Bankruptcy Bits

Surviving the credit crunch storm

As with most financial issues, money is cyclical. Most anticipate things will eventually turn around and the crunch will ease. In the meantime, there are steps that can be taken to minimize the impact of the current conditions.

Minimizing the Impact - The Residential Market

 

• Delay Selling - If not essential, consider postponing the sale of your home. As there is less mortgage money available to buyers, the pool of potential buyers begins shrinking, thus resulting in fewer and lower offers to buy.
  
• Delay Buying - As real estate values depreciate, if you are not in need of mortgage financing, it may be a good opportunity to consider purchasing real estate at values that have been reduced; however if you are in need of financing, the time may not be right to purchase until the mortgage markets stabilize. In addition, avoid adjustable rate mortgages, as indicators appear to show a likelihood of increasing interest rates. In addition, the ability to refinance out of an adjustable rate mortgage is no longer a guarantee.
• Loan Reformation - As many homeowners recently refinanced with adjustable rate mortgages, intending to refinance again, the loss of mortgage money may make another refinance difficult. Some lenders may be open to re-writing some of the terms of your current mortgage in order to make them more favorable and in order to allow you to avoid a foreclosure.
• Second Mortgages - During times of falling equity, avoid using a second mortgage to pay off unsecured debts and to make small home improvements. Not only does this put your house at increased risk of foreclosure due to the increase in your monthly mortgage obligation, but it also may make your house more difficult to sell, as now any selling price must include the payoff for the first and second mortgage.

 

 

By: Justin H. Dion, Esq.

Judicial oversight - potential alternative to amending Bankruptcy Code Sec. 1322(b)(2)

The United States Constitution grants to Congress the jurisdiction to make laws relating to Bankruptcy. It is suggested that the grant of authority evidences that bankruptcy law is the safety valve that protects the citizenry from the pressures of financial indebtedness that could otherwise oppress honest debtors. Indeed, bankruptcy has its roots in the concept of a Jubilee Year found in the Old Testament.

One of the issues confronting contemporary American society is the sub-prime mortgage crisis, in which the existing Bankruptcy Code does not provide an acceptable way for an individual to address the issues of a mortgage induced by the predatory lending practices of the lender, the reality that the property is worth less than the amount of the mortgage and that interest rates are substantially in excess of those “advertised” or existing market rates.

One suggestion advanced to provide relief to the victims of predatory lending practices is the amendment of Sec. 1322 of the Bankruptcy Code and to allow the Bankruptcy Court to modify first mortgages on residential real estate.

Another suggestion being advanced is to amend Massachusetts law to provide judicial oversight to the residential foreclosure process. The Commonwealth is among a minority of jurisdictions that does not require judicial oversight or provide the owner of real estate notice of hearing and an opportunity to be heard before a foreclosure can proceed. Legislation bringing MA into conformity with the practices of the majority of the states would assure due process to those facing the foreclosure of their homes.

A question to be addressed is whether the imposition of judicial oversight would obviate the need for amending Section 1322 of the Bankruptcy Code. Evidence of the experiences in other jurisdictions indicates that the remedies are not mutually exclusive.


By: Eugene B. Berman, Esq.

Amending Bankruptcy Code Sec. 1322(b)(2) can help homeowners who are in over their heads

During this time of rising defaults and foreclosures of sub-prime mortgages initiated as a result of predatory lending practices, objective studies and empirical evidence demonstrate that lenders and the holders of such mortgages have been unwilling to enter into meaningful loan modifications.

Massachusetts Attorney General Martha Coakley testified before a briefing of the U.S. of Representatives Financial Services Committee that the results of asking lenders and servicers of troubled mortgages to modify loans to avoid foreclosures “are dismal.”  In her statement to the Committee, the Attorney General observed that even, “…when so-called loan modifications are completed, too often they fail to provide an affordable monthly payment, and therefore fail to result in a sustainable loan.”

There are those, including the local Alliance of Providers of Legal Services to Individuals Facing Foreclosure and the Commercial Law League of America, as well as members of Congress, who contend that the only solution to the present Mortgage Foreclosure Crisis is to amend the Bankruptcy Code to allow bankruptcy judges to modify residential first mortgages. The change proposed is the amendment of Sec. 1322(b)(2) of the Code by eliminating the special exception that prevents homeowners from having the same right to deal with partially secured mortgages that vacation homeowners, rental property owners, and business owners have always enjoyed.

While mortgage lenders have opposed such an amendment arguing that it would substantially limit the availability of mortgage loans, proponents of the amendment have suggested that the elimination of the exception would encourage lenders to revert to sound lending practices based upon the value of the property and the borrower’s ability to make the mortgage payments.

The issue of amending Sec. 1322 is one that will command the attention of Congress and the public until finally resolved.


By: Eugene B. Berman, Esq.

Reorganizing under Chapter 11 - giving your business some breathing room

Bankruptcy protection is not just intended individuals. Small business owners who are dealing with less credit, rising inflation and costs, and slower accounts receivables collection often face tough choices in this economy. As bills get harder to pay and collection efforts ensue, the risk of business closure increases.

In enacting chapter 11 of the Bankruptcy code, Congress concluded that it is sometimes the case that the value of a business is greater if sold or reorganized as a going concern than the value of the sum of its parts if the business's assets were to be sold off individually. It follows that it may be more economically efficient to allow a troubled company to continue running, cancel some of its debts, and give ownership of the newly reorganized company to the creditors whose debts were canceled.

Alternatively, the business can be sold as a going concern with the net proceeds of the sale distributed to creditors ratably in accordance with statutory priorities. In a Chapter 11, jobs may be saved, the engine of profitability is maintained rather than being dismantled, and, as a proponent of a chapter 11 plan is required to demonstrate, the business's creditors will end up with more money than they would in a chapter 7 liquidation. All creditors are entitled to be heard by the court that is responsible for determining whether the plan of reorganization complies with the purposes of the bankruptcy law and provides for fair and equitable treatment of all parties in interest.

Some contracts, known as executory contracts, may be rejected if canceling them would be financially favorable to the company and its creditors. Such contracts include labor union contracts, supply or operating contracts (with both vendors and customers) and real estate leases. The standard feature of executory contracts is that each party to the contract has duties remaining under the contract. In the event of a rejection, the remaining parties to the contract become unsecured creditors of the debtor.

Chapter 11 is reorganization, as opposed to liquidation. Debtors may "emerge" from a chapter 11 bankruptcy within a few months or several years, depending on the size and complexity of the bankruptcy. Debtors in Chapter 11 have the exclusive right to propose a plan of reorganization for a period of time. After that time has elapsed, creditors may also propose plans. Plans must satisfy a number of criteria in order to be "confirmed" by the bankruptcy court.

Among other things, creditors must vote to approve the plan of reorganization. If a plan cannot be confirmed, the court may either convert the case to a liquidation under Chapter 7, or, if in the best interests of the creditors and the estate, the case may be dismissed, resulting in a return to the status quo before bankruptcy. If the case is dismissed, creditors will look to non-bankruptcy law in order to satisfy their claims.

As with other forms of bankruptcy, petitions filed under Chapter 11 invoke the automatic stay of § 362. This requires all creditors to cease collection attempts and makes post-petition debt collection void. Under some circumstances, creditors or the United States Trustee can ask the court to convert the case to a liquidation under Chapter 7 or to appoint a trustee to manage the debtor's business.

The court will grant a motion to convert to Chapter 7 or appoint a trustee if either of these actions is in the best interest of all creditors. Sometimes a company will liquidate under Chapter 11, and the pre-existing management may be able to help get a higher price for divisions or other assets than a Chapter 7 liquidation would be likely to achieve. Appointment of a trustee requires some wrongdoing or gross mismanagement on the part of existing management, and is relatively rare.

Although bankruptcy is a last resort, it can sometimes keep your business afloat during times that would otherwise cause closure.



By: Justin H. Dion, Esq.