Interviewer: I know I’m having trouble (or soon will be having trouble) making my mortgage payments. How can I know if bankruptcy is the best way to address this mortgage problem?
John’s Answer: Bankruptcy is one powerful way to deal with mortgage problems, whether it be in Chapter 7 or Chapter 13. However, our office frequently discusses alternatives to bankruptcy with our clients having mortgage problems.
As you correctly imply, there are non-bankruptcy alternatives including: working with the “loss mitigation” department of the mortgage creditor for the purpose of trying to obtain approval of a mortgage modification under a government program such as HAMP or HARP, or reinstating the mortgage, requesting a forbearance, entering into a deed in lieu of forclosure , or selling your home to pay off a mortgage that has become unaffordable.
Generally, if you have no debt problems other than your mortgage problem, then non-bankruptcy options may be better and should be tried first before filing for bankruptcy. If the non-bankruptcy options are unsuccessful, bankruptcy may be needed. The best way to know whether bankruptcy or non-bankruptcy options are better for you is to discuss your unique situation with an experienced bankruptcy attorney.
Interviewer: How exactly will bankruptcy help me with mortgage problems?
John’s Answer: The first way that a filing of a Chapter 7 or Chapter 13 case helps is an immediate and powerful way by providing your house with the protection of the Automatic Stay, which requires your mortgage creditor, immediately upon the filing of the bankruptcy petition, to stop any forclosure lawsuit that may be in progress (or refrain from filing a foreclosure case if one has not yet been filed).
If you intend to keep the house having missed payments, the bankruptcy case is typically filed as a Chapter 13 case with request that the Bankruptcy court approve your plan to make up any missed mortgage payments, generally through 3-5 years. If you will surrender the house (in Chapter 7 or 13) then the discharge you receive from the Bankruptcy Court will eliminate your personal obligation to pay the promissory note on the house (but the mortgage is seldom removed).
In many instances the client does not want to keep the house and, in fact, is glad to surrender the property to the creditor as it is burdensome to the client. In this instance, the client is looking for a bankruptcy discharge order to erase his personal liability on the house and would welcome a foreclosure sale as that would get the deed out of his name.
The filing of a Chapter 7 case will cause the mortgage creditor a temporary delay for the reasons I just noted. However, within a few weeks to a month or so the creditor’s attorney will typically come in to Bankruptcy Court and request relief from the Automatic Stay, perhaps indicating in their papers that the mortgage creditor is not adaquately protected because there are many missed payments on the mortgage and no efforts have been made to reinstate the mortgage and/or there is insufficient equity in the property to protect the creditor in the event of a foreclosure. The creditor generally tries to show that it is continuing to lose money and that the foreclosure sale may not provide sufficient funds to pay the creditor off in full. Because Chapter 7 is not designed to reorganize and to save a house from foreclosure, the Bankrutpcy Judge will typically grant that type of relief to lift the Automatic Stay and then the creditor can proceed through the same manner as it would have had no bankruptcy been filed. The filing of the Chapter 7 in this instance would have been for purposes other than to save the house, such as to discharge credit card debts.
John’s Answer: A Chapter 13 case bankruptcy case is generally begun with the filing of a Chapter 13 petition, schedule, and plan. The plan will generally provide that the arrears on the house are being paid through the Chapter 13 plan and that regular monthly payments thereafter, i.e. with the first due date after the filing of the petition, will be paid directly be the client to the mortgage company. So in instances where the client missed $20,000 in payments to the mortgage creditor prior to filing Chapter 13, that $20,000 plus the bankruptcy-required rate of interest on that amount will be paid through a three- to five-year payment plan. The client pays the Chapter 13 Trustee each month typically, and the Chapter 13 Trustee will then forward funds to all appropriate creditors, including the mortgage creditor on the $20,000 in missed mortgage payments.
Interviewer: What if I want to save my house from a foreclosure, but can’t afford the required Chapter 13 monthly plan payments to the Trustee in order to do so?
John’s Answer: You could consider proposing a modified plan to sell the real property within a year or so. Once sold, the house arrears would be paid at the closing of the sale. Therefore, you would now be able to modify your plan to make lower monthly payments to the Trustee because the sale of the property removed the large $20,000 of arrears out of the plan. You could then afford to make the balance of required payments to fund the plan to address the remaining other debts, if any. If there are no other debts except the house, at that point the Chapter 13 plan would conclude upon the sale of the house. You can keep the equity from the sale (up to $75,000 per home owner under NY exemption rules). That would be a successful Chapter 13 plan because the creditor received the funds owed on its mortgage (including the arrears), and thereby received probably more than it would have gotten in foreclosure and you may have been able to get some of your equity out of the property by selling the property at market price, as distinct from letting the bank sell it at a distress foreclosure sale auction.
Interviewer: A major reason why there have been so many foreclosures is because second and third mortgages were given based on inflated property values or in situations where borrowers could not really afford the required monthly payments. You’ve said that bankruptcy is powerful; is there anything that can be done to address the second and third mortgages that may be the principal reason why I don’t have sufficent money to make the regular first mortgage payment and still make ends meet?
John’s Answer: Yes. Bankruptcy does provide powerful remedies, including one very powerful remedy available only in Chapter 13 which permits a client to “strip off” a lien provided that no part of this lien is secured by the value of the property.
By the way, this Chapter 13 remedy also applies to non-residential real property and, with certain restricions, to vehicles. Let’s look at an example: Say you own a $100,000 residence with a first mortgage of $120,000 and a second mortgage of $25,000. You can use Chapter 13 to “strip off” the entire $25,000 second mortgage because that second mortgage does not attach to any value of the house (as the first mortgage attaches to the entire equity in the house). What this effectively means is that the second mortgage no longer needs to be paid outside the Chapter 13 plan as a regular mortgage payment. Rather, it will be paid inside the plan as a general unsecured debt which will be paid at the same rate that the court will approve for general unsecured creditors which, significantly, is often only 5% or 10% repayment with the remaining percentage forgiven upon receipt of the bankrupcty discharge.
When the Chapter 13 plan payments have been completed, the second mortgage lien will be removed on the county records by Order of the Bankruptcy Court and the creditor on the second mortgage will have no further ability to collect from the client. This is one dramatic way in which bankruptcy counsel can help a client to effectively reorganize and save their house.