{"id":3687,"date":"2017-04-10T07:00:10","date_gmt":"2017-04-10T12:00:10","guid":{"rendered":"https:\/\/nybankruptcy.net\/main\/?p=3687"},"modified":"2018-08-08T01:38:07","modified_gmt":"2018-08-08T01:38:07","slug":"new-york-bankruptcy-court-prohibits-lien-stripping-debtors-duplex","status":"publish","type":"post","link":"https:\/\/nybankruptcy.net\/main\/new-york-bankruptcy-court-prohibits-lien-stripping-debtors-duplex\/","title":{"rendered":"New York Bankruptcy Court Prohibits Lien-Stripping of Debtor’s Duplex"},"content":{"rendered":"

It’s an unfortunate fact of Chapter 13 that it does not allow debtors to cram down their mortgages to the market value of their properties the way they can auto loans. Specifically, debtors can’t cram down their principal homes’ mortgages, but cram-downs are possible for investment properties<\/a>. One question that’s been popping up recently in bankruptcy courts adds a twist: What if their principal homes also generate investment income? A 2017 New York bankruptcy case provides an answer.<\/p>\n

The facts of the case are sad but clear: In 2005 debtor Mary Addams wanted to buy a duplex or multi-unit building in Manhasset, New York, but she didn’t qualify for a conventional mortgage large enough to cover the $850,000 purchase price. She borrowed some money from Chase Mortgage, but then borrowed the remaining amount from her friends the Shapiros. (Already, you can see why it’s a sad story because the debt will get in the way of the friendship.) Ms. Addams defaulted on the mortgage in 2010, and the Shapiros initiated a foreclosure proceeding, obtaining a judgment in August 2015. The debtor filed chapter 13 bankruptcy the eve before the sale was to commence in December 2015.<\/p>\n

The salient facts that In Re: Addams<\/i> raises are (1) the junior mortgage was not underwater, and (2) the house was not used exclusively as the debtor’s principal residence. If the mortgage to the Shapiros were underwater, then the debtor would probably be able to strip the lien entirely because it was unsecured (the debt limits would be a factor if the debtor owed more than $1,184,000 in secured debt).<\/p>\n

As for the point about the debtor’s residence, section 1322(b) of the Bankruptcy Code states, “[T]he plan may \u2026 modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor\u2019s principal residence.” The debtor argued she could bifurcate and revalue the creditors’ secured debt to the extent it’s her principal residence while treating the rental portion as an unsecured claim. Importantly, her plan could not be confirmed if she could not bifurcate the claim.<\/p>\n

The Eastern District of New York bankruptcy court noted that the issue of whether a property is not used exclusively as the debtor\u2019s principal residence was not one that had been adjudicated in the Second Circuit. A court in the Western District of New York outlined some of the responses it and other courts in the country have taken. One approach\u2014the majority\u2014prohibits bifurcation so long as any part of the property is used as the debtor’s primary residence, even if the debtor lives in a shed attached to a large factory. The second approach permits bifurcation so long the property is not used exclusively as the debtor\u2019s principal residence, and finally some courts treat the circumstances on a case-by-case basis.<\/p>\n

The In Re: Addams<\/i> court chose the first approach: Because some part of the property is used as the debtor\u2019s principal residence, bifurcation is not possible despite the commercial use of the property.<\/p>\n

It reasoned that the Bankruptcy Code’s definition of “debtor’s principal residence” includes, “incidental property,” which the code further defines as encompassing, “property commonly conveyed with the residence,” including rental-incomes.<\/p>\n

Because the debtor could not bifurcate the property, the court then dismissed the case. It added that the case had been pending for “an exceptionally long time for a chapter 13 case to pend without a confirmed plan.” The case was filed on November 30, 2015, and this decision came down March 9, 2017, so debtors should recognize that it really should not take that long to confirm a plan, even if unusual circumstances arise.<\/p>\n

The opinion is here (pdf<\/a>).<\/p>\n

There are three lessons to take from In Re: Addams<\/i>: One, although it’s not settled law, debtors may not be able to bifurcate income-generating property from their principal residences in chapter 13 New York bankruptcy. Two, this case took too long to resolve, and an effective New York bankruptcy lawyer won’t let that happen. Three, it’s a shame when money lent between friends ends in acrimony.<\/p>\n

If you have a complicated financial situation, then talking to an experienced New York bankruptcy lawyer can help you assess your options.<\/p>\n

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.<\/p>\n","protected":false},"excerpt":{"rendered":"

It’s an unfortunate fact of Chapter 13 that it does not allow debtors to cram down their mortgages to the market value of their properties the way they can auto loans. Specifically, debtors can’t cram down their principal homes’ mortgages, but cram-downs are possible for investment properties. One question that’s been popping up recently in …<\/p>\n

New York Bankruptcy Court Prohibits Lien-Stripping of Debtor’s Duplex<\/span> Read More \u00bb<\/a><\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"default","ast-global-header-display":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":""},"categories":[16,26,7,10,14],"tags":[2,29,32,11,15,108,51,52],"acf":[],"yoast_head":"\nNew York Bankruptcy Court Prohibits Lien-Stripping of Debtor's Duplex -<\/title>\n<meta name=\"description\" content=\"It's an unfortunate fact of Chapter 13 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