Short Sales in Massachusetts are detailed enough without having to add the entanglement of a bankruptcy. Because there is so much confusion surrounding short sales and bankruptcy, I thought I would do a follow-up interview with my 2010 Short Sale Bankruptcy Interview with Attorney Jessica Greenwood. I’ve had so much positive feedback on that post. I’ve also had many more questions that I really felt needed to be explored further so today, I had the privilege of interviewing attorney Jacob Simon of Liss Law in Brookline. I will say upfront I promote attorneys who advocate short sales. I do find many attorneys don’t have the correct attitude to complete a short sale and bankruptcy together so it’s important to highlight the ones that do.
Attorney Simon is licensed in Massachusetts however, we can do a short sale alongside a bankruptcy in New Hampshire, Maine and Massachusetts if necessary. Overall if a homeowner is in Chapter 7, they will need to be discharged from the bankruptcy before we can get Short Sale approval, and if a homeowner is inactive Chapter 13, we will need approval from the court.
So let’s get right to the interview:
Short Sale Mitigation, LLC – Massachusetts – What are the types of Bankruptcy a homeowner may file?
Jacob Simon, Esquire – Liss Law – two types – Chapter 7 and Chapter 13 – Seven is a fresh start. You’re basically moving on and debt load is too much to handle. It doesn’t necessarily mean you are surrendering your property. You can keep your property especially if there is equity. Chapter 7 lasts about approximately 3 months. Chapter 13 lasts at least 36 months and can go as long as 60 months. That’s for someone who is behind on their mortgage, who wants to catch up on arrears and pay over time.
SSM – So someone in 13 likely wants to keep their property?
JS – Yes. They want to keep their property and make up their mortgage payments
SSM – What does it mean when someone surrenders their property?
JS – Surrendering is a term that is not well defined. You are walking away from the property. For a lot of people, it’s attractive. You avoid foreclosure. The debt is discharged. For someone who had an ARM and found themselves paying several hundred more a month and decide they want to rent somewhere for half the price, do, they can do that. For someone who owes more than a property is worth it’s a good option.
SSM – What do you consider before you approve a homeowner for bankruptcy?
JS – We don’t approve anything. That’s up to the court. We advise them the best we can. Based on income and expenses we will say they qualify for chapter 7. If they make a certain amount more they may qualify for a chapter 13. It’s a heavily litigated area of bankruptcy. Everyone wants a 7, but if you make over a certain amount of money, the court will say you should file 13 to pay off creditors, but in the end that debt can be discharged. Income doesn’t alone dictate whether someone files chapter 13 or chapter 7, but it is the biggest factor.
SSM – What is the best time for them to file bankruptcy?
JS – If you’re up against an auction, you definitely want to file before the auction. If you wait until after the auction, technically the home is owned by the bank. The homeowner loses about 95% of their rights in the property. So you want to file before the auction unless you’re a serial filer. You can only file a certain amount of time. The bankruptcy stops all collection activities. We can file a BK at 2:00 if the auction is at 4:00.
As far as the short sale process, the bankruptcy can throw a monkey wrench into the process. So the short sale needs to make sense for homeowners.
SSM * NOTE (According to my interview with Attorney Jessica Greenwood, if you are not up against an auction, filing bankruptcy AFTER a short sale is the ideal time, especially if your mortgage lender didn’t agree to release the debt)
SSM – Which type of homeowners does a Short Sale make sense for?
JS – You have to do what is best for the client. The person has to make a commitment to the short sale. The people it makes sense for are those who have debt that going forward their debt prepetition is covered. Anything post-petition of bankruptcy is not covered. With most short sale negotiators, most have something built in that states the client is NOT liable for debt coming out of this property. That can be very attractive for some homeowners. It will knock out most of what they owe with the exclusion of student loans. When you surrender the property, you may still be on the hook for anything that happens on the property ie, if someone slips and falls. As a negotiator, you should have a built-in during the negotiation if someone slips and falls, from this point forward, the client is not liable.
SSM – What about other debt? Credit card, IRS tax liens, MA tax liens, Condo liens – Does that debt still stay during the short sale if they file bankruptcy?
JS – It depends on when they file. If there is a tax lien then the IRS has announced to the world they have recorded a lien at the registry that they intend to take that money on a sale. Bankruptcy can discharge income taxes. There is a period of time… I believe it’s 4 years from when the income tax is due that it can be discharged. You have to have filed the tax returns. Fraud can’t be involved. Taxes that are older can in some cases be discharged. As far as attachments, and judgments, bankruptcy states any personal liability goes away. Every case is different.
SSM – Why does bankruptcy halt an auction?
JS – We can stop an auction 10 minutes before it if a homeowner files bankruptcy. It’s called an automatic stay. Any collection activities get an order of relief the minute you file bankruptcy. These days you can file it from the law office (online) – You get instant relief. You call the mortgage company. They run the case number and then you cannot file a foreclosure auction as it’s an attempt to collect a debt and the automatic stay states you cannot do that.
SSM – When someone is inactive bankruptcy does a motion to sell happen in both chapter 13 and chapter 7?
JS – Usually that only happens in 13. All your property goes into bankruptcy estate which is the property of the Trustee. In a 7 it would have to go through the trustee as it’s the trustee’s property and the same is true for a chapter 13. I usually see it in chapter 13. Someone may have multiple properties. Disposing of assets in bankruptcy you need court approval for, get court summation, and trustee objects or doesn’t object and then you can have the sale.
SSM – So on chapter 7 you need a discharge of debt?
JS – On the 7 you can have a property short sales in chapter 7 but you will usually get a discharge. They are not mutually exclusive though.
SSM – If they start chapter 13, can they switch to chapter 7?
JS – Absolutely. It’s actually a matter of rights. You don’t even have to ask the court. You can just convert it.
SSM – What does stripping a second lien mean?
JS – It can’t be done in a 7, although I’ve heard some attorneys say it can be done. I’ve never done it. It’s when you have a wholly unsecured second mortgage in chapter 13 meaning the value of the property is less than or equal to the value of the first mortgage on the property – for example the first mortgage is $400,000 and the value of the property is $350,000. If you have a second random mortgage on there for $40,000 you can strip it off.
SSM – If the first mortgage is under the $350,000 mark does that mean they can’t get rid of the second mortgage?
JS – It’s not a strip off. It’s something called a cram-down. Where the second mortgage can be crammed down to the value of the property. You can’t do that to a first mortgage but you can to a second. You can do it to the first mortgage on an income property, but not a primary residence.
SSM – Let’s say the value is $350,000 and the homeowner has a mortgage for $330,000 on the first and $50,000 on the second, are you saying you can cram down $30,000 on the second mortgage to equal the value of the property at $350,000 and get rid of that $30,000 off the second mortgage? So 420,000 would be the balance on the second mortgage.
JS – so then the $30,000 balance would be discharged at the end of chapter 13.
SSM – Do you need an attorney to file bankruptcy?
JS – No, but it’s not a good idea. To file a chapter 13 without an attorney is like suicide. It’s time-sensitive and technical. Chapter 7 can be done if it’s simple, but it’s necessary many times to have an attorney. Your petition has to be correct. All your debt has to be on there and debt is bought and sold all the time. You can file a motion to sell, with strip offs and cram downs, but I would never recommend it.
SSM – Who is the trustee and who assigns the trustee?
JS – The clerk of court assigns the trustee, and the trustee looks out for the interest of unsecured creditors. When you file bankruptcy goes into an estate. The trustee will look for exemptions. If you own a rug that you owe $30,000. Let’s say you can only exempt $10,000 then that is $20,000 in unsecured assets. It’s the job of the trustee to liquidate that $20,000 and pay unsecured creditors. Secured creditors have a recorded lien so their interests are already looked out for.
SSM – Is it the trustee to make the decision to sell the property?
JS – For a short sale you have to get the approval of a trustee, but you are talking about a property that’s underwater, so there is nothing for the trustee to sell it for so in many cases they don’t object. They abandon the asset, but the trustee needs to be consulted.
SSM – Are there conditions where you have seen the court NOT agree to allow the sale of the property?
JS – I’m sure there are, but as long it’s reasonable I believe the courts will allow it so long as you’ve done your homework. It should go through.
SSM – If the property is inactive bankruptcy, is there a possibility where the lender can get around the bankruptcy?
JS – They file a motion for relief. It happens when a property is surrendered. It happens in 7 many times. The banks have to file in order to collect on that debt. If you’re in a 13 and you haven’t been paying your mortgage (you have to pay your mortgage in chapter 13 – people don’t realize you still have to pay your mortgage) – the bank can come to court and file a relief from stay. They do have to ask the court. Homeowners are protected, but if you aren’t following the terms of your agreement, the lender can come in and foreclose.
If you have further questions related to Bankruptcy and Short Sales, please feel free to call Liss Law at:
Jacob Simon, Esq.
Liss Law, LLC
2 Sewall Ave
Brookline, MA 02446
T- 617 505 6919
M- 617 480 7233
F- 617 505 6921
As usual, Short Sale Mitigation, LLC advocates Short Sales in Massachusetts, New Hampshire, and Maine over foreclosure and are happy to work with your bankruptcy attorney should you wish to move forward with a short sale while in bankruptcy.
Maryann Little, VP Mitigation
Short Sale Mitigation, LLC
Short Sale Negotiation
Massachusetts, Maine, New Hampshire, New York
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