Can a Mortgage Prevent you from Filing for Bankruptcy?

Individual bankruptcies, typically Chapter 7 or Chapter 13, are limited in certain ways.  For instance, Chapter 7 bankruptcy has income limitations, while Chapter 13 bankruptcy has debt limitations.   Below we will explain how your mortgage could disqualify you from filing Chapter 13 bankruptcy under the debt limitations.

A mortgage is a legal instrument typically securing a debt against real property, such as your residence. In our current real estate market, many homes are underwater. Not in the literal sense.  Figuratively, when a home is described as "underwater" it refers to the mortgages on said home having a value greater than the current fair market value of the home.

When filing a Chapter 13 bankruptcy, a wholly unsecured second mortgage or even the unsecured portion of an under-secured first mortgage should be listed as unsecured debt. Depending on other circumstances you may or not be able to discharge this "unsecured" debt, however that doesn't change the fact that the Court will consider it unsecured.

Why does this matter?

When filing a Chapter 13 bankruptcy, there are debt limits defined by 11 U.S.C. §§ 109(e). Said debt limits were recently raised, effective April 1, 2010. Under the current limits, a Chapter 13 bankruptcy will be dismissed if the debtor has unsecured debt greater than $336,900 and/or secured debt greater than $1,010,650. As of April 1, 2010, those figures rose to $360,475 and $1,081,400 respectively.

Consider the following scenario:
A debtor owns a $600,000 home but has $900,000 in mortgages. The debtor has a car with a lien of $20,000 (secured debt) and credit card (unsecured debt) of $100,000.

If the entire mortgage debt was considered secured then the debtor would be under the debt limits with a total secured debt of $920,000 and a total unsecured debt of $100,000. Unfortunately, because the Court considers the $300,000 of "underwater" mortgages unsecured, the debtor has a total unsecured debt of $400,000, which is above the debt limits. This debtor would, therefore, be ineligible to file for relief under Chapter 13 and be forced to seek other relief (possibly filing for bankruptcy under Chapter 7 or Chapter 11).

This is the exact scenario articulated by a California Court in an unpublished decision: In re Estrada.

Estrada refers to a Ninth Circuit decision: In re Scovis, 249 F.3d 975, 982 (9 th Cir. 2001). In Scovis, the Court stated that a "vast majority of courts, and all circuit courts that have considered the issue, have held that the unsecured portion of undersecured debt is counted as unsecured for 13 § 109(e) eligibility purposes."

It appears that this is also the law in Massachusetts. In re Marrama, 345 B.R. 458, 472 n.23 (Bkrtcy.D.Mass. 2006) In Marrama the court referenced Scovis and noted that the debtors failed to list the unseured portion of an undersecured mortgage as unsecured debt, which would have resulted in a greater unsecured debt.

What is the difference between Chapter 7 and Chapter 13 bankruptcy?

Generally speaking, a Chapter 7 Bankruptcy involves a total liquidation of the debtor’s assets (although the debtor may keep certain allowable exempt assets), and any non-exempt assets are used to satisfy the debtor’s unpaid debts.  Any remaining dischargeable debts are discharged, meaning they are no longer owed.  A Chapter 7 case places no limits on the amount of debt that may be discharged; however, there are income qualifications in order to be eligible for Chapter 7 as a result of the 2005 changes to the Bankruptcy law.

A Chapter 13 case places no income restrictions on the debtor, so if you cannot file Chapter 7 because you do not pass the means test, you can likely file Chapter 13.  Chapter 13 begins much like a Chapter 7 case, but after the liquidation of non-exempt assets, if any, the debtor will pay a certain amount based on his available income and after deduction of living expenses to the U.S. Trustee, who will distribute payment to creditors on a pro-rata basis.  The debtor will make monthly payments for 3-5 years, depending on certain factors, and then, as long as the debtor makes payments every month, the remaining unpaid portion of most debts will be discharged (though some debts, such as student loans may still be owed even after completion of the plan).

Chapter 13 has the benefit of permitting the debtor to spread out the repayment of certain debts over a 3-5 year period that would be otherwise non-dischargeable, such as tax debt, or student loans.  Additionally, the debtor could use Chapter 13 to avoid foreclosure and pay back mortgage arrearages over the term of the plan, which is helpful in cases where the lender is demanding a high “cure” amount to voluntarily get a house out of foreclosure.

Bankruptcy & Litigation Series: #7 Foreclosures and Short Sales

Foreclosures are down for the sixteenth straight month in Massachusetts (Source: Massachusetts Real Estate: Foreclosure Activity down yet again).  Whether you credit government intervention programs, improvements in the economy, or something else, this is good news for most people.  However, not everyone will be able to avoid a foreclosure of their property.

Homeowners encounter serious problems when they cannot pay (and have not paid) the mortgage especially if they have negative equity in the property (meaning that the mortgage is more than the fair market value).

Whether you took on a mortgage payment that you could not afford - i.e., purchased "too much house" - or some other temporary situation has impacted your finances such as an unexpected medical expense, loss of a job or other significant interruption in income, the bank will begin threatening foreclosure when you get behind on payments.  At this point, you must weigh your options.

If you can afford your mortgage payment and have just gotten behind then you may be able to work out a mortgage modification directly with your bank, but if they are not willing or able to work with you then bankruptcy can forestall a foreclosure proceeding.  In a Chapter 7 bankruptcy, you will have to pay any mortgage arrears if you want to keep the property, but the foreclosure will likely be delayed partially during the process.  In a Chapter 13 bankruptcy, the mortgage arrears can be included in your payment plan so long as they will result in a full payoff of the arrears by the end of the plan.

If you can't afford the payments, and your financial situation does not permit a mortgage modification, then your options may include bankruptcy, short sale, or foreclosure, or some combination of those.

Short Sales:

In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the borrower. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. Borrowers are able to mitigate damage to their credit history, and partially control the debt. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer. The borrower must work directly with the lender to seek approval of the short sale by the bank, obtain a purchaser, and complete the transaction before any foreclosure proceedings are completed. (In some cases, the bank may have initiated foreclosure proceedings, in addition to contemplating consent for the short sale.) Timing is critically important, and the debtor is an important part of the short sale process.

However, if the individual does not then pay off the deficient portion of the mortgage (the unpaid portion of the mortgage after the short sale proceeds were applied to the balance), the lender can take further legal action against the debtor to collect the unpaid portion of the mortgage, which may include trustee process attachments, garnishments, or seizure of other assets, depending on the debtor's other property. The debtor may, after the short sale is complete, file for Bankruptcy upon completion of the short sale to discharge any deficiency and extinguish any further liability to the lender.  If the homeowner is already in bankruptcy, they will need the trustee or court's approval to transfer the property in a short sale.

Foreclosure and Bankruptcy:

A final option is to simply file for bankruptcy, and indicate that the debtor's intention is to surrender the property to the bank. Procedurally, the Bankruptcy case will progress through the Bankruptcy Court, and eventually the secured lender will seek permission from the Bankruptcy Court to be relieved of the automatic stay protections, and begin foreclosure proceedings. Regardless of whether the foreclosure auction is completed by the bank before or after the debtor's discharge (meaning they no longer owe certain debts, including the mortgage debt), any deficiency from the foreclosure auction is discharged by the bankruptcy court. From the debtor's perspective, the whole process is completed through the bankruptcy, and does not require any specific participation directly with the lender.

This option provides a swift resolution to the issue of past-due mortgage debt, the pending foreclosure on the property, and any mortgage deficiency all in one process that, in the case of a Chapter 7 bankruptcy, can be completed from filing to discharge in under six months. It is best utilized when the lender will not agree to a short sale, when there is insufficient time to arrange a short sale, or when the debtor's other financial concerns (such as collection actions on other debt) require immediate action. It also does not require the lender's permission or cooperation - provided you qualify for bankruptcy, the Bankruptcy Laws dictate the result, not the lender's business decision.

The credit implications of a foreclosure and bankruptcy (or in the context of bankruptcy) are more detrimental than a short sale followed by bankruptcy, if the debtor wants to obtain a mortgage again in the future.

U.S. Bank v. Ibanez And Beyond: Massachusetts Courts Leading The Way In the Foreclosure Crisis(Guest Post by Richard D. Vetstein, Esq.)

Bankruptcy and foreclosure are two subjects that often go hand-in-hand. Some recent court decisions have had a major impact on how foreclosures are handled in Massachusetts. To provide some insight on these decisions, we are pleased to present a guest post from Richard D. Vetstein, Esq. of Vetstein Law Group, P.C. Richard's firm runs a very popular real estate blog: The Massachusetts Real Estate Law Blog.




U.S. Bank v. Ibanez And Beyond: Massachusetts Courts Leading The Way In the Foreclosure Crisis

I’m honored to be guest blogging regarding recent Massachusetts foreclosure and mortgage crisis court rulings. Although not as impacted by foreclosures as Florida or California, Massachusetts has been a hotbed for controversial and landmark rulings in this ever-changing area. And there will be more to come as our Supreme Judicial Court will decide several more important cases in the upcoming months. Here’s a summary of what’s happened in the last year and what’s on the upcoming docket.

U.S. Bank v. Ibanez

In January 2011, the Massachusetts Supreme Judicial Court’s U.S. Bank v. Ibanez decision quickly became a huge national story. CNN-Money called it a “beat down” of the big banks. Reuters said it’s a “catastrophe risk” for banks. The ruling spooked investors, as bank stocks were down in reaction to the ruling.

Ibanez was the first state supreme court ruling to weigh in on the legal ramifications of widespread irregularities and paperwork snafus in the residential securitized mortgage industry. The high court ruled that two foreclosures of sub-prime mortgages were null and void where the lenders could not establish the chain of ownership within the securitized mortgage back securitized pools.

The Ibanez case has been attributable for the recent slowdown in foreclosure activity in Massachusetts, however, as of August the numbers are starting to pick back up as lenders are getting their acts together. It’s important for you and your bankruptcy attorney to verify whether your mortgage lenders has complied with the Ibanez case by recording the proper mortgage assignment paperwork.

Bevilacqua v. Rodriguez

We should find out any day now the SJC’s opinion in the next case in the U.S. Bank v. Ibanez saga: Bevilacqua v. Rodriguez. This case will consider whether a home buyer can rightfully own a property if the bank that sold it to him didn’t have the right to foreclose on the original owner, after the U.S. Bank v. Ibanez ruling in January. This case, which national legal experts are watching closely, may determine the rights of potentially thousands of innocent purchasers who bought property at foreclosure sales that have been rendered invalid after the Ibanez ruling. “The Massachusetts case will have significant repercussions in many states that allow nonjudicial foreclosure,” Alan White, a law professor, commented to BusinessWeek. “The decision in Bevilacqua will not only determine the fate of past foreclosure sale deeds, but hopefully provide guidance so that lenders and their lawyers can get it right going forward.”

Eaton v. Fannie Mae

In a rare “sua sponte” (on their own) direct appellate review, the Massachusetts Supreme Judicial Court has agreed to hear an appeal in Eaton v. Fannie Mae, considering the controversial “produce the note” defense in foreclosure cases and whether a foreclosing lender must possess both the promissory note and the mortgage in order to foreclose. Based on arguments asserted by the lender, the court may also consider the circumstances by which a mortgage granted to Mortgage Electronic Registration System (MERS) can be effectively foreclosed in Massachusetts. This could be a very important decision — potentially as important as the landmark U.S. Bank v. Ibanez. A ruling against the lenders could expose a gaping and fatal legal black hole with many foreclosure-bound mortgages that were hastily bundled and sold to Wall Street during the real estate boom years. A rejection of the borrower’s arguments as recently made by a bankruptcy judge in Worcester, however, could significantly reduce some MERS induced anxiety and heartburn presently being experienced by lenders and foreclosure attorneys.

Bank of NY v. Bailey

In the closely watched case of Bank of New York v. Bailey, the Massachusetts Supreme Judicial Court ruled on August 4, 2011 that the Housing Court may hear a homeowner’s challenge that a foreclosing lender failed to conduct a foreclosure sale in accordance with state law and under the now seminal U.S. Bank v. Ibanez decision. Previous to this decision, foreclosing lenders and their attorneys were quite successful in evicting homeowners even where there were defects in the foreclosures. Watch for the Housing Court to be on the front lines of foreclosure defense now.

Suffice to say, Massachusetts courts have been very busy with foreclosure and mortgage crisis rulings. I’ve been following these cases for a while and there is definitely a marked trend by the courts to a more balanced, pro-consumer approach in these cases. Judges are human beings and no doubt, they are not oblivious to the news and widespread financial distress going on in Massachusetts and the country today.




Richard D. Vetstein, Esq. is an experienced real estate litigation attorney who’s handled numerous foreclosure defense and title defect cases in Land Court and Superior Court. Please contact him if you are dealing with a Massachusetts foreclosure or title dispute.

The Emergency Chapter 13 – Skeletal Filings and What to Expect

You’ve been working with your bank on a mortgage modification, short sale, or deed-in-lieu of foreclosure. For whatever reason, your preferred course of action doesn’t work out, and you receive a foreclosure notice. The worst thing you can do is ignore it, but what happens if you do?

A complete Chapter 13 filing can take your attorney some time to prepare, and is usually approximately 30-50 pages long, depending on the complexity of your case. However, you may not have that much time, especially if a foreclosure auction is only days away, or the IRS has started to levy your paycheck. If you find yourself facing a foreclosure auction and want to try to keep your home, an emergency Chapter 13 filing may allow you to keep your home, pay back mortgage arrears over a 5 year period, and get current on other non-dischargeable debts, such as taxes and student loans.

Your attorney will work with you on the following documents, which can be prepared within hours, and filed with the court.

1. Ensure all tax filings are current.
2. Take pre-petition financial management course on-line.
3. Prepare and file voluntary petition.
4. Prepare and file Statement of Social Security Numbers.
5. Prepare and file Declaration of Electronic Filing.
6. Prepare and file Chapter 13 Agreement between Debtor and Debtor’s Attorney.
7. Prepare and file Joint Certification of Section 522(q) Obligations.

Once the above are filed, the Automatic Stay in bankruptcy will prevent further collection actions by your creditors. Foreclosure auctions will be postponed, lawsuits and other collection actions will be stayed, and garnishments will cease.

Immediately begin preparing all documents your attorney tells you to prepare the remainder of your bankruptcy case. The Court will issue an Order to Update regarding the missing filings. Generally, the order will require that you file all deficient (missing) documents in a period of time set by the court. This is a typical timeline for these filings:

1. In one week: File the Creditor Matrix (a list of all individuals and corporations you owe money to).

2. In two weeks: File all Schedules (outlining Real Property, Personal Property, Property Claimed Exempt, Creditors Holding Secured Claims, Creditors Holding Unsecured Priority Claims, Creditors Holding Unsecured Non-Priority Claims, Executory Contracts and Unexpired Leases, Co-Debtors, Current Income of Debtors, and Current Expenses of Debtors), Declaration Concerning Schedules, Statement of Financial Affairs, Statements of Intention, B22C Statement of Current Monthly and Disposable income with Calculation of Plan Duration, the Chapter 13 Plan, Evidence of Current and Sufficient Liability and Property Insurance, and the Disclosure of Compensation of Attorney.

Requests for more time must be made by motion, and the court will often grant a 2-week extension.
In any case, the most important thing you can do is immediately prepare your financial records, and provide them to your attorney. If this is not done immediately after filing the skeletal petition, then you may not meet these court deadlines. The Bankruptcy Court’s deadlines are very strict, and missing one or more may be grounds for having your case dismissed. If your case is dismissed you'll be back to square one and may not be able to file again.

What if my Bank tells me to Stop Paying my Mortgage?

We get this question all the time from potential bankruptcy clients, and we always answer this question with a question: Do you have that in writing?

Unfortunately, more and more people are claiming they were told by bank customer service representatives that they should stop paying their mortgage payments. In many cases this is the "advice" given when requesting a refinancing or trying to convince a bank to accept a short sale. However, I have never had one of these homeowners tell me that they obtained this advice in writing.

The result is too often a foreclosure proceeding that the homeowner now wants to avoid. But if they can't cure the arrears they may not be able to keep the property at this point unless they can prove the advice that they were given. According to a recent ABA Journal article, even a Judge fell for this trap.

If you have a mortgage, it requires you to make regular payments or end up in default, which could lead to foreclosure. Don't take advice that says any different unless you get a written agreement from the bank to forgo payment. If you don't make your payments, and have no evidence that the bank advised you to do so, then you put yourself at risk of foreclosure.

Dealing with House Debt: Short Sales, Foreclosures & Bankruptcy - Part II

In this Three-Part Post, we will evaluate some of the different methods of dealing with real estate debt when a mortgage modification or forbearance agreement is not an option.

• Part I addressed the most common scenario which forces a homeowner/borrower to consider how to deal with property he or she can no longer afford.


• Part II will address short sales and their interactions with Bankruptcy.


• Part III will address "walking away" from a property through bankruptcy, and the resulting foreclosure by the lender.

Part II: Short Sale (and maybe Bankruptcy)

In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the borrower. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. Borrowers are able to mitigate damage to their credit history, and partially control the debt. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer. The borrower must work directly with the lender to seek approval of the short sale by the bank, obtain a purchaser, and complete the transaction before any foreclosure proceedings are completed. (In some cases, the bank may have initiated foreclosure proceedings, in addition to contemplating consent for the short sale.) Timing is critically important, and the debtor is an important part of the short sale process.

Short sales are a type of settlement, and they adversely affect a person's credit report, though the negative impact may be less than a foreclosure. Depending upon other credit information, it may possible to obtain another mortgage 1-3 years after a short sale, or even sooner if the borrower is current at the time of the sale.

However, if the individual does not then pay off the deficient portion of the mortgage (the unpaid portion of the mortgage after the short sale proceeds were applied to the balance), the lender can take further legal action against the debtor to collect the unpaid portion of the mortgage, which may include trustee process attachments, garnishments, or seizure of other assets, depending on the debtor's other property. The debtor may, after the short sale is complete, file for Bankruptcy upon completion of the short sale to discharge any deficiency and extinguish any further liability to the lender.

In this scenario, a foreclosure will never appear on the debtor's credit report. Although the Bankruptcy and Short Sale will appear on the debtor's credit report, some members of the mortgage lending agency will extend first mortgage financing, and even sub-prime mortgage financing, to prospective borrower with a bankruptcy that did not involve mortgage debt in as little as 3-4 years after the bankruptcy, provided the debtor has reestablished credit and used it responsibly during that time. Even if the bankruptcy included a small portion of mortgage deficiency debt, the fact that it did not include a foreclosure action will result in the debtor's credit healing much more quickly than if the debtor also went through a foreclosure during or before bankruptcy.

Deciding which option to pursue can be a daunting challenge for many individuals. Don't go alone. An attorney with Kelsey & Trask, P.C. can help you make these difficult decisions, and help you with the process. For an initial consultation, click here, or call 508-655-5980.

Dealing with House Debt: Short Sales, Foreclosures and Bankruptcy - Part I

In this Three-Part Post, we will evaluate some of the different methods of dealing with real estate debt when a mortgage modification or forbearance agreement is not an option.

• Part I addressed the most common scenario which forces a homeowner/borrower to consider how to deal with property he or she can no longer afford.


• Part II will address short sales and their interactions with Bankruptcy.


• Part III will address "walking away" from a property through bankruptcy, and the resulting foreclosure by the lender.

Part I: How did we get here? Where exactly is "here"?

Many homeowners today have negative equity in their homes, that is, they owe more on the mortgage than their homes is worth. This may be due to any number of factors, most commonly resulting from a combination of purchasing the property during the "housing bubble" of the early to mid 2000's, jumbo mortgages which finance 90% or more of the purchase price, and the use of "home equity loans" to fund consumer expenses. If you are current with your mortgage payments and plan to stay in your home, the "solution" to this problem is to basically wait out the market until home prices rise again or you have paid off enough principal of the mortgage to create positive equity in the property.

Homeowners encounter serious problems when they cannot pay (and have not paid) the mortgage and they have negative equity in the property. Perhaps the homeowner took on a mortgage payment that they could not afford - i.e., purchased "too much house" - or some other temporary situation has impacted the homeowner's finances such as an unexpected medical expense, loss of a job or other significant interruption in income. In any case, the bank may be threatening foreclosure, the homeowner is in jeopardy of loosing their home, and the value of the property at foreclosure auction is not enough to pay off the balance of the mortgage, resulting in an individual liability by the former homeowner to the bank for tens, if not hundreds, of thousands of dollars.

At this point, homeowners weigh their options and understand that they can no longer afford to keep the house. They can't afford the payments, and realize it is a loosing proposition to struggle to pay into a property that has negative net value. Assume for this scenario that the debtor's financial situation does not permit a mortgage modification. Perhaps the mortgage has already been modified; the borrower does not qualify for a modification; a modification has been denied; or the borrower's income is insufficient to to continue to make any payments, due to job loss or medical illness. After conducting some research, the homeowner is now weighting two options: A Short Sale of the property and/or Bankruptcy.

... to be continued...

Dealing with debt can be a daunting challenge for many individuals. Don't go alone. An attorney with Kelsey & Trask, P.C. can help you make these difficult decisions, and help you with the process. For a free initial consultation, click here, or call 508-655-5980.

Terms in Loan Modifications that Waive Automatic Stay Protection Void

On March 2, 2010, the Massachusetts Bankruptcy Court issued "Emergency Standing Order 10-2" addressing certain provisions of Loan Modification and Forbearance Agreements.

Emergency Standing Order 10-2 effectively voids any provision of any loan modification or forbearance agreement which states that upon default of the lender, the benefits of the automatic stay are waived. Prior to Emergency Standing Order 10-2, if a modification included such a waiver, the bank or mortgage lender could proceed with a foreclosure or other collection actions despite the filing of a Chapter 7 or Chapter 13 bankruptcy. Any individual considering a loan modification should be very careful when considering the terms offered by the lender in any loan modification. Nevertheless, Emergency Standing Order 10-2 effectively extends the protection of 11 U.S.C. s. 362(a) to cases where lenders have attempted to circumvent automatic stay protections through prior modifications, forbearance agreements or other loan workouts by voiding any provision in any agreement which attempts to waive automatic stay protection.

The full text of the order is available here.