Tag: real property

Homestead Exemption and Married Spouses

It is not uncommon for one spouse to seek bankruptcy relief under Chapter 7 or Chapter 13 of the Bankruptcy Code in a situation where title to the real property is held in both parties’ names. Generally, under such circumstances, the debtor typically claims a half interest in the property. Thus, the homestead exemption, under either New York law or federal bankruptcy exemptions, would be used to protect that interest. This creates an interesting legal issue  since under New York’s Real Property Law both spouses hold an undivided interest in the entirety of the property. If so, does the homestead exemption have to protect all of the equity in the property? 

In In re Naples, W.D.N.Y. Bk #14-10264, the bankruptcy trustee made precisely that argument. The trustee argued that since only one of the spouses had filed bankruptcy, and since the property was held by the parties as tenants by the entirety, creating undivided interest in each spouse, the debtor did not have sufficient homestead exemption to protect his equity in the property. The bankruptcy court disagreed. It held that under those circumstances, for purposes of valuing the debtor’s interest in the property, only one half interest needs to be valued and homestead exemption would be applied only to that half interest. The court reasoned that since the way the title is held creates limitations on each spouses to transfer title without consent of the other spouse, for the bankruptcy court’s valuation, only one half interest needs to be valued.

I think that this is a well thought-out result. If both spouses were filing for bankruptcy, each spouse would be able to apply their own exemption to any equity in the property, so if only one spouse files, that spouse should only need to protect that spouse’s half interest.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

“Pond” Motion and Avoiding Second Mortgage Lien in Chapter 13 Bankruptcy

In Chapter 13 bankruptcies, it is not uncommon to see situations where the debtor, who owns a home, has both a first and a second mortgage, or even a third mortgage on that home.  In today’s real estate market, it is not uncommon for those mortgages to exceed the value of the home by a significant amount.  Since the secured debt must be paid in full in Chapter 13 bankruptcy, does it make sense for the debtor to greatly overpay the value of that home? The bankruptcy law offers us a solution for those situations.  Debtor’s bankrutcy lawyer can bring a “Pond” motion.  The motion is named after a decision, In re Pond, 252 F.3d 122 (2nd Cir. 2001).

A Pond motion is a motion made in a chapter 13 Bankruptcy case where the debtor owns and lives (as his or her primary residence) in a residence which has a second mortgage and the value of the house is less than the amount owed on the first mortgage, as of the date the debtor files his or her Chapter 13 bankruptcy petition.  If the motion is successful, the second mortgage will be treated as unsecured debt, removing its secured status. As a result, the amount owed to the second mortgage company gets treated like any other unsecured debt, and paid, in most Chapter 13 bankruptcies, pro rata. If the debtor is paying 50% of his unsecured debt through the Chapter 13 plan, it means that the amount paid on the second mortgage will be 50% of the amount owed.  Once the debtor obtains his or her discharge the remainder of the second mortgage debt is no longer owed.

Here in Rochester, Judge Ninfo has written a number of decisions addressing Pond motions.  One critical issue associated with Pond motions is valuation of the real estate.  In In re Dzenziel, the central issue presented to the court was whether the valuation of the property would make the second mortgage unsecured.

The debtors brought their Pond motion, alleging that their residence had a value of $99,047, and the balance due on the first mortgage was $99,813.97 as of their most recent mortgage statement.  Since the balance due on the first mortgage exceeded the value of the residence, the debtors asserted that the second mortgage was totally unsecured on the date they filed their Chapter 13 petition.  Because the second mortgagor disputed the debtor’s valuation of the property, the court conducted a trial on the Pond motion.

Testimony at trial indicated that the debtors originally purchased the property for $101,000 when the property had been appraised at $111,000. The debtors reported that when they obtained the second mortgage in 1999, the property had been appraised at $180,000.  The competing real estate appraisers testified respectively that the value of the property was either between $97,808 and $100,285 (adjusted to $99,047), or  $120,000.

Analyzing the Pond decision, Judge Ninfo wrote, “If there is no equity in a debtor’s residence after accounting for other encumbrances that have priority over a mortgage lien, so that the mortgage lien is not even partially secured, the lien can be avoided and the mortgage debt treated as unsecured.”  The court further stated that the burden falls upon the debtor to demonstrate that there is not even $1 of value over prior valid liens to support the mortgage lien that is to be avoided.  The court also held that the debtor’s burden of proof is higher when “it appears that there was equity available for the mortgage … at the time it was executed; the alleged value deficiency may have been created in part because of a debtor’s failure to make payments on superior mortgages… and [if] the alleged value deficiency is not substantial….”
Reviewing the evidence presented, the court determined that the property has a value of at least $100,000, which does exceed the balance due on the first mortgage, and based upon relevant testimony, the property probably has a value between $120,000 to $145,000.  Judge Ninfo concluded that  the debtors have not met their burden to demonstrate that there is no value over prior liens that would enable the court to avoid the second mortgage and denied the motion.

The above demonstrates that valuation of property is critical in those situations where the debtor has an opportunity to convert second mortgage to unsecured debt.  The bankruptcy lawyer would do well to use a reputable real estate appraiser and be prepared to conduct a hearing to substantiate the property’s value.

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a bankruptcy lawyer.