Chapter 13 as a Relief Valve for Abandoned Foreclosure Properties
Are you one of the many people who suffered hardship as a result of the foreclosure bubble? Have deed in lieu and short sale options failed, and you wonder how can you ever rid yourself of the burden that is that real estate? If you’re dealing with abandoned foreclosure properties, bankruptcy may provide an answer.
This case comes out of our own Bankruptcy Court for the Eastern District of New York. The question presented is whether, in a chapter 13 case, a debtor may surrender and vest title to real property to the mortgagee upon plan confirmation. This court answered in the affirmative.
In a chapter 13 case, generally, the debtor provides a plan as to how they intend on paying back creditors over the course of either three or five years. Chapter 13 cases allow a lot of flexibility in terms of how a debtor can pay things back, including paying different amounts to different classes of debts (as long as similar classes of debt are treated equally). In a chapter 13 case, the debtor is to contribute their disposable monthly income (monies left over after necessary expenses) to paying off creditors. What happens, though, when the debtor has real property that they have abandoned (as has been a consequence of the foreclosure crisis)? Even in filing chapter 7 bankruptcy, while the debtor is no longer liable for the underlying note, title does not transfer, and so the debtor remains stuck with the responsibility of ownership of the property, including keeping up with taxes, water/sewer charges, and probably maintaining property insurance. These costs can effectively prevent a debtor from obtaining the “fresh start” contemplated by the Bankruptcy Code, especially when foreclosure cases may sit in state court for years at a time, as well as preclude a debtor from being able to confirm a plan in the chapter 13 case.
By allowing a chapter 13 debtor to surrender and vest title to abandoned real property to the mortgagee (in most cases, the lender), the burden now shifts to the mortgagee to manage the property. The mortgagee has to keep up with taxes, sewer charges, and insurance. The mortgagee, in theory at least, gets what it would have gotten in foreclosure (the real property that would sell at its market price), so expedites the process for all sides. The lender in this case argued that by forcing lenders to accept real property that is below value (“underwater”), it would lead to unintended consequences that could be injurious to the economy. The judge in this matter, however, did not find that policy argument persuasive. In re Zair, 15-74456-AST, (Bankr. E. D. N. Y., Aug. 13, 2015).
Credit for this strategy can be attributed to David Baker, Esq., who practices in Massachusetts and is a member of the National Association of Consumer Bankruptcy Association (NACBA). Mr. Baker, as well as other NACBA members, have been testing these plans in the courts over the years, creating relief for debtors in the bankruptcy space. If you are dealing with abandoned, underwater properties, or would like to discuss bankruptcy relief for yourself or your business, contact LORK.