Most Long Island homes have doubled in value over the past six years. This increase in real estate values has produced a windfall of increased equity to those who own homes, which in turn has affected the bankruptcy options of those homeowners who have serious debt problems.
Despite this boom, foreclosures are at record numbers. This may be attributable in large part to easy financing that enables people to refinance and obtain home equity loans without having to satisfy their existing credit card debts. Although most bankruptcies are attributable to financial crises such as large medical bills, divorce, loss of job, etc., many homeowners get into a bind because they tap their home equity ostensibly to satisfy existing consumer credit debt, yet continue to accumulate more debt.
The tremendous increase in real estate values also means that bankruptcy practitioners must be more careful in advising clients. In many instances, what was often done several years ago in the course of representing a consumer debtor homeowner should not be done today. Here are some tips and practice pointers that address how you should change your approach to such cases:
1. Be Cautious About Recommending Chapter 7 to Homeowners. Chapter 7 filings may not be feasible. Remember that the permitted homestead exemption in New York is only $10,000 worth of equity per person. In the early to mid 1990’s, many homes had declined in value and had very little equity. It was common practice during that time for homeowners to take advantage of utilizing Chapter 7 to eliminate their credit card debts, yet keep and protect their homes. However, the recent increase in real estate values means that there are extremely few homes that would be fully exempt and protected. What would have worked smoothly several years ago will not necessarily work well today.
2. Be Cautious About Submitting Chapter 13 Plans That Pay Less Than 100%. Before the real estate boom, when many homeowners had relatively little equity in their homes, it was commonplace to see many Chapter 13 plans offering only a 10% distribution to unsecured creditors, which is generally accepted as the smallest permitted distribution to that class of creditors. However, 10% plans in Chapter 13 cases for homeowners are becoming sparse as the amount of equity has substantially increased. If you offer a plan that pays less than 100%, the Chapter 13 trustee will very closely scrutinize that plan. If it appears that the amount of non-exempt equity is greater than the amount of unsecured debt, then you should consider a 100% plan.
Such 100% Chapter 13 plans offer many benefits over conventional refinancing. Generally, there is no interest on any mortgage arrears or unsecured debt. In most cases, only older mortgages which originated prior to October 1994 are entitled to interest. I explain to my Chapter 13 clients that a 100% plan is like a forced refinance that creditors must accept. It is as if the client borrowed all of the necessary funds to satisfy all existing debts, but was given the opportunity to pay that back with no interest over a five-year period.
3. Be Aware That Some Chapter 7 Trustees Are Becoming Very Aggressive. With the potential to administer a valuable asset (which in turn will pay the trustee a sizable commission), trustees are becoming very aggressive in trying to administer and sell houses as an asset of the bankruptcy estate. For this reason, even after you and your debtor client have engaged in due diligence before filing to ascertain the current fair market value of the property, it is quite possible to encounter a trustee who thinks the property is worth even more. The issues to consider in addressing such situations can easily take up an entire column and more, and I will try to devote a future column to this topic.
In any event, if you encounter a very aggressive trustee, some possibilities include: negotiating a settlement that can be paid from exempt, borrowed or gifted funds; converting to Chapter 13 (which overly-aggressive Chapter 7 trustees will try to oppose); litigating against the trustee; or letting the trustee try to sell the house, in which event the debtor would have to leave upon a sale, but this would nevertheless require the trustee to pay the debtor the $10,000 per person homestead exemption from the proceeds of sale.
4. Be Very Cautious About Real Estate Valuations. Several years ago, when real estate was not increasing at an incredible rate, many attorneys would simply tell their bankruptcy clients to obtain broker price opinion letters in order to determine the value of their property. However, in today’s very volatile real estate market in which values can change overnight, it is essential to utilize the services of an unbiased and highly qualified real estate appraiser. Be aware that in Nassau County, where there is a property value assessment system, the assessed value is not an accurate indication of the current value of the property.
Also be cautious that the appraisal can become obsolete within a matter of weeks or months. Many a client will retain a bankruptcy attorney, obtain an appraisal, and then put off filing for many months. If this happens, you should consider obtaining an update on the appraisal if the disposition of the existing case is very dependent on the real estate valuation.
Another difference in today’s practice is that trustees generally no longer rely on appraisals submitted by debtors or their counsel. Several years ago, trustees would often accept submitted appraisals as conclusive proof of the value of real estate. Today however, many trustees will obtain their own independent real estate valuation, often well before the meeting of creditors. Accordingly, the real estate appraisal is becoming more of a tool to assist counsel in determining how to best represent the client, than a means for persuading a trustee that there is little equity.
5. Consider Non-Bankruptcy Options Such as Refinancing or Sale. Bankruptcy is not the answer for everyone. Some debtors cannot file chapter 7 because of extensive non-exempt real estate equity, yet they are not eligible to file Chapter 13 because they do not have sufficient income to fund a plan. Keep in mind that there are a number of lenders who specialize in the sub-prime market. However, many individuals who are over-extended, or who have already cashed out most of their home’s equity, may not qualify for any type of financing. If bankruptcy and refinancing are both out of the question, then the only remaining option may be for the debtor to sell the home. It is important to help your clients be realistic about their options.
About the Author. Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the February 2005 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
Written by Craig D. Robins, nurse Esq.
Just as most bankruptcy attorneys find matrimonial issues confusing, recipe most matrimonial attorneys find bankruptcy issues confusing. Nevertheless, in order for the matrimonial attorney to be able to effectively represent his or her client, certain bankruptcy fundamentals should be recognized, especially considering that divorce is one of the major factors which drives consumers into bankruptcy. Although bankruptcy-matrimonial matters can easily fill a treatise, I will concisely point out the top ten issues that you should be aware of.
1. The Basic Premise Still Exists: Maintenance and Support Are Not Dischargeable. The Bankruptcy Code excepts from discharge, maintenance or support payments owed to a spouse, former spouse or child of the debtor, in connection with a separation agreement, divorce decree, court order, administrative determination, or property settlement. Section 523(a)(5).
2. The Other Basic Premise, that Equitable Distribution is Not Dischargeable, Has Changed. Prior to October 1994, when the Bankruptcy Code received a major overhaul, it was easy for attorneys to advise clients: Maintenance and support were dischargeable; equitable distribution was not. However, the 1994 Bankruptcy Amendment Act changed that with the introduction of a new provision, section 523(a)(15), which makes equitable distribution “potentially” non-dischargeable.
This new section enables an aggrieved spouse to make equitable distribution non-dischargeable if the aggrieved spouse can prove a two-prong test: a) the debtor has the ability to pay the debt; and b) the detrimental consequences to the aggrieved spouse outweigh the benefits to the debtor spouse in discharging the debt.
If you ask attorneys who primarily represent wives, they would say that this section was added to protect innocent spouses, who, during the marriage, relied on their husbands for their economic well being. However, if you ask counsel who often represent husbands, they would argue that the new law was passed to ensure that bankruptcy lawyers are fully employed and that bitter wives be given one last whack at their husbands, in the court of last resort.
3. Objecting to the Dischargeability of Equitable Distribution Requires Quick Action. The bankruptcy court has exclusive jurisdiction of dischargeability determinations under the section 523(a)(15) two-prong test. The aggrieved spouse must file an adversary proceeding complaint with the bankruptcy court within 60 days of the date of the meeting of creditors, objecting to the dischargeability of the equitable distribution. This date is known as the “bar date.”
4. The Bankruptcy Court Shares Concurrent Jurisdiction. Although the bankruptcy court has exclusive jurisdiction of the two-prong test of section 523(a)(15), it shares concurrent jurisdiction with the state court on section 523(a)(5) issues concerning whether a debt is non-dischargeable because it is support or maintenance.
5. Bankruptcy Judges Hate Matrimonial Law Issues, and Supreme Court Judges Hate Bankruptcy Law Issues. Two courts are often needed. State court judges tend to have limited familiarity with bankruptcy law issues and do not seem to be eager to get involved with interpreting bankruptcy law. On the other hand, whether a bankruptcy judge has exclusive or concurrent jurisdiction over matrimonial debt issues, the bankruptcy judge will often kick the sticky divorce issues back to the matrimonial court for a determination there, which the bankruptcy court will then adopt.
6. Bankruptcy Judges and State Court Judges Have Different Objectives. You should also be aware that bankruptcy judges theoretically may favor the debtor since the policy of bankruptcy is to offer a debtor the opportunity for a fresh new financial start. Meanwhile, matrimonial judges may be more likely to favor the aggrieved spouse as the state has a public policy of protecting innocent spouses.
7. The Burden of Proof is on the Aggrieved Spouse. A general rule of law about objecting to discharge is that the aggrieved spouse creditor carries the burden of proof that the debt is non-dischargeable.
8. Settlement Agreements and Divorce Decrees Are Not Always Binding. Settlement agreements and divorce decrees usually designate debts as either support and maintenance, or equitable distribution. However, such designations are not binding and the bankruptcy court can look beyond such language to determine the true nature of the debt. There is a large body of case law that explores those factors that the court should consider.
The main factors that the court will look at to determine whether the debt is in the nature of a support payment or equitable distribution are: a) whether the payments terminate upon death or remarriage of the spouse receiving them; b) whether payments are contingent on future earning abilities; c) whether payments are to be periodic over a long period of time; and d) whether the payments are designated as being for the purposes of medical care, mortgage, or other needs of the spouse receiving them.
9. Attorneys’ Fees Are Usually Non-dischargeable. Income-providing husbands are often ordered to pay the attorneys’ fees of their spouses. However, when a husband files for bankruptcy, such attorney’s fees are usually found to be in the nature of support, and thus, non-dischargeable (unless a successful adversary proceeding is brought regarding the two-prong test under section 523(a)(15)).
10. Know When To Consult With Bankruptcy Counsel. There are many bankruptcy traps for the unwary matrimonial attorney. Consider conferring with a bankruptcy attorney experienced in bankruptcy-matrimonial issues.
Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a frequent columnist for the Nassau Lawyer, the official publication of the Nassau County Bar Association in New York. This article appeared in the February 2005 issue of the Nassau Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.