I recently wrote about what happens to condo or homeowners fees in New York bankruptcy, but I left out the prominent alternative, non-renting urban residence: co-ops. That wasn’t an accident; the reason is co-op maintenance fees are paid before mortgage payments, so a debtor would default on a mortgage before co-op fees. The result is that those fees aren’t likely to play a role in a co-op bankruptcy before a foreclosure has already begun, and by that time, the debtor is already facing significant problems.
So what happens to a co-op in foreclosure or New York bankruptcy?
Co-ops are legally unusual arrangements according to the law. A homeowner or condo dweller purchases a piece of real estate, so traditional real property law applies. Co-op residents, by contrast, receive shares in the company that owns the property along with a proprietary lease. The shares are, therefore, personal property, and they are treated as such by the law. Debtors obtain mortgages from regular lenders to buy the shares.
Once a shareholder-resident falls behind on payments to the bank, the mortgage lender resorts not to the standard foreclosure procedures but to the one in the Uniform Commercial Code (UCC). Foreclosures under the UCC are faster, cheaper (for the lender), and harder to contest than foreclosures on homeowners or condo dwellers. The mortgagee must serve the co-op borrower with an authenticated notification of disposition ninety days before the sale. Then it must serve another notice ten days before the sale. Borrowers can challenge the sale, but so long as the notices and other requirements are met, courts will side with the lender.
Alternatively, borrowers who have received the first notice can cure the mortgage deficiency, obtain a mortgage modification, or file bankruptcy. I’ll skip the first two of these alternatives, but bankruptcy, particularly chapter 13, offers a few options. One, the automatic stay halts a foreclosure, so for sure it buys borrowers time. Two, debtors can include mortgage arrears in their three-to-five-year repayment plans and get back on track. Three, debtors can strip liens on underwater, junior mortgages. Finally, debtors can enter the New York City bankruptcy loss mitigation program, which can help them keep their co-op units.
Importantly, debtors may find that co-ops and lenders will work together to foreclose on units. Even though the co-op has a prior lien for the maintenance payments, the lender may offer to repay those so that it can initiate the notice action on its own. The co-op gets some of its money up front and the lender can get paid more quickly. The result is that the debtor may face a foreclosure more quickly than expected.
If you are a co-op member and are encountering financial difficulties, time is not on your side and the system favors co-op boards and lenders. It’s definitely worth your while to consult with an experienced New York bankruptcy lawyer.
For answers to more questions co-op units in bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn NY foreclosure attorneys Bruce Weiner for a free initial consultation.