Home values can rise quickly, and while most homeowners like that just fine, it’s usually not a good thing for New York bankruptcy debtors, particularly those with underwater junior mortgages on their primary residences. The consequences can affect consumer debtors in all chapters, and it they can eliminate the advantage to filing in chapter 13 altogether. Why should debtors facing financial difficulties consider talking to a New York bankruptcy lawyer sooner rather than later when the housing market is improving?
Reason number one is that equity eats into exemptions. Although New York State has generous exemptions for homeowners, they aren’t unlimited. Once a home’s value crosses over the exemption limit, a debtor is much more likely to lose the home in bankruptcy.
Reason number two is the effect on underwater junior mortgages. In chapter 7, debtors’ underwater junior mortgages are discharged; however, they must continue paying on those mortgages because the liens remain on their homes. Debtors filing in chapter 13 (or chapter 11), on the other hand, can strip the liens off their mortgages, but the process takes longer. Worse, once there’s equity in a junior mortgage, the debtor must treat the creditor as a secured creditor that will be paid in full plus arrearages over the course of the plan, and the lien won’t be stripped. So long as the junior mortgage is underwater, chapter 13 will treat it as an unsecured debt.
One question that matters here concerns timing. When is the house valued for bankruptcy purposes? Is it the petition date, the confirmation date, or the discharge date? Fortunately, the answer for New York bankruptcy is the petition date. This is good because, at least for chapter 13 cases, some other federal circuits use the confirmation date instead. Nevertheless, just because the valuation is timed to the petition date doesn’t mean debtors are in the clear. Obviously, creditors can challenge valuations if they think debtors had more equity in their homes than they did, and this will lead to adversary proceedings with competing evidence as to the homes’ values. (Click here to read about how to value a house in bankruptcy.)
The closer equity values are to bringing junior mortgages above water, the more likely debtors should consider filing chapter 7 over chapter 13. Once the second mortgage has any equity, the opportunity to strip the lien disappears, and it won’t even be discharged in chapter 7. It’s a compelling reason to act quickly if stripping a lien is a goal.
If you are experiencing financial difficulties, then talking to an experienced New York bankruptcy lawyer is crucial because doing so will ensure that your home is accurately assessed before bankruptcy, and your petition will be filed timely and correctly.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
