New York Bankruptcy Lawyer Blog

There is an ongoing problem with a record number of foreclosures taking place this year throughout the New York metropolitan area. Many people in New York, Queens, Bronx, Brooklyn, and Westchester County are facing the prospect of losing their homes in foreclosure and are exploring their options. For many of them bankruptcy may be their best option. In a prior post New York Foreclosure & Chapter 7 Bankruptcy I discussed when and how chapter 7 can be used to deal with foreclosure in New York. Today we focus on chapter 13.

NY Foreclosure & Chapter 13 Bankruptcy

In chapter 13 the debtor keeps his/her property. The trustee does not sell it to pay creditors. Instead, creditors’ claims are dealt with over time. A debtor filing chapter 13 to deal with real estate problems, such as a pending foreclosure, needs to be able to make current mortgage payments as they become due and can seek to cure the arrears (i.e., past due part of the mortgage) over time through the chapter 13 plan. If a debtor is unable to make current mortgage payments as they become due chapter 13 bankruptcy may still be used as a means to try to prevent a foreclosure and obtain a voluntary sale of the debtor’s property (subject to Bankruptcy Court approval). This may be desirable when a debtor has equity in the property that would get wiped out in chapter 7 bankruptcy and wants to maintain control of the sale process.

In chapter 13 bankruptcy the debtor has the ability to cure arrears (past due portion) of the mortgage over time through a chapter 13 plan -- even if there is a foreclosure judgment as long as sale has not yet occurred. You can file chapter 13 and still try to pursue a settlement/workout/loss mitigation program with the lender at the same time, but most lenders will require that you dismiss your bankruptcy case before they will finalize any deal.

To be eligible for chapter 13 a debtor can’t have secured debt (such as mortgages, judgment liens, or tax liens) greater than $1,010,650 total, or unsecured debt greater than $336,900 total (such as credit card debt, student loans, medical bills, etc.).

Many people in New York, Bronx, Queens, Brooklyn, Staten Island and Nassau and Suffolk Counties are in danger of losing their homes through foreclosure these days. Bankruptcy may be a good option for many of these people to try to save their homes. There are three different bankruptcy options available to individuals, chapter 7, chapter 13 and chapter 11. Today we will look at when chapter 7 can be used to stop a foreclosure.

NY Foreclosure & Chapter 7 Bankruptcy

Once a debtor files bankruptcy the automatic stay goes into effect and prohibits the lender from continuing with the foreclosure. In chapter 7 bankruptcy a critical issue is whether the homeowner has equity in the home. Equity is the difference between the current fair market value of the home and all the mortgage liens on the property. In chapter 7 bankruptcy in New York the debtor is entitled to an exemption (i.e., gets to keep) up to $50,000 of equity in his/her home, or $100,000 if married and the home is jointly owned by debtor and his/her spouse. This is commonly known as a homestead exemption. If the equity is less than this there is no value for the bankruptcy estate to turn to cash to satisfy creditors’ claims. However, if a debtor has significant equity greater than the value of allowed exemptions then the chapter 7 trustee can seek to sell the home. In a sale by the chapter 7 trustee the mortgage(s) would get paid, the debtor(s) would get a check for the amount of their exemption, and the remaining money would go into the bankruptcy estate to be distributed to creditors by the trustee.

For people with mortgage problems and other unsecured debt problems as well, chapter 7 bankruptcy can be a good option if eliminating the other unsecured debt (such as credit card debt or medical bills, etc.) would solve their money problems so they would have enough money to pay the mortgage. However, to keep your home in chapter 7 you need to continue to pay the mortgage as it become due.

A common question I get asked a lot by people from New York City, Manhattan, Brooklyn, Queens and the Bronx is how bankruptcy can be used to wipe out a New York judgment. A judgment in New York is good for 10 years and can be renewed for another 10 years. The judgment can be enforced during this period. Interest accrues on a judgment at 9% per year. So for every $1,000 face amount of judgment every year another $900 gets added in. A creditor with a judgment can garnish the judgment debtor’s (i.e., person who owes the judgment’s) wages, attach his/her bank account, put a lien on his/her house or any real estate, and seek to seize and sell his/her car or other assets.

A judgment also appears on the credit report of the person owing the judgment for 7 years and will have a negative effect on his/her credit standing.

Once a judgment debtor files personal bankruptcy any attachment of the debtor’s bank account must be released by the judgment creditor.

A personal bankruptcy filing will wipe out a debtor's personal liability for a judgment. There is an exception for very limited categories of debts that are automatically excepted from discharge, but depending on the amount of the judgment a chapter 13 bankruptcy can still be used to pay off the judgment over time.

In addition, if a judgment has been recorded with the County Clerk in a county where the judgment debtor owns real estate, the lien will not get automatically wiped out in bankruptcy. However, depending on the circumstances the debtor may be able to avoid the lien in the bankruptcy.