Chapter 13 Bankruptcy Plan May Permit Modification of Mortgage on Under- Secured Rental Property

Justin Gillman — Tue, 05 May 2009 23:19:35 +0000

Question: How can I deal with a rental property which is under-secured (value is less than the mortgage(s)) and for which I am not receiving sufficient rent and income to cover the mortgage and monthly expenses?

One potential option in a Chapter 13 Bankruptcy (if one qualifies) is to propose a modification of the mortgage obligation. Although there are significant limitations in the bankruptcy code, the law does currently allow a debtor(s) to propose to modify a secured claim of a mortgage company on property which is not the principal residence. An example, Client owns a rental property which they purchased in 2006 for $250,000 and took a mortgage of $225,000 requiring monthly payments of $2,000 per month (assuming a 30 year fixed rate mortgage at 6.5% with principal and interest payments of $1,422.15, and a monthly escrow of $577.85 for annual taxes and insurance). They are receiving $2000/month in rent. However, with the changes in the real estate market, the property is now worth only $190,000. Due to a period in which the property was vacant for 3 months, Client fell behind in payments and is facing a possible foreclosure. By filing a Chapter 13 Bankruptcy, Client may be able to save the property and better their chances of addressing the shortfall on both the monthly payment and the problem of the lack of equity. Chapter 13 might allow Client to propose a Plan in which they reduce the loan amount to the value of the property. This may allow Client two (2) benefits. First, they may be able to reduce their monthly expense by $200/month to address the administrative expense of the landlord (i.e. eviction costs, legal fees, permits, cleanup, maintenance, etc.). Second, if they effectively reduce the total loan balance, their monthly payments would give them a chance, depending on the value of the property in the future, to sell the property and payoff the loan without requiring additional funds.

The provisions of Chapter 7, 11, 13 of the Bankruptcy Code and Chapter 7 may also provide other options . However, the bankruptcy law is complicated and the results which any person may be able to obtain are based on the specific circumstances of their case. We strongly recommend that anyone considering bankruptcy consult and retain an attorney.

Please Note: A Chapter 13 Bankruptcy Plan Mortgage modification can not be used to modify a mortgage which is secured by the principal residence of the Debtor. The United State Senate has defeated the Helping Families Save Their Homes Act (S. 896) by a vote of 45 to 51 which would have permitted mortgages secured by the debtors principal residence.

Fair Debt Collection Practices Applies to Mortgagee’s Attorneys in Foreclosure Proceedings

Allen Gillman — Tue, 05 May 2009 23:01:30 +0000

Attorneys Who Regularly Engage in Collecting Consumer Debts, Including Those Representing Mortgagees in Foreclosure Proceedings, Are Subject to the Fair Debt Collection Practices Act.

The United States Supreme Court in the Matter of Heintz v. Jenkins, 514 U.S. 291, 294-95, 115 S. Ct. 1489, 131 L. Ed. 2d 395 (1995) Rejected the Assertion that a Law Firm Representing the Original Creditor Is Not a Debt Collector Under the Provisions of the Fair Debt Collection Practices Act.

Some law firms have argued that if they represent the original creditors they are not considered as debt collectors under the provisions of Fair Debt Collection Practices Act. This assertion which is in direct conflict with the provisions of the Act and the authority of the United States Supreme Court in the matter of Heintz supra.

In Heintz, the Court squarely addressed the issue of whether a law firm representing an original creditor was subject to the provisions of the Act. The plaintiff in this case, Darlene Jenkins, borrowed money from the Gainer Bank in order to buy a car. She defaulted on her loan. The bank’s law firm then sued Jenkins in state court to recover the balance due. As part of an effort to settle the suit, a lawyer with that law firm, George Heintz, wrote to Jenkins’ lawyer. His letter, in listing the amount she owed under the loan agreement, included $ 4,173 owed for insurance, bought by the bank because she had not kept the car insured as she had promised to do. Jenkins then brought this Fair Debt Collection Practices Act suit against Heintz and his firm Heintz at 292

The Court found that the Act “applies to attorneys who ‘regularly’ engage in consumer-debt-collection activity, even when that activity consists of litigation,” for two reasons: First, the Act defines the “debt collector[s]” to whom it applies as including those who “regularly collec[t] or attempt[t] to collect, directly or indirectly, [consumer] debts owed or due or asserted to be owed or due another.” § 1692a(6). In ordinary English, a lawyer who regularly tries to obtain payment of consumer debts through legal proceedings is a lawyer who regularly “attempts” to “collect” those consumer debts.

In the recent matter of Barrows v. Chase Manhattan Mortg. Corp., 465 F. Supp. 2d 347, 356 2006, the Court found that the law firm of Hubschman & Roman, PC, and John J. Roman, Jr., Esquire representing the mortgagee in foreclosure proceeding are “debt collectors” under the provisions of the FDCPA” Following Congress’s removal of language in the FDCPA that expressly excluded attorneys from FDCPA liability, the United States Supreme Court clarified the lower courts’ disagreement over whether attorneys could[**14] be classified as “debt collectors” and be subject to liability under the Act.

In Heintz v. Jenkins, 514 U.S. 291, 294-95, 115 S. Ct. 1489, 131 L. Ed. 2d 395 (1995), the Court found that FDCPA “applies to attorneys who ‘regularly’ engage in consumer-debt-collection activity, even when that activity consists of litigation,” for two reasons: First, the Act defines the “debt collector[s]” to whom it applies as including those who “regularly collec[t] or attempt[t] to collect, directly or indirectly, [consumer] debts owed or due or asserted to be owed or due another.” § 1692a(6). In ordinary English, a lawyer who regularly tries to obtain payment of consumer debts through legal proceedings is a lawyer who regularly “attempts” to “collect” those consumer debts.

Under the Act, a debt collector may not communicate with a consumer if inter alia ” [I} the debt collector knows the consumer is represented by an attorney with respect to such debt and has knowledge of or can readily ascertain, such attorney’s name and address unless the attorney fails to respond within a reasonable period of time to a communication from the debt collector or unless the attorney consents to direct communication with the consumer” 15 USC Sec 1692c(2) ” The term communication means the conveying of information regarding a debt directly or indirectly to any person through any medium”. 15 USC Sec 1692a

Gillman & Gillman | Experienced New Jersey Bankruptcy Lawyers » Mortgage

Chapter 13 Bankruptcy Plan May Permit Modification of Mortgage on Under- Secured Rental Property

Fair Debt Collection Practices Applies to Mortgagee’s Attorneys in Foreclosure Proceedings