Foreclosures and Bankruptcy--Where do they meet?

By Roberta M. Gubbins Legal News The problem, according to Perry Thompson, lawyer with Legal Services of South Central Michigan, speaking to local attorneys at the ICBA Luncheon Lecture on Sept. 21st, is that lawyers aren't always aware of how "bankruptcy strategy impacts on the foreclosure process so today we will talk about where the two meet." "Like most things in law," Thompson said, "We start with answering the question 'what does your client want to do?' They are facing foreclosure and do they want to stay in the house or walk away clean?" Assuming that the client wants to stay in the house, which they might be able to do with a reduced monthly payment, Thompson explained that while a bankruptcy cannot modify a loan secured only by a mortgage, there are some options such as: * Strip the unsecured 2nd mortgage in Chapter 13 bankruptcy making it possible to pay the 1st mortgage in the future. * Eliminate the other debts to make mortgage affordable * It is possible with rental property to "cram down" the value to fair market value. * To catch up on the arrearage, a loan modification/repayment plan is first choice or use Chapter 13 if the bank will not voluntarily allow a repayment plan. If the client wants to walk away immediately due to a job transfer or marriage, Thompson warned that there could still be problems. "If they file a bankruptcy, they state their intent to surrender the house, they get the discharge but the bank doesn't foreclose. So until they foreclosure, you still own the house, and are liable for snow removal, utilities, fines, taxes, etc. And all the new debt is post disposition debt, so you will have to wait another eight years before you can file again." He recommends that clients wait until the bank forecloses and then file the Chapter 7 bankruptcy. Other possibilities are to rent the house or "give it away using a quit claim deed. How long they have the house is up to the bank and the trustee." If they don't need to leave right away, he recommends staying in the house as long as possible. "When you are thinking about doing a bankruptcy, things to consider include eligibility to receive a discharge, whether they had sufficient income to make the payments under a repayment plan and non-dischargeable debt such as student loans." In the case of student loans, he urged practitioners to explain in writing to their clients that those debts do not go away with bankruptcy. What can be accomplished in a bankruptcy that can't be done outside of bankruptcy? While the debtor still owns the house, it is possible in a bankruptcy to repay the arrears over a maximum of 60 months and then resume regular mortgage payments. The debtor can file a formal objection to amount owed on the home, which could involve consideration of MERS. MERS, Mortgage Electronic Registration System was a company created to simplify the transfer of mortgage documents. Thompson indicated that the question of whether MERS ever owns or has the authority to transfer the mortgages and notes has been raised to challenge standing in state court litigation and in bankruptcy. There are cases on both sides, making the answer unclear. It is possible, he noted, to avoid a wholly unsecured junior mortgage. This situation arises when the value of the house is less than first mortgage and any delinquent taxes; in that case there is no value in the property for the junior mortgage to attach to. "The idea of using a bankruptcy to avoid a Sheriff's sale," he said, " may be possible if the house is worth more than the mortgage amount, the bank comes in and bids the mortgage amount, they got value worth more than the debt, which is a preferential payment to a creditor under bankruptcy and should be able to be reversed." (In re Andrews, 262 B.R. 299 (Bankr.MD.PA, 2001) Thompson recommended that those who work in the foreclosure field "keep a list of local non-profit housing counselors handy. They are pros at what is available right now and they can get people approved." Perry Thompson was in private practice prior to joining LSSCM. He is a member of the State Bar of Michigan and the Eastern and Western Districts of Michigan. He is a graduate of Wayne State University Law School. He is member of National Association of Consumer Bankruptcy Attorneys, National Association of Consumer Advocates, Debtors Bar of West Michigan, and Certified Distressed Property Experts. Published: Thu, Sep 29, 2011

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