Should I Reaffirm my Mortgage Debt? What about a Second Mortgage?

Addressing mortgage debt is often a primary concern in many consumer bankruptcies. Debtors that decide to continue to pay the mortgage on their current house may be setting themselves up for future financial problems if they have difficulty paying the mortgage, post-bankruptcy. Alternatively, a debtor may be able to discharge the underlying mortgage and surrender the house back to the bank if the payments are not affordable, but is then faced with finding a new place to live. The decision of whether or not to re-affirm comes down to the specific facts of your case and what is a realistic future budget for your household.

Popular mortgage packages offered in the past ten years often featured “jumbo” financing: that is, financing of nearly one-hundred percent of the purchase price of the home. In many cases, this was done with a primary traditional mortgage, which financed approximately 80% of the purchase price, then a second mortgage or home equity line of credit that financed the balance.

Today, with the decline in home prices, many borrowers find themselves owing more on their homes than they are worth; in extreme cases, the second mortgage may be completely unsecured because the home is worth less than the balance of the first mortgage, without even adding in the balance of the second. In some cases, it is possible to “strip off” an unsecured second mortgage in bankruptcy, leaving the borrower with only one mortgage to pay. It is generally accepted that in Chapter 13 bankruptcy, a second mortgage can be avoided, and treated as unsecured debt.

Although, most attorneys believed that this could be done in a Chapter 7 case, an Eastern District of New York bankruptcy case may suggest otherwise. Here, the Debtors owned a house, where the fair market value was less than the balance of the first mortgage, leaving the second mortgage unsecured. After filing bankruptcy, the bank requested for permission to foreclose on the second mortgage the debtors opposed; arguing that the bank could not foreclose because the second mortgage should be avoided as wholly unsecured and not treated as secured debt.
The Court agreed.

The bank was not permitted to foreclose, and the lien was permanently voided. Judge Eisenberg explained that the well-recognized holdings in Chapter 13 clearly demonstrate that under the Bankruptcy Code it is appropriate to distinguish partially secured liens from wholly unsecured liens, and that there is no reason why in a Chapter 7 context the same language in the Bankruptcy Code should not void the lien of a wholly unsecured claim.

Of course, this is the outcome of a single New York case, and the bankruptcy Judges in Massachusetts are not obligated to follow this outcome. However, given the proper circumstances, it may be an option to consider. If you would like

Kelsey & Trask, P.C. would like to thank Dan Press, Esq., a Maryland Bankruptcy Attorney, for inspiring this article.

Will I Lose my Professional License if I file for Bankruptcy?

Pursuant to section 525(a) of the bankruptcy code a government agency cannot deny, revoke, suspend or refuse to renew a license to a person who has filed for bankruptcy, solely due to their filing for bankruptcy. This means that you will not lose your license to practice your profession due to filing, but it does not mean that you won't lose your license for related reasons if you have violated the standards of your profession.

For example, an attorney in Texas lost his license to practice law based on his failure to comply with a debt management plan and eventual bankruptcy. The Court relied on the questions his poor debt management raised about whether he could demonstrate that "he was a person of good moral character." The decision was not solely due to his bankruptcy, but the "good moral character" standard used by the Court was so vague as to give the bar great leeway in denying a license.

Regardless of whether you are forced to file bankruptcy, you should refer to the specific standards and requirements of your profession and ensure that you comply with those standards and requirements to avoid a similar fate.

Can I Lose my Job for Filing Bankruptcy?

It is prohibited by the Bankruptcy Code for an employer to fire you solely because you filed for bankruptcy.

Section 525(a) of the bankruptcy code states that a governmental unit may not

"deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act."

Similarly, Section 525(b) prohibits private employers from terminating the employment or discriminating with respect to employment of a person who is or has been a debtor under all the same circumstances quoted above.

It is important to note, though, that the same standards may not apply to hiring discrimination. Recently, the Third Circuit Court of Appeals held in Rea v. Federated Investors that the omission of the words "deny employment to" in subsection (b) meant that private employers could discriminate against a potential employee because that person had filed for bankruptcy. The Court decided that the inclusion of the words "deny employment to" in subsection (a) was a significant difference in the obligations of governmental employers and private employers.

Special thanks to the Lawffice Space Blog for bringing this recent case to our attention.

Don't Go Alone Word Cloud

Wondering what we've been writing about. Below is a word cloud generated by Wordle displaying our most written about subjects:

What will happen at your Section 341 Creditor's Meeting?

After a bankruptcy petition is filed under Chapter 7 or 13, each "petitioner" must sit through their section 341 meeting of creditors, usually scheduled approximately 30 days after the filing date. Many of our bankruptcy clients feel anxious leading up to their 341 meeting as they are unsure as to what to expect, but if you are prepared there is nothing to worry about.

The majority of 341 meetings only last five to ten minutes. You are required to bring your social security card and driver's license for identification. The trustee will review your identification, swear you in and ask you a few basic questions after reviewing your petition, for example your current living arrangements, whether you own any businesses, and whether you are the beneficiary of any trusts. If anything on your petition sticks out to the trustee, he or she might ask a few follow-up questions. Usually, if there is something that will stick out to the trustee, your attorney will have already asked you the same questions that the trustee will ask.

Generally, creditors do not attend the 341 meeting, although they have the right to be there and may be given the opportunity to ask you some basic questions. If you owe the IRS taxes, they will often attend the creditors meeting and ask questions relating to the petition. Again, your attorney should prepare you for the potential questions that might be asked if a creditor does decide to attend the meeting.

If you would like more information about how to prepare for your creditor's meeting, contact Attorney Matthew Trask or call 508.655.5980 to schedule a one-hour consultation.

How do I decide when to file for Bankruptcy?

There are numerous factors that dictate the best time to file your bankruptcy. Sometimes these are in your control, such as having your taxes filed, and sometime they are not, such as needing the automatic stay to delay a foreclosure proceeding.

Factors regarding the need to obtain an automatic stay will likely be dictated by your creditors, not you. The automatic stay is a useful tool in temporarily stopping foreclosure proceedings brought by your mortgage holder(s), as well as collection efforts, collection calls and lawsuits filed by your creditors, if any. This foreclosure and debt collection process generally takes a few months, not a few days, and the benefit of the automatic stay can create some additional time for the debtor to deal with logistical issues associated with preparing the bankruptcy petition, appraising assets, selling real property or finding new housing, if necessary.

In order to file for bankruptcy under any section of the Bankruptcy code (Chapter 7, 11, or 13), your federal income taxes must be filed up to the current year (2008). Other documents are necessary for preparing the bankruptcy petition and schedules, such as a credit report, current credit card statements, bank statements, and income information. If this information is not immediately available, it will take some time to collect and review. If you believe a bankruptcy filing is on the horizon, your best bet is to contact an attorney for a bankruptcy planning consultation, then begin preparing the information needed to file.

Equally important in deciding when to file is a debtor's own ability to handle the current situation, balanced against their need to make immediate changes. Some debtors will need time to prepare for relocation to an apartment or smaller home, whereas others will be anxious to take action to save their house or get a fresh start. These factors are unique to each case, and should be discussed with an attorney before filing your bankruptcy petition.

2 cows, 12 sheep, 2 swine and 4 tons of hay.

Are you overwhelmed with debt, but worried about your sheep? Bankruptcy might be the answer to your problems.

When filing a Bankruptcy as a resident of Massachusetts a debtor can choose to use the exemptions allowed under either State or Federal law, but you must choose one or the other. There are many exemptions that are similar under both schemes, such as the exemption of most qualified retirement plans.

There is one significant difference between the Massachusetts and Federal exemptions, though: under the Massachusetts' exemptions you can exclude from the bankruptcy 2 cows, 12 sheep, 2 swine and 4 tons of hay (M.G.L. c. 235 s. 34)

There is also one other significant difference worth mentioning between the Federal and Massachusetts exemptions: the equity in a residence is exempt under the Massachusetts exemptions up to $500,000 but only $20,200 in the Federal exemptions. Of course, who needs a home so long as you have your flock.

UPDATE: The Massachusetts Exemptions have recently changed. For more information read our post on the changes: New Massachusetts Property Exemptions: The Return of 2 Cows, 12 Sheep and 2 Swine.