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Articles Posted in Personal Bankruptcy

As a result of the current state of the real estate market in New York and elsewhere, we receive many inquiries regarding Chapter 13 bankruptcy from people wondering if they can use Chapter 13 to save a home or investment property. The answer is that Chapter 13 can be used to save a home or investment property, but has its limitations.

Eligibility Requirements for Chapter 13 Bankruptcy:

Secured Debt Limits. A debt is secured if the debt is collateralized by a lien or mortgage. As of the date of this posting, to be eligible for Chapter 13 a debtor can’t have more than $1,010,650 in total secured debt. This means that if a debtor either has a home or apartment with greater than $1,010,650 in mortgages on it, or has more than one property – such as a primary home subject to a mortgage and 2nd investment property subject to a mortgage – with total debt on all properties greater than $1,010,650, then Chapter 13 is not an option. Car loans (but not car leases) also get added in to the total when calculating the secured debt limit.

Unsecured Debt Limits. To be eligible for Chapter 13, as of the date of this posting a debtor cannot have unsecured debt greater than $336,900. A debt is unsecured when it is not secured by a mortgage or lien on property. Typically credit card debt and student loans are unsecured. Tax debt is unsecured unless the taxing authority has filed a tax lien or warrant.
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Commonly Encountered Problems in Chapter 13

Need to Make Current Mortgage Payments. 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 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.

Inability to Restructure Home Loan through Bankruptcy
. The Bankruptcy Code provides that the rights of a mortgage lender secured by real estate that is the debtor’s principal residence can’t be modified in Chapter 13. This means that we can’t use Chapter 13 to try to modify the loan and, for example, split it into two separate secured and unsecured loans that receive separate treatment. We can do this for investment properties or other properties owned by the debtor that are not the debtor’s principal residence. We can also use Chapter 11 to do this for the debtor’s principal residence. However, unfortunately, the expense and complexity of Chapter 11 puts it beyond the reach of most consumer debtors.

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.

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.

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.

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