Posts Tagged ‘Mortgages’

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.