Archive for the ‘Real Estate’ Category

In bankruptcy it is not uncommon for a debtor to own real property (a house or land) jointly with another person who is not filing. An example of this would be if you own your home with your spouse and your spouse is not filing bankruptcy. While this does not present a major problem for most debtors, there are situations where joint ownership could present a problem. In this article, I will discuss the situations where a debtor jointly owns property with someone else and the ramifications bankruptcy will have on that property.

The Homestead Exemption

When a person files bankruptcy, you are entitled to keep certain types of property up to a certain value. The property you get to keep is known as “exempt.” An example of exempt property is your residence, known as a “homestead.” In Massachusetts, if you own a home, you are entitled to an exemption in your homestead. As of March 2011, Massachusetts residents are entitled to an automatic homestead for $125,000. This means that if you have less than $125,000 in equity in your home, it is automatically exempt and you can keep your home in a bankruptcy. If you have more than $125,000 in equity, then you need to actually file a document at the registry of deeds in the county that your home is located known as a “declaration of homestead.” Filing this document will increase your homestead and protect the equity in your home up to $500,000.00.

However, if you have more equity in your home than $500,000, then your home could be soled in the bankruptcy to repay your debt. For example, if you have $600,000 in equity in your home, then $100,000 is not exempt and your home can be sold to satisfy your creditors. After the sale you will get $500,000, but the other $100,000 would be used to repay your creditors. In bankruptcy there are certain debts that a homestead will not protect you from, and your homestead is limited if you have not owned you home for at least 40 months. For more information on the limitations of a homestead in bankruptcy, you should consult with a qualified Massachusetts bankruptcy attorney.

The Trustee’s Power to Sell

What happens if you jointly own property with someone else and the property is not exempt? In Bankruptcy, the Trustee who is overseeing your case has the authority to force a sale of the entire asset, including the co-owner’s interest; even when the co-owner is not filing bankruptcy. See 11 U.S.C. 363(h).

However, the Trustee does not have the power to act independently and cannot simply sell the property. The Trustee must seek the Bankruptcy Court’s approval by filing a lawsuit in the Bankruptcy Court, known as an “adversary proceeding.” In this adversary proceeding, the co-owner will have the ability to present evidence to the court that the detriment that they will suffer is greater than the benefit to the creditors. Many times, the co-owner will be given the opportunity to purchase the debtor’s interest in the property at a discounted rate. If the property is sold, then the co-owner will be paid back their fraction of the ownership interest in the property after the Trustee’s expenses are paid.

Real Estate Ownership Scenarios

In bankruptcy, we typically see three situations where a debtor owns real estate jointly with someone else: home ownership with a spouse, co-ownership of a parents home, and co-ownership of investment property.

Home Ownership With a Souse

If you own your home with your spouse, chances are, you either own it as Joint Tenants with Rights of Survivorship (“JTROS”) or as Tenants by the Entirety. This means that both you and your spouse each own the whole home, as compared to you having ½ ownership and your spouse having ½ ownership. Then if you or your spouse dies, the other spouse automatically owns the whole.

There are clear advantages to owning your home with your spouse as Tenants by the Entirety, because it prevents once spouse’s creditors from interfering with the other spouse’s right of possession. This is also beneficial in bankruptcy in Massachusetts, because any interest that the debtor has as a tenant by the entirety is exempt “to the extent that such interest … is exempt from process under applicable non-bankruptcy law.” 11 U.S.C. § 522(b)(2). This means that in Massachusetts the debtor’s interest in their home that is owned with a spouse as tenancy-by-the-entirety is subject to attachment but not subject to levy or execution at this time and, so, the debtor’s right to possession cannot be interfered with unless and until the property is sold, or debtor and their spouse are divorced, or the debtor survives her spouse, in which event the trustee will be free to enforce his interest in the debtor’s real estate.

However, as I stated earlier, filing a declaration of homestead on your residence will protect up to $500,000 of the equity in your home, regardless of how you hold title with your spouse; therefore, it is always a good idea to go to your local registry of deeds and have one recorded. The declaration of homestead may be in either spouses name and will protect all the family members. It is also important to remember that a homestead is not available for investment property and can only protect property that you either live in, or you intend to make your home and permanent residence. You should contact a qualified bankruptcy attorney for more information on how a homestead can protect your home.

Joint Ownership of a Parent’s Home: The “Poor-Man’s” Will

It is not uncommon for elderly parents to decide to add their children to the deed of their homes for estate planning purposes. Typically, in order to save on the expense of paying an attorney to properly prepare a will, parents transfer title of their property to themselves and their children, as joint tenants. While this is an effective method of transferring property and avoiding probate upon the parents’ death, it can have undesired consequences because the parents’ property can be attached and seized by their children’s creditors. Moreover, as I discussed earlier in this article, if one of the children files bankruptcy, the bankruptcy trustee can sell the parents’ home to repay creditors.

If your parents have added you to the deed of their home, it is important to inform your bankruptcy attorney before your case is filed. A qualified attorney should be able to ensure that your parents’ property is properly protected.

Co-Ownership of Investment Property

There are very few exemptions that are available for investment/vacation property. Therefore, co-ownership of both investment and vacation property is nearly impossible to protect in bankruptcy unless there is no equity in the property. (the value of the property is equal or less than the amount owed on the mortgage.) If you file bankruptcy and you co-own investment or vacation property that has equity; you can be assured that the bankruptcy trustee will take the steps to sell the property.

Conclusion

Co-ownership of real estate presents numerous complex issues if one of the co-owners decides to file bankruptcy. If you co-own property with a spouse, parent or partner and you are facing financial difficulties, you should seek a qualified bankruptcy attorney for advice. A good attorney will be able to advise you of any potential issues that may arise, and take steps to ensure that you and your loved ones can keep your homes. Under no circumstances should you decide to try to transfer property out of your name, without advice from an attorney, because such a transfer could be seen as a fraudulent and would make it easier for a Bankruptcy Trustee to seize the property.

When a person files for bankruptcy they usually ask what happens to their secured debt and the property it secures. Secured debt is any debt what is “secured” by collateral, like a mortgage on a home or a car loan.

First, it is important to understand that bankruptcy will discharge your obligation to repay your unsecured debt (credit cards, personal loans, medical bills, etc.). However, you have options when it comes to your secured debt. Through bankruptcy you have the option to keep the collateral that secures loans such as mortgages or car loans, or return the property to the lender and walk away from the debt. The rules are complicated and what ever you chose when you file bankruptcy can affect your future long after you have received your discharge.

This article is a summary of options that a debtor has when choosing how to deal with secured debt; it is the first in a series of articles where I will discuss in detail a debtor’s options for handing their secured debts.

The Notice of Intention

When filing bankruptcy, a debtor is required to file a document known as a “Notice of Intention.” In this notice, the debtor tells the court how they intend to treat their property that is encumbered by a secured loan.

In Massachusetts, a debtor typically has four options in handling their secured property. They can surrender the property, redeem the property or reaffirm the loan; or in the case of their mortgage, they can retain the property and continue to make monthly payments, something known as “ride through”.

Surrender

“Surrender” is exactly what it sounds like. When a person filed bankruptcy, if they cannot afford, or they do not want the collateral that secures a loan, they may surrender the property and allow the lender to repossess, or foreclose. In this case the debtor can walk away from the loan and the debt is discharged through the bankruptcy.

Redemption

You redeem property by paying the lender either the replacement value of the property, or the amount owed on the debt, whichever it is less. In order to redeem property, the debt must: have been incurred primarily for personal, family, or household use; be tangible property, (property that can be touched, such as furniture, appliances, and cars) and the property must either be exempt, or abandoned by the trustee.

Reaffirming the Debt

A reaffirmation agreement is a new contract signed between a debtor and a lender that reaffirms the debt and personal liability for the obligation. Reaffirmation agreements are permanent, meaning that the debtor is agreeing to be forever bound by the terms of the original secured debt, even if the debtor can no longer afford the debt.

In order to reaffirm a debt, the court must review and approve the agreement. If the agreement would result in an undue hardship to the debtor, then the agreement will not be approved.

If the secured debt is a mortgage, or a car loan, we typically do not recommend that a debtor signs a reaffirmation agreement unless the lender is willing to modify the terms of the original loan that are more beneficial to the debtor. Every situation is different, and an experienced bankruptcy attorney will inform you if it is in your interest to reaffirm these types of loans.

Retain and Pay/Ride Trough

If a debtor owns real estate that has a mortgage, they can choose to retain the property and continue to make payments on the mortgage. This option is known as a “ride through.” Ride through is not available for all secured debts, especially those involving debts that secure personal property. This option allows a debtor to walk away from the property in the future, should the debtor no longer be able to afford the property.

Conclusion

Debtors have options when it comes to keeping property that is secures a loan. The laws involve redemption and reaffirmation are extremely complicated and vary from state to state, so it is important that you consult with a reputable bankruptcy attorney.

Judge William C. Hillman, United States Bankruptcy Judge for the District of Massachusetts, recently issued a ruling that a Debtor’s Chapter 13 plan cannot be confirmed if a portion of the Debtor’s income is used to pay monthly expenses associated with a vacation property or second home. This opinion does not apply to investment properties, such as rental properties.

Judge Hillman ruled that a Debtor’s income that was dedicated to paying expenses for a vacation property (such as a mortgage) are not permitted and should be used to pay unsecured creditors; thus allowing the Chapter 13 trustee’s objection to a Debtor’s Chapter 13 plan.

In a Chapter 13 bankruptcy, a Debtor is permitted to deduct certain expenses from his income (such as food, clothing, utilities, etc.). The amount of money left over after all allowed expenses are paid is known as disposable monthly income. The disposable monthly income is paid to the Chapter 13 trustee who pays the money to the Debtor’s unsecured creditors. (for a more detailed explanation, visit our chapter 13 information page).

This ruling means that if a Chapter 13 debtor owns a vacation home; he/she is not permitted to include any of the expenses associated with associated with that property (such as utilities, taxes and mortgage) because the expenses are not reasonable and necessary. This ruling likely will apply to all types of vacation property, including time shares.

A vacation property is viewed as a luxury, and cannot be retained by a debtor in a Chapter 13 proceeding. The property must be liquidated and proceeds must be turned over to creditors, or surrendered in the bankruptcy proceeding. In other words, Chapter 13 debtors in Massachusetts will not be able to keep their vacation homes unless their creditors receive a 100% dividend/payout.

I receive a lot of calls from tenants who are facing eviction and are wondering if they can file bankruptcy to stop the eviction.  However, this is not such a simple question.  Under the current bankruptcy code, whether or not an eviction can be stopped requires one to look at both the bankruptcy code as well as state eviction statutes.

When you file bankruptcy, an “automatic stay” goes into effect, immediately halting nearly all collection attempts against the person filing the petition.  One of the things that is “stayed” are evictions.  Once your bankruptcy petition is filed, either Chapter 7 or Chapter 13, your landlord may not proceed with eviction attempts except under certain circumstances.

However, you must be cautioned against filing bankruptcy for no other reason than to stop an eviction.  Some bankruptcy courts consider this to be an abuse of Chapter 7 bankruptcy. If the bankruptcy court finds that this is true, the court can immediately dismiss the bankruptcy and impose other legal and monetary sanctions on you.

If you are not filing for the sole purpose of stopping eviction, then you should consider the following:

If You File Bankruptcy Before Your Landlord Wins Possession

If you have fallen behind on your rent, or you have violated your lease and your landlord is seeking eviction and has not won a judgment for eviction; then bankruptcy automatic stay will stop the eviction proceedings. However, in most cases, this stay will be lifted shortly after you file.

Removing automatic stay. Most likely, your landlord will file a motion in the bankruptcy court that will allow him to “lift” the automatic stay and allow him to proceed with eviction.  In most cases, the stay will be lifted within a matter of days and your landlord will proceed with eviction.

Drugs and Damage exception: If your landlord has initiated the eviction process because of the use of illegal drugs and/or causing damage to the property, then your landlord may serve a certification with the bankruptcy court which will cause the automatic stay to be lifted.  You have fourteen days to contest this certification; however, you must prove your case in a series of hearings and other proceedings.

If You File Bankruptcy After Your Landlord Wins Possession

If your landlord initiated eviction and has already obtained a judgment for possession then the automatic stay does not stop eviction.  Your landlord may proceed with removing you from the property.  Although there is a very limited exception to this rule, it does not apply to tenants in Massachusetts.

Back Rent

While bankruptcy cannot prevent eviction in either of the two situations listed above, it will prevent your landlord from collecting back rent.  Back rent is an unsecured debt that will be discharged upon the completion of the bankruptcy proceeding.

Conclusion

If you are being evicted from your home, the automatic stay may buy you a few days or a few weeks. However, if your landlord asks the bankruptcy court to lift the stay and let the eviction precede, most likely, the court will agree. It is seldom a good idea to file for bankruptcy solely because you’re being evicted. You’ll be better off looking for a new place to live or fighting the eviction in state court.

Currently there are two bills pending before the legislature this session that would have a major impact on debtors in Massachusetts:  The Massachusetts Homestead Act and Personal Property Exemption Statutes. Both statutes are in dire need of modernization and the proposed changes would increase financial protections to individuals in Massachusetts.

If these bills are passed, they will have a major impact on all homeowners in Massachusetts and would significantly consumer bankruptcy in Massachusetts.

Proposed Changes to the Massachusetts Homestead Statute

Currently: to take advantage of the Massachusetts homestead statute a homeowner must actively file a declaration of homestead with the registry of deeds where their property is located.  If passed, the new legislation will do the following:

1. Create Automatic homestead protection:  every homeowner will automatically be entitled to a homestead in the amount up to $125,000. Individuals and families with more equity in their homes can still file a declaration of homestead with the registry of deeds and will be able to protect up to $500,000 of their equity (the amount of the declared exemption under current law).
2. Beneficiaries of trusts are entitled to homestead protection.  Therefore, if your property is held in a trust, then the beneficiary is permitted to a homestead in the property.
3. Mortgages cannot terminate previously filed homesteads.
4. If you sell your home, or it is destroyed and you receive insurance proceeds, those funds are entitled to homestead protection (for up to a year for sale proceeds, and two years for insurance proceeds)
5. Transfers among family members will not terminate a previously declared homestead.
6. Manufactured homes are eligible for protection under all provisions of the statute.

Increase in Personal Exemptions from Execution

Personal exemptions from execution are those personal items that cannot be seized if someone obtains a judgment against you.  These exemptions are also used on bankruptcy because they represent the maximum value of an asset that you can keep without having to forfeit.  The current values of assets has not changed since the 70’s.  This means that many times, debtors were forced to surrender certain belongings to the trustee because the value of the exemption was too low.

Significant Proposed Changes to Personal Exemptions Statute

1. the proposed legislation would increases most of the personal property exemptions to adjust for the cost of living since the exemptions were last revised in the 1970’s. For example, the exemption amount in an automobile increases from $700 to $7,500.
2. New exemptions are created to account for items necessary to a modern household
3. Two new sections would provide for a “wildcard” exemption to cover personal property not covered by a more specific exemption.
4. A new limited exemption for jewelry.
5. Moreover, there would be an automatic cost of living adjustment, which is crucial to keep the Massachusetts exemption scheme current.

These changes are long overdue and would go along way to helping protect debtors and homeowners by allowing them to keep the basic necessities.  Moreover, these two statutes would also align Massachusetts with most other states.