Sunday, February 27th, 2011
Earlier this month on my Atlanta-bankruptcy web site blog I discussed an interesting case involving mortgage loan deficiency claims that was issued by the Georgia Court of Appeals and Georgia Supreme Court. In the River Farm vs. Suntrust case, the Georgia courts ruled that a mortgage lender could sue a defaulted borrower on the promissory note and thereby bypass the deficiency confirmation process associated with a foreclosure. This ruling is important because property values in Georgia have been trending downward and more and more often I am seeing cases where the balance due on a mortgage exceeds the fair market value of my client's home.
This court case should be of concern to you if you intend to walk away from your home because you are delinquent or if your are so "underwater" with your mortgage that it does not make sense to fight to keep a home that may never be worth what is owed on it. If you do walk away (without filing bankruptcy), your lender may sue you on the mortgage loan contract instead of foreclosing. The lender would refrain from foreclosing to avoid a legal requirement associated with foreclosure that would require the lender to appear before a judge to argue that the foreclosure sale price was reasonable.
In my article, I pointed out that this change in the law might encourage more people to file bankruptcies since a bankruptcy can discharge any deficiency claim.
However, there is another potential problem area that could arise if your lender holds off on foreclosing. This problem area relates to homeowners' association (HOA) dues.
Under Georgia law, homeowners' associations enjoy special protections. Unpaid dues can automatically can become liens that encumber your property. As HOA lawyers read the law, if you file a bankruptcy and surrender your home, your delinquent HOA dues as of the date of filing will be discharged. However, ongoing dues that accrue after the filing remain your obligation until title passes. In other words, if your HOA dues are $100 per month and you file Chapter 7 bankruptcy on February 28, your dues begin accruing again on March 1. If your lender does not foreclose until November, you would, in theory, be responsible for 8 months of dues, or $800, after your filing, even though you have stated your intention to surrender your house in bankruptcy.
Obviously, a provision of the law that involuntarily re-obligates you to hundreds or thousands of dollars of monthly dues on an asset you have surrendered seems contrary to the public policy associated with bankruptcy. Nevertheless, this is how lawyers for homeowners' associations read the law.
I discussed this issue with an attorney at a law firm that represents HOA's in the Atlanta area and throughout Georgia. This lawyer offered the above explanation of the law but he said that as a practical matter, his firm has not and does not plan to sue a homeowner for HOA dues that arise after a bankruptcy case has been filed, as long as the homeowner vacates the premises. However, the homeowner is presumably fair game if he remains in the house (or rents it out) while the bank is dilly-dallying about foreclosing.
He also advised me that his firm does not report post-petition HOA delinquencies to credit bureaus.
The problem here, of course, is that the HOA lawyer's explanation of policy is just that – a voluntary policy. Is it possible that this HOA law firm or one like it could change its policy? Is it possible that the HOA itself might sell this receivable to a debt buyer who would not hesitate to sue you?
I would not assume that an HOA or a debt buyer will necessarily write off otherwise collectible debt, but until this issue is litigated in a Georgia court, we will not know the answer to this issue. I do think that a homeowner who remains in a house after surrendering that house in a bankruptcy will face an increased likelihood of an HOA lawsuit. I will also continue my practice of rejected the HOA contract as part of my bankruptcy filings.
Posted in Foreclosure issues, Georgia Bankruptcy, Mortgage, Repossession issues, accruing, an, area, associations, case, claims, deficiency, delinquent, dilly dallying, discussed, dues, enjoy, foreclosing he, foreclosing , hoa, homeowners, homeowners association lawsuits, interesting, involving, law i, loan, month, mortgage deficiency claims, ongoing, problem, protections , read, relates, special, the, unpaid | Comments Off
Sunday, July 4th, 2010
On June 7, 2010, the United States Supreme Court released its decision in the case of Hamilton, Chapter 13 Trustee v. Lanning. The Supreme Court rarely hears argument in consumer bankruptcy cases so the Lanning decision is big news to consumer bankruptcy lawyers.
The issue in Lanning is one that has troubled bankruptcy lawyers since 2005, when the "means test" was added to the Bankruptcy Code. The means test functions as a test – do you have the "means" or disposable income to fund a Chapter 13 repayment plan? If the means test shows that you do not have sufficient disposable income to make a Chapter 13 work, then you qualify for Chapter 7.
As one of the assistant United States trustees once told me – the purpose of the means test is to disqualify as many people as possible from Chapter 7, and to force them into Chapter 13.
In practice, the means test does not work very well in predicting who can make a Chapter 13 work. One of the biggest complaints has to do with the mechanical nature of means testing. To run a means test, I have to gather pay stubs from the past 6 months. I then create a monthly average, which represents available income. Next I prepare a means test budget, but I do not use actual expense amounts. Instead, the means test tells me how much my clients are allowed to spend for food, medicine, utilities, etc. And where do these budget numbers come from? Means test numbers are based on IRS budgets used in delinquent tax repayment plans. In other words, the means test budget allocations are not especially generous.
This explanation of the means test is somewhat oversimplified, but you get the main idea – every bankruptcy debtor's income and expense numbers have to be run through the means test, and not surprisingly this somewhat mechanical test produces some absurd results.
The classic example of absurd results occurs when a debtor has received a Christmas bonus or a one time payment. That bonus/one time payment has to be included in the monthly income numbers even if it is not guaranteed or likely to happen again. In other situations a debtor may have earned a comfortable income but has now lost his job – under a strict reading of the means test, he earns too much money to file Chapter 7. And he can't afford to file a Chapter 13 because he now has no income.
The Supreme Court has injected some common sense into this situation. In the Lemming case, which was filed in Topeka, Kansas, the debtor's 6 month average was skewed by a one time payment arising from a buyout from her former employer. The debtor filed a Chapter 13 plan that called for a payment that the debtor could afford based on her actual, current income. The trustee objected on the grounds that the means test dictated a higher number (that the debtor clearly could not afford based on his actual income).
The Topeka bankruptcy judge agreed with the debtor and approved a plan that Ms. Lemming could afford. The trustee appealed and lost in the 10th Circuit Court of Appeals. The trustee appealed again and the Supreme Court granted certiorari.
The Supreme Court affirmed the decision of the 10th Circuit Court of Appeals and held that bankruptcy judges need not apply a "mechanical approach" to means testing in Chapter 13 cases. Instead, judges should "take into account other known or virtually known certain information about the debtor's future income or expenses." Rather than looking backwards, judges can take a forward looking approach and consider the realities of a debtor's income. This forward looking approach should be considered in cases with unusual facts and the Lemming decision should not be construed as an invalidation of the means testing formula.
Despite the Supreme Court's warning that a "forward looking" approach should only be used in limited situations, I suspect that bankruptcy judges will use "Lemming arguments" mitigate some of the harsh results of Chapter 13 in general. Bankruptcy judges recognize that Chapter 13 cases often do not work because means testing and aggressive trustee arguments force debtors to agree to plans that commit debtors to pay every last dime to the trustee. Unfortunately, family emergencies and unexpected things happen over the course of a five year bankruptcy plan and many plans will fail – not because the debtor did anything wrong, but because there is no "give" in the plan.
I predict that judges will use the rationale of Lemming to reduce some of the harsh results of the means test and help debtors improve their chances at success in Chapter 13.
If you want to read the Lemming decision, click on the link. I also found a nice summary of Lemming in attorney Jordan Bublick's fine South Florida bankruptcy blog.
Posted in 13, 2010, Chapter 13 issues, Debtors, Hamilton Chapter 13 trustee v. Lemming, Means Test issues, Trustee, Trustee objections in Chapter 13, affirmed, aggressive, and, argument, arguments, cases, certiorari the, chapter, chapter 13 plans, court, decision, facts, force, formula despite, granted, hamilton, hears, lanning , lemming, means, means testing, rarely, read, released, states, supreme, testing, the, trustee objections to chapter 13, united, unusual, v, work | Comments Off
