Presented by: Mark H. Wattenberg, Esq. Legal Assistance of Western NY, Inc.®
• A homeowner facing foreclosure may benefit from filing bankruptcy
• Pros and cons of Chapter 7 and Chapter 13 filings
• Bankruptcy vs. State court modification process
Preserving home
Giving up home but cancelling mortgage loan debt Chapter 7 Chapter 13 Debt liquidation Financial Restructuring
Discharges most Cures mortgage arrears consumer debts/non- through a 3 to 5 year mortgage debts but repayment plan reaffirms the mortgage
Means of preventing Discharges most debts, including mortgage loan mortgage or tax foreclosure for a new financial start
NOTE: Both chapters can be combined with mortgage modification programs or challenges to the mortgage • Bankruptcy court is a federal court governed by Title 11 USC and Federal Rules of Bankruptcy Procedure;
• Our filings are in the U.S. Bankruptcy Court – Western District of New York Northern District of New York
• The bankruptcy courts have informative websites - http://www.nywb.uscourts.gov - WDNY http://www.nynb.uscourts.gov - NDNY
• The web-sites include court calendars, decisions of the judges, local rules and practice orders, and information about admission. (Attachment “A” – Admission to Bankruptcy Court) http://www.nywb.uscourts.gov/files/78359/Adm_to_Practice_02-22-13.pdf
• There is an electronic filing requirement (Attachment “B” – Electronic Filing) http://www.nywb.uscourts.gov/cmecf.html
ADVANTAGES DISADVANTAGES
Automatic stay Expense Comprehensive relief Cancel judgment liens Scrutiny of financial Forum for challenging affairs bank’s claims May be combined with Possible loss of mortgage modification non-exempt assets programs (Attachment “C” – bankruptcy and mortgage modification programs) https://www.hmpadmin.com/ portal/programs/docs/hamp_s ervicer/mhahandbook_41.pdf
Most suitable if:
Mortgage arrears easily cured but client struggling with creditors OR Client wishes to give up home but avoid liability for mortgage loan
Not suitable:
For curing extensive mortgage default
(Unless mortgage can be modified under HAMP or non-bankruptcy program) Upon filing, automatic stay – foreclosure actions and all collection actions immediately suspended garnishments must be removed
Most debts discharged (some exceptions – child support, student loans)
Liens on property (such as a mortgage or car loan) remain unless property surrendered
Exempt property preserved
Non-exempt property distributed to creditors (Attachment “D” – federal v. state bankruptcy exemptions) https://docs.google.com/file/d/0B3Z9vYMazI9gTWd1QzJITkFQTzQ/edit?usp=s haring
Prior bankruptcies – no discharge if prior Chapter 7 discharge within 8 years. 11 USC § 727(a)(8) – or (in most cases) if prior Chapter 13 discharge within last 6 years. § 727(a)(9) Client must get credit counseling certificate
Gather financial information
Prepare petition and schedules (Attachment “E” – Chapter 7 petition and schedules) https://docs.google.com/file/d/0B3Z9vYMazI9gU3ZIVXBVUWFHQVk/edit?usp=sharing
Pay filing fee of $306 (Attachment “F” – filing fee) Waivers - http://www.uscourts.gov/uscourts/RulesAndPolicies/rules/BK_Forms_1207/B_003A_1207f.pdf Installments - http://www.uscourts.gov/uscourts/RulesAndPolicies/rules/BK_Forms_Current/B_003B.pdf
Electronically file – automatic stay goes into effect
Limitations on stay – dismissal of prior bankruptcy within previous year
Send financial information to Chapter 7 trustee – on pain of dismissal
Represent client at meeting of creditors (“341” meeting)
File §522 motion to discharge judgment liens
Obtain discharge order
Bankruptcy Court closes case Fresh financial start
Most debts discharged
Mortgage reaffirmed or Mortgage loan cancelled (house surrendered)
Avoid tax liability for discharge of indebtedness (Attachment “G” – 26 USC § 108(a)(1)(A)) http://www.gpo.gov/fdsys/granule/USCODE-2011-title26/USCODE-2011-title26-subtitleA-chap1-subchapB-partIII- sec108/content-detail.html
Most suitable if:
Regular source of income Mortgage arrears can be paid off over a 60-month period Mortgage interest rate is reasonable Client struggling with other debt
Special additional features:
Some second mortgages can be discharged Some used car loans can be modified Not suitable if: Client has erratic income Client unable to resume regular mortgage payments Client does not wish to have financial affairs restricted for 5 years File Chapter 13 Plan in addition to the petition and schedules
Chapter 13 plan Cures mortgage default Regular payments by wage order to Chapter 13 Trustee Term – 3 to 5 years (36 – 60 monthly payments) Added to payment - “cramdown” of used cars Percentage (usually 10%) for unsecured claims Trustee commission of 10%
In addition, within 30 days of filing, resume regular payments directly to lender
(ATTACHMENT “H” – Example of Chapter 13 Plan) https://docs.google.com/file/d/0B3Z9vYMazI9ga0FBWGZHa2ZoOW8/edit?usp=sharing
Prepare Petition and Schedules
Plus – Chapter 13 Plan
Compare income (Schedule I) with expenses (Schedule J)
Affordability test – after necessary expenses enough income to pay on-going mortgage payments + payment to trustee
Disposable income test - Apply surplus income, after necessary expenses, to unsecured creditors
“Chapter 7 test” - Pay unsecured creditors value of any non-exempt assets Ch. 341 hearing: Review by Chapter 13 Trustee Review by Bankruptcy Judge Confirmation of Ch. 13 Plan
Motions: § 522 motion to cancel judgments § 506 (a) motion to discharge certain second mortgage liens “Ponds” motion, 252 F.3d 122 (2nd Cir. 2001) – strips off lien of wholly unsecured 2d mortgage (at time of closing, no equity due to 1st mortgage)
Defense against motion by bank to vacate automatic stay
Right to convert to Chapter 7 Save home through Chapter 13 Plan
Discharge unsecured debts after completing plan
Mortgage holder or servicer must file claim documenting:
Amount due, including fees, interest, and expenses Proof of standing – mortgage note, assignments, etc. (Attachment “I”- new mortgage claim rules) http://www.uscourts.gov/uscourts/RulesAndPolicies/rules/BK_Forms_Current/B_010A.pdf
Mortgage holder or servicer may file motion for relief from automatic stay
Debtor may file objections to claim
Adversary proceeding: Lawsuits within bankruptcy (Attachment “J” Adversary Proceedings) http://www.uscourts.gov/uscourts/RulesAndPolicies/rules/BK_Forms_08_Director/Form_104_0807.pdf
Challenge to standing of Lender Failure of Lender to offer a modification (under non-bankruptcy law) Reduction of mortgage claim due to excessive fees . Force–placed insurance . Property inspection . Attorney’s fees Consumer defenses to mortgage claim: .TILA defenses .HOEPA defenses
Motion for relief from stay may be adjourned pending resolution of adversary proceeding Advantages of settlement conferences under CPLR § 3408:
Flexibility Adequate time to pursue modification
Advantages of bankruptcy
Comprehensive financial relief Excellent forum for challenging bank’s claims
Apply for admission to U.S. District Court –$200 fee
Sign petition for admission Sign 8-page ‘civility principles” and oath Obtain affidavit from sponsor File documents and wait for 30 days Appear with sponsor at morning court session for admission
Apply for U.S. Bankruptcy Court -No fee Sign petition Register for electronic filing View web-site trainings on electronic filing Obtain Pacer Account number to view pleadings and dockets Filing must be by electronic filing system, except in certain specified exceptions, such as attorneys who do not regularly file cases.
A PACER account is required, as well as a separate attorney-specific electronic filing account.
The site is https://ecf.nywb.uscourts.gov Once logged in, the “Bankruptcy” menu allows for the filing of specific documents and/or a semi-automated “case opening” filing.
All filers must redact: Social Security or taxpayer-identification numbers; dates of birth; names of minor children; and financial account numbers, in compliance with Fed. R. Bankr. P. 9037. This requirement applies to all documents, including attachments.
Immediate receipt and notice of case filing.
Different commercial products are available for the assembly and filing of bankruptcy papers. This software plugs entered data into forms, replicating and formatting where necessary. Some of the software will also perform tasks such as judging the means test results, calculating Chapter 13 plans, or checking liquidation tests. Both can be pursued simultaneously
HAMP Manual, 4.1
Basic Eligibility HAMP Manual, 4.1 – p. 75
Borrowers in active Chapter 7 or Chapter 13 bankruptcy cases are eligible for HAMP at the servicer’s discretion in accordance with investor guidelines, but servicers are not required to solicit these borrowers proactively for HAMP. Notwithstanding the foregoing, such borrowers must be considered for HAMP if the borrower, borrower’s counsel or bankruptcy trustee submits a request to the servicer.
HAMP Manual, 4.1 – p. 99.
When a borrower is in an active Chapter 7 or Chapter 13 bankruptcy, the servicer may accept copies of the bankruptcy schedules and tax returns (if returns are required to be filed) in lieu of the RMA and Form 4506T-EZ, and may use this information to determine borrower eligibility (with the income documentation).
Servicers should request the schedules and tax returns from the borrower, borrower’s counsel or bankruptcy court. If the bankruptcy schedules are greater than 90 days old as of the date that such schedules are received by the servicer, the borrower must provide updated evidence of income to determine HAMP eligibility. Additionally, either directly or through counsel, borrowers must provide a completed and executed Hardship Affidavit (or RMA).
FHA MORTGAGEE LETTER 2008-32
Effective immediately, mortgagees must, upon receipt of notice of a bankruptcy filing, send information to debtor’s counsel indicating that loss mitigation may be available, and provide instruction sufficient to facilitate workout discussions including documentation requirements, timeframes and servicer contact information. Working through debtor’s counsel, mortgagees may offer appropriate loss mitigation options prior to discharge or dismissal, without requiring relief from the automatic stay and in the case of a Chapter 7 bankruptcy, without requiring re-affirmation of the debt. It is strongly recommended that the bankruptcy trustee be copied on all such communications. All loss mitigation actions must be approved by the Bankruptcy Court prior to final execution. 1. The debtor seeks to maximize exemptions to protect property from creditors.
2. Chapter 7 Bankruptcy Estate = non-exempt assets as of date of filing -as if a snapshot is taken of debtor’s assets that date of filing -assets include claims, even if not liquidated, e.g. a negligence claim
3. Debtor has choice of exemptions of federal or state exemptions
Federal exemptions feature a very useful $10,825 “wildcard” exemption, but a more limited homestead exemption, $21,625.
New York State exemptions include a generous homestead exemption, $75,000, but a very limited cash exemption if the homestead exemption is claimed.
See chart for comparison
Dismissal of Chapter 7 only with court approval
This can result in serious problems if: Debtor transferred property or cash without fair value in the last 2 years 11 USC §§ 547 - 8 Debtor expecting a settlement
The Bankruptcy Petition is a Request for Relief under the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure 1002(a).
The petition is a procedural document containing information that identifies the debtor, notes any previous cases, and is signed by attorney and debtor. (Official Form 1, E-File)
A 2005 change to the petition was language wherein the attorney must sign that he or she “has no knowledge after an inquiry that the information in the schedules is incorrect.” 11 USC §707(b)(4)(D). Schedules A – Real Property All real property or interests in real property currently owned by the debtor. B – Personal Property 34 categories of possessions and interests owned by the debtor or in the debtor’s possession.
C – Property Claimed as Exempt Real or Personal Property claimed as protected by either state or federal exemption statutes.
D – Creditors Holding Secured Claims Names, addresses and account information of any creditors holding claims secured by the property of the debtor.
E – Creditors Holding Unsecured Priority Claims Names, addresses and account information for any creditors given special status by statute.
F – Creditors Holding Unsecured Nonpriority Claims Names, addresses and account information for all other creditors. Details of leases and contracts in effect at time of filing, G – Executory Contracts and Unexpired Leases including interest of debtor and names, addresses and interests of all other parties.
H – Codebtors Name and address of any person also liable on a debt, linked to contact information for the creditor.
I – Current Income of Individual Debtor(s) All income of debtor’s household, presented on a monthly basis. J – Current Expenditures of the Individual Debtor(s) The average or projected monthly expenses of the debtor and family. Other required forms:
Form Detail Exhibit D – Individual Debtor’s Statement of Compliance Statement regarding the pre-file credit counseling requirement, with Credit Counseling Requirement whether taken, planned or exempted. Collates totals from Schedules into cover sheet Form 6 – Summary of Schedules Signature page that all information in schedules is accurate, Declaration Concerning Debtor’s Schedules under penalty of perjury. Lengthy questionnaire seeking fuller picture of income, lawsuits, Form 7 – Statement of Financial Affairs transfers, etc. Statement of whether the debtor intends to keep or surrender Form 8 – Chapter 7 Individual Debtor’s Statement of secured and leased property. Intention Certification by attorney of amount paid by debtor within the Compensation Statement of Attorney for the Debtor(s) previous year for legal services on this matter.
Document signed by debtor that he/she has received and Notice to Individual Consumer Debtor of Available reviewed the document setting out the availability of Chapters 7, Chapters 11, 12 & 13. Sworn statement by debtor that list of creditors is true and Verification of Creditor Matrix complete. Compilation of all listed creditors, arranged in format as Creditor Matrix required by the court. Form 22A – Statement of Current Monthly Income/Means Determination of whether debtor’s filing triggers a presumption Test of abuse. Form 21 -Statement of Social Security Numbers Certification of complete social security numbers
Domestic Support Order Form 11 USC §521(a) and FRBP, Rule 1007 Chapter 7 filing fee = $306. Chapter 13 filing fee = $281.
For Chapter 7 debtors with income under 150% of the federal poverty guideline, as determined from Schedule I, the court may grant a waiver of the filing fee or of the filing fee in a Chapter 7 case and all other fees in the case (such as amendment costs, if any.) 28 USC §1930(f).
Debtors who cannot pay the full filing fee, in either chapter, may apply to pay in installments over a period up to 120 days from the filing of the bankruptcy case. 28 USC §1930(a), FRBP 1006(b). Effective: January 2, 2013 26 U.S.C.A. § 108
§ 108. Income from discharge of indebtedness (a) Exclusion from gross income.-- (1) In general.--Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if-- (A) the discharge occurs in a title 11 case, (B) the discharge occurs when the taxpayer is insolvent, (C) the indebtedness discharged is qualified farm indebtedness, (D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or (E) the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2014. 2011 amendments
Mortgage lender must file claim on special, detailed form - § 3001(c) (2)(C)
Must provide a notice itemizing all post-filing fees, expenses and charge, within 180 days - § 3002.1(c)
Must provide, upon completion of plan payments, notice of any claim that arrears not fully paid - § 3002.1(f) –
Special claims requirements for 5 servicers affected by National Mortgage Settlement Agreement – Bank of America; JP Morgan Chase; Wells Fargo; Citibank; and Ally/GMAC - (attaching note, endorsements, etc.) Debtor may file objections to claim
Mortgage holder or servicer may file motion for relief from automatic stay
Debtor’s objection to claim may come in the form of opposing affidavits or an adversary proceeding
An adversary proceeding is the equivalent of a federal court action – FRBP 7001 et. seq. applies – and incorporates much of FRCivP
Includes extensive pre-trial discovery
Relief may include challenge to standing, reduction of mortgage claim due to excessive fees, failure to offer a modification mandated by non-Bankruptcy law.
Bankruptcy courts have upheld the right of a debtor to challenge lack of compliance with FHA loss mitigation procedures, In re Shelton, 481 B.R. 22, 25 (Bankr. W.D. Mo. 2012) and have denied lender motions for relief from the automatic stay where the lender cannot establish ownership of the mortgage and note. In re Mims, 438 B.R. 52, 56 (Bankr. S.D.N.Y. 2010) (“Because Wells Fargo has not offered evidence that it owns the original Note, Wells Fargo lacks standing to foreclose on the Mortgage and has therefore failed to demonstrate it is the holder of a “claim.”)
The bankruptcy court for the WDNY has scrutinized attorney and foreclosure- related fees. In re Wasson, 402 B.R. 561, 567 (Bankr. W.D.N.Y., Bucki, J., 2009) Limitations on adversary proceedings –
They may not re-litigate issues decided already in a state court proceeding -Possible problem if judgment of foreclosure already obtained in state court
Court generally may not “cram-down” a mortgage absent non-bankruptcy law, due to 11 USC § 1322(b)(2) some exceptions – . mobile home that is actually mobile; . residence which is part of a multi-family apartment house or includes significant commercial use, e.g. a shop – review commercial character at time of closing