As we see increasing amounts of foreclosure throughout the New York metropolitan area, in Brooklyn, Queens, the Bronx, Staten Island, Westchester County, Nassau County and Suffolk County, our office (Starr & Starr, PLLC in Manhattan) get many inquiries about whether bankruptcy can be used to save a home facing foreclosure or deal with an adjustable rate mortgage that has reset to monthly payments that the homeowner can no longer afford.
A recent post on our blog New York Chapter 13 Bankruptcy Eligibility Requirements and Issues addressed the limitations that Chapter 13 bankruptcy has. One very significant limitation is that secured debt can’t exceed $1,010,650. Many condo and co-op apartments and houses in New York (particularly Manhattan, Nassau County, Suffolk County and Westchester County) have debt in excess of this amount based on multiple secured loans and liens, such as first mortgage, second mortgage, and home equity loan (and sometimes also tax liens).
As we also detailed in our prior blog posting, Commonly Encountered Problems in NY Chapter 13 Chapter 13 can’t be used to modified the rights of a lender secured by the debtor’s principal residence. However, Chapter 11 bankruptcy can
Eligibility Requirements for Chapter 11 Bankruptcy:
Unlike Chapter 7 and Chapter 13 there is no eligibility requirement for Chapter 11.
How Chapter 11 Works
The goal of a Chapter 11 case is to confirm a plan of reorganization. That plan, which creditors get to vote on and is subject to Bankruptcy Court approval, details the debtor’s proposed treatment of creditors.
Modification of Loans. In Chapter 11 a debtor can seek to modify loans secured by his/her home (or other property). If the value of the debtor’s home has fallen significantly, the debtor may be able to split a mortgage creditor’s claim into two parts: one that is secured and one that is unsecured.
For example, if a debtor owns a house that he/she bought for $1.4 million two years that is now worth $1.1 million and has a first mortgage for $800,000, second mortgage for $400,000, and a home equity loan (HELOC) for $100,000, in Chapter 11 the debtor has the ability to adjust the treatment of these loans.
The first mortgage would still be fully secured because the value of the house exceeds the balance of the loan. However, the second mortgage and HELOC would not. The second mortgage could be spilt into a secured piece of $300,000 and an unsecured piece of $100,000, because the current value of the home less the first mortgage is $100,000 below than the current balance of the second mortgage. In addition, the HELOC could be treated as entirely unsecured.
The significance of this is very important. It means that rather than being tied to the original repayment term and repayment amounts under the loan documents the debtor has the ability to change those terms. Under our example the debtor could propose a plan that proposed to treat the unsecured portion of $100,000 of the second mortgage and the $100,000 HELOC the same as the debtor’s other unsecured creditors.
Since in our example the debtor has no equity in the home, assuming the debtor’s other assets are not in excess of the debtor’s available exemptions (what a debtor gets to keep in bankruptcy – see https://www.starrandstarr.com/personalbankruptcy-ny-faqs.htm#17 FAQ 4 “Will I lose all my property if a I file bankruptcy?” for further info. about exemptions), the debtor might propose a plan that pays nothing or very little to unsecured (with any payments to be made over time out of income).
In addition, a debtor with an interest only loan or ARM might seek to modify the loan through Chapter 11 bankruptcy to provide for more manageable monthly payments.
A personal Chapter 11 bankruptcy is a potential way for homeowners in New York (particularly Manhattan, Nassau County, Suffolk County and Westchester County where home values are often quite high) who are not eligible for Chapter 13 to save their homes. It has received very little attention lately both in the popular press and from the bankruptcy community and is an option that should be considered.