Tuesday, August 25, 2009

Junior Mortgages in Bankruptcy

At Shenwick & Associates, we hear from many clients who have multiple mortgages on their property and want to stay in their home while reducing their debt burden. Chapter 13, which allows individual debtors to reorganize their debts and pay off secured creditors, is often a good choice for these clients. However, the treatment of unsecured junior mortgages has been a confusing one for both Debtors and Bankruptcy Courts alike.

In In re Pond, 252 F.3d 122 (2d Cir. 2001), the Second Circuit Court of Appeals held that a Debtor could void a wholly unsecured junior mortgage loan. The Debtors in In re Latimer, (Bk. No. 08-21242, Bank. W.D.N.Y., Ninfo, J., Oct. 27, 2008) wanted to bifurcate a second mortgage on their house into a secured claim and an unsecured claim, arguing that Pond didn’t address the plain language of 11 U.S.C. §§ 1322(c)(2) and 1325(a)(5)(B), which appears to specifically allow this type of bifurcation.

Relying on precedents from other Circuit Courts of Appeal, the Bankruptcy Court agreed and held that the Debtors could bifurcate the second mortgage on the real property into an allowed secured claim and an unsecured claim. Although the Second Circuit Court of Appeals (which has appellate jurisdiction over cases from New York) has not yet considered this issue, this case provides authority for debtors to bifurcate and strip down undersecured junior mortgages on their home in Chapter 13.

For more information about Chapter 13 bankruptcy and how to preserve the equity in your home in bankruptcy, please contact Jim Shenwick.

Monday, August 10, 2009

Bloomberg News: Consumer, Celebrity Bankruptcies May Hit 1.4 Million

By Linda Sandler and Andrew M. Harris

Aug. 10 (Bloomberg) -- Consumer bankruptcies show no sign of abating after rising more than a third this year and may hit 1.4 million by Dec. 31 as jobs are lost and loans are harder to get, according to the American Bankruptcy Institute.

More than 126,000 consumers filed for bankruptcy in the U.S. last month, 34 percent more than in July 2008, the ABI said in its latest report on Aug. 4. The increase came after a 36.5 percent rise in personal bankruptcies nationwide in the first six months, to 675,351, according to the ABI research group, which interprets data collected by the National Bankruptcy Research Center.

“Rising unemployment on top of high pre-existing debt burdens is a formula for higher bankruptcies through the end of this year,” ABI Executive Director Samuel Gerdano said in a statement. The group, composed of lawyers, accountants, bankers and judges, is based in Alexandria, Virginia.

Debt problems don’t stop with sub-prime borrowers. Celebrities who filed for bankruptcy in July included movie actor Stephen Baldwin, who sought protection from creditors after lenders began foreclosure procedures against his home. Lenny Dykstra filed for Chapter 11 bankruptcy in a petition that says the former Major League Baseball All-Star owes between $10 million and $50 million.

Banks Hurt

Also last month, con man lawyer Marc Dreier’s luxury Manhattan condominium sold for $8.2 million, 21 percent less than what he paid two years ago, in an auction at U.S. Bankruptcy Court in Manhattan. Proceeds will be used to pay creditors in Dreier’s bankruptcy case and victims of Dreier’s fraud, said Salvatore LaMonica, trustee in the Chapter 7 bankruptcy case.

Steeply rising filings by consumers are hurting commercial banks. JPMorgan Chase & Co., the second-largest U.S. bank, predicted more losses on consumer loans last month even as it announced a rise in second-quarter profit on record investment banking fees. Chief Executive Officer Jamie Dimon said he doesn’t expect the credit card business to make a profit this year or in 2010, and the company increased its loss projections for prime and subprime mortgages.

Credit Card Losses

JPMorgan said losses in its Chase credit-card portfolio may be 10 percent next quarter and will be “highly dependent” on unemployment after that. Losses for cards issued by Washington Mutual, which the bank acquired in September, may reach 24 percent by the end of the year, the company said.

JPMorgan’s credit cards lost $672 million, compared with income of $250 million in the second quarter last year. Home- equity charge-offs climbed to $1.3 billion, or 4.61 percent. Prime mortgage defaults rose to $481 million, or 3.07 percent, from $104 million, or 1.08 percent a year earlier.

Dimon, 53, said the company supported “proper consumer protection” and that pending legislation setting up an agency to monitor consumer lending practices would hurt short-term profits in credit cards.

Congress, in October 2005, enacted the Bankruptcy Abuse Prevention and Consumer Protection Act, a legislative reform package intended to make it harder for consumers to get court orders wiping out their uncollateralized debt.

The act required debt counseling and a means test for would-be filers.

Copyright 2009 Bloomberg L.P. All rights reserved.

Monday, August 03, 2009

Short Sales of Real Estate

At Shenwick & Associates, with the continuing fall in the value of real estate, we have received many inquiries regarding short sales of real estate (where the balance on the loan exceeds the value of the real estate in residential or commercial properties). Section 363 of the Bankruptcy Code concerns the use, sale or lease of property, and has been in the news of late with the GM and Chrysler bankruptcies. There are two ways to sell real estate or other assets in bankruptcy. One is pursuant to Section 363 of the Bankruptcy Code, and the other is pursuant to a confirmed bankruptcy plan.

While Section 363 is the quicker way to sell assets, there is a benefit to selling real estate through a confirmed bankruptcy plan, due to the fact that the seller (the bankrupt entity or individual) will not have to pay city or state real estate transfer taxes, based on the U.S. Supreme Court case Florida Department of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. __ (2008). Accordingly, it may be beneficial to all parties for the debtor to file a simple, boilerplate Plan and Disclosure Statement and then sell the real estate pursuant to that Plan.

Recently, Shenwick & Associates represented a lender who was foreclosing on a property in which the borrower's principal had guaranteed the debt. The borrower filed for Chapter 11 bankruptcy to stay the foreclosure. A deal was reached in which the property would be conveyed to the secured lender pursuant to a confirmed Chapter 11 Plan. The transaction was a win-win situation for all parties. The debtor was able to transfer property that was "underwater," the debtor's principal was relieved of liability under his personal guaranty and the secured creditor obtained title to property, without paying city and state transfer taxes.

Any parties having questions regarding this or other transactions involving real estate in bankruptcy should contact Shenwick & Associates.