Los Angeles Bankruptcy Law Monitor : Los Angeles Bankruptcy Lawyer & Attorney : Christine Wilton Law Firm : Southern California Chapter 13 & Chapter 7 Bankruptcy, Foreclosure

We are all on the edge of our seats, watching the news about the Obama Home Affordable program and how so many trial loan modifications are failing in comparison to the number of applications for mortgage modifications.  We have also stood by and watched Congress shoot down the Mortgage Cramdown Legislation under SB61 that would have given bankruptcy judges the authority to modify mortgages in chapter 13 bankruptcy cases.  While all of this continues to take center stage in the news, there is a quiet storm brewing in the practice of chapter 13 bankruptcy that may modify some residential mortgages.

11 U.S.C. § 1322 (b) (2) is referred to as the 'anti-modification' statute and allows modification of secured loans; however, a bankruptcy court's power to modify loans does not extend to loans secured "only by a security interest in real property that is the debtor's personal residence."  What this means is that most homeowners are precluded from filing a chapter 13 case for the purpose of modifying their mortgages.  However, and here is where it gets flavorful because bankruptcy courts have distinguished some residential loans as not being protected under § 1322 (b) (2).

In re Scarborough, 461 F.3d 406 (3rd Cir. 2006) held that, "based on the plain language of 1322 (b), a creditor does not receive anti-modification protection for a claim secured by real property that includes both the debtor's principal residence and other rental property that is not the debtor's principal residence.  In re Bulson, 327 B.R. 830 (Bankr. W.D. Mich. 2005) allowed modification of a loan secured by an interest in property in which the debtor resided when the property involves multi-unit dwellings.  These two cases point to situations where the residential homeowners both lived in their homes and rented out a portion thereof, or otherwise lived in duplexes or other multi-unit properties.  This may be good news for some residential mortgage holders.

But here is the twist.  The lender must know, or have reason to know that the property was being used as both the principal residence and providing rental income at the time of the loan.  So, if you had a tenant on your property when you took out your loan and used that rental income in part, to qualify for that loan, then you may be able to modify your residential mortgage in a chapter 13 bankruptcy. 

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The gulf states must contend with hurricanes.  The northeast has their bitter cold.  Here in California, we must always be prepared for "The Big One," earthquakes that is.  As our economy limps along, virtually lifeless, and looking more like a depression rather than the politically correct "recession," we must be prepared for the onslaught of more potential foreclosures.

If you, or someone you know is facing or potentially facing a foreclosure, an attorney who is familiar with this area of law can explain your options so you can choose the course of action that is best for your individual needs, goals and desired outcome.

The five (5) ways to stop a foreclosure are:

1. Modification
2. Short Sale
3. Deed in Lieu
4. Bankruptcy
5. Injunction

Of the methods listed above, only a bankruptcy and a court ordered injunction will legally stop a foreclosure and even those methods may be temporary.  Most of the time, the lender may suspend their foreclosure proceedings in order to entertain the workout options of a modification, short sale or deed in lieu of foreclosure, but they are not legally required to do so. 

Recent court rulings in Massachusetts to invalidate thousands of foreclosure proceedings because the chain of title had not included all of the assignments that had taken place prior to foreclosure.  Unfortunately, a homeowner is not likely to invalidate a foreclosure in California after the sale date, especially where a bonified purchaser is involved and the property has been transferred.

A Chapter 13 bankruptcy is still the most economical and effective way to temporarily stop a foreclosure because of the automatic stay.  This allows the homeowner time to make up all past due payments.  This also allows the attorney to file any adversary proceedings necessary to invalidate the foreclosure proceedings and possibly sue the lender under TILA and RESPA violations; potentially recouping damages on behalf of their clients.

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