Minnesota Bankruptcy Courts Now Allow a Chapter 13 Debtor to Compel a Mortgagee Bank to either Foreclose or Take Deed to a ‘Zombie Property’

On September 1, 2015, the honorable Judge Michael Ridgway of the US Bankruptcy Court for the District of Minnesota joined several other jurisdictions nationally in recognizing a chapter 13 debtor’s ability to compel her mortgage bank to either foreclose a property or to take deed to a property for which it had previously refused to foreclose. In so creating this new caselaw in Minnesota, Judge Ridgway has now established the legal procedure for debtors to get out from under a ‘zombie property’, i.e.., a property that the bank refuses to foreclose for financial reasons unknown.

Particularly when it comes to zombie condos and townhomes, mortgagee banks often elect not to foreclose in effort to avoid incurring the homeowner’s association fees, real estate taxes and other accruing costs for a property that may not easily sell to recoup its losses. For such zombie properties, the homes can remain abandoned for years before it is finally either subject to a tax forfeiture proceeding or the toxic mortgage is eventually assigned to a bank who will foreclose. To the homeowner, however, it means years of uncertainty and increasing personal liability for homeowner’s association assessments and other costs of remaining the titled owner to an unwanted home.

For now in Minnesota, chapter 13 bankruptcy offers an avenue of relief in that the debtor can now force a lienholder—i.e., the mortgage bank, the homeowner’s association, or perhaps even the county itself—to either foreclose the property or take deed to the property.

In In re Stewart (Case No 15-40709-MER), the chapter 13 debtor had long-abandoned a condominium property in her former state of residence, Maryland, before moving to Minnesota and eventually filing for bankruptcy relief. For over three years, the condo sat vacant, abandoned and awaiting foreclosure by the bank or any other lienholder for that matter. Yet despite her many efforts to cooperate in a voluntary foreclosure or even deed-in-lieu the property to its lienholders, no one wanted to take deed and ownership to the zombie condo. Even after successful completion of a 5-year chapter 13 plan, she would have emerged from bankruptcy owing tens of thousands of dollars in HOAs and other costs if property continued to not be foreclosed. In essence, the very purpose of her bankruptcy proceeding would have been negated if she could not rid herself of the debts associated with the condo. Therefore, her chapter 13 plan—which was confirmed without objection by any party—provided that the condo unit would vest in its mortgagee bank (One West Bank at that time) in satisfaction of the claim and the deed would so transfer out of her name at long last. Yet over two years after her chapter 13 plan was confirmed, neither the mortgagee bank nor the homeowner’s association made any attempts to foreclose the zombie property. So the debtor and her attorney, Lynn Wartchow, brought a motion to compel the mortgagee bank to either foreclose or take deed to the property once and for all.

In so deciding in favor of the debtor and enforcing the terms of her chapter 13 “Baxter Plan”, Minnesota is now aligned with several other bankruptcy courts including Hawaii (In re Rosa, 495 B.R. 522 (Bankr. D. Haw. 2013)), Oregon (In re Watt, 520 B.R. 834, 839 (Bankr. D. Or. 2014)), Massachusetts (In re Sagendorph, II, 2015 WL 3867955 (Bankr. D. Mass. June 22, 2015)) and the Eastern District of New York (In re Zair, 2015 WL 4776250 (Bankr. E.D.N.Y. Aug. 13, 2015)).

The full memorandum opinion and order of In re Stewart may be viewed on the bankruptcy court’s website at http://www.mnb.uscourts.gov/sites/mnb/files/opinions/Stewart%2013-40709%20Opinion.pdf.

 

Congress Extends the Income Exclusion for 1099 ‘Forgiven’ Mortgage Debt to Tax Years 2015 and 2016

For a more detailed discussion on tax debt and other tax resolution issues, be sure to read Wartchow Law’s Tax Blog.

On December 18, 2015, Congress extended certain tax breaks to apply for both tax years 2015 and 2016, including the income exclusion for forgiven mortgage debt on a qualified principal residence. “Forgiven” or “cancelled” mortgage debt on a Form 1099-C occurs usually after a homestead is foreclosed, short sold or otherwise a defaulted mortgage goes unpaid for the statutory period of time. Upon the occurrence of these events, banks are required to treat the unpaid balance as “forgiven” and issue a Form 1099-C to the homeowner for the balance that is cancelled. (The term “forgiven” is a gross misnomer since, in fact, the mortgage balance remains lawfully collectible in full—more on that later in this article).

As of October 20, 2015, the Mortgage Debt Relief Act had not yet been extended to tax year 2015. However since President Obama approved an extension of the tax relief for the next two tax years (i.e., 2015 and 2016), this means that homeowners receiving a 1099 for mortgage debt will not be required to declare mortgage debt as taxable income on their federal income tax return. In past years, Congress has typically waited until December to extend the Act’s tax relief to homeowners (better last minute than never).

The Internal Revenue Service and state taxing authorities treat the 1099’d mortgage debt as taxable income unless an exclusion is claimed by the taxpayer on Form 982 for the tax year for which the 1099 is issued. This means that a 1099 received on even a mortgage balance of $30,000, for example, can result in significant federal and state income tax liability upwards of $5,000 or more for just a middle-income taxpayer. For higher income earners, this 1099 could result in massive tax consequences into the tens of thousands. The exclusion operates to exclude the 1099 from taxable income if the amount forgiven was “qualified principal residence indebtedness”. For current information on this and other income exclusions, see IRS Publication 4681.

This income tax exclusion for forgiven mortgage debt dates back to 2007 and Congress’s then-response to overwhelming consumer need for protection against tax liability contained in the Mortgage Foreclosure Debt Forgiveness Act. This most recent bill passing by Congress now allows for homeowners to claim the income exclusion on their 2015 and 2016 tax returns (assuming the 1099-C is issued for 2015 or 2016).

Tax year 2017 is currently without any extension of the mortgage debt income exclusion–look for that decision to be before Congress in December 2017. Other income exclusions may still be available however, for example the insolvency exclusion or the exclusion for a discharge received in bankruptcy.

This income tax “relief” for forgiven mortgage debt is not to be taken without a heaping measure of caution, however.

First, a 1099 does not actually denote that the mortgage balance forgiven and, in fact, the homeowner still owes the entire amount to the bank which can be collected upon via lawsuit and other means. Wait, back that up. The bank declares the mortgage forgiven and takes their tax benefit, the homeowner is personally responsible for the resulting income tax on the forgiven amount, but yet the homeowner can STILL be held accountable for the mortgage balance owed? Yes, actually. Practically, this means that the bank may still lawfully report the entire balance as due, owing and in default on a homeowner’s credit report, potentially ruining their credit. More significantly, perhaps, this also means that a homeowner can be sued for the forgiven balance and, if judgment is obtained, their wages garnished and bank account levied.

There are many state courts around the country—including here in Minnesota—that have declared that issuance of a Form 1099-C does not alone operate to legally extinguish a debt and, therefore, the full balance remains outstanding absent some operation of the law, such as a discharge received in a bankruptcy proceeding. These courts rely on an IRS Information Letter dated December 30, 2005, which explained: “The Internal Revenue Service does not view a Form 1099-C as an admission by the creditor that it has discharged the debt and can no longer pursue collection.” See I.R.S. Info. 2005-0207, 2005 WL 3561135 (Dec. 30, 2005). How’s that for deceptive wording?

Second, the timing of asserting the exclusion on your income tax return is tight to say the least. Assuming a homeowner timely receives the 1099-C following the end of the tax year for which it is issued, they still have time to report the income and claim the exclusion via IRS Form 982. But for homeowners who did not timely receive the 1099-C from the bank, the deadline to amend their tax return to claim the exclusion is six months from the date the return was originally due, which is usually April 15th of the following year. As an illustration, if a homeowner was in an active bankruptcy proceeding when the bank declared the mortgage forgiven on a home foreclosed prior to filing bankruptcy, the bank may have issued a 1099-C to the IRS yet simply never sent the 1099-C to the homeowner due to their being in bankruptcy at the time (or instead of bankruptcy, perhaps the 1099 was lost in the mail or the bank sent it to the wrong address). In this example, the homeowner may not find out about the 1099-C until years later when the IRS sends a collection letter for the additional income tax due on the forgiven mortgage—and all in spite of the bankruptcy. The result is that the homeowner is outside of the 6-month deadline for amending their 2013 tax returns to claim the income exclusion and is now strapped with the additional tax debt and a battle against both the bank and the Internal Revenue Service. Try unwinding that tax debacle.

For more about 1099s and the insolvency exclusion, see Received a Form 1099-C on Foreclosed Home? You May Qualify for the Mortgage Forgiveness Exclusion to Cancellation of Debt Income.

What are the Options for a Home Mortgage in Bankruptcy: Can I Get Rid of a Second Mortgage in Bankruptcy or Chapter 13?

The answer is that it depends. If you file chapter 7 bankruptcy, you cannot restructure any mortgage yet the underlying note is still discharged in chapter 7 bankruptcy. However, a discharge of the second mortgage does not mean that the mortgage itself is released and many debtors nevertheless continue to make the regular monthly payments on the discharged second mortgage to avoid foreclosure or to allow for a sale of the home. A discharge of the note merely means that the bank cannot collect against a homeowner personally after the bankruptcy (via a lawsuit or otherwise) yet the bank can still foreclose the collateral or demand payment of the unpaid balance in order for the property to transfer to a buyer. Therefore a chapter 7 discharge offers little benefit to a homeowner, particularly when the second mortgage is at least partially secured by equity in the property beyond the balance owed on the first mortgage.

However there are viable and beneficial options regarding a second home mortgage (or third mortgage or other junior lien) in chapter 13 bankruptcy. There are generally two options in chapter 13 bankruptcy regarding a second mortgage on a homestead property: 1) Lien strip an entirely unsecured second/junior mortgage, or 2) Cramdown the balance of a “short term” mortgage, which essentially bifurcates that mortgage into a secured portion which must be paid off during the life of a chapter 13 plan and an unsecured portion which is dischargeable at the end of the chapter 13 plan. Each option is further explained below.

Option #1: Chapter 13 Lien Strip when 2nd mortgage is entirely unsecured:

If the second mortgage is entirely unsecured—i.e., the balance owed on the first mortgage plus any other senior liens exceeds the value of the home so that there is no equity which secures/collateralizes the second mortgage—this junior mortgage may be stripped from the property. This process is called a “chapter 13 lien strip” and can only be obtained in chapter 13 bankruptcy. A chapter 13 lien strip typically requires that a recent appraisal be done which proves that the value of the house is less than the amount owed on the first mortgage. In Minnesota, a motion to determine value of the secured claim must be filed in the bankruptcy court shortly after the chapter 13 case is filed. The mortgagee-bank will have the opportunity to object to the lien strip, usually on the basis that the debtor’s appraisal is too low and that there is equity which at least partially secures the second mortgage so that it cannot be stripped under the law. However if no objection is filed or the bankruptcy judge finds that the value of the home is such that the second mortgage is entirely unsecured, the mortgage will be stripped from the property at the successful completion of all payments due under the chapter 13 plan.

Option #2: Chapter 13 Cramdown of ‘Short Term’ 2nd Mortgage:

If option #1 does not apply because there is some equity which at least partially secures the second mortgage, a chapter 13 debtor may still have an option to “cram down” the balance of the second mortgage. In this option, the balance of the second mortgage is effectively reduced to the amount of equity in the property which secures that mortgage. A chapter 13 cramdown can only be done if the second mortgage is “short term” under the Bankruptcy Code, i.e., the mortgage either has become due prior to filing bankruptcy or will become due during the 5-year chapter 13 plan. This option will not apply if the second mortgage does not become due until after the 5-year chapter 13 plan ends, i.e., the mortgage is not “short term”. Assuming the second mortgage is short term, section 1322(c)(2) of the Bankruptcy Code provides for the mortgage to be bifurcated into two parts: 1) a secured claim which must be paid off in full, through the chapter 13 plan in no more than five years and at a low interest rate; and 2) an unsecured claim which, like all other unsecured creditors, is typically repaid a fractional dividend of the total amount of the claim and the balance of the claim is then dischargeable at the end of the chapter 13 plan.  Depending on the amount of equity which secures the second mortgage and the potential savings on lowering the contract interest rate to perhaps 4% or 5%, a chapter 13 cramdown can be greatly advantageous and offer a vehicle to pay off a second mortgage for less than owed. This option is also particularly appealing for homeowners whose short term mortgages have already ballooned or soon will balloon and the homeowner is unable to pay off the amount due or otherwise refinance under favorable terms.

For more information about the advantages of chapter 13 bankruptcy, keep reading Chapter 13: Not Always a Gloomy Diagnosis in Bankruptcy.

Attorney Lynn Wartchow can help you determine whether Chapter 7 or Chapter 13 best fits your needs regarding a mortgage. Contact Lynn for a free consultation and more information on options available under either Chapter 7 or Chapter 13 bankruptcy.

How the 2014 Changes to Regulation Z (TILA) and Regulation X (RESPA) Impact Homeowners who are in Default on their Mortgage or in Bankruptcy

The Consumer Financial Protection Bureau (CFPB) is the federal agency that oversees and sets the standards and regulations for how home mortgages are serviced by lenders, particularly in the wake the post-2010 mortgage crisis. Amongst its many duties, the CFPB is tasked with creating and enforcing regulations on how home mortgages are serviced in the United States and, more specifically, how homeowners that are in default or in an active bankruptcy proceeding. In January 2014, the CFPB made some notable changes to Regulation Z (TILA) and Regulation X (RESPA) in an effort to provide homeowners with greater consumer protections regarding their mortgages.

For more information about foreclosure in Minnesota and options in bankruptcy, read Foreclosure in Minnesota: Know the Process, Timeline and How Bankruptcy Can Help.

As of January 10, 2014, the CFPB instituted new mandatory requirements regarding mortgages, including the following changes that apply to homeowners in bankruptcy proceedings:

  • “Dual tracking” of foreclosure actions now prohibited while a mortgage modification application is pending. Most important for many homeowners is that the recent 2014 changes now prohibit foreclosure while the homeowner has a mortgage modification application pending a response from their bank. “Dual tracking” is the practice of many banks to continue foreclosure proceedings while at the same time consider a mortgage modification application submitted by the homeowner. Understandably, this dual tracking caused enormous frustration for homeowners already struggling through the tedious and often prolonged process of obtaining a mortgage modification before the clock ticked down on a simultaneous foreclosure proceeding. Instead, mortgage servicers are now prohibited from initiating foreclosure proceedings during the first 120 days of delinquency and also must stop a foreclosure proceeding if the homeowner has submitted a “complete” application for loss mitigation.
  • Monthly mortgage statements must be provided despite the homeowner’s default or bankruptcy. Previously, many homeowners in default on their home mortgage or in an active bankruptcy proceeding experienced that their lender ceased sending the periodic mortgage statements that are relied on to track mortgage account information and make the monthly mortgage payments. With the 2014 changes, the mortgagee bank must now provide a homeowner who is 45 days or more delinquent with a detailed statement that includes, amongst other items: the date of first delinquency and a six-month account history that tracks the accrued delinquency over time, notification of risks such as foreclosure as well as loss mitigation options including mortgage modification and contact information for HUD-approved home counselors and the total amount due to bring the account current. These new rules do not apply to some fixed rate mortgages, reverse mortgages or timeshares.
  • Notice of all mortgage payment changes must be filed with the Bankruptcy Court and provided to Chapter 13 debtors. Previously, homeowners in bankruptcy cases were not always notified when their adjustable rate mortgage adjusted interest rate and, accordingly, their monthly payment also adjusted. With the 2014 changes, homeowners in Chapter 13 will receive notice from the mortgagee bank of the upcoming mortgage payment change since the bank must now file a statement with the bankruptcy court each time that the mortgage payment changes due to an adjustment in interest rate or other change in terms.
  • Force placed insurance now restricted. Previous to the 2014 changes by the CFPB, some mortgagee banks required that homeowners compensate the bank for mandatory hazard insurance that the bank obtains instead of the homeowner providing their own homeowner’s insurance. Once the bank obtained a separate insurance policy on the home, the bank would then force the homeowner to compensate the bank either by a mandatory and additional escrow into their mortgage payment and/or a charge-back to the homeowner for the bank-paid insurance. This force placed insurance often resulted in higher premiums to the homeowner, additional bank fees and increased the total arrearage owed to bring the mortgage current. The January 2014 changes now mandate that the mortgagee bank must now provide at least two notices to the homeowner requesting proof of insurance before the bank can institute the often more costly force placed insurance. Additionally when it is allowed after the requisite notice, the bank’s costs and fees associated with force placed insurance are also now restricted.
  • Banks must respond to homeowner request for account information and error reporting within 60 days. The 2014 changes to Regulations Z and X now require that mortgagee banks respond to homeowner requests for account information and alleged account errors within 60 days. Additionally, mortgagee banks must provide confirmation to the homeowner of their request within 5 days and must initiate an investigation within 30 days.

Links to more information on CFPB and consumer protection in mortgage servicing laws:

For more information on the foreclosure process in Minnesota and how Chapter 13 or Chapter 7 bankruptcy may help, contact Wartchow Law Office for a free bankruptcy consultation to understand your options.

How to Postpone the Sheriff’s Sale: Minnesota Statutory Postponement of Foreclosure Sale

In Minnesota, homeowners can apply for a postponement of the sheriff’s sale scheduled in a foreclosure process. So long as the foreclosure process is the standard “foreclosure by advertisement” (i.e., the most common Minnesota foreclosure process for residential homestead property), the sheriff’s sale is at least several weeks away, and the documents are properly completed and recorded in the correct offices, a sheriff’s sale will be automatically postponed by five months. The trade-off to gaining these extra months prior to foreclosure is that the usual six-month redemption period following foreclosure will be reduced to five weeks due to the postponement. Homeowners may wish to postpone their sheriff’s sale so that they remain record owner of the property so that they may qualify for a refinance or mortgage modification.

Under the Minnesota statute, the homeowner is referred to as the “mortgagor” and the lender is referred to as the “mortgagee”.

Be sure to follow the directions closely and watch the timeline for postponement, as the documents must be processed in a specific window of time at least 15 days prior to the sheriff’s sale date.

The general requirements for postponement of sheriff’s sale under Minnesota Statute 580.07:

  • Property must be classified as a homestead property.
  • Property must consist of one to four dwelling units.
  • Property is being foreclosed under a “foreclosure by advertisement” process having a six month redemption period under Minn. Stat. 580.23, subd 1.
  • Homeowner completes a notarized Affidavit of Postponement (see link below) and has it recorded at the county’s recorder office at least 15 days prior to the date scheduled for the sheriff’s sale. Be sure to keep a copy for the next step.
  • Homeowner files by mail or delivers in-person a copy of the recorded Affidavit of Postponement along with a copy of the Notice of Mortgage Foreclosure Sale to the county sheriff’s office at least 15 days prior to the sale date, along with the service fee. Note that the Notice of Mortgage Foreclosure Sale must be attached to the affidavit.
  • Deliver to the attorney/law firm conducting the mortgage foreclosure a copy of the recorded affidavit at the same time that the Affidavit is delivered to the sheriff’s office.

Resources for more information:

Lynn Wartchow is the founding attorney of Wartchow Law Office located in Edina, MN and represents individual consumer and business bankruptcy clients in the Minneapolis / St. Paul and greater Twin Cities metro area in Chapter 7, Chapter 13 and Chapter 11 bankruptcy proceedings filed in the Bankruptcy Court for the District of Minnesota. 

Homeowners Associations and Bankruptcy: How Does Bankruptcy Affect My Condo or Townhome and My Association Dues (HOAs)?

The prevalence of condo and townhome development in the mid-2000s throughout Minneapolis and the suburbs was hit especially hard by the decline in the real estate market, with prices sinking disproportionately on these urban homes that were often originally overpriced and over-marketed to younger consumers. Owners of condos or townhomes who file bankruptcy should be aware of the Minnesota laws that govern the association’s rights as well as be properly advised of what bankruptcy can and cannot do with regard to unpaid HOA assessments.

Under Minnesota law, a homeowner’s association has a statutory lien for any unpaid HOA assessments, which means that unpaid association dues automatically become a lien against the property much like a second mortgage would be however without the need for the HOA to record the lien with the county. Additionally, the association also has a claim against the homeowner for any unpaid HOA dues incurred prior to filing bankruptcy. With both avenues of relief available, the association has several options to collect against a defaulting homeowner, including restriction of rights to use common amenities, bringing a civil action against the homeowner and even foreclosure of the unit under Minnesota law.

While the bankruptcy of an association member will discharge their personal liability to repay the HOA assessments accrued through the file date of the bankruptcy case, the association nonetheless still retains its lien against the property. This association lien can be foreclosed just same as an unpaid second mortgage. An association lien often also includes additional amounts for unpaid late charges or interest, fines imposed upon an owner for violations of the HOA’s rules and regulations, attorney fees incurred by the association, and any other amounts charged against an owner under the association’s declaration.

In either Chapter 7 bankruptcy or Chapter 13, the rule of thumb is that a homeowner will be liable for most if not all HOA assessments in spite of their bankruptcy, particularly if the property is not foreclosed or otherwise the homeowner continues to own the property. This is because any HOAs arising after the file date of a bankruptcy case are not included in the bankruptcy, and any HOAs that arose prior to the file date of a bankruptcy case usually remain a lien against the property and therefore must be paid off in order for the owner to sell or refinance. If the property is foreclosed, the homeowner generally will owe all HOAs due through the later date of either the foreclosure (i.e., the sheriff’s sale in Minnesota) or the homeowner’s bankruptcy.

In Chapter 13, the homeowner can obtain relief with regard to HOA arrears by paying those off with interest over the course of a three to five year Chapter 13 plan.

If you are considering bankruptcy and own a condo or townhome, it’s important to understand how bankruptcy may impact your liability for HOA association dues and other assessments, your right to continue to occupy the property and use the common amenities (noting some amenities can be denied), and foreclosure. Especially under these circumstances, you should seek advice from a bankruptcy attorney who can advise you on the best way to obtain bankruptcy relief while protecting your interests with regard to your property.

Lynn Wartchow is a Minneapolis / St. Paul area bankruptcy attorney representing clients in Chapter 7 and Chapter 13 consumer bankruptcy proceedings in Minnesota since 2005. Email for a free bankruptcy consultation to understand your options in Chapter 13 or Chapter 7 bankruptcy.

Foreclosure in Minnesota: Know the Process, Timeline and How Bankruptcy Can Help

Home foreclosures in Minnesota are common and arguably are even on the rise despite an improving real estate market. In April 2012, the Star Tribune reported that while foreclosures were slightly down during the first quarter of 2012, signs still point to an 11 percent increase in Minnesotans facing foreclosure, adding that one in 312 Minnesota homeowners have received some sort of notice of foreclosure.

Home foreclosure in Minnesota happens via one of two legal proceedings: either the lender forecloses by advertisement or the lender forecloses by action. This post only discusses foreclosure by advertisement, which is the more common of the two Minnesota home foreclosure processes.

In a foreclosure by advertisement, the defaulting homeowner will typically receive one or more pre-foreclosure notices that warn of their lender’s intent to start the foreclosure process if payments are not brought current within a specified time. The time between the first default in mortgage payments and a homeowner’s receipt of the pre-foreclosure notice can be one to three months or more, depending on the lender and any efforts the homeowner may be making to do a workout with their lender. After the pre-foreclosure notice has gone out and the homeowner still has not brought their mortgage current, the lender will then serve the homeowner with a notice of sheriff’s sale. While the Minnesota laws governing service of process in a foreclosure proceeding are detailed, most homeowners are served in-person with the foreclosure papers at their home address. The Notice of Sheriff’s Sale, sometimes also called the auction notice, will provide the date, time and location of the upcoming sheriff’s sale, usually to be held six weeks after the date of service and at the county sheriff’s office. Once the sheriff’s sale has come and passed, ownership of the home transfers to the winning bidder (which is usually the lender for the first mortgage on the home) and the homeowner then has his or her redemption period to reside in the home before vacating it permanently. The length of the redemption period varies according to circumstances, but is most often six months from the date of the sheriff’s sale.

Chapter 13 bankruptcy can help a homeowner save their home from foreclosure by providing an avenue to repay the mortgage arrears over three to five years in a Chapter 13 plan. In fact, mortgage arrears is one of the most Common Reasons for Filing Chapter 13 Bankruptcy in Minnesota. If the homeowner can afford to make the monthly Chapter 13 plan payments, their mortgage may be brought current at the end of the Chapter 13 plan, in addition to the discharge of other debts allowed in bankruptcy.

Chapter 7 can stall the foreclosure process for two or more months and, like Chapter 13 bankruptcy, can also serve to discharge any deficiency owed on the second mortgage. While Chapter 7 bankruptcy will not help to resolve any mortgage arrears owed so that the homeowner can save their home, it can buy more time in the house before the homeowner must leave.

Keep reading for more information about How to Postpone a Sheriff’s Sale in Minnesota.

While Minnesota law governs the foreclosure process, the terms of a mortgage also govern a homeowner’s rights and a lender’s ability to foreclose. For more information on the foreclosure process in Minnesota and how Chapter 13 or Chapter 7 bankruptcy may help, contact Wartchow Law Office for a free bankruptcy consultation to understand your options.

Common Reasons for Filing Chapter 13 Bankruptcy

For some people, the bankruptcy code and rules may dictate that you simply do not qualify for Chapter 7, in which case the alternative is to file Chapter 13 “wage earner’s plan”. However, there are reasons why someone may actually choose to file a Chapter 13 rather than Chapter 7, even when they have the option of filing for the more common “straight discharge” Chapter 7 bankruptcy.

Possible circumstances when you must file Chapter 13 (i.e., do not qualify for Chapter 7):

  • Your household income exceeds the applicable median income for the state of Minnesota and you do not have enough other certain expenses to reduce your disposable income in order to qualify for Chapter 7. If your income is too high, you will need to file Chapter 13 instead of Chapter 7. This calculation is determined by the “Means Test”.
  • Regardless of your household’s income level, you still have disposable income every month after payment of all your monthly living expenses. In Chapter 7, you cannot have significant disposable income or your case could be dismissed or converted to Chapter 13.
  • You filed a previous Chapter 7 within the last 8 years so you do not qualify for another Chapter 7 at this time. Chapter 7 can only be filed once every 8 years. Note: a previous discharge in any chapter of bankruptcy will prevent a discharge in subsequent bankruptcy filed within 8 years, meaning that if you file a Chapter 13 within 8 years after a prior Chapter 7, the new Chapter 13 plan must propose a 100% repayment to creditors (i.e., no discharge is allowed in less than every 8 years). Other bankruptcy protections and tools, such as the automatic stay and ability to repay mortgage arrears to fend off foreclosure, are still available in a subsequent Chapter 13 filed within 8 years after a prior Chapter 7 bankruptcy.

When you may choose to file Chapter 13 bankruptcy over Chapter 7:

  • You need to repay mortgage arrears and/or default payments on your car loan in order to prevent foreclosure or repossession of the collateral. In Chapter 13 bankruptcy, you can repay home mortgage arrears over 3 to 5 years in the Chapter 13 plan.
  • You have assets which would be non-exempt in a Chapter 7 filing and would either face surrendering or paying to keep if you filed Chapter 7. In Chapter 13, you can “pay to keep” any non-exempt assets over 3 to 5 years of a Chapter 13 plan.
  • You want to see that your creditors receive some money despite the bankruptcy and even if it means they still won’t get paid in full. Most Chapter 13 bankruptcy plans provide for the proportionate repayment of unsecured creditors anywhere from pennies on the dollar to 100%.
  • You have non-dischargeable debts that you want the flexibility to repay over five years with low or no interest.

Lynn Wartchow is a Minneapolis / St. Paul area bankruptcy attorney representing clients in Chapter 7 and Chapter 13 consumer bankruptcy proceedings in Minnesota since 2005. Call for a free bankruptcy consultation to understand your options in Chapter 13 bankruptcy.

When Will I Owe a “Deficiency” after Foreclosure in Minnesota? It Depends.

Under some circumstances after foreclosure, a deficiency may still be owed on a foreclosed property. A deficiency or “deficiency judgment” is obtained by some lenders (a.k.a. “mortgagees”) after a foreclosure on real estate where the sales price of the property does not cover the balance due on the mortgage plus related any fees and costs. The amount of the deficiency is usually the difference between the total amount due on the note including expenses and costs and the amount received from the foreclosure sale (or the fair market value of the mortgaged property if the property is agricultural).

Typically under the Minnesota Anti-Deficiency Statute (Minn. Stat. 582.30), a homeowner is protected from owing a deficiency on the first mortgage on foreclosed homestead real estate. This protection only applies to certain, although common, circumstances where the property is the owner’s home and the foreclosure process was conducted as a foreclosure by advertisement. If the property is not homestead, or otherwise if the owner moves out of the property or the property is foreclosed by action, Minnesota’s statutory protection against a deficiency may not apply.

Indications that no deficiency may be owed on a foreclosed home:

  • Property is classified as a homestead property
  • The home’s value is more than what was owed on the mortgage (i.e., the home had equity)
  • Foreclosure was conducted as a “foreclosure by advertisement”
  • Mortgage in question was the first mortgage
  • Home was not abandoned before the foreclosure process was complete
  • A discharge was received in prior bankruptcy and no refinance or reaffirmation of the mortgage has occurred since

Indications that a deficiency may be owed on a foreclosed home:

  • The property was non-homestead property, i.e. rental, agricultural or commercial property
  • The amount due on the mortgage exceeds the value or sales price of the property (i.e., no equity exists in the property)
  • Mortgage in question was the second or third mortgage (i.e., any mortgage other than first priority lien)
  • Foreclosure was conducted as a “foreclosure by action”
  • Instead of foreclosure, the property was short sold, surrendered or transferred back to the lender by a deed in lieu

A discharge in Chapter 7, Chapter 13 (or Chapter 11) bankruptcy relieves a debtor from owing a deficiency on a foreclosed mortgage in most instances. In order to understand your rights and the potential liability for deficiency that you may face, you should contact an attorney to review the real estate property and foreclosure process applicable to you.

Lynn Wartchow is the founding attorney of Wartchow Law Office located in Edina, MN and represents individual consumer and business bankruptcy clients in the Minneapolis / St. Paul and greater Twin Cities metro area in Chapter 7, Chapter 13 and Chapter 11 bankruptcy proceedings filed in the Bankruptcy Court for the District of Minnesota. Wartchow Law Office also represents consumer debtors in bankruptcy proceedings filed in the Western District of Wisconsin.

Received a Form 1099-C on Foreclosed Home? You May Qualify for the Mortgage Forgiveness Exclusion to Cancellation of Debt Income.

If you receive a Form 1099-C reporting ‘debt cancellation’ income after a home foreclosure, you may qualify for the Mortgage Forgiveness exclusion. As if the distress of home foreclosure isn’t enough, homeowners may receive a Form 1099-C from their former mortgage lender reporting the deficiency owed as income to the homeowner. The income reported on the Form 1099-C is what’s referred to as “Cancellation of Debt Income” or “Discharge of Indebtedness Income”, both of which generally must be reported as taxable income on an individual’s Form 1040 federal and state tax returns. When the 1099 relates to foreclosed real estate, the amount of cancelled debt can be significant and can consequently result in a substantial increase in tax liability for that year, loss of tax refunds or even additional tax liabilities owed to the IRS and Minnesota Department of Revenue.

For a more detailed discussion on tax debt and other tax resolution issues, be sure to read Wartchow Law’s Tax Blog.

Typically, cancellation of debt is an income realization event that must be reported on one’s tax returns. The idea is that any amount of principal or interest that a person legally owes but does not have to repay is considered taxable income in the year that such debt is cancelled. As an illustration, if you owe a commercial lender $15,000 between interest and principal due on a loan but that creditor agrees to accept $5,000 and cancel the other $10,000 in satisfaction of the full amount, that creditor is required by federal law to issue an IRS Form 1099-C, which reports the $10,000 cancelled debt as taxable income to you. Depending on the circumstances, the amount reported on Form 1099 must be included as personal income unless a statutory exclusion applies. Most of the IRS’s income exclusions are conditioned upon insolvency of the taxpayer—i.e., total debts exceed total fair market value of all assets—however bankruptcy is not necessarily required to qualify under certain IRS insolvency exclusions. Even in the absence of insolvency, a homeowner may still qualify for the Mortgage Forgiveness exclusion.

The Mortgage Forgiveness exclusion is provided under the Mortgage Debt Relief Act of 2007, which allows most taxpayers to exclude 1099 income resulting from the discharge of debt on their principal residence. The key to qualifying for this exclusion is that the debt must have been incurred to buy, build or substantially improve your principal residence and the debt must have been secured by your principal residence. Most traditional mortgages on homestead properties would meet this criteria. Currently, the Mortgage Debt Relief Act only applies through 2012, after which it may be extended by additional act of Congress.

When an individual files for bankruptcy, Section 108 of the Internal Revenue Code automatically excludes any debt that was discharged in the bankruptcy from taxable income. This is why consumer debtors who receive a discharge in a Chapter 7 or Chapter 13 bankruptcy proceeding rarely receive a 1099 regarding any of the discharged debts (and if you do, you should talk to your tax preparer about your options to dispute the 1099).

Wartchow Law Office is a law firm located in Edina, Minnesota with  an exclusive practice in Chapter 7, Chapter 13 and Chapter 11 bankruptcy law,  representing individual consumer and business clients throughout the Twin Cities of Minneapolis and St. Paul, Minnesota.

For more information on The Mortgage Forgiveness Debt Relief Act and Debt Cancellation, see IRS Publication 4681 and IRS Form 982 available on the IRS website at www.irs.gov. You should always ask your tax professional for tax advice and not rely on information found online. This information is intended for entertainment purposes only and use of any information from this site or any other web site referred to is for general information only and does not represent personal tax advice either express or implied. You are encouraged to seek professional tax advice for personal income tax questions and assistance.