About Me
“ Craig D. Robins, Esq., has been a practicing Long Island bankruptcy attorney for over twenty-four years ”
Benefits of Bankruptcy
Written by Craig D. Robins, Esq.What drives many clients to my Long Island Bankruptcy office is the constant harassment of debt collectors — daily phone calls, collection letters, contact at work and home, etc.
Some delinquent consumers are actually hounded more than others. This is because large collection companies pay for research on which credit card customers are more likely to pay an outstanding bill.
Armed with such valuable data, the debt collectors can then use their resources more efficiently. That means that some unlucky people will be harassed much more than others.
Collection Scores Are Often the Reason for Aggressive Bill Collecting Harassment
The three main credit reporting agencies (Experian, TransUnion and Equifax), as well as FICO, offer credit scores which most consumers are pretty familiar with. The higher the score, the easier it is to obtain new credit.
However, what most people do not know is that these agencies also offer “collection scores.” These are analytics based on a statistical analysis that they claim will help collection companies prioritize accounts to determine who they should concentrate their resources on to collect.
The Higher the Collection Score, the More Aggressive the Debt Collector Will Be
All large collection companies use highly specialized computer software that essentially determines what consumers to call (by using an account prioritization system that relies on these collection scores). These debt collection mills actually have the software automatically dial the calls. Debt collectors sitting in cubicles then take one call after another, all day long.
One company that sells these scores touts them as a great collection tool, stating that “collection scoring facilitates debt management decisions. Used in debt collection systems, collection scoring helps improve collection and recovery efficiency, reduce write-offs and decrease staff costs.”
Of course, bill collectors can manually enter info into their debt collection system to increase the priority of going after a particular person.
Click here to see an actual brochure that FICO provides its bill collection firm customers about collection scores.
Other Ways Collection Companies Become More Aggressive
Some of the credit reporting bureaus also offer services which alert debt collection companies to become more aggressive with an older delinquent account if there has been recent activity reflected in the consumer’s credit report that might indicate that the consumer may now have a greater ability to pay something.
The credit bureaus also offer “bankruptcy risk scores.” Although these are most often used by lenders at the time they are processing a request for credit to ascertain the likelihood of default and subsequent bankruptcy, they can also be used by creditors to ascertain the likelihood of bankruptcy filing — which would mean that the creditor will not get anything.
Here’s some reasons why debt collectors are being forced to be more aggressive: Six Reasons Why It’s a Tough Time for Debt Collection Attorneys .
Filing for Bankruptcy Stops Debt Collectors Cold
Of course, filing for bankruptcy will enable a consumer to immediately stop all collection calls. Usually, consumers can totally discharge all credit card debt through bankruptcy.
How Quick Will Creditors Stop Calling Me If I File Bankruptcy? The minute a bankruptcy petition is filed, the automatic stay goes into effect, making it illegal for any creditor to continue to collect a debt.
Written by Craig D. Robins, Esq.In an interesting cover story this week, the New York Times wrote about Debt Collectors Cashing In on Student Loans.
Apparently, debt collectors have become very excited at the prospect of working for student loan lenders, and see great profits in chasing consumers on student loans. So even though many borrowers are suffering and struggling to pay off their student loans, the debt collection industry is cashing in.
The article mentioned that the number of individuals who have taken out student loans in recent years has exploded, and so has the number of who have fallen seriously behind.
If you are behind with a student loan, you are not alone. About one in six borrowers with a student loan is in default. That’s almost six million Americans!
What You Can Do If You Are Behind on a Student Loan
Most consumers who are delinquent on student loans also have a substantial amount of credit card debt.
However, the difference between student loan debt and credit card debt is that credit card obligations can be discharged in a bankruptcy whereas student loan debts cannot.
If a consumer is just barely getting by and trying to pay a little to each creditor, then they would be much better off eliminating their credit card and other dischargeable debts, so that they can then concentrate on a repayment plan with the student loan.
Almost all student loan lenders will work with a delinquent borrower to create a long-term payment arrangement, often based on the amount of the borrower’s income.
While it may be possible to hide from bill collectors chasing down credit card debt, it is not so easy when it comes to student loans, which are backed up by the federal government. Unlike credit card companies, the federal government has extraordinary collection tools such as seizing tax refunds and garnishing paychecks and Social Security payments.
Also, unlike a statute of limitations for collecting credit card debt, which is six years in the state of New York, and fewer years in some other states, there is no statute of limitation for collecting student loans
Bottom Line: If you owe student loans, you will likely end up paying them back at some point or another, but if you can eliminate credit card debt in bankruptcy if you qualify.
Written by Craig D. Robins, Esq.There are many types of debts that can be discharged in a Chapter 7 bankruptcy filing. Most consumers seek to discharge credit cards debts, medical bills, loans, etc. Some consumers have the Social Security Administration (SSA) chasing them down as well.
This is because the SSA, after they paid benefits to a particular consumer, determined that they paid too much for one reason or another, and they demanded the consumer to pay the overpayment back. What happens most frequently is that the applicant, who was receiving Social Security benefits, goes back to work but the SSA continues to make payments.
When the SSA learns that there has been an overpayment, it makes a demand that the overpayment be repaid within 30 days. These overpayments can add up to a sizable amount. Can this type of obligation be discharged in a bankruptcy filing?
Yes. In general, Social Security overpayments can be eliminated by filing for Chapter 7 bankruptcy. They can be treated as typical unsecured debt in Chapter 13.
Although claims owed to some governmental entities are entitled to special treatment in a bankruptcy filing, the Social Security Administration is not. They are treated like any other general unsecured creditor. That means that a consumer seeking Chapter 7 relief can discharge a debt owed to the SSA.
However, all creditors have the ability to challenge discharge if it appears that the debtor incurred the debt through fraud or fraudulent pretenses. The SSA technically has the right to object to discharge if it appears that the debtor knew or should have known that he or she was not entitled to the Social Security benefits.
That being said, I have never seen an instance of the SSA challenging discharge in my 25+ years of practicing consumer bankruptcy on Long Island. Nevertheless, it would be wise to consult with an experience bankruptcy attorney if you owe Social Security debt.
Once a bankruptcy petition is filed, the SSA must immediately stop all proceedings to collect the overpayment. Not only is this statutory bankruptcy law, it is also SSA policy on bankruptcy filings.
Written by Craig D. Robins, Esq.Lindsay has been getting into one mess after another and the drama continues this week for the young actress following her crash this past Friday on the Pacific Coast Highway.
One can’t help but wonder what liabilities she is getting into and how she will resolve them.
As a bankruptcy attorney, I thought it would be an interesting exercise to ponder the issues and obligations that have arisen from her recent foibles and see how she would resolve them in a Chapter 7 bankruptcy filing.
Lindsay Just Crashed her Porsche
On Friday Lindsay crashed her sports car on the Pacific Coast Highway, on her way to the set where she is filming the Elizabeth Taylor biography. Although no one was hurt, this became major news within hours.
The liability is damage to her expensive car, damage to the truck she collided with, and possible fines.
So far, the matter is being investigated. News just released today could mean Lindsay is in for more trouble as she initially told officers that she was a passenger, but today it was revealed that her assistant claimed that Lindsay was driving.
If is determined that alcohol was involved, her insurance carrier will likely deny coverage to her. She would also be fined. Fines are a type of debt that cannot be discharged in bankruptcy.
Also, any debt she incurs as a result of driving while intoxicated constitutes one of the more unusual exceptions to discharge. Thus, if she was drunk, any financial liability she incurs from the accident would be non-dischargeable. However, any creditor seeking a determination that the debt is nondischargeable will have to bring an adversary proceeding.
If Lindsay incurred any financial liability, and the car crash was accidental, and she was not drunk, then she would be able to discharge these obligations. That would include any balance due on the car loan or lease.
Lying to the Police About Who Was Driving
This twist will certainly be interesting to follow. It also reminds us of the importance of being truthful in bankruptcy proceedings. Lying to a bankruptcy court is a serious offense punishable as a felony under federal law, meaning the potential of more than a year in jail.
This twist will certainly be interesting to follow. It also reminds us of the importance of being truthful in bankruptcy proceedings. Lying to a bankruptcy court is a serious offense punishable as a felony under federal law, meaning the potential of more than a year in jail.
The Stolen Necklace
Lindsay is currently on probation for having shoplifted a necklace. Any debts from this caper cannot be eliminated in bankruptcy. Criminal fines are non-dischargeble. So is restitution.
The Two DUI Incidents from 2007
As indicated above, any traffic fines and restitution obligations are non-dischargeable.
Credit Card Debts
Lindsay surely built up a bunch of debt from being out of work, having stints in jail, and attending rehab. She also lost some movie deals. Several years ago, people said she was broke, owed over half a million dollars and also owed money to her landlord.
In general, credit card debts and other personal obligations are fully dischargeable in bankruptcy, even if bad behavior led to getting into debt. Thus, if Lindsay filed bankruptcy, she would be able to eliminate her credit card debts.
The Playboy Shoot Enables Lindsay to Avoid Bankruptcy
Some commentators have suggested that Lindsay avoided bankruptcy by posing for Playboy last year.
Doing so gave her a quick cash infusion of up to a million bucks that enabled her to resolve her debts for the time being.
Consumers can avoid a bankruptcy filing if they can come up with some cash resources that would enable them to negotiate their debts. We help consumers negotiate credit card debt on Long Island, which is a viable alternative to bankruptcy.
What Bankruptcy Court Would Lindsay File In?
Lindsay used to live here on Long Island, where my bankruptcy practice is, and where her mother still resides. If she had to file, she would probably want to do it where she could be comforted by her mother.
However, she would be required to file where she has regularly resided for the greater portion of the prior 180 days, which would be Los Angeles.
My Bankruptcy Firm’s (Indirect) Connection to Lindsay Lohan
As a Long Island bankruptcy lawyer, I previously represented one of the many ex-girlfriends of Lindsay’s father, Michael Lohan, with the filing of her bankruptcy. As a matter of fact, Michael Lohan paid the girlfriend’s legal fee and came to our office to do so.
As a Long Island bankruptcy lawyer, I previously represented one of the many ex-girlfriends of Lindsay’s father, Michael Lohan, with the filing of her bankruptcy. As a matter of fact, Michael Lohan paid the girlfriend’s legal fee and came to our office to do so.
However, a few weeks later, they broke up and he contacted us, demanding that we return the legal fee! Of course, we did not. We then filed the ex-girlfriends bankruptcy and she received her discharge.
Written by Craig D. Robins, Esq.Victim of Identity Theft Uses Chapter 7 Bankruptcy to Put Financial Mess Behind Him
We recently filed a Chapter 7 bankruptcy case for an individual who was victimized in the largest mortgage fraud and ID theft scheme in Nassau County’s history.
Nassau County’s investigation, dubbed “Operation: Sweet Deal,” involved more than 45 independent acts of fraud. District Attorney Kathleen Rice indicted 17 people in March 2011 for charges ranging from enterprise corruption and first-degree grand larceny to money laundering, identity theft and conspiracy.
As our client’s recent Chapter 7 bankruptcy filing illustrate, the ripple effects continue.
The masterminds, James Robert Sweet, 43, and Dwayne Benjamin, 44, both of Westbury, New York, lined up straw buyers, some of whom were duped, to buy homes in foreclosure claiming that such purchases would be a good investment opportunity. However, the scheme involved purchasing the properties at a higher price than what the seller was asking.
Sweet Deal underhandedly arranged to keep the difference as part of the scam. In addition, they told the new purchasers that they would rent out the properties, collect rent from tenants, and make the mortgage payments; yet they intentionally did not make any payments. Sweet Deal thus walked away with the profits, stole the equity in the properties, left the purchasers in the lurch.
How Our Client Was Duped
Our client was just one of those purchasers who was deceived into getting involved with the venture. Unbeknownst to our client, after purchasing one property, Sweet Deal purchased a second and third property in our client’s name by using an impersonator. Our client only found out someone purchased these other properties in his name after the lenders got in touch with him, saying that he was delinquent.
After our client cooperated with investigations by the Nassau County District Attorney and the FBI, he contacted my Long Island bankruptcy law firm to see what would be the easiest way to resolve the financial mess he was now in.
Chapter 7 Bankruptcy Provided an Easy Way Out
Considering that he was now facing foreclosures on three properties, and also had other debt, we recommended Chapter 7 bankruptcy as a way to easily discharge his obligations (even if some of them he didn’t intentionally enter into) and get a fresh, new financial start.
We filed his case a number of weeks ago and recently represented him at his meeting of creditors in Bankruptcy Court where the trustee examined him and closed his case. We anticipate that our client will receive his Chapter 7 discharge shortly, meaning that this financial nightmare will become history.
Although there are many ways to resolve situations where an innocent consumer incurs debt as a result of identity theft, sometimes a simple bankruptcy filing is the best option, although getting the advice of an experienced bankruptcy attorney would be most important in making such a decision.
Incidentally, the perpetrators of the fraud pleaded guilty to a variety of felony charges and are currently in prison.
My Girlfriend Is Thinking of Leaving Me
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Written by Craig D. Robins, Esq.“My girlfriend is thinking of leaving me.” This is a comment I hear repeatedly, in one form or another, quite regularly in my bankruptcy practice, when I counsel singles in serious relationships who suffer from debt problems.
After all, who wants to marry into debt? Sometimes the thought of marriage drives lovelorn, debt-laden consumers to see me. Their significant other has given my client an ultimatum: Either you clean up your finances or I will not marry you!
Those just starting to date will typically avoid broaching certain topics like how much money they owe on their credit cards. Of course, these facts tend to emerge as the relationship becomes serious — and then there are problems.
This is a concept I recently discussed with Jennifer Gargotto who blogs about dating issues in her blog, MsMorphosi.com. We talked about this phenomenon at BlogWorld this week, a large conference and tradeshow for us bloggers.
Fortunately, Chapter 7 bankruptcy often provides an escape from debt, and seeking bankruptcy relief when necessary can, and often should, be done before getting married. It is often easier to discharge debt while you are still single, and before you get married.
Here’s why: The bankruptcy means test requires married individuals to calculate the income of both spouses to determine Chapter 7 eligibility, but it does not necessarily require a single person who is filing to include the income of a significant other. In addition, the Chapter 7 trustee appointed to a case is entitled to ask to see a non-filing spouse’s financial information. In most cases, a trustee would not seek such information from a non-married significant other.
Determining family size for means test purposes can still be tricky, even for single consumers, and obtaining the advice of an experienced bankruptcy attorney is important. In any event, avoiding the additional burden and stress of debt when heading towards marriage can only make for a better, healthier and more stable relationship.
So if you have significant debt problems, consider consulting with a bankruptcy attorney now. And for those married couples with significant debt, Bankruptcy Can Save Your Marriage.
New York Bankruptcy Exemptions Suddenly Increased – This Is the Biggest Bankruptcy News in Years!
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Written by Craig D. Robins, Esq.For New Yorkers considering bankruptcy, the biggest bankruptcy news in five years dropped like a bombshell this afternoon when Governor Patterson unexpectedly signed legislation greatly increasing exemptions for consumers.
Exemptions are those statutes that permit consumer debtors in bankruptcy to keep and protect assets.
New York Residents Seeking Bankruptcy Relief in 2011 Will Be Able to Protect More Assets than Ever Before
This will certainly cause an explosion in the number of consumer bankruptcy cases we will see next year as more financially burdened consumers will be able to eliminate their debts while keeping and protecting all of their assets.
Homestead Exemption Increasing to $150,000 per Person for those on Long Island
Right now each homeowner can protect only $50,000 worth of equity in a house. However, for those on Long Island who live in Nassau and Suffolk Counties, that amount will triple to $150,000.
Since a husband and wife can pool their exemption, that means that a couple will be able to protect a whopping $300,000 worth of equity in their home.
This will enable almost any typical Long Island middle class family to file bankruptcy to eliminate their credit card debts while protecting their home.
In my Long Island bankruptcy practice, I am regularly meeting with homeowners who are forced to file for Chapter 13 bankruptcy instead of Chapter 7 because they have too much equity in their homes. Now, almost everyone will be able to seek Chapter 7 bankruptcy relief and keep and protect their homes.
Incidentally, the amount of the new homestead exemption will be based on what county the debtor’s home is in. For most upstate counties, the homestead exemption will only be $75,000 per person.
More than half of the states previously had more generous homestead exemptions than New York; now it will have one of the best.
Amounts for Almost All Other Exemptions Categories Are Being Increased and New Categories Are Being Added
The new bill also increases the exemptions for a great deal of other assets like cars, and adds some new categories like home computers and vehicles for the handicapped.
Many of the exemption amounts that are being increased had not changed in decades.
I am in the process of reviewing each of the various changes to the exemption laws, and I will discuss and outline them in a post tomorrow.
Proposed Legislation to Expand New York’s Exemptions Has Been Periodically Submitted in Albany for Years
For years, legislation was proposed each and every year in Albany that sought to increase exemption amounts. This legislation never received any publicity because it was periodically struck down and nobody ever expected it to pass.
In years past, when I would discuss this with some of my colleagues, they were surprised to hear that there was pending legislation considering that it wasn’t publicized at all.
Despite reaching various stages in Albany each year for the past decade, such legislation has never found its way into law except once, when the homestead exemption was increased in September 2005. That year it was increased five-fold from $10,000 per person to $50,000 per person. Here’s the article that I wrote about that: Surprise Law Enactment – Homestead Exemption Increased .
The Governor’s Signing of the Bankruptcy Legislation Today Was Totally Unexpected
In July of this year we seemed to get closer than ever before to seeing a change in New York’s woefully inadequate exemption laws.
At that time, both houses of the New York State Legislature passed legislation to increase bankruptcy exemptions in New York State. However, the banking industry, which has an extremely large presence in New York, vigorously lobbied Governor Patterson to veto the bill.
Very few people thought there was any chance that Governor Patterson would sign the legislation into law. For that reason, no one was holding their breath about its passage because nobody expected it to happen.
The Bankers carry a lot of power, even with Democrats. They argued that many consumers owe taxes to New York State, and with the bill’s added protections for debtors, both in and outside of bankruptcy, New York State’s tax collections would suffer.
New York City officials also opposed the legislation, arguing that it would impair the City’s ability to tow and auction cars for outstanding parking violations.
For months, the bankruptcy legislation, which was signed by both houses, just sat on the Governor’s desk, and we all assumed it would die there.
Yet, Gov. Patterson, who is leaving office in just one week, signed the bill today – his very last — with no advance notice and no fanfare of any kind, catching me, as well as all other bankruptcy practitioners, by surprise. And a very nice surprise at that!
Perhaps the Governor, who apparently does not see public service in his future, was upset at the damage wrought by the financial sector which drove the economy into a recession, and used this opportunity to give something back to his constituents.
Governor Patterson Issues Press Release Discussing Why He Signed New Exemption Law
Along with the new law came a press release. In it the Governor said:
“During this time of economic crisis, it is our responsibility as public servants to protect those who are struggling the most.
“A reconsideration of the current exemptions, which in some cases have not been changed in decades, is particularly warranted when an increasing number of individuals find themselves in dire financial condition. Though this is not a perfect bill, the benefits far outweigh its concerns.”
The press release also stated: This bill would provide a much-needed update to the exemptions law in New York as many provisions of State’s exemptions law are antiquated or have not been amended since the 1980’s. The purpose of such exemptions is to permit debtors in bankruptcy to retain a modest amount of personal property and equity in their homes so that they can continue to maintain their lives, and to protect them from becoming homeless, unemployed, or otherwise dependent on the State.
The New and Increased Exemptions Will Help Future Bankruptcy Debtors in Many Ways
Not only will more consumers be able to file for Chapter 7 bankruptcy, but many of those who seek Chapter 13 protection instead will end up paying substantially less through their monthly Chapter 13 plan.
Also, many existing Chapter 13 debtors may be able to convert there cases to one under Chapter 7 and eliminate all further monthly payments.
The bankruptcy attorneys in my office and I will be quite busy reviewing all of our cases over the next few weeks to ascertain how to best take advantage of the new exemptions amounts.
To see a number of post that I’ve written about bankruptcy exemptions, see the articles under this category: Bankruptcy Exemptions.
Written by Craig D. Robins, Esq.A person’s house is usually their most valuable asset. Understandably, one of the first questions my homeowner-clients ask me is “How will filing bankruptcy affect my home?”
Foreclosures and Collections Are Stopped Cold
The first thing you should know is that as soon as your petition is filed, the automatic bankruptcy stay kicks in.
This means that if you were behind with your mortgage, it now becomes against federal law for the mortgagee to continue any foreclosure proceeding.
If the House is Exempt, There Is No Problem Keeping It
Every state has a homestead exemption statute that sets forth how much equity you can keep in your home, while eliminating debts in a Chapter 7 bankruptcy case. In some states, the homestead exemption is based on federal law.
In New York, the homestead exemption is $50,000 per person. This is based on New York State law. See: Bankruptcy Exemptions in New York .
A husband and wife who file jointly can pool that homestead exemption and protect a total of $100,000 worth of equity. Sometimes Bankruptcy Exemptions Can Be Doubled .
If the House Has a Great Deal of Equity, You Can Still Keep It
Even if there is more than $50,000 of equity per person, then you can still keep you house if you file a Chapter 13 payment plan bankruptcy.
In such cases, the total amount you will have to pay back to your creditors through the plan, which is usually over a period of 60 months, must be at least equal to the amount of unprotected equity.
Sometimes deciding whether to keep a home or not can be a difficult decision.
If You Can’t Afford Your Mortgage or You Do Not Want to Continue Paying Your Mortgage You Can Walk Away (Eventually)
If you can no longer afford to keep your home and you have little or no equity in the home, then you may want to file for Chapter 7 bankruptcy in which case you can walk away from your obligation without any financial recourse from the lender. See: Strategic Mortgage Defaults Increasing .
In such cases, the lender still has the right to eventually foreclose on the home and take it back, but that can take an extended period of time during which you can continue to reside in the house without making any payments. Bankruptcy Can Provide Way Out of Bad, Highly-Leveraged Real Estate.
When the lender eventually does take the property back, it cannot pursue you for any deficiency amount. This is because the bankruptcy had the effect of discharging that debt. One-Fourth of All U.S. Homeowners Are Underwater. What Should These Homeowners Do?
Filing for Chapter 7 When There Is Substantial Unprotected Equity in the House
It is extremely rare that we recommend to a bankruptcy client that they file for Chapter 7 bankruptcy if they have a great deal of unprotected equity in their home. Usually we recommend that they try to sell their home first.
However, we do see situations in bankruptcy court where a homeowner with substantial equity files for bankruptcy. In such cases, the Chapter 7 trustee will seek to sell the home. However, the trustee must pay the debtor the amount of the homestead exemption from the proceeds, which would be $50,000 per person.
If You Have Real Estate and Need Bankruptcy Relief, You Should Consult With Experienced Bankruptcy Counsel
Protecting real estate in bankruptcy can be tricky and must be done the right way. When it comes to houses and homes, there are often many options when dealing with problematic debt situations.
It therefore makes sense to consult with a qualified and experienced Long Island bankruptcy attorney.
Written by Craig D. Robins, Esq.Chapter 7 bankruptcy is designed to enable an honest consumer to get a fresh new financial start. This is done by permitting the consumer to permanently eliminate or “discharge” most debts.
The Most Common Debts That Are Dischargeable Include:
• Credit Card Debts
• Personal Loans
• Medical Bills
• Utility Bills
• Checking Account Overdrafts
• Certain Income Tax Debts Older Than Three Years
The Most Common Debts that Can’t Be Eliminated in Bankruptcy Include:
• Alimony and Child Support Obligations
• Most Recent Tax Debts
• Most Student Loans
• Debts Owed to Governmental Units (Traffic Tickets and Fines)
• Debts for Willful or Malicious Injury
• Debts Incurred While Driving a Vehicle When Intoxicated
• Debts Incurred Through Fraud or False Pretenses
• Criminal Restitution
What Happens to Non-Dischargeable Debts?
Those debts that are non-dischargeable will survive the bankruptcy. However, with most non-dischargeable debts, the creditor is precluded from collecting them during the pendency of the bankruptcy proceeding, which usually lasts several months.
What About Discharging Taxes in Bankruptcy?
Certain income tax debts can be eliminated in a Chapter 7 bankruptcy case. However, there are several multi-prong tests for determining whether a tax debt can be discharged. For a complete discussion, see Eliminating Taxes in Bankruptcy .
Don’t Be Greedy — Using Credit Cards After Deciding to File Bankruptcy Can Cause Big Trouble
Once you decide to seek bankruptcy relief, do not use your credit cards any further. Doing demonstrates bad faith and can make all of your debts non-dischargeable. See: Big No-No: Using Credit Cards After You’ve Decided to File Bankruptcy.
Chapter 7 Cram-Down of Second Mortgages
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Written by Craig D. Robins, Esq.New Long Island case now permits lien-stripping that was previously impossible
One of the biggest problems that homeowners face in today’s recessionary economy is the loss in value to their homes. It is not uncommon to see houses that have dropped 50% in value over the past few years, leaving many to wonder if it is even worthwhile to keep their home.
One of the biggest problems that homeowners face in today’s recessionary economy is the loss in value to their homes. It is not uncommon to see houses that have dropped 50% in value over the past few years, leaving many to wonder if it is even worthwhile to keep their home.
As such, many homes are “under water” or “upside down” meaning that the homes are worth less than the balance due on the mortgage. In many cases, there are two mortgages and the home is worth less than the first mortgage, making the second mortgage totally unsecured.
Up until recently, there was little recourse available to consumer bankruptcy filers to eliminate mortgages that were underwater. However, a new decision released last month has now changed all that, permitting cram-down of second mortgages in Chapter 7 bankruptcy cases.
What is a Cram-down in Bankruptcy? Also known as a “strip-off”, a cram-down is when a debtor modifies the rights of a mortgagee, who is a secured creditor, by having the bankruptcy court strip off the secured status of the mortgage because there is insufficient value in the property to secure any part of it.
A cram-down removes the mortgage as a lien on the premises.
Cram-downs in Chapter 13 Bankruptcy Cases
The existing state of the law has been that only Chapter 13 debtors had the unique ability to cram-down mortgages, and then, only the second mortgage. Chapter 7 debtors did not have any ability to cram down any mortgage.
The reason for this is that the provision for cram-down is § 1322(b)(2), located in Chapter 13 of the Bankruptcy Code, which limits debtors from cramming down first mortgages.
The Lavelle Case Changes the Law
On November 25, 2009, Central Islip Bankruptcy Judge Dorothy T. Eisenberg issued a decision permitting Chapter 7 debtors to cram-down second mortgages. In re: Mark T. Lavelle, et. al (09-72389-478, Eastern District of New York).
An unusual aspect of this case is that the debtors did not even file an application seeking to cram-down their mortgage – it fell in their lap. The debtors are typical consumers residing in Levittown who sought Chapter 7 relief in April 2009. They were represented by Long Island bankruptcy attorney Norman M. Mendelson, Esq.
The home was in the name of the husband and it was worth $400,000. The balance owed on the first mortgage was $411,000 and the balance on the second mortgage was $9,900. Both mortgages were held by Bank of America.
In May 2009, the mortgagee, represented by Steven J. Baum, P.C. filed a motion seeking relief from the stay on the second mortgage based on the fact that the debtor had no equity in the property.
However, the debtor defended that motion by filing opposition in the form of a cross-motion seeking to avoid the mortgagee’s lien on the second mortgage under Bankruptcy Code § 506(a), arguing that the creditor only had a secured claim to the extent of the value of its collateral, and an unsecured claim for the balance.
However, the debtor defended that motion by filing opposition in the form of a cross-motion seeking to avoid the mortgagee’s lien on the second mortgage under Bankruptcy Code § 506(a), arguing that the creditor only had a secured claim to the extent of the value of its collateral, and an unsecured claim for the balance.
The debtor argued that even though this was a Chapter 7 case, the ability of the Court to modify wholly unsecured liens against a debtor’s residence in a Chapter 13 case under § 1322(b)(2) should be extended to Chapter 7 cases.
Judge Eisenberg, in a very complicated and complex, technically-worded decision which discussed two Supreme Court cases, first noted that the debtor’s motion should have been brought by adversary proceeding, but nevertheless permitted the debtor to proceed by motion, which she pointed out was “technically incorrect.”
The Distinction Between ‘Strip-Down” and “Strip-Off”
The Court addressed the 1992 Dewsnup Supreme Court decision which held that a Chapter 7 debtor may not “strip down” a first mortgage to the fair market value of the property. However, there is a difference between “stripping down” a mortgage and “stripping off” a mortgage.
Stripping-down refers to removing that portion of a mortgage that is unsecured, which is done pursuant to § 506. On the other hand, “stripping off” is essentially cramming down a mortgage, which means removing its lien status altogether.
The Judge observed that since Dewsnup, the issue of whether wholly unsecured liens may be “stripped off”, as opposed to “stripped down”, has been a contentious issue between various bankruptcy and district courts and their respective Courts of Appeals.
Judge Eisenberg then discussed the 1993 Supreme Court case of Nobelman which barred Chapter 13 debtors from relying on § 506 to bifurcate an undersecured mortgage to secured and unsecured components. (I wrote an article about Nobelman for the Suffolk Lawyer 16 years ago).
However, the Nobelman case only applies to situations where a portion of the mortgage remains secured, and the Supreme Court did not address situations where the mortgage is totally unsecured. Consequently, debtors have been able to cram-down totally unsecured second mortgages in Chapter 13 cases.
However, the Nobelman case only applies to situations where a portion of the mortgage remains secured, and the Supreme Court did not address situations where the mortgage is totally unsecured. Consequently, debtors have been able to cram-down totally unsecured second mortgages in Chapter 13 cases.
Cramming-Down Mortgages in Chapter 7 Cases
Judge Eisenberg, after utilizing a rather complex analysis, determined that the second mortgage was wholly unsecured (which means that § 506(a) does not apply), and that the plain meaning of § 506(d) required the lien to be voided. The Judge went on to say that there was no logical reason that this result should be any different in a Chapter 7 context as opposed to a Chapter 13 situation.
Thus, the Judge voided the lien on the second mortgage. Since this was a Chapter 7 case, the debt, now considered an unsecured debt, became totally discharged. A big win for the consumer.
What Does This Bankruptcy Decision Mean for Consumers and Society?
There is a record number of homeowners facing foreclosure, and there appears to be a groundswell of support by politicians, bankruptcy attorneys and consumer groups for a change to the Bankruptcy Code to deal with this. As such, perhaps some judges, like Judge Eisenberg, are taking a position rooted in public policy that recognizes the existing problem.
Many provisions in bankruptcy law have favored the mortgagee and secured lender over the past two decades. It now looks like the tides may be shifting in the other direction.
This case will likely result in a number of Chapter 7 cram-down proceedings being brought. As the Judge put it:
“Arguments that debtors will benefit from possible windfalls, are not persuasive. Markets are uncertain, and it is not certain such a scenario will ever occur. Secondly, the creditors’ right to foreclose will not result in any present monetary gain for the creditor since there is no value in the property for them.”
“Bankruptcy is not intended to benefit either the creditor in securing a potential increase in property value, or the debtor. However, where the future is unknown, bankruptcy principles of giving the debtor a fresh start should apply.”
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 December 2009 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 Patchogue, 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.
IMPORTANT UPDATE ABOUT CHAPTER 7 CRAM-DOWN (April 2009): Judge Eisenberg is one of three bankruptcy judges in the Central Islip Bankruptcy Court, in the Eastern District of New York. The other two judges, in the past month, have reached a different conclusion as to a debtor’s ability to cram-down a second mortgage in a Chapter 7 case. Please see this post for full info: Judges Differ with Chapter 7 Bankruptcy Cram-Down.