Consumer Bankruptcy Journal Fall 2015 - Page 20

Chapter 13 Debtors Need Not Pay Late-Filed Mortgage Arrearage Claims By Robert V. Schaller Schaller Law Firm, P.C, Oak Brook, Illinois N early every NACBA attorney has had prospective clients walk in the office seeking bankruptcy help to save their home from foreclosure. In the “good old days” before the Great Recession and before the current loan modification craze, debtors would come to the office with relatively small mortgage arrearage claims compared to today. The arrearages in my office were small (between $15,000-$30,000) because mortgage lenders typically started and completed the foreclosure process in judicial states over a few months and there was insufficient time for the arrearage to increase dramatically ($80,000$120,000). Bankruptcy was a first resort for many homeowners because of the automatic stay protections and the ability to cure the mortgage arrearage over a 60-month period. Bankruptcy now appears to be the last resort for many homeowners struggling with foreclosure. Worse, a mortgage arrearage balance can grow massively because the delay in the foreclosure process in judicial states has stretched from months to years. The delay emanates from 20 CONSUMER BANKRUPTCY JOURNAL due process challenges, standing and notice issues, court-mandated mediation requirements, loan modification efforts, and the advent of the foreclosure defense bar whose singular goal appears to be delaying the foreclosure sale. a. Stripping Secured Mortgages Consequently, NACBA attorneys had to be creative and develop new strategies to help homeowners save their underwater homes and prevent foreclosure despite huge mortgage arrearages. Attorneys started targeting wholly-unsecured second and third mortgages when the fair market value of the residential real estate securing these mortgages was insufficient to cover the senior mortgage obligations. Eight circuit courts have held that a debtor may strip-off a wholly-unsecured junior lien secured by a chapter 13 debtor’s primary residence.1 Plus, strip-downs became a popular tool to reduce a mortgage obligation from the contractual amount owed to an amount equal to the value of the real estate securing the loan. Stripdowns of mortgages secured by non-residential real property were Winter 2015 easy.2 Strip-downs of mortgages not secured “only” by residential property proved successful.3 Also, victories were had stripping-down mortgages secured by residential property in cases “in which the last payment on the original payment schedule for a claim …is due before the date on which the final payment under the plan was due.”4 b. Objecting to Arrearage Claims Mortgage Sometimes a chapter 13 homeowner facing foreclosure cannot afford to cure the mortgage arrearage on a senior mortgage lien, even after a junior mortgage strip-off. Until recently, these homeowners had no other chapter 13 option other than to propose a plan that (a) surrenders the property to the senior lienholder pursuant to §1325(a)(5)(C);5 or (b) restructures the debt with the acceptance of the senior lienholder pursuant to §1325(a)(5)(A).6 Sadly, NACBA members know how hard it is to deal with recalcitrant mortgage lenders.7 Now the U.S. Court of Appeals for the Seventh Circuit has given homeowners a third option: striking National Association of Consumer Bankruptcy Attorneys