for a judgment by default.  The FFA’s procedures provide not only multiple opportunities to avoid foreclosure, but substantially lengthen the time from the start of the process to foreclosure sale. The FFA applies, by its terms only to “residential mortgages” which are defined as those where the property is a house, real property or condominium located in New Jersey, which is occupied, or is to be occupied, the an individual borrower or  or a member of the [his/her] immediate family, as that person’s residence. The property can contain up to 4 dwelling units as long as the borrower or a family member lives in one of them. The final requirement is that the property “is or is planned to be, occupied by the [borrower] or a member of the [borrower’s]  immediate family as [that person’s] residence at the time the loan is originated.

In a recently reported case in Cape May County, (Sturdy Savings Bank v Roberts) Judge William Todd held that these protections are lost when the borrower or family members move out before a foreclosure is started with no intention to return. This is admittedly contrary to a strict reading of the statute, but Judge Todd looked instead to the purpose of the law, to protect those who currently occupy a mortgaged residence. Since the Roberts’ had moved out long before the foreclosure, he held they were not entitled to the protections intended to help those in residency.

Certain other requirements contained in the court rules, intended to counter abuses such as “robo-signing”, still apply, Judge Todd ruled

For a variety of reasons, we have long encouraged those facing foreclosure not to move out sooner than they have to, unless there is good cause to do so.  This decision simply underscores and confirms that advice. Proper advice and planning, from a qualified attorney, is always wise and worthwhile.

Foreclosure Advice

Is the foreclosure mess ending? Hopeful signs but careful planning still needed.

Recently, the New York Times has reported that the residential housing market is showing signs of life, with prices and sale activity in certain aress going up.  http://www.nytimes.com/2012/06/28/business/economy/new-indications-housing-recovery-is-under-way.html. Another article reports that increasing numbers of homeowners in financial trouble have been able to get help through a refinancing program called HARP. http://www.nytimes.com/2012/06/24/realestate/mortgages-increased-interest-in-expanded-harp.html. (HAMP is the other program people have heard about. HARP is for people who are current on their mortgages)

This is good news for many, but we caution not to look at the problem piecemeal. Too many of our clients did just that, thinking that refinancing their home or taking money out of pensions or IRA’s would solve all their problems when in fact the underlying problem of too little income and too much expense or debt remained. When we help people with a mortgage modification or restructuring, we always counsel that this is only part of the solution. A close look at spending vs income, with planning for future needs (the car will need tires! I need that root canal!) is essential.

Most important is a long term change in lifestyle and priorities. Just as a crash diet fails without long term changes in eating habits, any credit fix will fail if overspending continues. We always explore all the choices our clients have with a  broader long term view in mind.

We hope that all our clients will find their way to long term financial stability, and will learn to enjoy not having to worry about how to pay the next unexpected bill.

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.

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