Thursday, May 28, 2009

Modification of Mortgages in the Southern District of New York

As many of you may know, a bill to modify the bankruptcy laws to allow Bankruptcy Judges to modify mortgages on debtors' primary residences passed the House of Representatives in March, but unfortunately, due to intense opposition by mortgage bankers and a lack of support from President Obama, that bill failed to pass the Senate last month. Notwithstanding that, due to the current recession, the United States is experiencing a record number of personal bankruptcy filings. 1.2 million Americans filed for bankruptcy from April 2008 to last month, and experts predict that bankruptcies could reach 1.5 million this year before leveling off at 1.6 million next year.

Despite the failure of the new bankruptcy bill, the U.S. Bankruptcy Court for the Southern District of New York (NYSB) adopted Loss Mitigation Program Procedures in January 2009. It has been our experience to date that filing for bankruptcy (either Chapter 7 or Chapter 13) in conjunction with requesting loss mitigation is one of the most effective ways to modify a first mortgage (the purpose of the proposed bill).

Last week we were negotiating with outside counsel for Chase Home Finance regarding a modification of a first mortgage for a debtor's primary residence, and they indicated that the quickest way to modify a first mortgage would be to move for loss mitigation through the NYSB procedures. Use of the NYSB Loss Mitigation Program Procedures requires that: (1) the individual must reside in the Southern District of New York (which includes the counties of New York, Bronx, Westchester, Rockland, Putnam, Orange, Dutchess, and Sullivan) and (2) loss mitigation can only be requested for an individual's primary residence.

Additionally, for individuals that file for bankruptcy, there is a $50,000 homestead exemption per spouse under the New York State Debtor & Creditor Law, so an individual can file for Chapter 7 bankruptcy, and if they're married, they can keep their house by reaffirming the debt (which means that the debtor(s) agree to that the debt will not be discharged in bankruptcy and will be continue to be paid) on a primary residence that has no more than $100,000 in equity.

Due to the sharp decrease in residential real estate values that has left many homeowners with no equity (or "underwater"), many individuals can file for Chapter 7 bankruptcy, wipe out credit card, business debt or guaranties and other debts, retain their house, request Loss Mitigation to modify the terms of the mortgage, reaffirm the mortgage and then emerge from bankruptcy with their homeownership intact.

Anyone with questions regarding personal bankruptcy or the Loss Mitigation Program in the Southern District of New York should contact Jim Shenwick.

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