I. Introduction
a. Why
do people file for bankruptcy today?
1.
Credit card debt
2.
Unemployment
3.
Business reversals
4. Real estate foreclosures
5. High housing costs
6. Student loans
7. Divorce
8. Medical bills and illness
b. 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 2013 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. For
the first three quarters of 2012, there were slightly less than 947,000
bankruptcy filings nationwide, and slightly less than 33,000 bankruptcy filings
in New York State.
d. The
goal of this outline is to explain contemporary issues facing debtor’s in New York State in 2013 and strategies
for dealing with those issues.
∙The
goal in personal bankruptcy is to obtain the “fresh start” for a
debtor-discharge as many of the debtor’s debts as possible and allow them to
retain as much property as possible
∙Pre-bankruptcy
planning is allowed under the law and often times necessary to obtain the
“fresh start” or an optimal result for the client
e. Current
Developments: Rent Controlled and Rent Stabilized Leases are not exempt
property under New York State law
·
A recent case in the Southern District of New
York, In re Goldman, Case No. 11-11371 (SHL), involved an attempt by a
Bankruptcy Trustee to sell the rent stabilized co-op unit of a long-time
resident at 420 Riverside Drive in the Morningside Heights neighborhood of
Manhattan. The case was a Chapter 7 bankruptcy filing assigned to Judge Lane,
who entered a consent order permitting the Bankruptcy Trustee to have the U.S.
Marshals Service evict Mr. Goldman from his apartment, and then the rights to
the lease on the co-op unit would be sold back to the landlord, who would pay
the Bankruptcy Trustee $60,000 when the apartment was delivered free and clear
of all tenancies, including that of Mr. Goldman, the rent-stabilized tenant.
·
This is the third decision permitting a
rent-stabilized apartment to be sold by a Bankruptcy Trustee to a landlord in
the Southern District of New York. The other two cases are In re Stein, 281
B.R. 845 (Bankr. S.D.N.Y. 2002) and In re Toledano, 299 B.R. 284 (Bankr.
S.D.N.Y. 2003). In both of these cases, the debtors lived in luxury apartments
just south of Central Park–171 West 57th Street, Apartment 3C and 230 Central
Park South, Apartment 9/10B.
·
Many people will be surprised by these
decisions; however, the Bankruptcy Code and Rules seem to allow the result.
Section 541 of the Bankruptcy Code states that when a debtor files for
bankruptcy, a hypothetical estate is created, and all property of the debtor
(with certain exemptions created by state and federal statute) is owned by the
Bankruptcy Trustee. Section 365 of the Bankruptcy Code allows a debtor or a
Bankruptcy Trustee to assume and assign (sell) a lease to a third party.
Additionally, bankruptcy is federal law, and federal law generally primes
(supersedes) state law. When you put this all together, the transaction looks
as follows:
·
A Bankruptcy Trustee will review a bankruptcy
petition and determine how many years the debtor has lived in the apartment,
the rent that the debtor is presently paying under the rent-stabilized lease
and the market value rent if the apartment was not rent-stabilized. The
Bankruptcy Trustee will then contact the landlord or owner of the unit and
offer to evict the tenant and deliver the apartment broom clean for a certain
sum of money.
·
In the Goldman case, the landlord and the
Bankruptcy Trustee entered into a stipulation that was “so ordered” by the
Bankruptcy Court, which provided that the landlord would pay the Bankruptcy
Trustee $60,000, which would be held in escrow until the Bankruptcy Trustee had
the U.S. Marshals Service evict or remove the debtor from the apartment and
delivered possession of the apartment to the landlord. The Bankruptcy Trustee
receives a commission and legal fees are paid to the Bankruptcy Trustee’s
counsel. The balance of the monies is distributed to the debtor’s unsecured
creditors. While the result may seem harsh and surprising to many, three
Bankruptcy Judges have ruled that these sales are allowed. None of these cases
have been appealed to the Second Circuit Court of Appeals or the Supreme Court.
·
An individual who is contemplating filing for
bankruptcy and lives in a rent-stabilized unit must go through the following
analysis:
·
1. How many years has the debtor lived in the
apartment?
·
2. What rent are they paying under the
rent-stabilized lease and what is the market value rent if the apartment was
vacant and not rent-stabilized?
·
3. Is the apartment in a gentrifying area or a
high income area, such as the Upper East Side, Central Park West or Central
Park South?
·
4. Has the apartment building recently undergone
a condo or co-op conversion? And did the debtor decline to buy the unit, and
therefore become a non-purchasing tenant?
·
There is one recourse for the debtor. The
Bankruptcy Code allows the debtor to match the offer (in this case, $60,000)
and pay that money to the Bankruptcy trustee to keep the apartment unit. Few
individuals filing for bankruptcy have that type of money; however, they may be
able to borrow that money from friends or family to keep the unit.
·
Additionally, if a husband and wife are married
and only one elects to file for bankruptcy, or two people who are unmarried
live in the apartment and both names are on the lease, since the Bankruptcy
Trustee would only be able to assign the unit for the individual who filed for
bankruptcy, the result may be that a landlord would be unwilling to pay a
significant sum of money in that scenario, because the other party remaining in
the unit would still be rent-stabilized. However, other than those two
scenarios, this situation is a significant risk, and we are seeing more and
more of these cases.
·
It would seem that either the New York State
legislature or Congress needs to address this issue, and create some type of a
safe harbor. Again, debtors in rent stabilized apartments must proceed with
caution and consult an experienced bankruptcy attorney before filing for
bankruptcy.
II. Chapter 7 Personal Bankruptcy-“BAPCPA”
∙ Pre-BAPCPA there were no
income limitations or restrictions on the ability of a debtor to file chapter 7
personal bankruptcy
∙ The goal
of BAPCPA was to prevent many debtors from filing for chapter 7 bankruptcy and
forcing them to file for chapter 13 bankruptcy
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 November 1st, 2012, the median
income of a single person in New
York State is $46,821. For a family of two, the income threshold
for the Median Income Test is $58,106,
for a family of three it is $67,652 and for a family of four it is $81,522.
Add $7,500 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.
∙ The expense limitations in the
Means Test are based on the IRS offer in compromise standards
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 90-95% 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 (including private student loans):
·
Section 523(a)(8) of the Bankruptcy Code,
concerning educational debt says:
“A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of
this title does not discharge an individual debtor from any debt - unless
excepting such debt from discharge under this paragraph would impose an undue
hardship on the debtor and the debtor's dependents, for - an educational
benefit overpayment or loan made, insured, or guaranteed by a governmental
unit, or made under any program funded in whole or in part by a governmental
unit or nonprofit institution; or an obligation to repay funds received as
an educational benefit, scholarship, or stipend; or any other educational loan
that is a qualified education loan, as defined in section 221(d)(1) of the
Internal Revenue Code of 1986, incurred by a debtor who is an individual.”
·
The courts have devised several tests for “undue hardship”, but the most
frequently used test was articulated by the Second Circuit Court of Appeals in
Brunner v. New York State Higher Education Services Corp. The Brunner test for undue hardship requires a three-part showing: (1)
that the debtor cannot maintain, based on current income and expenses, a
“minimal” standard of living for herself and her dependents if forced to repay
the loans; (2) that additional circumstances exist indicating that this state
of affairs is likely to persist for a significant portion of the repayment
period of the student loans; and (3) that the debtor has made good faith
efforts to repay the loans.
·
Failure to by the debtor to prove any of these
factors can result in denial of discharge of the educational debt.
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 $600 for
luxury goods or services and cash advances aggregating more than $875 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-Part I done prior to the bankruptcy filing and
Part II done after the 341 meeting of creditors;
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 counseling (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.
Debtorwise (
http://www.debtorwise.org/website/index.aspx),
one of the approved credit counseling agencies, charges $25 for the online
course or $34.95 for the telephonic course.
vi. Additionally,
within 60 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 Debtorwise is $15 for the online course or
$24.95 for the telephonic course.
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 10 years-however Debtor’s are able to rehabilitate their
credit by obtaining and using credit responsibly, savings as much as possible
and spending as little as possible
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:-this property collected by the Bankruptcy
Trustee and distributed to unsecured creditors
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 2011, New York State increased the homestead exemption
(for debtors residing in the counties of Kings, New York, Queens, Bronx,
Richmond, Nassau, Suffolk, Rockland, Westchester, and Putnam) to $150,000 per
Debtor, so a married couple living in those counties can exempt $300,000 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 $1,000,000
Mortgage ($500,000)
Equity $500,000
NYS Homestead Exemption ($300,000)
Non-Exempt Equity $200,000
In this scenario in a Chapter 7 bankruptcy, the Chapter 7
Trustee would sell the house and receive $200,000 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 $300,000 (Homestead Exemption
amount) 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 §524(c)
and 524(k) 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.
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 is a personal decision 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-this
is the “In re Persky” scenario
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 without consideration, this a fraudulent conveyance.
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 non–debtor 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 non–debtor
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.
How does one sell
real estate in bankruptcy? 1. Pursuant to a section 363 motion to sell real
estate in a chapter 11 case, 2. Pursuant to a confirmed chapter 11 Plan of
Reorganization and 3. By a chapter 7 bankruptcy trustee in a chapter 7 case
B. The alternative way to sell real
estate (or other assets) in bankruptcy is via 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. 33
(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.
C. A few years ago, my firm represented
a lender who was foreclosing on a property on 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.
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 and
Eastern Districts of New York (see Section V below)
∙ Three benefits to Bankruptcy Court
ordered mediation: 1. Settlement with the Bank, 2. Delay and 3. File goes to
the “top of pile” in the Bank
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. Short Sales
- A short sale is a
sale of the property which will net less than the amount required to pay
off the principal amount of the loan(s) on the property. In these
difficult times for real estate, many banks are more amenable to approving
short sales than they used to be.
- The first step in this
process is to find a buyer for the property, then enter into a contract of
sale with a special rider provision that discloses to the purchaser
that the property will only be sold if the short sale is consented to by
the seller’s bank.
- The bank will also
require an appraisal of the property (the Bank will order their own
appraisal), as well as preapproval of a HUD-1 Settlement Statement,
a form which is required under the Real Estate Settlement Procedures Act
(RESPA) and used to itemize services and fees charged to the borrower by
the lender or broker when applying for a loan for the purpose of
purchasing or refinancing real estate.
- Another issue that must
be addressed in the short sale is relief of indebtedness income
(discussed further in Section X, below). There are tax consequences when
the property is sold for less than the balance of the mortgage, which must
be discussed with the owner/borrower’s accountant and/or attorney.
- If the bank will approve
the short sale, then this will allow the seller to sell the property, with
some impact on his or her credit report and tax consequences; however, the
net result is that the seller no longer has to worry about a property that
is underwater.
VI. The Southern and
Eastern Districts of New York’s Loss-Mitigation Programs
- In response to a growing
number of mortgage defaults and foreclosures, the U.S. Bankruptcy Court
for the Southern District of New York adopted Loss Mitigation Program
Procedures in January 2009. A full
description of the Southern District’s Program is at: http://www.nysb.uscourts.gov/pdf/lossmit/RevisedLossMitigationProcedures.pdf
- The U.S. Bankruptcy Court
for the Eastern District of New York followed suit in December 2009. A full description of the Eastern
District’s Program is at: http://www.nyeb.uscourts.gov/admin_orders/ord_582.pdf
- “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. It is available in
cases filed under Chapter 7, 11 or 13 of the Bankruptcy Code.
- Loss mitigation can only
be requested for an individual’s primary residence.
E. 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. In the Chapter 13 Plan, a Chapter 13 Debtor may request loss mitigation
with a creditor. When requesting
Loss Mitigation in the Chapter 13 Plan, the Debtor must serve the Plan on the
creditor and file proof of service via the Electronic Case Filing System
(“ECF”). If the creditor fails to object
within 21 days of service of the plan, the Debtor must submit a Loss Mitigation
Order and the Bankruptcy Court may enter the Loss Mitigation Order.
b. A Debtor may file a request for
Loss Mitigation with a creditor. The creditor has 14 days to object. If no
objection is filed, the Debtor must submit a Loss Mitigation Order and the Bankruptcy
Court may enter the Loss Mitigation Order.
c. Upon entry of the Loss Mitigation Order,
the Debtor must serve it on the creditor and file proof of service on ECF.
d. If a
creditor has filed a motion requesting relief from the automatic stay pursuant
to Section 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
request for Loss Mitigation. 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 and any opposition by the creditor.
ii. By a
creditor- A creditor may file a request for Loss Mitigation. The creditor must
serve the request on the Debtor and Debtor’s counsel and file proof of service
on ECF. The Debtor shall have seven days
after service of the request to object. If no objection is filed, the creditor
must submit a Loss Mitigation Order and the Bankruptcy Court may enter the Loss
Mitigation Order. Upon entry of the Order, the creditor must serve it upon the Debtor
and Debtor’s counsel and file proof of same on ECF.
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.
- Upon entry of a
Loss-Mitigation Order:
- The Loss Mitigation
Parties shall negotiate in good faith. A party that fails to participate
in Loss Mitigation in good faith
may be subject to sanctions.
- The Debtor: Unless the
Debtor has already done so in the Chapter 13 Plan or as part of
a request for Loss Mitigation, the
Debtor shall provide written notice to each creditor, indicating the manner in which the creditor should
contact the Debtor.
- The creditor: Unless a
creditor has already done so as part of a request for Loss
Mitigation, each creditor shall
provide written notice to the Debtor, identifying the name,
address and direct telephone number
of the contact person who has full settlement authority.
- The creditor shall serve
upon the Debtor and Debtor’s attorney a request for
information using the “Creditor
Loss Mitigation Affidavit” form within seven days of service of the Order. The creditor shall file same on ECF.
- The Debtor shall serve
upon the creditor a response to the creditor’s request for
information using the “Debtor Loss Mitigation Affidavit”
form within 21 days of service of the
Creditor Loss Mitigation Affidavit.
The Debtor shall file only the Debtor Loss Mitigation Affidavit on ECF.
G. 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.
H. 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; and a motion to approve
Loan Modification and terminate Loss Mitigation.
I.
Loss Mitigation will delay a motion to lift stay (filed
by a mortgagee) to commence or continue a foreclosure action, and delay a
foreclosure action as well. A creditor
may not file a motion to lift stay during the Loss Mitigation period, except
where necessary to prevent irreparable injury.
VII. Exemptions in
Chapter 7 Bankruptcy for a New
York State
Resident
∙If you are married, and you and
your spouse file for bankruptcy then your exemptions are doubled
∙If you do
not own real estate and you have a lot of cash, or money in a bank account,
then you can choose the federal exemptions and exempt $10,825.00
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 § 283(2),
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 the counties of Kings,
New York, Queens, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, and
Putnam, an individual debtor may
exempt up $150,000 of equity in a residence, and a joint debtor
may exempt up to $300,000 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.
VIII. 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.
∙
One strategy for dealing with a judgment is to let the “judgment get old and
cold” and then reach out to the creditor and negotiate an “out of court
workout”
B. If
a married couple owns property as tenants by the entirety (deed must say as
“husband and wife” or similar language”), 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. Debtor’s 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 the counties of Kings, New York, Queens, Bronx,
Richmond, Nassau, Suffolk, Rockland, Westchester, and Putnam, $150,000 for an
individual Debtor, $300,000 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.
E. Cancellation of Record of
Judgment Discharged in Bankruptcy under New York State
Debtor and Creditor Law § 150
1. 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.
2. 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.
3. 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.
4. 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.
IX. Relief of Indebtedness Income
A. Under § 108 of the
Internal Revenue Code, debt relief is considered income.
B.
The Mortgage Forgiveness Debt Relief Act of 2007 (which
was scheduled to expire on Dec. 31, 2012) 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.
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.
X. Chapter 13
-Planning Opportunity/Strategy-if
the Debtor has equity in the property and a creditor is foreclosing, file the
chapter 13 bankruptcy to stop the foreclosure sale and give the Debtor time to
sell the property
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 $281 (which is $25
less than 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 (before increasing it again in
2011), 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 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)
XII. 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
Visit the Shenwick & Associates website:
jshenwick.googlepages.com, which has
detailed information regarding personal bankruptcy.
Please e-mail Jim Shenwick with any questions at jshenwick at gmail com.
