Bankruptcy and Foreclosure: How Bankruptcy Can Help You Save Your Home

If an individual  is faced with imminent foreclosure or financial issues regarding real property, bankruptcy  through either Chapter 7 or 13, can present significant loss mitigation tools.

Chapter 7 can be extremely effective in relieving the monetary obligation of an individual that no longer wishes to keep his or her home. Often a individual will have attempted to short sale the property prior to considering any bankruptcy option. Those attempts can be unsuccessful, or undesirable inasmuch as the lender may require the individual sign a note to pay any deficiencies on the mortgage as a condition of the sale. Consequently, discharging the mortgage obligation prior to a short sale, puts the homeowner firmly in the driver’s seat when it comes to dealing with lenders  in the short sale process.

The options available in Chapter 7, however, pale in comparison to the tools at the disposal of the creditor in a Chapter 13 bankrupcy. Chapter 13 bankruptcy is typically referred to as a “paying” bankruptcy. The essential purpose of the Chapter 13 bankruptcy is to avoid liquidation of assets in a Chapter 7 case and allow the debtor(s)’ to reorganize their affairs. This almost always includes monthly payments for a period between 36 and 60 months composed of the debtor(s)’ disposable monthly income. There is not a “means test” for the purposes of determining eligibility for Chapter 13, rather it is only required that the debtors have income.

It is important to emphasize that the timing of a Chapter 13 petition is everything in relation to distressed real estate. If a foreclosure is in process, a Chapter 13 petition must be filed before the date of the Sheriff’s Sale in order to give the homeowner any shot at retaining his property.

The first (and most common) tool that a Chapter 13 debtor(s) would have at their disposal is the ability to cure arrears on a secured debt. If a homeowner has fallen behind on their payments, has been denied a modification, and wishes to keep their home, the arrears on the mortgage can be divided into 60 payments to cure the deficiency. The debtor would be required to make their current monthly payment and then in addition to that monthly payment, they would pay a portion of the arrears. At the completion of their Chapter 13 plan, the debtor will have made progress on the current balance of the mortgage as well as cured any arrears. The only requirement is that the debtor be able to make the monthly payment required.

Second, an individual that has more than one mortgage on his principal residence may be eligible to “strip off” or remove the lien the property created by junior mortgages.  In order to qualify for this relief, a principal residence must have at least two mortgages. The value of the home, as determined by a recent appraisal, has to be at or below the amount owing on the first mortgage. Effectively, this makes any junior mortgage “wholly” unsecured. As a result, the junior mortgage is treated in the Chapter 13 bankruptcy as an unsecured creditor that may only get a fraction of the amount owed to it through the Chapter 13 plan. If the debtor successfully completes their plan and receives a discharge, the lien is removed from the property. The end result is that the Debtor will have been making monthly payments on the first note, while at the same time, they will have removed junior liens, often leaving them with equity in their home.

Third, an individual may be able modify short term mortgages or “balloon payments.”  Under section 1322(c)(2) the bankruptcy court is permitted to modify mortgages on which the final payment becomes due during the course of the Chapter 13 Plan. Often, this arises in the instance of balloon payments. As a result, the individual would be able to modify the terms of that mortgage, including payment, interest rate and treat the unsecured portion of the debt as an unsecured creditor in the Chapter 13 Plan, effectively “cramming down” the mortgage to the value of the property.

Fourth, an individual may be able to modify mortgages that are secured by property, including the individual’s principal residence, and any other property under the plain language of 1322(b)(2). It is not uncommon for a mortgage to secure, in addition to the real estate, other items such as household goods, bank accounts, or even other property. Courts will examine whether the agreement provide for security in other collateral that provides an additional interest other than an existing component of that creditor’s security interest in the property. In 2005, congress also added language to 1322(b)(2) that exclude from modification, liens that secure the property and “incidental property.”

Ancillary to a cross collateralized mortgage, a mortgage may be modified in Chapter 13 if it is secured by a multi-family residence or a combined residential and commercial property. The restriction on anti modification claim applies, only to the debtor’s principal residence. Much like the exclusion for debt that is secured by real estate and other property, a multi-unit property can be also be modified.

Finally, a lien may be modified or removed if it is not a “security interest” in real property. A “security interest” in real property is defined as a lien created by agreement. Consequently, a lien created through the judicial process or that is statutory is subject to modification in Chapter 13.

 

Can a Spouse Strip a Joint Junior Mortgage in an Individual Chapter 13 Plan?

One of the benefits to some individuals in filing for Chapter 13 is the possibility of "stripping" or removing a second mortgage lien from the property through the completion of their Chapter 13 Plan.

Typically, such cases are filed as adversary proceedings (at least in the Eastern District of Michigan), which essentially is a lawsuit in the bankruptcy proceedings, by the property owners against the mortgage company. The process by which this occurs is, in and of itself, a whole topic to be covered in a later blog post.  The issue is, however, whether an individual spouse strip a joint lien when the other spouse has not filed bankruptcy. It would appear, that at least in the Eastern District of Michigan, the answer is "yes."

For purposes of this discussion, lets assume that Client A is married.  She and her husband have two mortgages on the property that they own as tenants in the entirety. The value of the house and the amount due on each mortgage indicate that this case is ripe for a lien strip proceeding in a Chapter 13 petition. Does the spouse (who is still on the mortgage and note) have to file Chapter 13 as well in order to get the lien strip?

In most jurisdictions, the answer would be "no."Several courts have held that a non-filing individual is not allowed to reap the benefits of bankruptcy without paying the costs of bankruptcy.  In re Hunter, 284 B.R. 861, (Bkrtcy E.D.Va 2002). Others have held that to allow a lien strip to occur where one of the legally responsible parties has not filed bankruptcy is a violation of the mortgage lien holder's due process rights. In re Erdmann, 446 B.R. 861 (Bkrtcy N.D.Ill 2011).

In In re Strasborough, 426 B.R. 243, Bkrtcy E.D.Mich 2010), the Eastern District of Michigan was presented with the question of whether an individual can strip off a second mortgage in a Chapter 13 Plan, even if her jointly liable, non-filing spouse was not a party to the action. Judge Steven Rhodes held that debtors acting alone and with no participation by non-debtor spouses, could avoid junior mortgage liens on homestead property that is held by tenants in the entirety. Judge Rhodes rejected the analysis set forth by In re Hunter by looking at Congressional intent: Did Congress intent to allow the avoidance of a junior lien on entireties property when only one spouse files? Since the language of the statute is silent on the issue, Judge Rhodes held that the avoidance of junior lien on entireties property is consistent with entireties law.

Strasborough thus allows, Michigan, one spouse to file Chapter 13 and allow a spouse that is a joint mortgage holder to not file, and still allow a lien strip to occur.

Can a same sex couple file a joint bankruptcy petition?

It's a hot button topic in the news right now. As more and more states approve same sex marriage, I often get asked if a same sex couple, if legally married in their state, can file a joint petition for bankruptcy. The short answer is no.

Why?

It makes absolute sense that these couples should be afforded the same status under the bankruptcy code as heterosexual married couples; often these couples have co-habitated for many years, raised families together, even purchased homes together (and jointly incurred the debts that go along with all of that). There are many benefits to a joint filing, notably the payment of one filing fee, one set of court dates, etc.

Keeping in mind that Bankruptcy is a federal statutory scheme, it is wise to look at the United States Code. 11 USC 302(a) states that a joint petition can only filed by "an individual that may be a debtor under such chapter and such individual's spouse." According to the plain language of the statute, there is no gender bias in the definition of a joint case. The bankruptcy code is simply silent as to defining marriage.

Traditionally, marriage has been an issue of state law with the federal government staying out of the issue for the most part. Consequently, it would make sense that if a state approves same sex marriage, that the coupe would then qualify as "married" under the bankruptcy code. 

Now for the monkey wrench in the system: the Defense of Marriage Act (DOMA). 1 U.S.C. 7 clearly states that "In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word "marriage" means only a legal union between one man and one woman as husband and wife, and the word "spouse" refers only to a person of the opposite sex who is a husband or wife."

Given that the Bankruptcy Code is an Act of Congress, DOMA supersedes the general nature of the term "spouse" in 11 U.S.C. 302(a) and limits the definition to heterosexual couples. Because Bankruptcy is a federal proceeding, this definition supersedes any definition of marriage enacted by a state. As a result, on heterosexual couples can file joint petitions under the bankruptcy code.

This does not mean that same sex couples cannot get bankruptcy relief, but rather, now requires that said couples file two separate (though related) bankruptcy petitions.

Getting Started

Over the past couple of years, I have seen my law practice develop into something that would have been unrecognizable to me in law school. I had always wanted to practice in environmental law and went to great lengths to pursue that as a career.

It wasn't until I took an internship in Toledo, OH for a collection attorney that I began to shift my focus towards consumer law. After starting my own law practice in Temperance, MI, I quickly realized that a need existed for qualified and competent bankruptcy attorneys.

In September 2012, I joined the law firm of Aronoff & Linnell, PLLC. I handle a wide variety of issues for the firm, including Chapter 7 and Chapter 13 Bankruptcies, family law, and tax issues. I can honestly say that I love my work. I enjoy helping people untangle the often frustrating and demoralizing burden of financial problems. I know that my co-workers feel the same.

It is my intention that this Blog serve as guidance to individuals that may be looking for answers. I hope that the information that I provide brings answers and ultimately peace of mind.

Thanks for reading and let me know if you have any comments or questions!