Foreclosure and the Bankruptcy Stay

While there are many reasons for the rise in bankruptcy filings, with working families falling victim to job losses, the collapse in the real estate market and plunging home values is one of the principal reasons for the rise in filings.

Over the last three years, as the economic recession lingered and the recovery became more and more tentative, 4 million consumers filed for bankruptcy matching the records levels reached before the 2005 changes in the Bankruptcy Act made it more difficult and costly for Americans to seek Bankruptcy protection.

One of the significant reasons for this spike in bankruptcy filings is the record foreclosure rates that have existed since the 2008 crash. These record foreclosures have forced homeowners and investors alike to seek the protection of Bankruptcy Act and in particular the protection afforded by the automatic stay provided for in 11 U.S.C. 362.

The filing of a bankruptcy case, under any chapter of the Bankruptcy Code, automatically triggers an injunction against foreclosure by a bank or other secured lender against the debtor’s property, including the debtor’s home or other real estate. 11 U.S.C. 362.  

The stay stops foreclosure and provides a breathing spell for the debtor, during which negotiations can take place to try to resolve the difficulties in the debtor's financial situation, subject to the oversight of the bankruptcy judge.

The injunctive relief provided by the automaticstay, however, is not without limits. A court may give a creditor relief from the stay if the creditor can show that the stay does not give the creditor "adequate protection" or if it jeopardizes the creditor's interest in the property.

This means in the context of a foreclosure on real property, that in order for the stay to remain in effect the homeowner or other real property owner, must demonstrate that the interest of the creditor in the property is not damaged by the stay. 

Practically speaking, this means either of two things. The first, is that there is so much equity in the property that a temporary stay will not impair the creditors security.  In a world of “underwater” real estate, however, most debtors do not have sufficient equity to provide “adequate protection” to the secured creditor. In these situations, in order for the stay to remain in effect the debtor will be required to make periodic cash payments in the form of monthly payments to the creditor so that the creditors’ interest in the real property is not further impaired by bankruptcy and its stay.

If the debtor is unable to provide “adequateprotection” to the secured creditor, creditor can obtain an order from the court granting permission to continue the foreclosure.

Creditors are granted relief from stay when the debtor has no equity in the property and the property is not necessary for an effective reorganization. In such cases, the court will lift the stay to permit the creditor to foreclose on the property.       11 U.S.C. § 362(d).

Moreover, in “single asset real estate” cases the Bankruptcy Code provides circumstances under which creditors of a single asset real estate debtor may obtain relief from the automatic stay which are not available to creditors in ordinary bankruptcy cases. 11 U.S.C. § 362(d)

The term "single asset real estate" is defined as "a single property or project, other than residential real property with fewer than four residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental." 11 U.S.C. § 101(51B).

In a “single asset real estate case” a secured creditor with a claim secured by the single asset, will be granted relief from the automatic stay unless the debtor files a feasible plan of reorganization or begins making monthly adequate protection payments to the creditor within 90 days from the date of the filing of the case, or within 30 days of the court's determination that the case is a single asset real estate case.

Can I Walk Away from My Mortgage

This is an educational article about the current financial crisis and whether it is wise to "walk away" from your mortgage.

The answer to this question depends to a large part on whether you live in a state that has consumer protection statutes known as "anti - deficiency" statutes. These statutes are designed to protect the homeowner from being responsible for loans secured by their personal residence when the personal residence is "underwater."

An"underwater" personal residence is one in which the principal balance on the loans that are against the property are in excess of the value of the property.

In many states, some form of consumer protection has been enacted by the state legislature which prevents banks from suing homeowners for deficiencies. These laws typically apply to single family owner occupied residences.

In California, for example, the legislature enacted Code of Civil Procedure section 580b whichprohibits a deficiency judgment in the strict sense, i.e., a personal judgmentagainst the debtor. In relevant part the code section provides as follows:

"No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser."

In layman's terms this means that a homeowner who secures a "purchase money" loan ( which means a loan used to purchase his home can not be sued by his bank on the loan that is secured by the home.

You will also note that this section only applies to a "dwelling of not more than four families" which in essence means that if you live in and own and duplex, triplex or fourplex, this anti - deficiency statute applies to you.

This type of statute has been adopted in many states across the country. You should check with an attorney in your state to find out the exact language of the statute in your state and whether or not it applies to you.

So if your personal residence is "underwater" in the state like California and it is secured by a "purchase money" loan, you can safely "walkaway" from the mortgage and its financial obligation without fear of being sued by your lender.

Will I be Able to Keep My Home if I File for Bankruptcy?

One of the first questions, many homeowners who are contemplating filing bankruptcy ask is "Will I lose my home if I file for bankruptcy?"

The answer to this question depends upon a number of factors. The first of which is, what chapter bankruptcy is contemplated i.e., Chapter 7 or Chapter 13.

Under a Chapter 13, which is a court sanctioned repayment plan, a homeowner who is behind on his mortgage payment is given the opportunity to make monthly plan payments to save his home. Plan payments consist of the contractually agreed upon regular monthly installment payments, plus, if a homeowner is behind on his mortgage, an amount necessary to cure his arrears over the time frame established by the court approved Chapter 13 plan.

Chapter 13 plans can be as long as five years. Thus, a homeowner will be able stretch his arrearage payment out over this term, so long as he does not miss the monthly court approved upon plan payment. Assuming the homeowner can make the plan payments, over the life of the Chapter 13 plan, the secured lender will not be able to foreclose and the homeowner will be able to keep his home.

A Chapter 7 bankruptcy, unlike aChapter 13, is known as liquidation. This type of bankruptcy has the effect of wiping out all dischargeable debt. Typically all unsecured debt is dischargeable. However, there are exceptions for taxes, domestic support obligations and other debts that the bankruptcy court deems are non - dischargeable. A determination that a debt is not dischargeable, requires a court hearing in what is known as an adversary proceeding. Certain intentional wrongs, like fraud and willful injury claims fall within this category and may be subject to an adversary proceeding.

In a Chapter 7, however, a secured creditor whose debt is dischargeable, in that the debtor will no longer have any personal liability for the debt, will continue to maintain any interest that the creditor had in the property that it holds as security for the debt. Therefore a creditor that has as security a car or home will be able to repo the car or foreclose on the home and recover its collateral, should the Chapter 7 debtor fall behind and not be able to catch up on the debtor's regular and contractually agreed upon monthly installment.

One further thing that should be mentioned, when the debtor has equity in an asset, over and above any exemption that might be applicable, the trustee in a Chapter 7 can force a sale of that asset to satisfy the demands of the unsecured creditors.

The extent of the exemption in real estate, which is known as the homestead exemption because it applies only to owner occupied residences, varies from state - to - state. Additionally, the homestead exemption varies depending upon the age and status of the person claiming the exemption.