November 25, 2009
By KEVIN SACK
NASHVILLE — Some of the debtors sitting forlornly in this city’s old stone bankruptcy court have lost a job or gotten divorced. Others have been summoned to face their creditors because they spent mindlessly beyond their means. But all too often these days, they are there merely because they, or their children, got sick.
Wes and Katie Covington, from Smyrna, Tenn., were already in debt from a round of fertility treatments when complications with her pregnancy and surgery on his knee left them with unmanageable bills. For Christine L. Phillips of Nashville, it was a $10,000 trip to the emergency room after a car wreck, on the heels of costly operations to remove a cyst and repair a damaged nerve.
Jodie and Charlie Mullins of Dickson, Tenn., were making ends meet on his patrolman’s salary until she developed debilitating back pain that required spinal surgery and forced her to quit nursing school. As with many medical bankruptcies, they had health insurance but their policy had a $3,000 deductible and, to their surprise, covered only 80 percent of their costs.
“I always promised myself that if I ever got in trouble, I’d work two jobs to get out of it,” said Mr. Mullins, a 16-year veteran of the Dickson police force. “But it gets to the point where two or three or four jobs wouldn’t take care of it. The bills just were out of sight.”
Although statistics are elusive, there is a general sense among bankruptcy lawyers and court officials, in Nashville as elsewhere, that the share of personal bankruptcies caused by illness is growing.
In the campaign to broaden support for the overhaul of American health care, few arguments have packed as much rhetorical punch as the there-but-for-the-grace-of-God notion that average families, through no fault of their own, are going bankrupt because of medical debt.
President Obama, in addressing a joint session of Congress in September, called on lawmakers to protect those “who live every day just one accident or illness away from bankruptcy.” He added: “These are not primarily people on welfare. These are middle-class Americans.”
The Senate majority leader, Harry Reid of Nevada, made a similar case on Saturday in a floor speech calling for passage of a measure to open debate on his chamber’s health care bill.
The legislation moving through Congress would attack the problem in numerous ways.
Bills in both houses would expand eligibility for Medicaid and provide health insurance subsidies for those making up to four times the federal poverty level. Insurers would be prohibited from denying coverage to those with pre-existing health conditions. Out-of-pocket medical costs would be capped annually.
How many personal bankruptcies might be avoided is unpredictable, as it is not clear how often medical debt plays a back-breaking role. There were 1.1 million personal bankruptcy filings in 2008, including 12,500 in Nashville, and more are expected this year.
Last summer, Harvard researchers published a headline-grabbing paper that concluded that illness or medical bills contributed to 62 percent of bankruptcies in 2007, up from about half in 2001. More than three-fourths of those with medical debt had health insurance.
But the researchers’ methodology has been criticized as defining medical bankruptcy too broadly and for the ideological leanings of its authors, some of whom are outspoken advocates for nationalized health care.
At the bankruptcy court in Nashville, lawyers provided a spectrum of estimates for the share of cases in Middle Tennessee where medical debt was decisive, from 15 percent to 50 percent. But many said they felt the number had been growing, and might be higher than was obvious because medical bills are often disguised as credit card debt.
“This has really become the insurance system for the country,” said Susan R. Limor, a bankruptcy trustee who calculated that 13 of the 48 Chapter 7 liquidation cases on her docket one recent afternoon included medical debts of more than $1,000.
Under Chapter 7, a debtor’s assets are liquidated and the proceeds are used to pay creditors; any remaining debts are discharged, and filers are left with a 10-year stain on their credit ratings.
“You can’t believe how many people discharge medical debts,” Ms. Limor said. “It’s a kind of trailing indicator of who’s suffering in this economy.”
Kyle D. Craddock, a bankruptcy lawyer here, said his medical cases were heartbreaking because the financial devastation was so rapid and ill-timed. “They’re sick, they’re bankrupt, and if they stay sick for too long, they end up losing their jobs as well,” he said.
That was the case for Ms. Phillips, 45, who said she was fired in October from her job in a shipping department because she had missed so much work while recuperating from her car accident and operations. Her firing came only 11 days after she filed for bankruptcy, listing about $7,000 in unpaid medical bills among her $187,000 in liabilities.
“The medical bills put me over the edge,” said Ms. Phillips, who lost her health insurance along with her job. “I had no money for food at this point. How was I going to do it?”
It was the same for the Mullinses, who have two children. They had a mortgage and owed money on credit cards and student loans. “But the medical problem is what took us down,” said Ms. Mullins, who is packing to move from the two-bedroom house they will soon surrender to Wells Fargo. “Everything was due, they wanted their money now, now, now, and it just became overwhelming.”
For some, like Nathan W. Hale, 34, who had an attack of pancreatitis two months after losing his job with a Nashville cable company, it is the absence of insurance that pulls them under. Others, like Robin P. Herron, 35, of Eagleville, Tenn., have insurance, but it is not enough. Her Blue Cross Blue Shield policy covered only 80 percent of the cost when her daughter needed surgery to remove a cyst from a fallopian tube, leaving her $6,000 in debt.
After cortisone injections failed to cure his gimpy knee, Mr. Covington, 31, had surgery because the pain was forcing him to miss days of work as an emergency medical technician. His recovery kept him off the job for five months.
Simultaneously, his wife, a 911 dispatcher, developed sciatica while pregnant and had to take months off on reduced disability pay. Their insurance policy, with an $850 monthly premium, has a $4,000 annual deductible per family.
As the bills rolled in, the Covingtons compounded their troubles by placing medical charges on credit cards, simply to make the collection agencies stop calling. They fell months behind on their mortgage, and by August had lost their house and both cars.
Mr. Covington, who has taken a second job, said he found it ironic that it had not been the recession that forced them into bankruptcy. “I tell my wife that we beat the economy,” he said, “but health care beat us.”
Copyright 2009 The New York TImes Company. All rights reserved.
Wednesday, November 25, 2009
Tuesday, November 17, 2009
Developments in Personal Bankruptcy in These Tough Times
The following is the outline of a Continuing Legal Education course given by James H. Shenwick, Esq. at First American Title Insurance Company of New York on November 12, 2009.
I. Introduction
a. Why do people file for bankruptcy today?
1. Credit card debts
2. Business reversals and job loss
3. Falling real estate values
4. High housing costs
5. Student loans
6. Divorce
7. Medical bills and illness
b. Many of the problems that are causing individuals to file for personal bankruptcy are real estate related. Fortunately, the Bankruptcy Code and New York State Debtor and Creditor Law provide many remedies to real estate issues and other debtor/creditor problems facing individuals in 2009 in New York State.
• Chapter 7 bankruptcy constitutes the vast majority of individual filings, and can be very helpful in dealing with many debtor/creditor problems that individuals have these days.
c. 1 million Americans filed for bankruptcy from January 2009 to October 2009, and experts predict that bankruptcies could reach 1.5 million this year before leveling off at 1.6 million next year.
d. The goal of this outline is to explain contemporary issues facing debtors in New York State in 2009 and strategies for dealing with those issues.
II. Chapter 7 Personal Bankruptcy-“BAPCPA”
A. In 2005, Congress radically revised and amended Chapter 7 personal bankruptcy laws. These changes include median income and means testing, where if an individual (single, married or with children) has income that exceeds a certain dollar amount, then the bankruptcy filing is considered an abuse of the system and facially they are not permitted to file Chapter 7 bankruptcy.
B. The first test under the revised code is whether a debtor exceeds the median income for their family size based on their state of residence. Pursuant to the 2005 amendments, a case where the debtor makes less than the median is presumed to be a non-abusive filing, and a below-median debtor may file for Chapter 7 bankruptcy. Effective March 15, 2009, the median income of a single person in New York State is $46,523. For a family of two, the income threshold for the Median Income Test is $57,006, for a family of three it is $67,991 and for a family of four it is $83,036. Add $6,900 for each individual in excess of four. Median income figures are periodically revised by the Census Bureau.
C. However, all is not lost for a debtor who exceeds his or her state median income threshold. If an individual’s income exceeds the median income for their respective state and family size, they may still be allowed to file for Chapter 7 bankruptcy if they pass the so-called “Means Test,” i.e. the results show that the bankruptcy filing is not a presumption of abuse under § 707(b)(7) of the Bankruptcy Code. The Means Test (officially known as Form 22A, “Chapter 7 Statement of Current Monthly Income and Means-Test Calculation”) is one of the most complicated calculations in the law. It consists of eight pages, and is similar to doing a 1040 tax return for an individual. The Means Test incorporates the debts that an individual has (both unsecured and secured (i.e. mortgages and car loans), taxes that they owe, and expenses specified by the IRS in its financial analysis standards–food, clothing, household supplies, personal care, out-of-pocket health care and miscellaneous (National Standards); housing and utilities (non-mortgage expenses), housing and utilities (mortgage/rental expense), with adjustments, transportation (vehicle operation/public transportation/transportation ownership or lease expenses)(you are entitled to an expense allowance in this category regardless of whether you pay the expenses of operating a vehicle and regardless of whether you use public transportation)–as well as many other factors.
D. However, with proper planning, most individuals or couples whose income exceeds the median income can still pass the Means Test and will be allowed to file for Chapter 7 bankruptcy, notwithstanding the legislative intent of the changes under BAPCPA, which was to try and minimize the number of individuals who could file for Chapter 7 bankruptcy and force them to either not file for bankruptcy or to file for Chapter 13 bankruptcy.
E. Means Test Planning Opportunities:
1. If an individual’s debts are primarily business debts, then the debtor is not required to take the Means Test.
2. The data that is used to calculate the Means Test is a six-month rolling look back at the debtor’s income and expenses. Accordingly, if a debtor is self-employed or is an independent contractor, they may be able to arrange their financial affairs so that they have less income for the months included in the Means Test, and therefore pass the Means Test. This is known as pre-bankruptcy planning.
3. Our experience is that 95% of all debtors pass the means test and qualify for Chapter 7 personal bankruptcy.
III. Why do the vast majority of Americans who file for bankruptcy file for Chapter 7 bankruptcy?
A. Chapter 7 bankruptcy provides individuals who qualify to file under this chapter with a “discharge,” which can wipe out a significant amount of an individual’s debt.
B. What debts are discharged in a Chapter 7 personal bankruptcy?
i. Credit card debt
ii. Personal, business, automobile and real estate loans
iii. Lines of credit
iv. Medical bills
v. Utility bills
vi. Personal and “good guy” guaranties-“good guy” guaranties are guaranties created for the leasing of commercial space
C. Certain “old income taxes” may be dischargeable if:
i. The tax return was filed more than two years prior to the bankruptcy filing;
ii. The taxes are more than three years old;
iii. The taxes were assessed more than 240 days before the filing of the petition;
iv. There was no attempt to avoid or evade the taxes.
If all of these conditions are met, the taxes are dischargeable in bankruptcy.
D. The IRS has heightened its scrutiny of the discharge of income taxes in bankruptcy, and their position (based on case law) is that if you spend too much money on luxury items and/or pay other creditors ahead of the IRS, then according to the IRS, those tax debts would not be dischargeable, and the IRS will commence an adversary proceeding (litigation in a bankruptcy case) to object to the discharge of these taxes. See Wright v. Internal Revenue Service, 191 B.R. 291 (S.D.N.Y. 1995); Haesloop v. U.S. (In re Haesloop), 2000 Bankr. LEXIS 1104, 2000 WL 1607316 (Bankr. E.D.N.Y. Aug. 30, 2000); Lynch v. United States, 299 B.R. 62 (Bankr. S.D.N.Y. 2003); Epstein v. United States, 303 B.R. 280 (Bankr. E.D.N.Y. 2004)
E. What is not dischargeable in a Chapter 7 bankruptcy filing?
i. Recent income taxes (2-3 years old)
ii. “Trust fund” taxes (i.e. sales or employment taxes)
iii. Student loans
iv. Domestic support obligations (i.e. alimony and child support payments)
v. Debts incurred within 90 days of a bankruptcy filing that aggregate at least $550 for luxury goods or services and cash advances aggregating more than $825 within 70 days.
Chapter 7 bankruptcy is a very effective tool for the right debtor!
F. New BAPCPA (2005) requirements in Chapter 7 bankruptcy
i. Under BAPCPA, in addition to the list of creditors, schedules of assets, liabilities, income and expenses debtors must now provide:
a. A certificate of credit counseling;
b. Payment advices from employers received 60 days before filing (if any);
c. A statement of monthly net income and any anticipated increase in income or expenses after filing;
d. Tax returns or transcripts filed in the most recent tax year;
f. Photo ID; and
g. Social Security card
ii. Failure to provide the documents within 45 days after the petition has been filed (with a possibility of a 45-day extension) results in automatic dismissal of the case.
iii. Also new under BAPCPA, a debtor must have received pre-petition credit briefing (in person, by phone or internet) from an approved non-profit entity that outlined opportunities for credit counseling and assisted the Debtor in performing a personal budget analysis in the 180 days before filing a petition. Greenpath, one of the approved credit counseling agencies, charges approximately $45.
vi. Additionally, within 45 days after the first Meeting of Creditors, the debtor must also take a post-petition financial management course and file a certificate of completion with the Bankruptcy Court. The cost of this course from Greenpath is also approximately $45.
iv. The Bankruptcy Court may grant a waiver based on the Debtor’s sworn statement that they were unable to obtain the counseling services within five days of making the request and had to file immediately, but the waiver expires 30 days after the petition is filed.
v. The briefing is not required if the Bankruptcy Court determines that the Debtor is mentally incapacitated, physically disabled, or is an active member of the military in a combat zone.
G. What are the negatives of filing for Chapter 7 bankruptcy?
i. The filing stays on a person’s credit report for seven to ten years
ii. A debtor may only file for Chapter 7 bankruptcy every eight years (however, if a debtor files for Chapter 7, receives a discharge, and then gets into further financial trouble, they can file under Chapter 11 or 13 of the Bankruptcy Code).
H. Property of the Bankruptcy Estate:
i. This includes tax refunds
ii. Lawsuits (usually personal injury cases) commenced by the debtor prior to the bankruptcy filing
iii. Inheritances received by the debtor within 180 days of the bankruptcy filing.
IV. Chapter 7 bankruptcy can be very effective for individuals with real estate in which they live that is “underwater” (where the fair market value of the property is less than the value of the mortgages to which the property is subject)
A. When we talk about real estate, we’re talking about houses, townhouses, co-ops and condos. In order to qualify for the homestead exemption, a debtor must reside in the property at the time the bankruptcy is filed.
In 2005, New York State increased the homestead exemption to $50,000 per Debtor, so a married couple under New York law can exempt $100,000 of equity in a residence. Let’s look at a few examples of how residential real estate issues play out in a Chapter 7 bankruptcy filing.
Real Estate Scenarios:
For example, let’s take a look at a married couple considering filing for bankruptcy and the value of their property and mortgage(s) on their property.
FMV $600,000
Mortgage ($500,000)
Equity $100,000
In this scenario, the couple could file for Chapter 7 bankruptcy, discharge their unsecured debts, and keep their house, provided that they continue to make mortgage payments.
FMV $700,000
Mortgage ($500,000)
Equity $200,000
NYS Homestead Exemption ($100,000)
Non-Exempt Equity $100,000
In this scenario in a Chapter 7 bankruptcy, the Chapter 7 Trustee would sell the house and receive $100,000 for the equity above the homestead exemption (less costs and expenses), and that money would be used to pay the couple’s creditors. The Trustee would pay $100,000 to the Debtors at the end of their case as a result of their homestead exemption. Alternatively, the debtors could repurchase the house from the Trustee by buying the equity from the Trustee (redemption).
FMV $400,000
Mortgage ($500,000)
Negative Equity ($100,000)
In this scenario, the house has a negative equity of $100,000 and is “underwater” and would not be sold by the Chapter 7 Trustee. However, in order to keep the house, the debtor must reaffirm the debt to the mortgagee before the case is discharged and continue to make the payments on the mortgage, notwithstanding the fact that the value of the house is less than the amount of the mortgage.
Reaffirmation is governed by section 524(c) of the Bankruptcy Code, and requires that the debtor file an agreement with the court stating that he or she agrees to be legally bound to repay the otherwise dischargeable debt. The reaffirmation agreement must be filed 60 days after the meeting of creditors. The debtor’s attorney must file an affidavit stating that such an agreement will not be a hardship for the debtor. In the case of a pro se debtor, the bankruptcy judge will interview the debtor to ensure the agreement is voluntary and that it does not present a hardship for the debtor. In any event, the debtor may rescind the agreement up to 60 days after the agreement is filed with the court, or the case is discharged, whichever is later.
Here’s a question for all of you-Under these circumstances why would the couple want to retain the house?
Wouldn’t they be better off economically to file for Chapter 7 bankruptcy and let the bank make a motion for relief from the automatic stay so they can foreclose and obtain title to the house? This a personal decision for the debtors would have to make, which may include non-economic considerations that would lead them to want to keep a house that is $100,000 “underwater.”
Scenario: One spouse files for bankruptcy, the other spouse does not and the house has equity.
In a Chapter 7 bankruptcy, the Trustee may be able to sell the house. However, under New York State law due to “tenancy-by-the-entirety” protection, the house cannot be sold. The creditor can docket a judgment against the property, which is good for 20 years, and the home cannot be sold or refinanced.
Under this scenario, NYS law may provide more protection to the non-filing spouse than bankruptcy law. See §§ 363(h), (i), and (j) of the Bankruptcy Code when dealing with a scenario where one spouse files for bankruptcy, the other spouse does not and the house has equity.
Note that if the home is transferred from one spouse to the other, this a fraudulent conveyance.
Planning opportunity: If the couple divorces, the house may be transferred from one spouse to the other for no consideration, pursuant to New York State equitable distribution law.
In Chapter 7 bankruptcy, the factors to be considered as to whether the Chapter 7 bankruptcy trustee can sell the house are: (i) the equity in the property; (ii) the respective ages of the debtor and the spouse; and (iii) the burden to the non-filing spouse of having to leave the house (i.e. the impact on minor children).
Section 363(h) of the Bankruptcy Code deals with the conditions which must be met for a Trustee to sell a co-owner’s interest in property (whether owned as tenants in common, joint tenants or tenants by the entirety), which include:
1. Partition of the property between the bankruptcy estate and the co-owners is impracticable;
2. Sale of the bankruptcy estate’s undivided interest in the property would realize significantly less for the estate than the sale of the property free of the interests of the co-owners;
3. The benefit to the bankruptcy estate of a sale of the property free of the interests of the co-owners outweighs the detriment, if any, to the co-owners.
In Community Natl. Bank and Trust Co. of New York v. Persky (In re Persky), 893 F.2d 15 (2d. Cir. 1989), the Second Circuit Court of Appeals reviewed a bankruptcy filing in which only one of the co-owners was indebted to the bank and filed for bankruptcy relief. The Court found that:
• The Bankruptcy Court had the power to review the Trustee’s discretion to sell the property.
• The benefit to the bankruptcy estate should be analyzed from the standpoint of the sale of the nondebtor spouse’s entire interest in the property, including their possessory and survivorship interests, in determining whether the property should be sold.
• Noneconomic factors should be considered when analyzing the detriment to the nondebtor spouse of a sale of the property.
Section 363(i) of the Bankruptcy Code provides that in a Chapter 7 bankruptcy, if the property is to be sold, the debtor’s spouse may purchase the estate’s share of the property.
Pursuant to §363(j) of the Bankruptcy Code, the Chapter 7 Trustee must distribute to the debtor’s spouse the proceeds of the sale (less costs and expenses), but not including any compensation of the Trustee, in accordance with the ownership interests of the non-filing spouse and the bankruptcy estate.
Pursuant to § 363(k) of the Bankruptcy Code, the mortgagee may also bid on the house and, if they’re successful, they may offset their secured claim against the purchase price of the house.
Mortgage Arrears and Chapter 7 Bankruptcy
The above scenarios assume that the debtors are current on their mortgage. If the debtors were not current, then the mortgage arrears would need to be cured in order to keep the house during Chapter 7 bankruptcy.
A. How does a debtor deal with mortgage arrears?
i. Negotiate with the lender prior to the bankruptcy filing.
ii. Negotiate with the lender after the bankruptcy filing for payment plan for the arrears. Pursuant to Bankruptcy Code § 524, a debtor must reaffirm within 60 days from the date of the first scheduled meeting of creditors. Once the reaffirmation is executed, unless the agreement is rescinded, the debtor is liable; if they default on the mortgage in the future after reaffirmation, the mortgage debt is not dischargeable.
iii. Loss mitigation in the Southern District of New York (see Section V below)
iv. Conversion of a Chapter 7 case to a Chapter 13 case, pursuant to Bankruptcy Code § 706.
v. Abandon the house to the mortgagee pursuant to the Chapter 7 filing, if you can’t work out a payment plan with the lender.
V. The Southern District of New York’s Loss-Mitigation Program
A. In response to a growing number of mortgage defaults and foreclosures, the U.S. Bankruptcy Court for the Southern District of New York (NYSB) adopted Loss Mitigation Program Procedures in January 2009. A full description of the program is available here.
B. “Loss mitigation” includes the full range of solutions that can prevent either the loss of a Debtor’s property to foreclosure, increased costs to the lender, or both. Loss mitigation commonly consists of the following general types of agreements, or a combination of them: loan modification, loan refinance, forbearance, short sale, or surrender of the property in full satisfaction of the mortgage.
C. 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. Loss Mitigation is not available in the Eastern District of New York (which includes the counties of Kings, Queens, Richmond, Nassau and Suffolk). However, the Eastern District is contemplating setting up a similar program.
D. Parties are encouraged to request loss mitigation as early in the case as possible, but loss mitigation may be initiated at any time, by any of the following methods:
i. By the Debtor
a. A Debtor may request Loss Mitigation in a Chapter 7 or Chapter 13 Plan by filing and serving a Notice of Loss Mitigation Request (along with an affidavit of service) on a particular creditor. The creditor has 21 days to object. If no objection is filed, the debtor shall submit an order as soon as possible to the Judge assigned to the bankruptcy case. The order may be submitted: (1) after the expiration of the 21 days; or (2) with the Notice of Loss Mitigation Request on Notice of Presentment on the 22nd day.
b. A Debtor may also file and serve a Loss Mitigation Request-By the Debtor (along with an affidavit of service) for loss mitigation on a particular creditor separate from a Chapter 13 Plan. The creditor has 14 days to object. If no objection is filed, the debtor shall submit an order as soon as possible. The order may be submitted: (1) after the expiration of the 14 days; or (2) with the Loss Mitigation Request-By the Debtor on Notice of Presentment on the 15th day.
c. If a creditor has filed a motion requesting relief from the automatic stay pursuant to § 362 of the Bankruptcy Code (a Lift-Stay Motion), at any time prior
to the conclusion of the hearing on the Lift-Stay Motion, the Debtor may file a
Loss Mitigation Request-By the Debtor. The Debtor and creditor shall appear at the scheduled hearing on the Lift-Stay Motion, and the Bankruptcy Court will consider the Loss Mitigation Request-By the Debtor and any opposition by the Creditor.
ii. By a creditor.
A creditor may file a Loss Mitigation Request-By the Creditor. The Debtor shall have seven days to object. If no objection is filed, the creditor shall submit an order as soon as possible. The order may be submitted: (1) after the expiration of the seven days; or (2) with the request on Notice of Presentment on the 8th day.
iii. By the Bankruptcy Court.
The Bankruptcy Court may enter a Loss Mitigation Order at any time, provided
that the parties that will be bound by the Loss Mitigation Order have had notice and an opportunity to object.
D. Upon entry of a Loss-Mitigation Order:
i. Each creditor is authorized to contact the Debtor directly. It shall be presumed
that such communications do not violate the automatic stay.
ii. Except where necessary to prevent irreparable injury, loss or damage, a creditor shall not file a Lift-Stay Motion during the loss mitigation period. Any Lift-Stay
Motion filed by the creditor prior to the entry of the Loss Mitigation Order shall
be adjourned to a date after the last day of the loss mitigation period, and the stay
shall be extended pursuant to § 362(e) of the Bankruptcy Code.
iii. In a Chapter 13 case, the deadline by which a creditor must object to
confirmation of the Chapter 13 plan shall be extended to permit the creditor an
additional 14 days after the termination of loss mitigation, including any
extension of the loss mitigation period.
iv. All communications and information exchanged by the Loss Mitigation Parties
during loss mitigation will be inadmissible in any subsequent proceeding pursuant
to Federal Rule of Evidence 408.
E. The Loss Mitigation Parties shall provide either a written or verbal report to the bankruptcy court regarding the status of loss mitigation within the time set by the
bankruptcy court in the Loss Mitigation Order. The status report shall state whether one
or more loss mitigation sessions have been conducted, whether a resolution was reached,
and whether one or more of the Loss Mitigation Parties believe that additional loss
mitigation sessions would be likely to result in either a partial or complete resolution. A
status report may include a request for an extension of the loss mitigation period.
F. The Bankruptcy Court will consider any settlement reached during
loss mitigation. A settlement may be noticed and implemented in any manner
permitted by the Bankruptcy Code and Federal Rules of Bankruptcy Procedure, including, but not limited to, a stipulation, sale, plan of reorganization or amended plan of reorganization.
G. Loss Mitigation may delay a motion to lift stay (filed by a mortgagee) to commence or continue a foreclosure action, and delay a foreclosure action as well.
VI. Exemptions in Chapter 7 Bankruptcy for a New York State Resident
A. IRA. The maximum amount of a qualified IRA that may be exempted is $1,000,000.
B. Under New York Debtor and Creditor Law §5205(a), an individual debtor may exempt up to $5,000 of personal property and a joint debtor may exempt up to $10,000 of personal property.
C. Homestead exemption-As discussed in Section IV above, in New York State, an individual debtor may exempt up $50,000 of equity in a residence, and a joint debtor may exempt up to $100,000 of equity in a residence.
D. An unlimited amount of rental or utility security deposits.
E. 60 days of food.
F. $7,500 (for an individual debtor) or $15,000 (for a joint debtor) of monies recovered for a personal injury.
VII. Remedies for Dealing with Judgments
A. Under New York Debtor and Creditor Law, a judgment is good for 20 years. A judgment docketed against a property would prevent the owner from selling or refinancing the property without satisfying the judgment.
B. If a married couple owns property as tenants by the entirety, a creditor can docket the judgment against the property, but can’t force a sale of the property. This is to prevent the innocent spouse from the consequences of the judgment debtor’s actions.
C. Creditors may file a motion to avoid a judicial lien under section 522(f) of the Bankruptcy Code. Section 522(f) of the Bankruptcy Code protects Debtors’ exemptions and discharge, and thus their fresh start, by allowing them to avoid certain liens on exempt property (but not consensual mortgages). A Debtor may avoid a judicial lien on any property to the extent that the property could have been exempted in the absence of the lien.
a. The formula for calculating avoidance of a lien is:
i. Add the lien being tested for avoidance, all other liens and the maximum exemption allowable in the absence of liens (in New York State, $50,000 for an individual Debtor, $100,000 for joint Debtors).
ii. From the above sum, subtract the value of the property in the absence of the lien to determine the extent of the impairment.
iii. If the extent of the impairment of the exemption exceeds the entire value of the Debtor’s lien, the entire lien is avoidable.
b. If the extent of impairment is less than the entire value of the Debtor’s lien, the lien can be avoided only to the extent of the impairment of the exemption and the rest remains as a lien.
c. If the property has increased in value, there may now be too much equity for § 522(f) to apply if the current date is used as the date of valuation. The Debtor will want to use the date the bankruptcy petition was originally filed as the date of valuation.
D. Judgments entered within 90 days of a bankruptcy filing are a voidable preference.
VIII. Cancellation of Record of Judgment Discharged in Bankruptcy under New York State Debtor and Creditor Law § 150
A. Under this section of New York State law, at any time after a year has elapsed since a Debtor is discharged from their debts in bankruptcy, a Debtor may apply, upon proof of their discharge of debts, to the court in which a judgment was rendered against the Debtor, or to the court in which the judgment was docketed, for an order directing that a discharge or a qualified discharge of record be marked upon the docket of the judgment.
B. If it appears after a hearing that the Debtor has been discharged from the payment of a judgment or the debt upon which it was recovered, the court must enter an order directing that a discharge or qualified discharge be marked on the docket of the judgment.
C. If it appears that any lien of the judgment upon real property owned by the Debtor prior to the commencement of the bankruptcy was invalidated or surrendered in the bankruptcy or set aside in an action brought by the receiver or trustee, the order shall direct that a discharge be marked on the docket of the judgment.
D. If (a) it does not appear whether the judgment was a lien on real property owned by the Debtor prior to the commencement of the bankruptcy, or (b) if it appears that the judgment was a lien on such real property, and it is not established to the satisfaction of the court that the lien was invalidated or surrendered in the bankruptcy or set aside in an action brought by the receiver or trustee, the order shall direct that a qualified discharge be marked on the docket of the judgment. If the court directs that a qualified discharge be marked on the docket of the judgment, it must specify in its order which of the two grounds stated above was the basis of its order.
VIII. Relief of Indebtedness Income
A. Under § 108 of the Internal Revenue Code, debt relief is considered income.
B. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
i. This provision applies to debt forgiven in calendar years 2007 through 2012.
ii. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).
iii. The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
iv. This provision does not apply to credit card debt or non-residential property. But a Chapter 7 bankruptcy filing eliminates relief of indebtedness debt.
IX. Chapter 13
A. What are the pros and cons?
i. Cons
a. The debtor is placed on an austerity budget and must pay their disposable income to the Chapter 13 Trustee on a monthly basis.
b. If the debtor is over the “median income,” then they must prepare a five year, 60 month plan. The shortest plans are generally three years.
c. The filing fee is $279 (which is $20 less then the filing fee for a Chapter 7 filing).
d. However, legal fees are greater than those for a Chapter 7 filing, since there are fees for preparing the plan, the hearing on plan confirmation, and the plan must be served on creditors and must be confirmable.
e. In the Southern District of New York, historically only 30% of Chapter 13 plans pay out over time.
f. Pursuant to §1322 of the Bankruptcy Code, first mortgages cannot be modified in Chapter 13. However, second mortgages can be modified and mortgages on investment properties and vacation homes can be modified.
g. The Chapter 13 Trustee receives a commission of 10% of the monies paid into a Chapter 13 plan.
h. Since 2005, when New York State increased the homestead exemption to $50,000, Chapter 7 can accomplish much of what can be accomplished with a Chapter 13 filing at a lesser cost to the Debtor.
ii. Pros
a. Chapter 13 allows the debtor to retain property that he or she would otherwise lose in a Chapter 7 liquidation (e.g. a car or a house with substantial equity)
b. A Chapter 13 debtor remains under bankruptcy court protection for the duration of the repayment plan (3-5 years)
X. Alternatives to Chapter 7 bankruptcy
A. Do nothing
B. File for Chapter 13 bankruptcy
C. File for Chapter 11 bankruptcy (which is an extremely expensive and time consuming process). A debtor would only file under this chapter if they didn’t fit within the confines of the Chapter 7 or Chapter 13 requirements, had a very unique problem or had an extremely high net worth.
D. Out of court workout with creditors
I. Introduction
a. Why do people file for bankruptcy today?
1. Credit card debts
2. Business reversals and job loss
3. Falling real estate values
4. High housing costs
5. Student loans
6. Divorce
7. Medical bills and illness
b. Many of the problems that are causing individuals to file for personal bankruptcy are real estate related. Fortunately, the Bankruptcy Code and New York State Debtor and Creditor Law provide many remedies to real estate issues and other debtor/creditor problems facing individuals in 2009 in New York State.
• Chapter 7 bankruptcy constitutes the vast majority of individual filings, and can be very helpful in dealing with many debtor/creditor problems that individuals have these days.
c. 1 million Americans filed for bankruptcy from January 2009 to October 2009, and experts predict that bankruptcies could reach 1.5 million this year before leveling off at 1.6 million next year.
d. The goal of this outline is to explain contemporary issues facing debtors in New York State in 2009 and strategies for dealing with those issues.
II. Chapter 7 Personal Bankruptcy-“BAPCPA”
A. In 2005, Congress radically revised and amended Chapter 7 personal bankruptcy laws. These changes include median income and means testing, where if an individual (single, married or with children) has income that exceeds a certain dollar amount, then the bankruptcy filing is considered an abuse of the system and facially they are not permitted to file Chapter 7 bankruptcy.
B. The first test under the revised code is whether a debtor exceeds the median income for their family size based on their state of residence. Pursuant to the 2005 amendments, a case where the debtor makes less than the median is presumed to be a non-abusive filing, and a below-median debtor may file for Chapter 7 bankruptcy. Effective March 15, 2009, the median income of a single person in New York State is $46,523. For a family of two, the income threshold for the Median Income Test is $57,006, for a family of three it is $67,991 and for a family of four it is $83,036. Add $6,900 for each individual in excess of four. Median income figures are periodically revised by the Census Bureau.
C. However, all is not lost for a debtor who exceeds his or her state median income threshold. If an individual’s income exceeds the median income for their respective state and family size, they may still be allowed to file for Chapter 7 bankruptcy if they pass the so-called “Means Test,” i.e. the results show that the bankruptcy filing is not a presumption of abuse under § 707(b)(7) of the Bankruptcy Code. The Means Test (officially known as Form 22A, “Chapter 7 Statement of Current Monthly Income and Means-Test Calculation”) is one of the most complicated calculations in the law. It consists of eight pages, and is similar to doing a 1040 tax return for an individual. The Means Test incorporates the debts that an individual has (both unsecured and secured (i.e. mortgages and car loans), taxes that they owe, and expenses specified by the IRS in its financial analysis standards–food, clothing, household supplies, personal care, out-of-pocket health care and miscellaneous (National Standards); housing and utilities (non-mortgage expenses), housing and utilities (mortgage/rental expense), with adjustments, transportation (vehicle operation/public transportation/transportation ownership or lease expenses)(you are entitled to an expense allowance in this category regardless of whether you pay the expenses of operating a vehicle and regardless of whether you use public transportation)–as well as many other factors.
D. However, with proper planning, most individuals or couples whose income exceeds the median income can still pass the Means Test and will be allowed to file for Chapter 7 bankruptcy, notwithstanding the legislative intent of the changes under BAPCPA, which was to try and minimize the number of individuals who could file for Chapter 7 bankruptcy and force them to either not file for bankruptcy or to file for Chapter 13 bankruptcy.
E. Means Test Planning Opportunities:
1. If an individual’s debts are primarily business debts, then the debtor is not required to take the Means Test.
2. The data that is used to calculate the Means Test is a six-month rolling look back at the debtor’s income and expenses. Accordingly, if a debtor is self-employed or is an independent contractor, they may be able to arrange their financial affairs so that they have less income for the months included in the Means Test, and therefore pass the Means Test. This is known as pre-bankruptcy planning.
3. Our experience is that 95% of all debtors pass the means test and qualify for Chapter 7 personal bankruptcy.
III. Why do the vast majority of Americans who file for bankruptcy file for Chapter 7 bankruptcy?
A. Chapter 7 bankruptcy provides individuals who qualify to file under this chapter with a “discharge,” which can wipe out a significant amount of an individual’s debt.
B. What debts are discharged in a Chapter 7 personal bankruptcy?
i. Credit card debt
ii. Personal, business, automobile and real estate loans
iii. Lines of credit
iv. Medical bills
v. Utility bills
vi. Personal and “good guy” guaranties-“good guy” guaranties are guaranties created for the leasing of commercial space
C. Certain “old income taxes” may be dischargeable if:
i. The tax return was filed more than two years prior to the bankruptcy filing;
ii. The taxes are more than three years old;
iii. The taxes were assessed more than 240 days before the filing of the petition;
iv. There was no attempt to avoid or evade the taxes.
If all of these conditions are met, the taxes are dischargeable in bankruptcy.
D. The IRS has heightened its scrutiny of the discharge of income taxes in bankruptcy, and their position (based on case law) is that if you spend too much money on luxury items and/or pay other creditors ahead of the IRS, then according to the IRS, those tax debts would not be dischargeable, and the IRS will commence an adversary proceeding (litigation in a bankruptcy case) to object to the discharge of these taxes. See Wright v. Internal Revenue Service, 191 B.R. 291 (S.D.N.Y. 1995); Haesloop v. U.S. (In re Haesloop), 2000 Bankr. LEXIS 1104, 2000 WL 1607316 (Bankr. E.D.N.Y. Aug. 30, 2000); Lynch v. United States, 299 B.R. 62 (Bankr. S.D.N.Y. 2003); Epstein v. United States, 303 B.R. 280 (Bankr. E.D.N.Y. 2004)
E. What is not dischargeable in a Chapter 7 bankruptcy filing?
i. Recent income taxes (2-3 years old)
ii. “Trust fund” taxes (i.e. sales or employment taxes)
iii. Student loans
iv. Domestic support obligations (i.e. alimony and child support payments)
v. Debts incurred within 90 days of a bankruptcy filing that aggregate at least $550 for luxury goods or services and cash advances aggregating more than $825 within 70 days.
Chapter 7 bankruptcy is a very effective tool for the right debtor!
F. New BAPCPA (2005) requirements in Chapter 7 bankruptcy
i. Under BAPCPA, in addition to the list of creditors, schedules of assets, liabilities, income and expenses debtors must now provide:
a. A certificate of credit counseling;
b. Payment advices from employers received 60 days before filing (if any);
c. A statement of monthly net income and any anticipated increase in income or expenses after filing;
d. Tax returns or transcripts filed in the most recent tax year;
f. Photo ID; and
g. Social Security card
ii. Failure to provide the documents within 45 days after the petition has been filed (with a possibility of a 45-day extension) results in automatic dismissal of the case.
iii. Also new under BAPCPA, a debtor must have received pre-petition credit briefing (in person, by phone or internet) from an approved non-profit entity that outlined opportunities for credit counseling and assisted the Debtor in performing a personal budget analysis in the 180 days before filing a petition. Greenpath, one of the approved credit counseling agencies, charges approximately $45.
vi. Additionally, within 45 days after the first Meeting of Creditors, the debtor must also take a post-petition financial management course and file a certificate of completion with the Bankruptcy Court. The cost of this course from Greenpath is also approximately $45.
iv. The Bankruptcy Court may grant a waiver based on the Debtor’s sworn statement that they were unable to obtain the counseling services within five days of making the request and had to file immediately, but the waiver expires 30 days after the petition is filed.
v. The briefing is not required if the Bankruptcy Court determines that the Debtor is mentally incapacitated, physically disabled, or is an active member of the military in a combat zone.
G. What are the negatives of filing for Chapter 7 bankruptcy?
i. The filing stays on a person’s credit report for seven to ten years
ii. A debtor may only file for Chapter 7 bankruptcy every eight years (however, if a debtor files for Chapter 7, receives a discharge, and then gets into further financial trouble, they can file under Chapter 11 or 13 of the Bankruptcy Code).
H. Property of the Bankruptcy Estate:
i. This includes tax refunds
ii. Lawsuits (usually personal injury cases) commenced by the debtor prior to the bankruptcy filing
iii. Inheritances received by the debtor within 180 days of the bankruptcy filing.
IV. Chapter 7 bankruptcy can be very effective for individuals with real estate in which they live that is “underwater” (where the fair market value of the property is less than the value of the mortgages to which the property is subject)
A. When we talk about real estate, we’re talking about houses, townhouses, co-ops and condos. In order to qualify for the homestead exemption, a debtor must reside in the property at the time the bankruptcy is filed.
In 2005, New York State increased the homestead exemption to $50,000 per Debtor, so a married couple under New York law can exempt $100,000 of equity in a residence. Let’s look at a few examples of how residential real estate issues play out in a Chapter 7 bankruptcy filing.
Real Estate Scenarios:
For example, let’s take a look at a married couple considering filing for bankruptcy and the value of their property and mortgage(s) on their property.
FMV $600,000
Mortgage ($500,000)
Equity $100,000
In this scenario, the couple could file for Chapter 7 bankruptcy, discharge their unsecured debts, and keep their house, provided that they continue to make mortgage payments.
FMV $700,000
Mortgage ($500,000)
Equity $200,000
NYS Homestead Exemption ($100,000)
Non-Exempt Equity $100,000
In this scenario in a Chapter 7 bankruptcy, the Chapter 7 Trustee would sell the house and receive $100,000 for the equity above the homestead exemption (less costs and expenses), and that money would be used to pay the couple’s creditors. The Trustee would pay $100,000 to the Debtors at the end of their case as a result of their homestead exemption. Alternatively, the debtors could repurchase the house from the Trustee by buying the equity from the Trustee (redemption).
FMV $400,000
Mortgage ($500,000)
Negative Equity ($100,000)
In this scenario, the house has a negative equity of $100,000 and is “underwater” and would not be sold by the Chapter 7 Trustee. However, in order to keep the house, the debtor must reaffirm the debt to the mortgagee before the case is discharged and continue to make the payments on the mortgage, notwithstanding the fact that the value of the house is less than the amount of the mortgage.
Reaffirmation is governed by section 524(c) of the Bankruptcy Code, and requires that the debtor file an agreement with the court stating that he or she agrees to be legally bound to repay the otherwise dischargeable debt. The reaffirmation agreement must be filed 60 days after the meeting of creditors. The debtor’s attorney must file an affidavit stating that such an agreement will not be a hardship for the debtor. In the case of a pro se debtor, the bankruptcy judge will interview the debtor to ensure the agreement is voluntary and that it does not present a hardship for the debtor. In any event, the debtor may rescind the agreement up to 60 days after the agreement is filed with the court, or the case is discharged, whichever is later.
Here’s a question for all of you-Under these circumstances why would the couple want to retain the house?
Wouldn’t they be better off economically to file for Chapter 7 bankruptcy and let the bank make a motion for relief from the automatic stay so they can foreclose and obtain title to the house? This a personal decision for the debtors would have to make, which may include non-economic considerations that would lead them to want to keep a house that is $100,000 “underwater.”
Scenario: One spouse files for bankruptcy, the other spouse does not and the house has equity.
In a Chapter 7 bankruptcy, the Trustee may be able to sell the house. However, under New York State law due to “tenancy-by-the-entirety” protection, the house cannot be sold. The creditor can docket a judgment against the property, which is good for 20 years, and the home cannot be sold or refinanced.
Under this scenario, NYS law may provide more protection to the non-filing spouse than bankruptcy law. See §§ 363(h), (i), and (j) of the Bankruptcy Code when dealing with a scenario where one spouse files for bankruptcy, the other spouse does not and the house has equity.
Note that if the home is transferred from one spouse to the other, this a fraudulent conveyance.
Planning opportunity: If the couple divorces, the house may be transferred from one spouse to the other for no consideration, pursuant to New York State equitable distribution law.
In Chapter 7 bankruptcy, the factors to be considered as to whether the Chapter 7 bankruptcy trustee can sell the house are: (i) the equity in the property; (ii) the respective ages of the debtor and the spouse; and (iii) the burden to the non-filing spouse of having to leave the house (i.e. the impact on minor children).
Section 363(h) of the Bankruptcy Code deals with the conditions which must be met for a Trustee to sell a co-owner’s interest in property (whether owned as tenants in common, joint tenants or tenants by the entirety), which include:
1. Partition of the property between the bankruptcy estate and the co-owners is impracticable;
2. Sale of the bankruptcy estate’s undivided interest in the property would realize significantly less for the estate than the sale of the property free of the interests of the co-owners;
3. The benefit to the bankruptcy estate of a sale of the property free of the interests of the co-owners outweighs the detriment, if any, to the co-owners.
In Community Natl. Bank and Trust Co. of New York v. Persky (In re Persky), 893 F.2d 15 (2d. Cir. 1989), the Second Circuit Court of Appeals reviewed a bankruptcy filing in which only one of the co-owners was indebted to the bank and filed for bankruptcy relief. The Court found that:
• The Bankruptcy Court had the power to review the Trustee’s discretion to sell the property.
• The benefit to the bankruptcy estate should be analyzed from the standpoint of the sale of the nondebtor spouse’s entire interest in the property, including their possessory and survivorship interests, in determining whether the property should be sold.
• Noneconomic factors should be considered when analyzing the detriment to the nondebtor spouse of a sale of the property.
Section 363(i) of the Bankruptcy Code provides that in a Chapter 7 bankruptcy, if the property is to be sold, the debtor’s spouse may purchase the estate’s share of the property.
Pursuant to §363(j) of the Bankruptcy Code, the Chapter 7 Trustee must distribute to the debtor’s spouse the proceeds of the sale (less costs and expenses), but not including any compensation of the Trustee, in accordance with the ownership interests of the non-filing spouse and the bankruptcy estate.
Pursuant to § 363(k) of the Bankruptcy Code, the mortgagee may also bid on the house and, if they’re successful, they may offset their secured claim against the purchase price of the house.
Mortgage Arrears and Chapter 7 Bankruptcy
The above scenarios assume that the debtors are current on their mortgage. If the debtors were not current, then the mortgage arrears would need to be cured in order to keep the house during Chapter 7 bankruptcy.
A. How does a debtor deal with mortgage arrears?
i. Negotiate with the lender prior to the bankruptcy filing.
ii. Negotiate with the lender after the bankruptcy filing for payment plan for the arrears. Pursuant to Bankruptcy Code § 524, a debtor must reaffirm within 60 days from the date of the first scheduled meeting of creditors. Once the reaffirmation is executed, unless the agreement is rescinded, the debtor is liable; if they default on the mortgage in the future after reaffirmation, the mortgage debt is not dischargeable.
iii. Loss mitigation in the Southern District of New York (see Section V below)
iv. Conversion of a Chapter 7 case to a Chapter 13 case, pursuant to Bankruptcy Code § 706.
v. Abandon the house to the mortgagee pursuant to the Chapter 7 filing, if you can’t work out a payment plan with the lender.
V. The Southern District of New York’s Loss-Mitigation Program
A. In response to a growing number of mortgage defaults and foreclosures, the U.S. Bankruptcy Court for the Southern District of New York (NYSB) adopted Loss Mitigation Program Procedures in January 2009. A full description of the program is available here.
B. “Loss mitigation” includes the full range of solutions that can prevent either the loss of a Debtor’s property to foreclosure, increased costs to the lender, or both. Loss mitigation commonly consists of the following general types of agreements, or a combination of them: loan modification, loan refinance, forbearance, short sale, or surrender of the property in full satisfaction of the mortgage.
C. 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. Loss Mitigation is not available in the Eastern District of New York (which includes the counties of Kings, Queens, Richmond, Nassau and Suffolk). However, the Eastern District is contemplating setting up a similar program.
D. Parties are encouraged to request loss mitigation as early in the case as possible, but loss mitigation may be initiated at any time, by any of the following methods:
i. By the Debtor
a. A Debtor may request Loss Mitigation in a Chapter 7 or Chapter 13 Plan by filing and serving a Notice of Loss Mitigation Request (along with an affidavit of service) on a particular creditor. The creditor has 21 days to object. If no objection is filed, the debtor shall submit an order as soon as possible to the Judge assigned to the bankruptcy case. The order may be submitted: (1) after the expiration of the 21 days; or (2) with the Notice of Loss Mitigation Request on Notice of Presentment on the 22nd day.
b. A Debtor may also file and serve a Loss Mitigation Request-By the Debtor (along with an affidavit of service) for loss mitigation on a particular creditor separate from a Chapter 13 Plan. The creditor has 14 days to object. If no objection is filed, the debtor shall submit an order as soon as possible. The order may be submitted: (1) after the expiration of the 14 days; or (2) with the Loss Mitigation Request-By the Debtor on Notice of Presentment on the 15th day.
c. If a creditor has filed a motion requesting relief from the automatic stay pursuant to § 362 of the Bankruptcy Code (a Lift-Stay Motion), at any time prior
to the conclusion of the hearing on the Lift-Stay Motion, the Debtor may file a
Loss Mitigation Request-By the Debtor. The Debtor and creditor shall appear at the scheduled hearing on the Lift-Stay Motion, and the Bankruptcy Court will consider the Loss Mitigation Request-By the Debtor and any opposition by the Creditor.
ii. By a creditor.
A creditor may file a Loss Mitigation Request-By the Creditor. The Debtor shall have seven days to object. If no objection is filed, the creditor shall submit an order as soon as possible. The order may be submitted: (1) after the expiration of the seven days; or (2) with the request on Notice of Presentment on the 8th day.
iii. By the Bankruptcy Court.
The Bankruptcy Court may enter a Loss Mitigation Order at any time, provided
that the parties that will be bound by the Loss Mitigation Order have had notice and an opportunity to object.
D. Upon entry of a Loss-Mitigation Order:
i. Each creditor is authorized to contact the Debtor directly. It shall be presumed
that such communications do not violate the automatic stay.
ii. Except where necessary to prevent irreparable injury, loss or damage, a creditor shall not file a Lift-Stay Motion during the loss mitigation period. Any Lift-Stay
Motion filed by the creditor prior to the entry of the Loss Mitigation Order shall
be adjourned to a date after the last day of the loss mitigation period, and the stay
shall be extended pursuant to § 362(e) of the Bankruptcy Code.
iii. In a Chapter 13 case, the deadline by which a creditor must object to
confirmation of the Chapter 13 plan shall be extended to permit the creditor an
additional 14 days after the termination of loss mitigation, including any
extension of the loss mitigation period.
iv. All communications and information exchanged by the Loss Mitigation Parties
during loss mitigation will be inadmissible in any subsequent proceeding pursuant
to Federal Rule of Evidence 408.
E. The Loss Mitigation Parties shall provide either a written or verbal report to the bankruptcy court regarding the status of loss mitigation within the time set by the
bankruptcy court in the Loss Mitigation Order. The status report shall state whether one
or more loss mitigation sessions have been conducted, whether a resolution was reached,
and whether one or more of the Loss Mitigation Parties believe that additional loss
mitigation sessions would be likely to result in either a partial or complete resolution. A
status report may include a request for an extension of the loss mitigation period.
F. The Bankruptcy Court will consider any settlement reached during
loss mitigation. A settlement may be noticed and implemented in any manner
permitted by the Bankruptcy Code and Federal Rules of Bankruptcy Procedure, including, but not limited to, a stipulation, sale, plan of reorganization or amended plan of reorganization.
G. Loss Mitigation may delay a motion to lift stay (filed by a mortgagee) to commence or continue a foreclosure action, and delay a foreclosure action as well.
VI. Exemptions in Chapter 7 Bankruptcy for a New York State Resident
A. IRA. The maximum amount of a qualified IRA that may be exempted is $1,000,000.
B. Under New York Debtor and Creditor Law §5205(a), an individual debtor may exempt up to $5,000 of personal property and a joint debtor may exempt up to $10,000 of personal property.
C. Homestead exemption-As discussed in Section IV above, in New York State, an individual debtor may exempt up $50,000 of equity in a residence, and a joint debtor may exempt up to $100,000 of equity in a residence.
D. An unlimited amount of rental or utility security deposits.
E. 60 days of food.
F. $7,500 (for an individual debtor) or $15,000 (for a joint debtor) of monies recovered for a personal injury.
VII. Remedies for Dealing with Judgments
A. Under New York Debtor and Creditor Law, a judgment is good for 20 years. A judgment docketed against a property would prevent the owner from selling or refinancing the property without satisfying the judgment.
B. If a married couple owns property as tenants by the entirety, a creditor can docket the judgment against the property, but can’t force a sale of the property. This is to prevent the innocent spouse from the consequences of the judgment debtor’s actions.
C. Creditors may file a motion to avoid a judicial lien under section 522(f) of the Bankruptcy Code. Section 522(f) of the Bankruptcy Code protects Debtors’ exemptions and discharge, and thus their fresh start, by allowing them to avoid certain liens on exempt property (but not consensual mortgages). A Debtor may avoid a judicial lien on any property to the extent that the property could have been exempted in the absence of the lien.
a. The formula for calculating avoidance of a lien is:
i. Add the lien being tested for avoidance, all other liens and the maximum exemption allowable in the absence of liens (in New York State, $50,000 for an individual Debtor, $100,000 for joint Debtors).
ii. From the above sum, subtract the value of the property in the absence of the lien to determine the extent of the impairment.
iii. If the extent of the impairment of the exemption exceeds the entire value of the Debtor’s lien, the entire lien is avoidable.
b. If the extent of impairment is less than the entire value of the Debtor’s lien, the lien can be avoided only to the extent of the impairment of the exemption and the rest remains as a lien.
c. If the property has increased in value, there may now be too much equity for § 522(f) to apply if the current date is used as the date of valuation. The Debtor will want to use the date the bankruptcy petition was originally filed as the date of valuation.
D. Judgments entered within 90 days of a bankruptcy filing are a voidable preference.
VIII. Cancellation of Record of Judgment Discharged in Bankruptcy under New York State Debtor and Creditor Law § 150
A. Under this section of New York State law, at any time after a year has elapsed since a Debtor is discharged from their debts in bankruptcy, a Debtor may apply, upon proof of their discharge of debts, to the court in which a judgment was rendered against the Debtor, or to the court in which the judgment was docketed, for an order directing that a discharge or a qualified discharge of record be marked upon the docket of the judgment.
B. If it appears after a hearing that the Debtor has been discharged from the payment of a judgment or the debt upon which it was recovered, the court must enter an order directing that a discharge or qualified discharge be marked on the docket of the judgment.
C. If it appears that any lien of the judgment upon real property owned by the Debtor prior to the commencement of the bankruptcy was invalidated or surrendered in the bankruptcy or set aside in an action brought by the receiver or trustee, the order shall direct that a discharge be marked on the docket of the judgment.
D. If (a) it does not appear whether the judgment was a lien on real property owned by the Debtor prior to the commencement of the bankruptcy, or (b) if it appears that the judgment was a lien on such real property, and it is not established to the satisfaction of the court that the lien was invalidated or surrendered in the bankruptcy or set aside in an action brought by the receiver or trustee, the order shall direct that a qualified discharge be marked on the docket of the judgment. If the court directs that a qualified discharge be marked on the docket of the judgment, it must specify in its order which of the two grounds stated above was the basis of its order.
VIII. Relief of Indebtedness Income
A. Under § 108 of the Internal Revenue Code, debt relief is considered income.
B. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
i. This provision applies to debt forgiven in calendar years 2007 through 2012.
ii. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).
iii. The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
iv. This provision does not apply to credit card debt or non-residential property. But a Chapter 7 bankruptcy filing eliminates relief of indebtedness debt.
IX. Chapter 13
A. What are the pros and cons?
i. Cons
a. The debtor is placed on an austerity budget and must pay their disposable income to the Chapter 13 Trustee on a monthly basis.
b. If the debtor is over the “median income,” then they must prepare a five year, 60 month plan. The shortest plans are generally three years.
c. The filing fee is $279 (which is $20 less then the filing fee for a Chapter 7 filing).
d. However, legal fees are greater than those for a Chapter 7 filing, since there are fees for preparing the plan, the hearing on plan confirmation, and the plan must be served on creditors and must be confirmable.
e. In the Southern District of New York, historically only 30% of Chapter 13 plans pay out over time.
f. Pursuant to §1322 of the Bankruptcy Code, first mortgages cannot be modified in Chapter 13. However, second mortgages can be modified and mortgages on investment properties and vacation homes can be modified.
g. The Chapter 13 Trustee receives a commission of 10% of the monies paid into a Chapter 13 plan.
h. Since 2005, when New York State increased the homestead exemption to $50,000, Chapter 7 can accomplish much of what can be accomplished with a Chapter 13 filing at a lesser cost to the Debtor.
ii. Pros
a. Chapter 13 allows the debtor to retain property that he or she would otherwise lose in a Chapter 7 liquidation (e.g. a car or a house with substantial equity)
b. A Chapter 13 debtor remains under bankruptcy court protection for the duration of the repayment plan (3-5 years)
X. Alternatives to Chapter 7 bankruptcy
A. Do nothing
B. File for Chapter 13 bankruptcy
C. File for Chapter 11 bankruptcy (which is an extremely expensive and time consuming process). A debtor would only file under this chapter if they didn’t fit within the confines of the Chapter 7 or Chapter 13 requirements, had a very unique problem or had an extremely high net worth.
D. Out of court workout with creditors
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