Appendix 4
Selected Articles
This appendix contains articles written by the attorneys of Sulaiman Law Group, Ltd. They are intended to discuss specific legal issues in more depth than the main body of this book. Atlas Consumer Law would like to thank attorneys Mohammed Badwan, Nosheen Rathore, and Mara Baltabols for their contributions to this appendix.
Chapter 7 Eligibility
By Mohammed O. Badwan, Attorney At Law
A Chapter 7 bankruptcy also known as a “straight liquidation”, liquidates a debtor’s non-exempt assets and pays back creditors the proceeds from liquidation, and the rest of the debt is forgiven. Almost all Chapter 7 filings are no asset cases; meaning no assets are liquidated and the debtor keeps all the property they owned at the time of filing. Whether or not assets are liquidated, a successful Chapter 7 filing will result in elimination of almost all of the debtor’s pre-petition liabilities (credit cards, contractual liabilities, mortgages, medical bills, etc). The bankruptcy process can be difficult and confusing. One of the first obstacles debtors must overcome is qualifying for a Chapter 7. A debtor’s Chapter 7 eligibility is highly dependent on one factor: income. The Bankruptcy Code is very complex to say the least. Congress decided to complicate matters to prevent bankruptcy abuse through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “Act”). The Act made qualifying for a Chapter 7 a confusing and daunting task. The Act implemented 11 USC §707(b)(2)(A)(i) which is also known as the “means test” to encourage debtors to reorganize their debts in a Chapter 13 rather than eliminating them in a Chapter 7. Pursuant to 11 USC §707(b)(2)(A)(i) a debtor’s Chapter 7 case may be dismissed if the presumption of abuse arises. The presumption of abuse arises if the debtor has disposable income after their necessary expenses are deducted.
The first question that needs to be addressed when determining whether a debtor is eligible for a Chapter 7 is whether they are above or below the median income for their applicable household size. For example, a household of 5 for a family in Cook County has a median income of $87,288. If a debtor within the same county and household size is under the median, then the “means test” is not applicable and there is no presumption of abuse of the bankruptcy code and they are presumably eligible. If a debtor is over the median income for the applicable household size, then there is a presumption of abuse and the debtor must overcome the presumption by passing the “means test”.
The “means test” is a Congressional invention that determines whether a debtor is presumably abusing the system. The “means test” only applies to debtors with “primarily consumer debt”. It is “supposed” to determine whether a debtor is living beyond their means. In a nutshell, if the debtor’s necessary expenses as defined by the means test are close to or outweigh their current monthly income then they pass the test. The nuisance of the “means test” is that debtor’s cannot deduct their actual expenses for most deductions. Conversely, the debtor must use IRS standard deductions to determine whether they have disposable monthly income after all their necessary expenses are deducted. However, a debtor can deduct all “contractually obligated” expenses, regardless of how high they are. For example, a $5000 mortgage can be used as a deduction whether or not the debtor wants to keep or surrender the home. Other necessary expenses are determined by IRS standards. For example, a family of 5 can only deduct $1427 for housing expenses (excludes utilities) if they rent. Keep in mind, if you own then you are “contractually obligated” to make that payment and can use the actual expense opposed to the IRS standard for the applicable household size. Once a debtor deducts all the necessary expenses from their income (average of 6 months prior to bankruptcy is used as the current income under the “means test), they will pass the “means test” if the number is around $200 or less. The “means test” was implemented to encourage some repayment to creditors if the debtor has disposable monthly income after all necessary deductions. Therefore, if a debtor has $500 left over each month, then they would have money left over each month to pay creditors in a Chapter 13.
The “means test” has caused confusion and hysteria in the bankruptcy community. Many believe that it does not reflect a debtor’s actual circumstance. The Bankruptcy Court is aware of the complex issues produced by the “means test”. It is common knowledge that the “means test” has its share of ambiguities. As a result, the Courts are having great difficulty interpreting Congress’s intent. Courts are divided on how portions of the “means test” should be interpreted. Consequently, one district may allow an expense where another does not. It has been around 5 years since the “means test” has been implemented and the issues that have spawned from the ambiguities are still far from settled. Therefore, it is of utmost importance that a debtor consults with a competent bankruptcy attorney before even considering filing a Chapter 7.
Passing the “means test” presumably qualifies a debtor for a Chapter 7. However, other major considerations still need to be addressed. As you recall, a Chapter 7 is a liquidation; meaning all non-exempt assets are subject to liquidation. So, just because a debtor qualifies for a Chapter 7 does not mean that debtor should file. For example, if a debtor has $40,000 in credit card debt and has unexempt personal property assets worth $80,000, then the assets will be liquidated. In the example, it would make more sense for a debtor to file a Chapter 13 and protect his assets.
Although income is the most important variable in qualifying for a Chapter 7, the debtor must meet some other qualifications. A debtor who has received a Chapter 7 discharge within the last 8 years does not qualify for a Chapter 7. Furthermore, a debtor who has filed and successfully completed a Chapter 13 in the last 6 years does not qualify for a Chapter 7 unless the debtor paid more than 70% of their unsecured debt in the Chapter 13. There is no debt limit for a Chapter 7. Therefore, whether your debt is $2 or $20 million, you can discharge the debt in a Chapter 7 bankruptcy.
In today’s economic climate, most debtors, whether above or below median income, do not have any assets and have considerable debt. A Chapter 7 bankruptcy assures the debtor a fresh start allowing them to proceed with their lives without the stress of creditors. Many high-income debtors assume they are not eligible for a Chapter 7 bankruptcy. Nothing can be further from truth. Although income is the most vital factor, there are numerous other considerations that need to be addressed. The Bankruptcy Code’s complexity is not to be taken lightly. The only way to determine your eligibility is to consult with a competent bankruptcy attorney.
Common Scenarios
Scenario 1
Client owns a home and has fallen back on his mortgage payments. The house is worth $350,000 and Client owes $550,000 between his first and second mortgage. Client has decided that the house is a bad investment and wants to walk away. Client is worried that the house will sell for less than it is worth at sale and the bank will go after him for the difference. Client makes about $90,000 between him and his wife and they have 2 kids. Client’s mortgage payments are $5000 a month, $6,000 if taxes and insurance are included. Client wants to file a Chapter 7 bankruptcy to ensure the bank will not come after him for the deficiency? Is he eligible?
A: The client will most likely qualify for a Chapter 7 even though his income for a family of 4 is above the median, thus triggering the “means test”. His $5,000 “contractually obligated” expense is the main qualifier in this scenario. A salary of $90,000 translates to $7500 a month before taxes are deducted. The necessary expense of $5000 eats up so much of the Client’s salary that he would not have any money left over each month to pay creditors after other necessary expenses are deducted (utilities, car payments, food, health care, transportation costs, etc). If the Client’s mortgage payment was $1200 a month, he most likely would not qualify for a Chapter 7 assuming he does not have any other mortgages on any other properties.
Scenario 2
Client owns 4 properties, 1 primary residence and 3 investment properties. The investment properties are underwater (worth less than Client owes). Client is having trouble finding renters and has maxed out his credit cards (owes $80,000). Client is married with 1 child. Client’s income is $180,000. The mortgages on the investment properties are $12,000 combined and he is not receiving rent on any of the properties. Client wants to surrender the properties to the bank but is worried they will come after him for the deficiencies. Client wants to keep his primary residence and the house is worth equivalent to what he owes. Is he eligible?
A: Once again, the answer is probably yes. For one, the debtors’ debts are primarily “non-consumer” and therefore the “means test” does not apply since most of his debt arose from investments. Even if the “means test” applied, he mostly likely would qualify. Since his “contractually obligated” expenses (all 4 mortgages) are so high, it will eat up his income in the means test leaving no money to pay back creditors in a Chapter 13.
Chapter 13 Lien-Stripping: History and Overview
By Mohammed O. Badwan, Attorney At Law
Although the 2005 amendments to the Bankruptcy Code through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) made it more difficult for debtors to qualify for Chapter 7 relief; a provision providing substantial relief for debtors with underwater properties (mortgage on property exceeds property value) remained in intact. It is still possible for homeowners to strip off any wholly unsecure liens in a Chapter 13 bankruptcy. [i] A lien is unsecure when the property’s value does not cover the value of the lien. This controversial provision resulted in legal warfare between debtors and banks. Banks relied on a bankruptcy provision that prohibits any modification of rights of holders of secured claims. [ii] Debtors relied on a provision stating that lien holders are only secured to the extent of the value of the collateral; therefore, if a lien is wholly unsecure, it is void pursuant to the clear and unambiguous language of the statute. Judges had their work cut out for them.
The main issue that had to be decided by the courts was whether a wholly unsecured junior mortgage may be stripped off pursuant to 11 U.S.C. §506(d), notwithstanding the anti-modification protection afforded holders of home mortgages in 11 U.S.C. §1322(b)(2). [iii] Section 506(a) of the Bankruptcy Code provides that “an allowed claim of a creditor secured by a lien on property in which the estate has an interest….is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property….and is an unsecured claim to the extent that the value of such creditor’s interest….is less than the amount of such allowed claim.” [iv] Subsection (d) of Section 506 then provides that “to the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” [v]
The banks relied heavily on a Supreme Court case that held when applying the two provisions, “a lien ‘strip down’ of an undersecured home mortgage lien is impermissible for claims secured by principal residences, because it modifies the total package of rights which such a claim holder bargained. A lien ‘strip down’ reduces an undersecured lien to the value of the collateral, in contrast to a lien ‘strip off’, which removes a wholly unsecured junior lien” [vi] The Nobleman court never addressed the issue of whether a lien ‘strip off’ is permissible but concluded that a lien ‘strip down’ is not permissible on a primary residence. It was now up to the courts to decide whether a lien ‘strip off’ would violate a statutory provision stating that the terms of a secured lien cannot be modified on a primary residence. The majority of courts decided in favor of homeowners and held that wholly unsecured liens may be ‘stripped off’. [vii]
Allowing the stripping off of wholly unsecure liens was a monumental victory for homeowners across the country. The decision became significant after the housing crisis resulted in the substantial decrease in home values across the country. Many homeowners found their homes to be worth substantially less than what is owed on the mortgages. However, the decision allowed the homeowners to strip off a second mortgage, assuming it was wholly unsecure (balance of first mortgage exceeds value of home), helping them regain value in their homes.
Lien stripping is only permissible in a Chapter 13 bankruptcy. A debtor that files a Chapter 7 may not strip off any non-judgment liens (mortgages) on their homes. A Chapter 13 bankruptcy is a repayment plan that typically lasts for three to five years, depending on the debtor’s annual income. The amount repaid in a Chapter 13 depends on how much disposable income a debtor has each month and the value of the debtor’s non-exempt assets. The repayment is usually anywhere between 10% to 100% of a debtor’s unsecured debt.
When a mortgage lien is stripped, the nature of the debt changes from secured to unsecured. The balance is treated is an unsecured debt just like credit cards. In most cases (depending on disposable monthly income and assets), the debtor only has to repay a portion of the balance of the once secured mortgage. For example, John Debtor owns a home that is worth $200,000. He has two mortgages on the property; a first for $210,000 and a second for $80,000. He can strip the second mortgage since the balance of the first mortgage exceeds the value of the home. So, the $80,000 second mortgage changes from secured debt to unsecured debt. The significance of the transformation is unsecured debt does not have to be repaid in its entirety in a Chapter 13 bankruptcy. Assuming John has $200 of disposable monthly income, he would repay the once secured second mortgage $12,000 (60 months x $200 in disposable monthly income) over the course of a 5-year Chapter 13 plan. Once John completes the plan, the mortgage will be officially stripped from the home.
Lien-stripping can be an extremely useful strategy for homeowners that are underwater; especially since the housing crisis continues to drive home values to the ground. Lien-stripping can benefit many homeowners who have seen the value of their homes plummet in the last couple of years. Not only can a Chapter 13 bankruptcy help the debtor strip a wholly unsecure second mortgage, but also can wipe out credit card debt with minimal repayment. With no end to the recession in sight, many homeowners should consider utilizing the Bankruptcy Code as a source for financial relief.
“Totality of Circumstances” As a Basis for Dismissal in a Chapter 7
By Mohammed Badwan, Attorney At Law
Successfully passing the means test in a Chapter 7 bankruptcy is not the only obstacle on the road to financial freedom. Although passing the means test rebuts the presumption of abuse in a Chapter 7 filing, the U.S. Trustee can still file a motion to dismiss if it believes the totality of circumstances of the debtor’s financial situation demonstrates abuse. [viii] If the Trustee succeeds, then the debtor must either convert to a Chapter 13 bankruptcy or their bankruptcy will be dismissed without the relief sought. The totality of circumstances provision was added to the Bankruptcy Code through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). [ix] Prior to BAPCPA, the U.S. Trustee could only file a motion to dismiss a Chapter 7 if the case was a substantial abuse of the bankruptcy code. The implementation of the totality of circumstances provision in the Code specifically allows the U.S. Trustee to file a motion to dismiss even if the debtor has passed the means test and rebutted the presumption of abuse. The new provision has resulted in confusion among bankruptcy practitioners and judges.
The new provision fails to expressly define the phrase, “totality of the circumstances,” forcing the courts to interpret its meaning with little guidance. Although the phrase is new to the Code, it has pre-BAPCPA roots. [x] The court in In Re Zaporski ruled that the totality of circumstances concept is a judicially created construct for determining substantial abuse under pre-BAPCPA; the case law applying that concept lays out the general scope of the abuse to be determined.” [xi] Therefore, in analyzing whether dismissal is appropriate under the totality of the circumstances provision, courts focus on the following factors: 1) whether the debtor has the ability to repay a substantial portion of his debts ; 2) whether the petition was filed because of sudden illness, calamity, disability or unemployment; 3) whether the debtor incurred cash advances and made consumer purchases far in excess of his ability to repay; 4) whether the debtor’s proposed family budget is excessive or unreasonable; and 5) whether the debtor’s schedules and statements of current income and expenses reasonably and accurately reflect the true financial condition of the debtor. [xii]
Many bankruptcy practitioners have been highly critical of the totality of the circumstances test. They believe it renders the means test a “mere surplusage”. [xiii] They argue that “to perform the means test and then perform another means test that is more to the U.S. Trustee’s liking ignores the plain language of the statute and would be a waste of judicial resources”. [xiv] The Nockerts court found the argument persuasive and ruled that a dismissal based on the totality of the circumstances, “requires proof of something more than the ability to fund a Chapter 13 plan in order to avoid rendering the means test a ‘mere surplusage’.” [xv]
Practically speaking, the totality of circumstances test becomes applicable when a debtor passes the means test but has disposable income on Schedule J. Schedule J is a list of the debtor’s actual expenses as opposed to the allowable expenses in the means test. If a debtor has disposable income, after all his reasonable and necessary expenses are deducted from his income, then that allows for a meaningful repayment to his creditors in a Chapter 13 plan. The U.S. Trustee, at its discretion, may then file a motion to dismiss the Chapter 7 petition based on totality of the circumstances. The U.S. Trustee would assert that the means test does not reflect the debtor’s actual financial circumstances and move the Court to dismiss the Chapter 7 since the totality of circumstances of the debtor’s financial circumstances (disposable income) demonstrates abuse of the bankruptcy code.
Case law on the totality of circumstances provision is still in its infancy. When determining whether a case is abusive by applying the totality of circumstances test, the court is ultimately being asked to determine whether the debtor’s expenses are reasonably necessary. “There is no bright-line rule for determining what is reasonably necessary.” [xvi] Judges are quick to point out that the “totality of circumstances” test is fact-sensitive and must be decided on a case–by-case basis. [xvii] Courts have refused to superimpose their values and substitute their judgment for the debtor when determining whether an expense is reasonably necessary. [xviii] However, courts will substitute their judgment when any one of the following additional factors are present: 1) the debtor proposes to use income for luxury goods or services; 2) the debtor proposes to commit a clearly excessive amount to non-luxury goods or services; 3) the debtor proposes to retain a clearly excessive amount of income for discretionary purposes; 4) the debtor proposes expenditures that would not be made but for a desire to avoid payments to unsecured creditors; and 5) the debtor’s proposed expenditures as a whole appear to be deliberately inflated and unreasonable. [xix]
It is evident that the application of the totality of the circumstances provision has resulted in a rather large gray area due to its subjective nature. One judge may find an expense to be reasonably necessary while another may find the expense to be unreasonable. The BAPCPA and its ambiguities have resulted in many issues that bankruptcy practitioners and judges alike are having difficulty tackling. When considering bankruptcy, it is imperative that a debtor seek competent bankruptcy counsel, to address the rather ambiguous totality of the circumstances provisions to increase the likelihood of a successful chapter 7 filing.
How to Determine Whether a Lender Has Standing to Foreclose on a Borrower’s Home
By Nosheen Rathore, Attorney At Law
In the current foreclosure crisis, it is common to see banks other than the original lender of the loan foreclosing upon borrowers. For this reason, it is important for borrowers to review the complaint and ensure that the plaintiff has standing to bring forth the suit.
To establish standing when bringing forth a foreclosure suit, a lender must have suffered an injury in fact for which a judicial decision may provide a redress or remedy. [xx]Further, standing requires that the party requesting relief (or the lender in a foreclosure context) must possess a personal claim, status, or right that is capable of being affected by the grant of such relief. [xxi] Whether the lender has standing to sue is determined from the allegations contained within the complaint. [xxii] Further, standing is a jurisdictional requirement which must be continuous throughout the foreclosure suit. [xxiii] In other words, a lender must have proper standing when it files a suit against a defendant and may not retroactively establish its standing to sue. [xxiv]
Section 1504 of The Illinois Mortgage Foreclosure Law (“IMFL”) establishes that only “the legal holder of the indebtedness, a pledgee, an agent, or the trustee under a trust deed….” may file foreclosure. [xxv] If the lender asserts a right to foreclose within its initial complaint, then the records must affirmatively show the capacity in which the lender is suing. [xxvi] The lender must provide adequate proof that it holds legal title from which no other party can recover at the time that it filed its complaint. [xxvii] Therefore, in order to verify whether a lender has proper standing, the first step is to review the allegations of the complaint and the attached mortgage and promissory note.
The most important documents to review is the promissory note which evidences the borrower’s obligation to the lender. In order to verify proper standing, a borrower must understand how a promissory note is transferred between banks. The standard promissory note in a foreclosure action is a negotiable instrument under the Illinois Uniform Commercial Code (“IUCC”) . A negotiable instrument is an unconditional promise to pay a fixed amount of money . [xxviii] The IUCC states the following in regards to enforceability of a negotiable instrument: A "person entitled to enforce" an instrument means (i) the holder of the instrument, (ii) a nonholder in possession of the instrument who has the rights of a holder, or (iii) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to Section 3‑309 or 3‑418(d).” [xxix]
The term "holder," with respect to a negotiable instrument, is defined as the person in possession if the instrument is payable to bearer [xxx] or, in the case of an instrument payable to an identified person, the identified person if that person is in possession. [xxxi] A person can become a holder when a negotiable instrument is either issued to that person, or as the result of a subsequent negotiation that occurs after issuance. [xxxii] Furthermore, when a negotiable instrument is first issued, there must also be a delivery of the instrument, meaning an initial voluntary transfer of possession. [xxxiii]
As a negotiable instrument, the subject mortgage is negotiated either by assignment or indorsement. [xxxiv] Either way, negotiation always requires a change in possession of the instrument because nobody can become the holder of a negotiable instrument without possessing the instrument either directly or through an agent. [xxxv] Ordinarily, a promissory note is transferred by negotiation, which is effected by delivery alone in the case of a bearer instrument or by indorsement plus delivery in the case of an order instrument. [xxxvi] In both instances, possession of the promissory note is a necessity of being a holder of the note. [xxxvii]
Therefore, to verify if the suing plaintiff in the foreclosure case is the proper party, a borrower must review the chain of title of the subject foreclosure suit and make sure that the plaintiff has possession of the promissory note. If a promissory note has been properly transferred, the indorsements on a promissory note will establish a chain of ownership leading from the lending bank to the foreclosing bank. However, if the plaintiff cannot show a proper chain of title or produce the original note, the court may dismiss the foreclosure suit for failure to verify that it is the proper party to bring forth the foreclosure suit.
Debt Cancellation: “What is my income tax liability post-foreclosure?"
By Nosheen Rathore, Attorney At Law
When a mortgage lender forgives a borrower’s debt through a foreclosure, it elects to discharge the remaining principal of the debt, usually because the lender considers the debt to be uncollectible. After a lender elects to forgive the debt, the borrower as a taxpayer must then determine whether the forgiven debt will become taxable income. To address this issue in the current housing crisis, Congress enacted the Mortgage Forgiveness Debt Relief Act of 2007 [xxxviii] (“MFDRA”) on December 20, 2007 for the purpose of excluding income which may be taxable as a result of debt forgiveness related to foreclosures, short sales, consent foreclosures, and loan modifications.
The concept of debt forgiveness is that the ordinary taxable income of a taxpayer includes the portion of debts which are forgiven by the lender. Section 2 of the MFDRA changes the Internal Revenue Code (“IRC”) to allow a taxpayer to exclude income from the discharge of indebtedness under Section 108 of the IRC. [xxxix] Pursuant to the new provision, gross income is no longer included as income if it is “qualified principal residence indebtedness which is discharged before January 1, 2010.” [xl]
To prevent any abuse of this provision and to ensure that it is used only for its intended purpose, Congress enacted certain qualifying guidelines. First, the provision only applies to qualified principal residence indebtedness. [xli] For purposes of debt forgiveness, principal residence shares the same definition that is used in IRC Section 121. Section 121 excludes the first $250,000 ($500,000 in the case of a joint return) in gain from the sale of a taxpayer's principal residence) from taxable income . [xlii] Therefore, the new Section 108 exclusion would not be applicable to second homes, vacation homes, or investment properties.
Second, the changes to Section 108 cap the amount of qualified principal residence indebtedness at $2,000,000.00 and $1,000,000.00 in the case of a married taxpayer filing a separate return. [xliii] Basically, what that means is that if a lender forgives the debt on the taxpayer's home mortgage, up to $2,000,000.00 of the amount forgiven will not qualify as taxable income to the taxpayer. However, any amount forgiven that exceeds the $2,000,000.00 cap will count as taxable income on that year's tax return.
The MFDRA also includes home equity debt as part of debt forgiveness. However, only home equity debt that was used to improve the residence where the residence collateralized the loan qualifies for forgiveness under the act. [xliv]Home equity debt that was used for other expenses, such as personal bills, vacations, or college tuition does not qualify to be forgiven.
Third, this exclusion from income only applies to discharges that arise directly from the declining value of the residence or the distressed financial position of the taxpayer. [xlv] The following situations are deemed to be qualifying circumstances: 1) modification of the terms of a mortgage, 2) a short payoff, or 3) foreclosure of the taxpayer’s principal residence. Although, as mentioned above, only the portion of the discharged loan that is qualified principal residence indebtedness will be excluded from taxable income. [xlvi]
For example, suppose a taxpayer lives in a principal residence with a mortgage of $300,000 and the tax payer takes out a home equity loan for $150,000. The taxpayer uses $100,000 of the home equity loan to add a sunroom to the house and uses $50,000 to start a business. Assuming that the taxpayer's financial condition caused him to go into foreclosure and lose his home, the taxpayer would be able to exclude $400,000 of the discharge of indebtedness from his income. He would still have to pay taxes on the $50,000 that he used to start a business.
Lenders who forgive debt in excess of $600.00 are required to issue a Form 1099-C. This form will reflect the amount of the forgiven debt. Further, the amount of forgiven debt to be excluded from the taxable income of the borrower must be reported on IRS Form 982 and attached to the tax return of the borrower. [xlvii]
Mortgage Escrow Accounts: “Why did my monthly mortgage payment jump so high?"
By Nosheen Rathore, Attorney At Law
In the current housing crisis, many distressed homeowners actively seek alternatives to foreclosure such as loan modifications or other repayment plans. After months of tedious paperwork and phone calls, many homeowners are shocked when their “modified” payment is higher than their regular payment. Often times, the reason behind the increase in a homeowner’s monthly payment is an escrow amount that is added to the principal and interest portion of the mortgage payment. This escrow amount can consist of past due and future projected property taxes and insurance, as well as related fees. The primary purpose of such escrow accounts is to ensure that a homeowner’s mortgage, tax, and insurance payments are made on a timely basis. [xlviii]
Although mortgage escrow accounts are usually created to protect the interests of both the homeowner and the lender, escrow arrangements can also lead to vulnerability of the interests of both parties. A lender may be compelled to expend its own funds to protect its collateral if the homeowner is not making necessary payments at the appropriate time. On the other hand, a homeowner usually has little control or knowledge of how an escrow amount is calculated. Because of the lack of a homeowner’s ability to determine a proper or improper escrow arrangement, a lender has the opportunity to require the homeowner to pay an amount that is more than necessary to cover the tax and insurance obligations on a property. A lender with thousands of customers could stand to gain substantial profits from the use of the funds gained through even small overcharges on escrow accounts.
For this particular reason, and to protect the interests of borrowers, Congress enacted the Real Estate Settlement Procedures Act (“RESPA”) [xlix] to govern the procedures to be followed in connection with mortgage escrow accounts. After a homeowner has defaulted on their loan, RESPA authorizes a loan servicer to estimate the property taxes and insurance that will be due over the following twelve months and to adjust the borrower's monthly escrow payments under the mortgage to cover the estimated expenses, subject to certain limitations. [l] More specifically, Section 10 of RESPA places limits on the amount a lender or servicer may require a homeowner to keep in his or her escrow account to cover the payments of taxes, insurance, or other disbursements. [li] This section also governs a lender's obligations with respect to providing an annual escrow account statement and notice of any shortage in the escrow account. [lii]
More specifically, Section 10 of RESPA states that a lender may charge a borrower a monthly sum equal to one-twelfth of the total annual escrow payments that the lender reasonably anticipates paying from the account. [liii] A lender may also add an amount to maintain a cushion equal to one-sixth of the estimated total amount of these annual payments from the escrow account. [liv] Because of the cushion amount, lenders are allowed to collect monthly escrow payments in excess of the amounts actually necessary to pay the tax and insurance premiums as they become due. Lenders are not permitted to collect greater than a two month cushion on the escrow amount. [lv]
Regulation X, RESPA's implementing regulation, further ensures that the correct amount of funds are placed in escrow. Regulation X authorizes a loan servicer to conduct an analysis of the amount of money that will become due into the escrow account at either: 1) the beginning of the loan, 2) at the end of each computation year, or 3) “at other times during the escrow computation year.” [lvi] This limitation is subject to an exception. RESPA and Regulation X authorize a lender to require that the borrower pay additional deposits if a deficiency or shortage exists in the escrow account. [lvii] If the lender determines that a deficiency amount exists, the lender may require the homeowner to make additional monthly deposits into the escrow account to remedy such deficiency, but must notify the homeowner of any shortage of funds. [lviii] A deficiency is the amount of a negative balance in an escrow account. [lix] A shortage is the amount by which an escrow account balance falls short of the target balance at the time of the escrow analysis. [lx] RESPA further authorizes lenders to calculate and collect certain “advance deposits in escrow accounts,” or shortage contributions, in order to minimize any negative balance that may occur in a borrower's escrow account over the applicable twelve months. [lxi]
The two primary calculations for determining whether your account has been properly escrowed are described as follows:
“Under the first [method], often referred to as the aggregate method, estimated requirements for anticipated disbursements for the next twelve months are added, the balance in the [escrow] account at the time of the analysis is subtracted ... and the result is divided by twelve to arrive at monthly escrow requirements for the coming year.... In other words, all escrow obligations ... are lumped together to determine the required monthly escrow payment from the mortgagor, even if the individual escrow items are of great disparity in the amount and become due on different dates. Under the second method, commonly known as individual item analysis, the lender creates sub-accounts within the escrow account corresponding to each expenditure that must be paid out. The lender then calculates the escrow amount needed to ensure that each escrow sub-account never falls below zero.” [lxii]
Although these particular laws have been put in place to avoid over-escrowing situations, it is important for homeowners to carefully review the escrow provisions within their mortgage, and to monitor escrow accounts if they are put into place. Violations of the above-mentioned law could lead to a homeowner’s monthly payment increasing to the point that he or she is forced into default and a subsequent foreclosure. Furthermore, if a lender violates escrow provision laws, it may be held liable for breach of contract, breach of fiduciary duty, unfair and deceptive business acts, claims for equitable and monetary relief, and any related attorney’s fees.
Condominium Associations: Do I Pay My Assessments if I’m in Foreclosure?
By Nosheen Rathore, Attorney At Law
As more and more condos are foreclosed upon, unit-owners are often unclear about whether they should continue to pay their association fees. Further, unit-owners are often times surprised to find that the condo association may have filed a separate suit to foreclose on the unpaid association fees and are moving for eviction.
When a unit-owner fails to pay the monthly assessments or fees on time, the association can automatically record a notice of lien against the condo. [lxiii] A lien against a condo for unpaid association fees will take priority over all other recorded or unrecorded liens and encumbrances, except for: (a) taxes, special assessments, and special taxes which are levied by any political subdivision or municipal corporation of Illinois, or any other state or federal taxes which by law are a lien on the interest of the unit owner prior to preexisting recorded encumbrances and (b) encumbrances on the interest of the unit owner recorded prior to the date of such failure to pay association fees or refusal which by law would be a lien thereon prior to subsequently recorded encumbrances. [lxiv] Further, any action brought to extinguish the lien of the association will include the association as a party to the suit. [lxv] Once notice of the lien is recorded, the lien may be foreclosed by an action brought by the association in the same manner as mortgage on a property may be foreclosed. [lxvi] Although foreclosing upon the lien is an option, the preferred remedy in Illinois is a forcible entry and detainer action. [lxvii] The Condominium Property Act provides that “in the event of any default by any unit owner in the performance of his obligations under this Act or under the declaration, bylaws, or the rules and regulations of the board of managers, the board of managers or its agents shall have such rights and remedies . . . including the right to maintain an action for possession against such defaulting unit owner . . . for the benefit of all the other unit owners in the manner prescribed by Article IX of the Code of Civil Procedure. [lxviii]
When an association files an action for forcible entry and detainer, it is only seeking possession of the delinquent unit. [lxix] The unit owner will still retain title and will remain obligated to continue paying his or her monthly mortgage payment. Once the association obtains a judgment for possession, the order can be placed with the sheriff to evict the unit-owner from the premises, as is done with rental property evictions. The unit-owner would have to tender the entire amount due on the lien to halt the association from taking possession of the condo.
In the event that a property is foreclosed upon by the mortgagee, the Condominium Property Act states that “the purchaser of a condominium unit at a judicial foreclosure sale, or a mortgagee who receives title to a unit by deed in lieu of foreclosure or judgment by common law strict foreclosure or otherwise takes possession pursuant to court order under the Illinois Mortgage Foreclosure Law, shall have the duty to pay the unit’s proportionate share of the common expenses for the unit assessed from and after the first day of the month after the date of the judicial foreclosure sale, delivery of the deed in lieu of foreclosure, entry of a judgment in common law strict foreclosure, or taking of possession pursuant to such court order.” [lxx] This payment confirms the extinguishment of any lien created for failure to pay association fees where the judicial foreclosure sale has been confirmed by order of the court, a deed in lieu thereof has been accepted by the lender, or a consent judgment has been entered by the court. [lxxi]
The Condominium Property Act also provides that the purchaser of a unit at a foreclosure sale must pay the association up to six months of unpaid assessments owed by the prior unit owner if several conditions are met. [lxxii] First, the condominium association must file a lawsuit to collect unpaid assessments to be entitled to this special relief. Second, the purchaser of the unit must be someone other than a mortgage holder; if a bank or other mortgage holder purchased the unit at a foreclosure sale, the obligation to pay assessments shifts to the third-party purchaser. Third, the new owner is liable to pay past assessments only to the extent that the assessments have not been paid by the previous owner. Finally, a person who buys from a mortgage holder is liable for payment of pre-foreclosure assessments only if the condominium association’s paid assessment letter and section 22.1 disclosures specified the amounts that must be paid. [lxxiii]
Because legislators have given condo associations a fair amount of power to pursue unit-owners and even subsequent purchasers for unpaid association fees, it is important to consider whether purchasing a condo with an association fee is the best option for you. Even after foreclosure proceedings are over, condo associations will still be able to recover unpaid fees based on a breach of contract. For these reasons, it is usually in a unit-owners best interest to stay current on the association fees or if in default, try to negotiate a payment plan to catch up with past due amounts.
How Do I Answer a Foreclosure Complaint in Illinois?
By Mara A. Baltabols, Attorney At Law
Many homeowners defending foreclosure are left with the inevitable choice of answering the foreclosure complaint without assistance from an attorney. Representing oneself in a legal case is otherwise known as proceeding “pro se.” A mortgage foreclosure complaint contains legal language that may be difficult for a non-attorney to understand. A foreclosure defendant that lacks a legal background may, despite his or her best efforts, not answer the complaint properly by either failing to admit or deny allegations contained in the complaint or by not properly pleading a defense or counterclaim. A defendant to foreclosure should sit down with the complaint, read each paragraph, and answer each one by stating that they either (a) admit (agree), (b) deny (disagree), (c) have insufficient information to admit or deny the allegations contained in that paragraph. If a defendant fails to answer the complaint or sufficiently deny certain allegations contained therein, the bank will likely obtain a judgment of foreclosure--either by default (for a failure to answer) or pursuant to summary judgment (for a failure to raise an issue of fact in the answer to the complaint). A borrower should only admit those paragraphs that he or she truly believes to be true, and deny those that he or she has sufficient reason to believe are not true.
To avoid improperly answering a complaint, it is important for a defendant to understand what a bank is required to plead therein. A complaint is presumed sufficient if it contains all of the statements and requests outlined in the Illinois Mortgage Foreclosure Law (“IMFL”). [lxxiv] The Illinois state legislature provided a short form in the IMFL that almost every foreclosure complaint follows. [lxxv] By using the model form, a bank’s complaint will generally be protected from attack for insufficient form. [lxxvi] Use of the model form is not required to foreclose, but almost every foreclosure complaint in Illinois follows it.
If a defendant fails to properly answer the complaint the bank will easily obtain judgment for foreclosure against them. Under the IMFL, the foreclosing bank is entitled to what is known as “summary judgment” where the allegations in the complaint are not denied via a verified answer or the borrower states that he or she has insufficient information to admit or deny the allegations contained in the complaint. [lxxvii] In other words, the bank will be entitled to a judgment of foreclosure where the borrower only admits or states that he or she has insufficient information to admit or deny the allegations in an unverified answer (an answer that is not signed under oath). [lxxviii] A verified answer is sworn to under oath via a signature and affirmation that all of the statements in the answer are true and correct.
A particular paragraph or paragraphs in the complaint that borrower should scrutinize are those stating the amounts alleged as owed. These allegations, including the “default” amounts, are normally set forth in paragraphs 3(J) and 3(K). If the borrower disputes that he or she is in default or the amount of the debt owed, the borrower may choose to deny one or both of these paragraphs. After analyzing the amounts alleged as owed in the complaint, a defendant may wish to dispute whether the bank is the true owner of the subject loan entitled to foreclose.
Whether the bank can foreclose relates to its ownership of the underlying debt or note. Ownership of the note pertains to its “standing” to bring the lawsuit. If the defendant disputes the bank’s standing, he or she may be in a position to “deny” paragraph 3(N) of the complaint, or its equivalent. Paragraph 3(N) of the short form complaint reads: “(N) Capacity in which plaintiff brings this foreclosure: plaintiff is the legal holder of the indebtedness.”
Also, if the defendant disagrees with the plaintiff’s ownership of the loan, the defendant may dispute whether the plaintiff is the “mortgagee.” Under the IMFL, “mortgagee” is defined as “the holder of the indebtedness.” If the defendant disagrees that that the plaintiff is the owner or holder of the note, it is appropriate to deny that the bank is the mortgagee. In which case, the defendant may choose to deny paragraph 3(D) of the complaint, or its equivalent, which normally reads: “(D) Name of mortgagee: plaintiff inserts its own name, or occasionally the name of the original lender.”
Otherwise, the defendant may dispute the bank’s ownership of the loan by objecting to whether the bank attaches a “true and correct” copy of the note to the complaint. [lxxix] The requirement that the bank attach a “true and correct copy” or the note, including all current signatures and endorsements (from one lender to another, as a party may endorse a check) is inferred from the language of the IMFL short form complaint. The IMFL model form is deemed to include allegations that the exhibits attached are “true and correct copies of the mortgage and note and are incorporated and made a part of the complaint of foreclosure by express reference.” [lxxx] Arguably, the copy of the note and mortgage attached to the complaint should look just like the original documents at the time foreclosure was filed.
The court will generally consider the copies attached to the complaint to be true and correct copies so long as the defendant does not object to their authenticity. [lxxxi] The defendant must present a valid dispute that the copies attached are true and correct copies in order to shift the burden back to the plaintiff to prove its case. [lxxxii] “Plaintiffs normally bear the burden of proving the elements of their claims.” [lxxxiii]
By attaching true and correct copies of the note, in particular, the bank supports that it is the holder of the indebtedness entitled to foreclose. [lxxxiv] “Under the Uniform Commercial Code, which Illinois has adopted, 810 ILCS 5/1-101 et seq. , a key requirement to being a holder is physical possession of the note secured by the mortgage.” [lxxxv]
Sometimes a plaintiff bank tries to show that it holds the note by bringing the original to court. To prove holder status via possession of the original note it must be either endorsed in blank (containing a blank space, or endorsement to “bearer”) or directly to the foreclosing party via single, or multiple specific endorsements, or a combination of both. [lxxxvi] If the copy of the note attached to the complaint does not appear to be a true and correct copy, the defendant may argue that the bank was not the owner or “holder” of the note at the time that it filed the complaint.
After answering the complaint and signing it under oath and defendant may choose to set forth defenses. It is logical to set forth defenses that relate to denials in the answer. For example, a defendant may allege a defense of “set off” for a failure to properly account for amounts paid under the mortgage or other disputes related amounts alleged as owed. Or, if a defendant objects to the bank’s standing to foreclose, or ownership of the loan, a defendant may raise a defense for “lack of standing.” These defenses need to be clearly labeled and supported by factual allegations set forth in outline or paragraph form. After pleading the defenses, a defendant should sign and file them along with the answer.
Overall, as intimidating as the legal process may seem, a pro se defendant should not shy away from denying allegations in a foreclosure complaint if he or she has reason to believe that they are not true. If a defendant has a good faith basis to plead a defense or counterclaim they should do so in conjunction with answering the complaint. Especially considering how easily the bank will obtain a judgment of foreclosure where a defendant fails to raise a dispute via his or her answer, defenses, or claims. Properly answering a complaint and raising defenses is an important part of defending against a foreclosure and presenting a dispute to the court. If a defendants fails to properly raise an issue to the court, the court may not be able hear the issue. Where there is no triable issue presented by the defendant, the bank will quickly and easily foreclose.
Does a Defendant in Foreclosure Have a Right to a Jury Trial?
By Mara A. Baltabols, Attorney At Law
Unless a foreclosure defendant pleads certain defenses or counterclaims, he or she has no right to a jury trial in Illinois state court. There are numerous advantages to making a jury demand. A jury of one’s peers could relate to the difficulty in keeping up mortgage payments in these tough economic times. A jury may feel the fear of losing a home where countless memories have taken place, compared to a judge focused on the rule of law. Even the added time commitment of a jury trial may influence the other side towards settlement. Unfortunately, a foreclosure defendant generally lacks the right to make a jury demand in Illinois courts.
In Illinois, claims in equity do not allow for a jury trial. The equity court, otherwise known as the chancery court, normally hears equitable claims. Equitable claims are generally claims where monetary damages are insufficient to make a party whole. The concept of “making a party whole” involves placing a party back to the position he or she would have been had they not entered into the transaction or experienced the injury. As such, the court may issue remedies or mandate performance in the interest of a fair and just result. Such remedies include specific performance, injunction, or as relevant to this discussion, foreclosure.
Foreclosure is a claim in equity because instead of seeking monetary damages it requests the sale of a specific property to pay off a debt. Property is considered unique, the value of which cannot be determined by a court of law. The equity court orders sale of the property for its value to the higher bidder. A court may order a monetary judgment after the sale if the property sells for less or more than the amount of the debt. Even so, the foreclosure remains a claim in equity.
By denying a right to a jury trial for equitable claims, the Illinois constitution does not violate the Seventh Amendment federal right to a jury trial. The Illinois Constitution states, “The right of trial by jury as heretofore enjoyed shall remain inviolate.” [lxxxvii] This means that the Illinois constitution does not interfere with the federal right to a jury trial, which existed before the Illinois state constitution was enacted. Illinois recognizes a right to a jury trial in criminal proceedings, under English common law, and where afforded by statute. [lxxxviii] This provision of the state constitution does not disturb a litigant’s right to a jury trial in federal court.
A foreclosure defendant interested in a jury trial must plead certain defenses and counterclaims. [lxxxix] Common law claims that the state legislature has not written into statutory law allow for a jury trial. [xc] Fraud, waiver, and estoppel all arise under common law and are defenses to foreclosure. Otherwise, if a party pleads only statutory claims, then the statute itself must allow for a jury trial. [xci] There are no traditional defenses to foreclosure arising under statute that confer a right to a jury trial. For instance, the Illinois Consumer Fraud Act [xcii] is a statutory defense to foreclosure, but it does not allow for a jury trial in state court. However, the Seventh Amendment right to a jury on statutory claims is preserved in federal court. [xciii] Therefore, the consumer wishing to bring an Illinois Consumer Fraud Act claim before a jury may prefer to sue first and file its complaint in federal court.
A party making a jury demand must do so prior to filing in its complaint or within the time for answering. [xciv] If a jury trial demand is made, the demanding party need not follow through with the jury demand. The requesting party will have to pay a jury demand fee regardless of whether the matter is ultimately tried before a jury. If a party fails to make a timely jury demand he or she will be considered to have waived the right to do so. [xcv] For the sake of discussion, claims that allow for a jury trial are generally called “legal claims.” Once a party sets forth legal claims in response to equitable claims, the court will decide how to hear each claim and in what order.
Where a case involves legal claims in addition the equitable claims, the action becomes one of multiple issues. The equity court may hear the legal claims along with the equitable claims, divided into claims at law and claims in equity. [xcvi] The court will normally sever the legal claims from the equitable claims and decide them separately. With a proper jury demand, the legal claims are issued to a jury and decided before the equitable claims. [xcvii] The court may take consider jury’s factual conclusions in deciding on the equitable claims, but is not required to do so.
It should be noted that conferring jurisdiction over an issue in equity is not necessarily excluding a trial by jury. In the absence of legal claims, an equity court has the option to issue factual questions to a jury at its discretion. The court may weigh the jury’s factual conclusions in deciding upon the equitable claims. To reiterate, even where a party brings legal claims or defenses to an equitable claim, it has no right to a jury on the equitable claims. For example, a court will continue to decide a foreclosure, but a party may assert a defense of fraud before a jury. The court has the option to take the jury’s factual conclusions on the fraud under advisement in deciding the foreclosure.
There are many factors to consider in bringing claims or defenses to a foreclosure regardless of whether a jury trial is an option. A foreclosure defendant proceeding without an attorney must research and properly plead each claim or defense. Moreover, if a foreclosure defendant has valid defenses and claims to a foreclosure it is important to assert them. A foreclosure defendant should never feel discouraged from pursuing all available claims or defenses under the law. In the event that a defendant wishes to hire an attorney, he or she should do so at the onset of a case. At the very least, so that the attorney may file a timely jury demand if one is available.
How Do I Know if I Can Rescind My Mortgage?
By Mara A. Baltabols, Attorney At Law
A Truth in Lending Act (“TILA”), [xcviii] rescission claim is based upon the original lender’s failure to provide the borrower with the required disclosures at closing of a mortgage loan refinance that secures a principal dwelling. [xcix] TILA provides a consumer with an unconditional right of rescission within three (3) business days following consummation of a residential loan refinance. TILA rescission rights apply to loans that are not used to fund the construction or purchase of property therefore it is generally required that they be a refinance.
For the applicable transactions, there is an unconditional right to rescind through midnight on the third business day following consummation of the loan. Where certain material disclosures were not provided, this three-day right to rescission never begins to tick and can extend up to three years. [c]
Due to the violations apparent on the face of the TILA disclosures documents, or lack thereof, a borrower may have a cause of action to rescind their mortgage pursuant to the Truth in Lending Act, 15 U.S.C. § 1601 et seq. (“TILA”), and Federal Reserve Board Regulation Z, 12 C.F.R. § 226 et seq. (“Regulation Z”). Even a technical violation in a material disclosure will give rise to a three-year extended right of rescission.
The material disclosure required for a refinance loan that secures a principal dwelling, are:
[T]he annual percentage rate, the method of determining the finance charge and the balance upon which a finance charge will be imposed, the amount of the finance charge, the amount to be financed, the total of payments, the number and amount of payments, [and] the due dates or periods of payments scheduled to repay the indebtedness….
15 U.S.C. § 1602(u).
A borrower may rescind for a failure to provide TILA disclosures that contain the required material information. For example, the disclosures did not provide clear payment schedule information, an understated finance charge, or an inaccurate APR. [ci] Other actionable disclosure violations include a lender’s failure to provide each person with a security interest in the home with two copies of the Notice of Right to Cancel.
The purpose of rescission is to place the parties back to the positions they held prior to the extension of the loan. A successful rescission operates to void the bank’s security interest in the borrower’s home, and allow for the recovery of statutory damages for any failure to honor rescission. To effectuate rescission, a borrower must send a notice of rescission outlining the material violations under TILA and explicitly requesting rescission of the loan. The borrower should send the notice of rescission to the current mortgage holder, servicer and the original lender, just to be safe. If the borrower is unsure of the address where to send the notices, the borrower may call the bank to request the appropriate mailing address. The borrower must send the notice of rescission within three-years of consummation of the loan or he or she will lose the right to rescind pursuant to the statute of limitations. [cii]
Despite that it is the original lender’s failure to supply accurate material disclosures, TILA allows the borrower to rescind against the assignee of the loan. A notice of rescission under TILA is effective against assignees of the loan. [ciii]
Upon receipt, the mortgage holder has twenty (20) days to comply with the request, void its security interest in the home and return any interest and finance charges paid by the borrower. To effectuate rescission the mortgage holder must release its security interest in the home and return all funds that that the borrower paid over the course of the loan, including interest and costs. At which point, the borrower must tender either loan proceeds or the property to mortgage holder. In other words borrower must be prepared to either (1) give the property to the mortgage holder, (2) obtain a loan to repay the mortgage holder the remaining principal balance of the loan (of course with better terms than the rescinded loan). If the borrower is unwilling to tender the property, and cannot obtain another loan to pay back the mortgage holder, the borrower must seek a repayment plan by settling with the mortgage holder or pursuing assistance from the courts. In the event that the mortgage holder disputes the borrower’s right to rescind or if it is unwilling to tender first, the mortgage holder is obligation to seek assistance from the courts.
Where mortgage holder will reject rescission and does not itself seek a declaratory judgment or other assistance from the courts, the borrower must take legal action to enforce rescission. If after 20 days the mortgage holder rejects, fails to honor rescission or fails to seek a rescission modification from the courts, then the borrower must file a complaint to enforce rescission. The complaint should join the mortgage broker, the original lender, and the current servicer as defendants. The complaint should allege rescission and damages against the mortgage holder for a failure to honor rescission.
TILA rescission is a powerful tool, but notable limitations are that a borrower must rescind within three-years, for material violations of TILA, and only for a refinance of a mortgage securing the borrower’s principal dwelling. Otherwise, TILA rescission is beneficial to a borrower not interested in keeping the property, because the borrower may tender the property and receive a return of all interest and other costs he or she paid over the course of the loan. The mortgage holder and other servicer is then required to cure all bad credit marks associated with the loan. Therefore, a borrower with a mortgage eligible for rescission may want to consider looking over their documents from the closing for TILA violations or have a qualified attorney consider their case for rescission.
Can A Foreclosure Court Deny A Deficiency Judgment?
By Matthew Hector, Attorney At Law
The July 2011 Illinois State Bar Association Commercial Banking, Collections, and Bankruptcy Section newsletter included an article entitled, “Taking deficiency judgments in foreclosure.” [civ] Its main premise is that the Illinois Mortgage Foreclosure Law (IMFL) does not give courts discretion to refuse to enter deficiency judgments. I disagree. While the author is correct that section 15-1508 of the IMFL states that a court “shall” enter a personal judgment for deficiency, the equitable powers of the court can still trump the command language of section 15-1508.
It is well-established that courts hearing mortgage foreclosure actions have broad discretion in approving or denying the confirmation of a mortgage foreclosure sale. [cv] The IMFL provides that a court may deny confirmation of sale if “justice was otherwise not done.” [cvi] This catch-all phrase allows the court to consider the totality of the circumstances surrounding the foreclosure action and the sheriff’s sale. More often than not, the foreclosing lender is repurchasing the property at the sheriff’s sale. The sheer volume of foreclosures and the instability of the housing market has kept many investors away from foreclosure auctions. What was once a lucrative way to acquire property is now a coin toss – it is entirely possible that the purchased property will lose equity as the market continues to deteriorate.
The declining housing market is also indicative of the artificial inflation of property values in Illinois. The housing bubble drove prices up higher than they should have been. As more loans are scrutinized, it also seems that a significant amount of mortgage fraud took place. In many instances, this mortgage fraud was used to inflate a property’s value, allowing buyers to cash out money at closing. These inflated values served as comparison values for further fraudulent appraisals, creating a perpetual motion machine designed to artificially inflate housing prices. When 49% of Chicago mortgages (not including the suburbs) are underwater, it becomes readily apparent that the market couldn’t truly support those inflated values.
These inflated values become particularly important when reviewing the case law that discusses section 15-1508. A good starting point is JP Morgan Chase Bank v. Fankhauser. [cvii]In Fankhauser, the court examines several other cases where courts refuse to confirm a sale based on the discrepancy between the amount bid at auction and the value of the debt. That number is the potential deficiency. It is also interesting that the Fankhauser court holds that a mortgagor is entitled to an evidentiary hearing as to the fairness of a judicial sale, even when that mortgagor has failed to appear in the case until after the foreclosure sale’s conclusion. [cviii] The case clearly establishes the broad, equitable powers of trial courts.
But do those powers allow trial courts to avoid the “shall” language of section 15-1508(e)? The article [cix] cites two cases that predate the IMFL to support its position that whether a deficiency issues is not a matter of equity, but one of contractual interpretation. [cx] The fact that both cases predate the IMFL, is merely an interesting footnote, at least as far as the article is concerned. [cxi] It would appear that when a promissory note allows for a deficiency against its maker, or that when a statute allows for the pursuit of a deficiency judgment, then so-called fairness does not come into play. Or does it? Section 15-1508(b) gives the court broad powers to deny confirmation of sale. [cxii] Section 15-1508(b)(iv)(2) provides that the confirmation order may include a deficiency judgment. [cxiii] This language seems to suggest that including such a judgment is not required. The article, however, soldiers on.
The article argues that even more potentially fatal to the pro-equity argument is the holding in Bank of Benton v. Cogdill, which also predates the passage of the IMFL. [cxiv] The Bank of Benton court held that, “the right to secure a deficiency judgment in any foreclosure proceeding is clear, provided that the mortgagee receives only one full satisfaction.” [cxv] Certainly, we don’t want to abrogate anyone’s rights. Instead, let’s examine the context of these opinions. In each and every one of these cases, the IMFL did not apply. None of the cases recite the standard for confirming a judicial sale. None of the cases even mentions the confirmation of the sale. Each case discusses something akin to a report of sale. Many of the issues in these deficiency judgment cases arose at what would be a modern confirmation of sale hearing. Moreover, the cases cited in the article [cxvi] were decided at times when the nation was not experiencing the utter collapse of a housing bubble that artificially inflated home values. The deficiencies mentioned in the cases do not “shock the conscience.” [cxvii]
As Fankhauser establishes, trial courts have broad, equitable powers when it comes to deciding whether to confirm a sheriff’s sale. [cxviii] This may leave many judges stuck with a Hobson’s choice. If they confirm the sale, they may be bound by the mandatory language of section 15-1508(e), utterly unable to deny a deficiency, no matter how large. If they refuse to confirm sales where the property is significantly underwater, the property may become stuck in a loop where it can never be sold. Each day that a property is in foreclosure adds to the total amount due under the note. Per diem interest accrues faster than one would imagine. Continually denying confirmation would result in an ever-increasing amount due, creating larger and larger disparities between the sale price and the loan balance. Add to that the fact that our trial courts are flooded with foreclosure matters. There is almost an incentive to confirm and get cases off the docket.
Granted, lenders could stop repurchasing the properties for less than a full credit bid. Certainly, the lender believed that the property was worth that inflated price when the loan was issued. Property values have yet to stabilize, and the added volume of foreclosures means that we may see further decline before the market rebounds. The debate really shifts to the question of, “who bears the burden of the depressed market?” This is where the court’s equitable powers can truly come into play. There is nothing in the law that prohibits courts from conditioning confirmation in such a way that maximizes fairness. If a judge conditioned confirmation of a sale upon the bank not seeking a deficiency in the foreclosure matter, then that would theoretically be within the court’s powers. That conditioned confirmation would not preclude the lender from later pursuing the borrower for his obligations under the note. If the note provides for recourse, then certainly the lender may attempt to pursue that debt in a separate lawsuit.
The current urban legend is that lenders aren’t pursuing deficiency judgments. The article [cxix] indicates something a bit different – a frustration with a system that is not granting such judgments. The truth is likely somewhere in between. Based on my reading of the law, there is no clear precedent under the IMFL that prohibits courts from refusing to grant a deficiency judgment. The standard mortgage foreclosure complaint seems to hedge as to whether the plaintiff will seek a deficiency. Either it states, “no deficiency will be sought against those who have received a Chapter 7 discharge,” or perhaps “a deficiency judgment may be requested against those who have not received a Chapter 7 discharge.” Very rarely does the complaint specifically request the remedy. Section 15-1598(e)(ii) seems to require that a deficiency be “requested in the complaint.” Language that hedges, hems and haws about whether a deficiency will ultimately be requested, and language that seeks to avoid violating the protections of the automatic bankruptcy stay does not amount to a request.
Given that there is limited IMFL case law on this point, and given that many mortgage foreclosure complaints do not specifically request a deficiency judgment, this issue is far from settled. If the court’s equitable powers allow it to deny confirmation where an unconscionable result would issue, what is preventing it from conditioning confirmation upon not issuing a deficiency judgment? As mentioned above, it would not preclude a separate lawsuit sounding in breach of contract. Foreclosure defense attorneys and consumer protection attorneys alike would do well to fight excessive deficiency judgments.
Can I Stop the Confirmation of My Home’s Sale? 735 ILCS 5/15-1508 Explained
By Matthew Hector, Attorney At Law
An Illinois foreclosure lawsuit does not end with a sheriff’s sale of the home. Although a judgment of foreclosure and sale is a judgment, it is not a final judgment. Before a foreclosure case is finalized, the sheriff’s sale must be judicially confirmed. [cxx] Sheriff’s sales are almost always confirmed. However, there are several reasons why a sale may not be confirmed. [cxxi] Most of the objections to confirmation involve the nature of the sale. [cxxii] A recent addition to the Illinois Mortgage Foreclosure Law (IMFL) creates an objection that is unrelated to the sale itself. These objections are powerful because they represent one of the last opportunities a home owner has to defend his home from foreclosure.
Denying confirmation of sale can be powerful because it can improve a home owner’s bargaining position in settlement negotiations. It may not seem like it, but attempting a loan modification is essentially a settlement negotiation. The extra time gained can be crucial. Preventing the confirmation of a sale does not vacate the judgment of foreclosure, but it does prevent the lender from enforcing that judgment. Recent changes to the IMFL have added extra protection for home owners seeking a loan modification under the Making Home Affordable (MHA) program established by the Obama administration.
Pursuant to §15-1508(d-5), if a home owner has applied for assistance under the MHA program, and the property was sold in violation of the program’s guidelines, then the sale will not be confirmed. [cxxiii] For example, a loan servicer is not allowed to file a foreclosure action until it has evaluated a home owner’s Home Affordable Mortgage Program (“HAMP”) eligibility. [cxxiv] If the home owner is eligible, then the servicer must offer a trial modification before proceeding to sale. [cxxv] It is worth noting that while HAMP is the most visible MHA program, it is not the only one that triggers §15-1508(d-5). The Home Affordable Foreclosure Alternatives program (“HAFA”) also limits when a servicer may proceed to foreclosure. [cxxvi] In order to be protected by MHA programs, the home owner must apply for them. Complacency does not trigger the protections of §15-1508(d-5). Although HAMP’s overall success has been underwhelming, it certainly cannot hurt to apply. Being denied a HAMP modification also triggers HAFA, which requires that servicers evaluate several options before proceeding to foreclosure. Even though an order denying the confirmation of sale won’t re-open the main case, a denied sale still buys valuable time.
Using §15-1508(d-5) as a basis for denying the confirmation of sale will not necessarily provide a basis for vacating the judgment of foreclosure. As an end-of-case strategy, delaying the confirmation of sale is a last-chance measure. It is very difficult to present a credible motion to vacate a judgment if it has been more than thirty days from the entry of that judgment. If the home owner has largely ignored the case up to this point, only a few fact patterns will justify the attempt. In those situations where it is possible to vacate the judgment, facts will generally exist that establish significant problems with the lender’s case.
When significant problems exist with the lender’s case, §15-1508(b) becomes the more important section. The “if justice was not done” provision of §15-1508(b) is a catch-all that includes many defenses and fairness-based arguments. Even if a party makes its first appearance at the confirmation of sale hearing, it may challenge the sale’s confirmation. [cxxvii] Although much of the case law on this subject relates to the sale price of the property, other arguments may be made to defeat the confirmation of sale. [cxxviii] Courts are to view the terms of the sale in their entirety when determining whether a sale should be confirmed. [cxxix] Illinois courts have indicated that sales price is one part of the overall terms of the sale. [cxxx] Therefore, the identity of the seller would also be part of the terms of the sale. This means that a home owner can assert the plaintiff-lender’s lack of standing to sue at the time of the confirmation of sale.
If a lender cannot demonstrate that it owns the loan associated with the property, it cannot prove that it has standing to sue. If the lender lacks standing to sue, the lender also lacks the ability to sell the house. This is because the lender must have owned the loan, and have been able to demonstrate ownership, at the time it filed the lawsuit. If a lender cannot demonstrate ownership at the time of filing, the case must be dismissed and re-filed as a new case. If a home owner can successfully challenge the lender’s standing at the confirmation of sale hearing, then the case against him must be dismissed. Since the judgment of foreclosure has already been entered at this stage in litigation, a motion challenging the confirmation of sale on these grounds should also be accompanied by a motion to vacate the judgment of foreclosure. If the lender lacked standing at the time of the sale, the lender also lacked standing at the time the case was filed.
In general, a motion to deny confirmation of sale is useful for giving the home owner more time to work out a loan modification or find a new place to live. Using §15-1508(d-5) to deny confirmation also forces lenders to complete their obligations pursuant to MHA’s guidelines. Similarly, barring a serious issue with the lender’s case, or some underhanded dealing on its part, using §15-1508(b) will only buy time. In some specific instances, it may represent a final chance to put facts in front of the judge that merit vacating the judgment of foreclosure and sale. In those instances it can be a powerful tool.
Standing, Securitization, and “Show Me the Note”
By Matthew Hector, Attorney At Law
If you spend some time researching foreclosure defense, sooner or later, the “show me the note” defense will make its appearance. It’s a perfectly valid means of defending against a foreclosure lawsuit, and is useful where even a traditional attack on a plaintiff’s standing to sue is inappropriate. Simply demanding to see the original note is good practice, even if the plaintiff bank is the home owner’s original lender. Without the original note, the plaintiff bank cannot demonstrate that it has the power to enforce the note. Does this mean that it lacks standing? If there is no evidence that the note was ever conveyed to a third party, maybe not. A lost note affidavit may provide enough evidence that a note existed to defeat the standing issue. Even in original-lender-as-plaintiff situations, demanding to view the original note makes good sense. You never know if it was negotiated to a third party.
During the real estate bubble, mortgages and their associated notes were sold and re-sold, then pooled into trusts. These trusts then sold bonds that entitled purchasers to a portion of the yield of the pooled mortgages. It turns out that many of the mortgages that were pooled were horribly underwritten – many did not even come close to conforming with the issuing bank’s lending standards. It also turns out that many lenders did not follow basic rules for buying and selling all of these mortgages and notes. Although many attorneys think of secured transactions as something that bored them to death in law school, the law of secured transactions is very much alive in modern foreclosure defense.
For purposes of this discussion, how a note is negotiated from one party to another is the key to understanding “show me the note” arguments as well as standing. As stated above, only the holder of the original note may enforce that note against its maker. The maker is the home owner who signed the note. The note is a promise to repay a specific amount of money to a specific entity at specified times. If the note is indorsed, it becomes negotiable, which means that it can be freely transferred to other parties.
For instance, Bob decides to purchase a starter home for $170,000. He has $20,000 in savings as a down payment. His local bank issues him a loan for the remaining $150,000 that Bob needs to purchase the house. To commemorate this loan, Bob signs a note and a mortgage. The note designates Bob as the maker/borrower. Bob promises to repay the $150,000 over a term of 30 years at 5% interest. His monthly payment will be $500. [cxxxi] The bank keeps the original note in a secure location. Over time, Bob makes payments. Eventually the note is paid off and the bank releases the mortgage it holds on his house. This was how things worked before securitization really took off.
Securitization made it possible for banks to sell their loans to the secondary market. This freed up capital at the bank, allowing it to make another loan to someone else. At first, there were strict guidelines regarding securitization. Over time, those guidelines were loosened. Securitization boomed. Lenders couldn’t originate loans fast enough to keep up with the demand. In order to meet that demand, many lenders loosened their lending standards. Thus began the rise of the sub-prime mortgage market. Many sub-prime loans were bundled together into the trusts that are the backbone of the mortgage-backed security market.
In a perfect scenario, National Bank, N.A. would issue the loan. It would then sell the loan to National Bank Holding, Inc. That sale would ideally be for the value of the loan and commemorated with physical documentation. Specifically, National Bank would indorse the note “Payable to National Bank Holding, Inc.” National Bank Holding, Inc. would then sell the loan to National Bank Holding II, LLC. That sale would also be documented and the note indorsed over to National Bank Holding II, LLC. At that point, National Bank Holding II, LLC would deposit the loan into a trust. Once fully funded, the trust would then sell bonds to investors seeking a stable, long-term investment.
It turns out that there were very few perfect scenarios. Mortgage-backed trusts are established via documents called Pooling and Servicing Agreements. These PSAs govern the ins and outs of the transactions that are needed to establish the trust. More often than not, the original lender would retain the servicing rights to the loan. This means that although the lender no longer owned the loan, it had the right to collect payments, assess late penalties, foreclose, etc. It turns out that the original lenders frequently retained the physical loan documents themselves. No indorsements were made, and the documents never changed hands.
Why is this a problem? If the physical note was never negotiated down the chain and into the trust, then the trust never actually held the note. It also means that the original lender, who allegedly no longer owns the loan, still has documents that make it appear as if it still owns the loan. These defective transfers are at the heart of the current mortgage foreclosure fiasco. This is also why it is vital that home owners demand to see the original note when their lender seeks to foreclose.
Even if a loan was never sold into the secondary market, the lender needs to demonstrate that it is in possession of the original note in order to enforce the note against a home owner. If a loan was sold on the secondary market, and especially if the loan was securitized, proving that possession becomes orders of magnitude more difficult. If a loan was sold from A to B and B to C and C to D, it must bear indorsements that demonstrate those transfers. If there is a gap in that chain of ownership, the current holder of the note will have a difficult time proving that it has the authority to foreclose upon the mortgage.
No matter what the facts of your foreclosure case may be, it is imperative that you always demand to see the original note. It could be the difference between losing a home and securing a loan modification or other settlement.
How Long Do I Have In My Home? Scenarios for Home Owners Facing Foreclosure
By Matthew Hector, Attorney At Law
Potential clients have lots of questions. “How long do I have in my home?” tends to be the most frequently asked. As is true with many legal questions, the answer is, “It depends.” Litigation can be a lengthy process. While some cases are similar, no two cases are the same. Many factors can affect how long resolving a foreclosure can take. This article will give some sample scenarios and timelines.
Some clients come to us before they are served with a summons. They are likely behind on their mortgage payments and may have received a demand letter from the lender’s attorneys. People at this stage are in the best possible position. Once a home owner is served with a foreclosure summons, Illinois state law gives him twenty-eight days to respond to the complaint. The first hearing date is usually thirty to forty days after the case is filed. In this situation, a borrower can remain in his home up to eighteen months before the lender acquires possession of the property. It all depends on the litigation strategy and the goals of the home owner.
If walking away from the property with dignity is the primary goal, this timeline can grow considerably shorter. Depending on the lender and its willingness to negotiate, a consent foreclosure can be processed in a matter of months. This means that an eighteen month timeline may contract down to three to six months. The ability to dictate your departure date is one of the big advantages to acting early.
If keeping the property is the primary goal, eighteen months can grow to three to five years, depending on the strategy. For example, if a loan modification is not possible due to a home owner’s income being too high, filing a Chapter 13 bankruptcy plan may take three to five years to complete. At the end of the plan, the back payments are paid off and the mortgage is current. If a loan modification is possible, a successful litigation strategy may help speed the process along. It may also buy the necessary time to compile the required documentation for the application process.
When a home owner acts at the beginning of a foreclosure case, the litigation timeline can be very long. For example, suppose that a home owner named Dave is served with a summons with a hearing date of January 2. Dave begins shopping around for an attorney but fails to find one before the first hearing date. Dave attends the hearing and asks for more time to find an attorney. Normally, the judge will grant between 21 and 28 days to do this. The case will be set for a status date shortly after that period of time expires. On the 27 th day, Dave hires an attorney. The attorney appears at the next hearing, which is set for February 7. At the February 7 hearing, Dave’s attorney asks the judge for time to file an appearance and to answer or otherwise plead in response to the bank’s complaint. The judge grants the attorney’s request. The case is set for a status hearing on March 14.
Dave’s attorney finds a defect in the lender’s complaint and files a motion to dismiss before his 28 day deadline to file lapses. At the March 14 hearing, the attorneys agree to file responsive briefs setting forth their arguments regarding Dave’s motion to dismiss. Both sides take 28 days to draft and file their responsive briefs. The motion is set for a hearing on May 16. At the May 16 hearing date, Dave’s motion is granted. Because Dave’s motion points out a defect that can be repaired, the lender is granted 28 days to amend its complaint. The case is set for a status hearing on June 20. At the June 20 status hearing, Dave’s attorney is granted 28 days to respond to the lender’s amended complaint.
At this point, the case is almost six months past the first hearing date and Dave has yet to file an answer to the lender’s complaint. Although every case is different, this is a rather typical scenario. This is a great example of why acting early is the best plan. Home owners who act early have the power of courtroom procedure on their side. Most people do not defend their foreclosures. Actively fighting against a foreclosure slows down the process and extends the amount of time a home owner has in his home. In the previous example, Dave could have up to another year in his home before having to move out.
When a foreclosure case is past judgment, it can be very difficult to defend. If a default judgment has been entered within the last 30 days, judgments are normally vacated simply by filing a motion to vacate. If the judgment is more than 30 days old, it will be more difficult to vacate. This is because a home owner must demonstrate a valid defense to the foreclosure and a valid reason why he never presented that defense. Most reasons that an average person would consider to be “valid” do not meet the requirement. For instance, hiring a bad attorney is not a valid reason. Applying for a loan modification and assuming the lawsuit could be ignored is not a valid reason. Aside from improper service of process, there are very few situations that satisfy this requirement.
As a general guideline, if a home owner waits until after a judgment is entered, he has considerably less time in his home than if he had acted when the case was filed. Once a lender has obtained a judgment of foreclosure and sale, the sale can take place as early as 30 days post-judgment. In order to proceed to sale, a notice of the sale must be published in a local newspaper for three consecutive weeks. The notice cannot begin to run more than 45 days before the sale date. If a judgment is entered on July 1, the sale will generally take place no earlier than the second week of August. After the sale, a confirmation hearing is held. Once the sale is confirmed, an order of possession can take effect in as few as 30 days from the date of confirmation. In some situations, a home owner can request more time and receive a 60 to 90 day stay on the order of possession. If a home owner waits until after a judgment is entered, he may only have 90 days left in the home.
When considering how to handle a potential or current foreclosure lawsuit, it is important to think about your primary goal. Some people don’t want to keep their homes. Some people want to keep their homes, even if that means remaining in an underwater property. Every case is different, and every client’s goals are personal choices. Regardless of the goals, understanding how a litigation strategy can change the timeframe for achieving those goals is important. Even more important is the understanding that acting early is better than acting late. Those who act early can almost dictate their move out date. Those who act late generally act too late.
Reopening A Bankruptcy Case –A Debtor’s Liability Considerations
By Matthew Hector, Attorney At Law
Why Reopen A Closed Bankruptcy Case?
Debtors may want to reopen a closed bankruptcy case to seek relief from the misconduct of their creditors. For example, if a creditor violates the bankruptcy discharge by attempting to collect a discharged debt, it would be necessary to reopen the case to pursue damages for that violation. Pursuant to 11 U.S.C. §350(b), it is possible to reopen a closed bankruptcy case to (1) administer assets, (2) accord relief to the debtor, or (3) for other cause. Although the Code does not define “other cause,” “a decision to reopen a case for “other cause” lies within the discretion of the bankruptcy court.” [cxxxii] This discretion is based on the bankruptcy court’s equitable powers, allowing “the bankruptcy judge broad discretion to weigh the equitable factors in each case.” [cxxxiii] This relief is available to debtors, the trustee, or any party in interest. [cxxxiv] Before reopening a bankruptcy case, there are some considerations that must be addressed. These considerations are going to be highly dependent on the facts of the individual case.
Undisclosed Pre-Petition Assets
It is possible for creditors to reopen a bankruptcy case to seek “recovery from a previously undisclosed asset of the debtor.” [cxxxv] In Shondel, a judgment creditor/injured party sought to reopen the debtor’s Chapter 7 case to see recovery from debtor’s insurance policy, which was not listed as an asset in her Chapter 7 petition. Although the debtor’s personal liability was not affected by reopening the case, it was proper to reopen the case to allow the creditor to pursue relief from debtor’s insurer.
The case law on the issue indicates that it is possible for creditors to pursue newly discovered assets, but the cases all speak to assets that existed prior to the debtor’s petition, not after-acquired assets. Potential assets, e.g. pre-petition causes of action, are included in this category if debtor was aware but did not properly schedule the cause of action. [cxxxvi] The Lopez court held that even once the ability to revoke the discharge had passed, reopening and allowing the administration of a previously undisclosed claim was warranted as it would provide the estate additional assets that could be distributed to the benefit of the creditors. [cxxxvii]
For undisclosed assets, the Lopez court also provides insight into how those assets would be administered. A trustee would be appointed upon reopening, and it would be allowed to evaluate whether the Action had value, then prosecute the action and settle, abandon or arrange for the debtor to prosecute the action in exchange for the estate receiving a share of the proceeds. Id. For the purposes of a debtor seeking to reopen a case for other reasons, e.g. violation of the automatic stay or discharge, motion to quit-claim real property, it is important for the bankruptcy practitioner to determine whether any undisclosed assets exist that may give rise to a claim by discharged creditors. This is doubly important when the case was previously filed by a different attorney – never assume that previous counsel’s work was 100% accurate.
Revocation of Discharge
Another consideration for a debtor seeking to reopen his case is whether it would give rise to a reason to revoke the debtor’s discharge. 11 U.S.C. §727(e) provides that the trustee, a creditor, or the U.S. Trustee may request a revocation of a Chapter 7 discharge up to 1 year after the date of discharge if the discharge was obtained through an unknown fraud of the debtor [cxxxviii], or up to one year from the date the case was closed if the debtor acquired property that is property of the estate or was entitled to acquire property and knowingly and fraudulently failed to report the property or surrender it to the trustee. [cxxxix] A Chapter 7 discharge may also be revoked up to 1 year after the case is closed if the debtor has refused to obey any lawful order of the court, or refused to testify after being granted immunity from self-incrimination. [cxl] Once the case is over a year past the date is was closed, the discharge cannot be revoked. As such, there is no opportunity for scheduled creditors to attack the discharged based on a fraudulently concealed asset.
Chapter 13 debtors seeking to reopen their case post-discharge run into a similar, but less comprehensive revocation of discharge issue. Pursuant to 11 U.S.C. §1328(e), a party in interest can, within one year of discharge, request the revocation of a discharge if the discharge was obtained via fraud and the party in interest was unaware of the fraud until after the discharge was granted. [cxli] Ultimately, for both Chapter 7 and Chapter 13 debtors, it is important to determine whether there was fraud in the underlying petition. For Chapter 7 debtors, it is also important to determine whether there were any undisclosed assets that could be described as knowingly and fraudulently withheld. If the one-year statute of limitations has run, creditors cannot bring an action to revoke the discharge or revoke confirmation of a plan. [cxlii]
Given that the grounds for revocation of discharge are so limited, it is highly unlikely that a debtor seeking to reopen his case for any of the purposes listed in §350(b) of the Code will face renewed liability to his creditors. The discharge injunction is permanent and can only be disturbed for the ground enumerated in §§727 and 1328 of the Code. [cxliii] This is further supported by the intention underlying the Code, that the honest but unfortunate debtor be afforded a fresh start. [cxliv] It would fly in the face of the equitable powers conferred by §350(b) to think that a debtor reopening his case to pursue a discharge violation would suddenly be subject to renewed claims by his creditors if the petition was accurate and complete when filed.
Post-Petition or Post-Discharge Assets
Some debtors may wonder whether reopening the case will bring assets acquired after the bankruptcy was filed, or after the discharge is granted, back into the bankruptcy estate. 11 U.S.C. §541 describes the property of the bankruptcy estate. The Code provides that an interest in property that would have been the property of the estate becomes property of the estate if it is acquired within 180 days after the case is filed. These interests include inheritances, divorce property settlement agreements, and life insurance benefits. [cxlv] It also covers any interest in property that the estate acquires after the commencement of the case. [cxlvi] This does not appear to cause a problem for a debtor seeking to reopen his case because scheduled assets not administered at the closing of the case are abandoned to the debtor. [cxlvii] The only true risk would be an asset acquired pursuant to §541(a)(5) where the debtor seeks to reopen the case post-discharge but within the 180-day look back period.
Post-discharge assets would not be reabsorbed into the case upon being reopened – this would both frustrate the fresh start provided by the discharge and significantly chill any debtor’s attempts to pursue post-discharge claims. Moreover, once the case is closed, the estate ceases to exist but for the limited of property that is not abandoned, nor administered in the case, which remains property of the estate. [cxlviii]
Conclusion
Barring a situation where a debtor has willfully or fraudulently failed to schedule pre-petition assets, and attempts to reopen the case within one year of discharge, it is extremely unlikely that the debtor risks any negative affect to his discharge. As to assets acquired post-discharge the Code indicates that those assets cannot become a part of the bankruptcy estate. Likewise, assets that were abandoned by the trustee or abandoned by operation of law, those assets revert to property of the debtor post-discharge. If the trustee failed to administer those assets, it stands to reason that they are also safe from interference when a debtor seeks to reopen his bankruptcy case. It is important, however, to fully analyze the debtor’s petition, in particular during the 180-day look back period described in 11 U.S.C. §541(a)(5) and during the 1-year statute of limitations period established for revoking a discharge. Cases where reopening the bankruptcy may be necessary should be evaluated on a case-by-case factual basis before filing the motion. In situations where reopening the case could expose the debtor to further liability, it may be wise to wait until the appropriate time bar has passed.
About The Authors
Matthew Hector is an attorney licensed to practice in the State of Illinois. He received his Bachelor of Arts with honors from the University of Alabama in 1998. He received his Juris Doctor cum laude from The John Marshall Law School in 2004 and his Master of Law with honors from The John Marshall Law School in 2007. Matthew has published extensively and maintains the Atlas Consumer Law blogs. He would like to dedicate this book to his daughter, Molly, who scribbled on an early manuscript version with crayon. Her work vastly improved the contents of this guide.
Ahmad Sulaiman is an attorney licensed to practice in the State of Illinois and is the managing partner of Atlas Consumer Law He received both his Bachelor of Arts magna cum laude and his Juris Doctor from Loyola University in Chicago, Illinois. Mr. Sulaiman founded Atlas Consumer Law based upon the core principles of Dedication, Innovation, Compassion and Excellence. These four core principles inform every action taken by the firm.
[i] 11 U.S.C. §506(d)
[ii] 11 U.S.C. §1322(b)(2)
[iii] In Re Waters, 276 B.R. 879, 880 (Bankr.N.D.Ill.2002)
[iv] Id.
[v] Id.
[vi] Nobleman v. American Savings Bank, 508 U.S. 324 (1993)
[vii] In Re Waters, 276 B.R. 879, 881 (Bankr.N.D.Ill.2002)
“Totality of Circumstances” As a Basis for Dismissal in a Chapter 7 Endnotes
[viii] 11 USC 707(b)(3)
[ix] Id.
[x] In Re Zaporski, 366 B.R. 758, 769 (Bankr.E.D.Mich.2007); In re Nockerts, 357 B.R. 497, 505 (Bankr.E.D.Wisc.2006)
[xi] In Re Zaporski, 366 B.R. 758, 769 (Bankr.E.D.Mich.2007)
[xii] In re Lorenca, 422 B.R. 665, 669 (Bankr.N.D.Ill.2010)
[xiii] In re Nockerts, 357 B.R. 497, 506 (Bankr.E.D.Wisc.2006)
[xiv] Id.
[xv] Id.
[xvi] In re Nicola, 244 B.R. 795, 797 (Bankr.N.D.Ill.2000)
[xvii] In re Lorenca, 422 B.R. 665 (Bankr.N.D.Ill.2010)
[xviii] In re Navarro, 83 B.R. 348, 355 (Bank.E.D.Pa.1988)
How to Determine Whether a Lender Has Standing to Foreclose on a Borrower’s Home Endnotes
[xx] P & S Grain, LLC v. County of Williamson, 399 Ill. App. 3d 836, 842 (5th Dist. 2010) .
[xxi] Id. at 844.
[xxii] Id.
[xxiii] Italia Foods, Inc. v. Sun Tours, Inc., 399 Ill. App. 3d 1038, 1069 (2nd Dist. 2010).
[xxiv] Id.
[xxv] See 735 ILCS 5/15-1504(a)(3)(N).
[xxvi] Bayview Loan Servicing, LLC v. Nelson, 382 Ill. App. 3d 1184, 1188 (5th Dist. 2008).
[xxvii] Ray v. Moll, 336 Ill. App. 360, 364 (4th Dist. 1949).
[xxviii] See 810 ILCS 5/3-104(a).
[xxix] See 810 ILCS 5/3-301.
[xxx] A negotiable instrument is payable to bearer if it is not indorsed (i.e. signed) to a specific entity.
[xxxi] See 810 ILCS 5/1-201.
[xxxii] See 810 ILCS 5/ 3-201, Official Comment 1.
[xxxiii] See 810 ILCS 5/3-105(a).
[xxxiv] See 810 ILCS 5/3-201, See also Lewis v. Palmer, 20 Ill. App. 3d 237, 240 (4 th Dist. 1974).
[xxxv] See 810 ILCS 5/3-201, Official Comment 1.
[xxxvi] See generally 810 ILCS 5/3-205.
[xxxvii] Id.
Debt Cancellation: “What is my income tax liability post-foreclosure?" Endnotes
[xxxviii] Pub.L. No. 110-142, 121 Stat. 1803.
[xxxix] Mortgage Forgiveness Debt Relief Act of 2007 §2(a).
[xl] Id.
[xli] Id.
[xlii] Section 2(b) amended subsection (h)(1) of I.R.C. §108. I.R.C. §121(a) to define property as “principal residence” if “during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating [two] years or more.” Mortgage Forgiveness Debt Relief Act of 2007 §2(b).
[xliii] Section 2(b) amended subsection (h)(2) of I.R.C. §108 to define “qualified principal residence indebtedness” as “acquisition indebtedness” under I.R.C. §163(h)(3)(B), which “(I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and (II) is secured by such residence” and also includes “indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of [ I.R.C. §163(h)(3)(B)(i)]...but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.” Mortgage Forgiveness Debt Relief Act of 2007 §2(b).
[xliv] I.R.C. §163(h)(3)(B)(i)(I) (2008).
[xlv] Section 2(b) amended subsection (h)(3) of I.R.C. §108: exception for certain discharges not related to taxpayer's financial condition.--Subsection (a)(1)(E) [of I.R.C. §108] shall not apply to the discharge of a loan if the discharge is on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer. Mortgage Forgiveness Debt Relief Act of 2007 §2(b).
[xlvi] Mortgage Forgiveness Debt Relief Act of 2007 §2(b) amended subsection (h)(4) of I.R.C. §108.
[xlvii] http://www.irs.gov/newsroom/article/0,,id=174034,00.html
Mortgage Escrow Accounts: “Why did my monthly mortgage jump so high?" Endnotes
[xlviii] GMAC Mortg. Corp. of Pa v. Stapleton, 236 Ill. App. 3d 486, 489 (1st Dist. 1992).
[xlix] See 12 U.S.C. §§ 2601- 2617.
[l] See id. § 2609(a)(1)-(2).
[li] See 12 U.S.C. § 2609(a).
[lii] See 12 U.S.C. § 2609(b).
[liii] See 12 U.S.C. § 2609(2).
[liv] Id.
[lv] Id.
[lvi] See 24 C.F.R. Sect. 3500.17 (f)(1)(H).
[lvii] Id., see also 12 U.S.C. § 2609(a)(2).
[lviii] See 12 U.S.C. § 2609(a)(2), (b).
[lix] See 24 C.F.R. Sect. 3500.17.
[lx] Id.
[lxi] In re Rodriguez, 391 B.R. 723, 727-28 (Bankr.D.N.J.2008) .
[lxii] Aitken v. Fleet Mortgage Corp., 1992 U.S. Dist. LEXIS 1687, at 5, n. 1.
Condominium Associations: Do I Pay My Assessments if I’m in Foreclosure? Endnotes
[lxiii] See 765 ILCS 605/9(g)(1).
[lxiv] Id.
[lxv] Id.
[lxvi] See 765 ILCS 605/9(h).
[lxvii] See 765 ILCS 605/9.2.
[lxviii] See 765 ILCS 605/9.2(a).
[lxix] Id.
[lxx] See 765 ILCS 605/9(g)(3).
[lxxi] Id.
[lxxii] See 765 ILCS 605/9(g)(4).
[lxxiii] See 765 ILCS 605/22.1
How Do I Answer a Foreclosure Complaint in Illinois? Endnotes
[lxxiv] See 735 ILCS 5/15-1501, et seq. See also Mortgage Electronic Registration Systems, Inc. v. Barnes, 406 Ill.App.3d 1, 6-7 (1st Dist. 2010).
[lxxv] 735 ILCS 5/15-1504(a).
[lxxvi] 735 ILCS 5/15-1504(a), 5/15-1105(a). See Land of Lincoln Savings & Loan v. Michigan Avenue National Bank of Chicago, 103 Ill.App.3d 1095, 1099 (3d Dist. 1982).
[lxxvii] 735 ILCS 5/15-1506(a)(1).
[lxxviii] See First Federal Savings & Loan Association of Ottawa v. Chapman, 116 Ill. App. 3d 950, 953-54 (3d Dist. 1983) (finding that an answer to a verified foreclosure complaint should itself be signed under oath or supported by affidavit).
[lxxix] 735 ILCS 5/15-1504(a)(2).
[lxxx] 735 ILCS 5/15-1504(c)(2).
[lxxxi] See U.S. Bank National Ass’n v. Sauer, 392 Ill. App. 3d 942, 946 (2d Dist. 2009) (stating that it is defendant’s burden to prove lack of standing).
[lxxxii] See id.
[lxxxiii] Cogswell v. Citifinancial Mortgage Company, Inc., 624 F.3d 395, 401 (7th Cir. 2010), citing TAS Distrib. Co. v. Cummins Engine Co., 491 F.3d 625, 633 (7th Cir.2007); Midland Hotel Corp. v. Reuben H. Donnelley Corp., 118 Ill. 2d 306, 315-16 (1987) ; Dyduch v. Crystal Green Corp., 221 Ill. App. 3d 474, 477-78 (2d Dist. 1991) .
[lxxxiv] Cogswell, 624 F.3d at 402 (“Generally speaking, only a mortgagee can foreclose on property, and a mortgagee must [] be ‘the holder of an indebtedness ... secured by a mortgage.’”).
[lxxxv] Id. citing 810 ILCS 5/1-201(b)(21)(A).
[lxxxvi] 810 ILCS 5/1-201(b)(21)(A) (defining a holder as “the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession.”).
Does a Defendant in Foreclosure Have a Right to a Jury Trial? Endnotes
[lxxxvii] Ill. Const.1970, art. I, § 13.
[lxxxviii] Ill. Const. 1970, art. VI, § 9. Martin v. Heinold Commodities, Inc., 163 Ill. 2d 33, 71 (1994).
[lxxxix] “A plaintiff desirous of a trial by jury must file a demand therefor with the clerk at the time the action is commenced. A defendant desirous of a trial by jury must file a demand therefor not later than the filing of his or her answer. Otherwise, the party waives a jury. If an action is filed seeking equitable relief and the court thereafter determines that one or more of the parties is or are entitled to a trial by jury, the plaintiff, within 3 days from the entry of such order by the court, or the defendant, within 6 days from the entry of such order by the court, may file his or her demand for trial by jury with the clerk of the court. If the plaintiff files a jury demand and thereafter waives a jury, any defendant and, in the case of multiple defendants, if the defendant who filed a jury demand thereafter waives a jury, any other defendant shall be granted a jury trial upon demand therefor made promptly after being advised of the waiver and upon payment of the proper fees, if any, to the clerk.” 735 ILCS 5/2-1105(a).
[xc] Fisher v. Burgiel, 382 Ill. 42, 54-55 (1943); Martin, supra at n. 2.
[xci] Id.
[xcii] 815 ILCS 505/1 et seq.
[xciii] See Martin, supra at n. 2.
[xciv] Id.
[xcv] See id.
[xcvi] Once it is determined which claims are at law or chancery, Illinois Supreme Court Rule 135(b) provides that when a party pleads actions at law and actions at equity in a single complaint, the pleading party may separate the claims into distinct counts of “separate action at law” and “separate action at chancery.” Il. Sup. Ct. R. 135(b).
[xcvii] If a single pleading contains both actions in equity and actions at law, Supreme Court Rule 232(a) requires the court to decide if the actions at law and equity are severable and, if so, whether they should be tried separately and in what order. Il. Sup. Ct. R. 232.
How Do I Know if I Can Rescind My Mortgage? Endnotes
[xcviii] 15 U.S.C. §1601 et seq.
[xcix] See 15 U.S.C. § 1635 and 12 C.F.R. § 226.23.
[c] 15 U.S.C. § 1635(f); 12 C.F.R. §§226.15(a)(3), 226.23(a)(3).
[ci] See 15 U.S.C. §1602(u) and 12 C.F.R. § 226.18(g).
15 U.S.C. §1635(f).
[ciii] Schmit v. Bank Uninted FSC, 2009 WL 320490 at *3 (N.D.Ill. Feb. 6, 2009) (“Assignees…may not ‘hide behind the assignment’; timely notice to the original creditor rescinds the transaction in its entirety.”) quoting Hubbard v. Ameriquest Mortgage Co., 2008 WL 4449888 (N.D.Ill. Sept. 30, 2008).
Can A Foreclosure Court Deny A Deficiency Judgment? Endnotes
[civ] Available at http://www.isba.org/sections/commercial/newsletter/2011/07/takingdeficiencyjudgmentsinforeclos (last visited August 12, 2011).
[cv] See JP Morgan Chase Bank v. Fankhauser, 383 Ill. App. 3d 254 (2nd Dist 2008).
[cvi] 735 ILCS 5/15-1508(b)(iv).
[cvii] See fn2.
[cviii] Fankhauser, 383 Ill. App. 3d at 265.
[cix] See fn1.
[cx] See Eiger v. Hunt, 282 Ill. App. 399 (1st Dist. 1935)(holding that the right to a deficiency judgment does not rest on equity principles, but on the legal obligations of the note’s maker); see also Farmer City State Bank v. Champaign National Bank, 138 Ill. App. 3d 847 (4th Dist. 1985)(following Eiger v. Hunt).
[cxi] See fn1.
[cxii] See735 ILCS 5/15-1508(b).
[cxiii] 735 ILCS 5/15-1508(b)(iv)(2).
[cxiv] Bank of Benton v. Cogdill, 118 Ill. App. 3d 280 (5th Dist. 1983).
[cxv] Id.at 289.
[cxvi] See fn1.
[cxvii] Fankhauser, 383 Ill. App. 3d at 264.
[cxviii] See fn5. See also Citicorp Savings of Illinois v. First Chicago Trust Company of Illinois, 269 Ill. App. 3d. 293, 300 (1st Dist. 1995)(holding that “a court is justified in refusing to approve a judicial sale if unfairness is shown which is prejudicial to an interested party”).
[cxix] See fn1.
Can I Stop the Confirmation of My Home’s Sale? 735 ILCS 5/15-1508 Explained Endnotes
[cxx] 735 ICLS 5/15-1508.
[cxxi] 735 ILCS 5/15-1508(b).
[cxxii] A sale will not be confirmed if it was not properly noticed, if the terms of the sale were unconscionable, if the sale was conducted fraudulently, or if justice was not done. 735 ILCS 5/15-1508(b)((i)-(iv).
[cxxiii] 735 ILCS 5/15-1508(d-5).
[cxxiv] See Homeowner Frequently Asked Questions, Home Affordable Modification Program (HAMP), “What if I am facing foreclosure?,” available at http://www.makinghomeaffordable.gov/faqs/homeowner-faqs/Pages/default.aspx (last visited February 20, 2011).
[cxxv] Id.
[cxxvi] See Homeowner Frequently Asked Questions, Home Affordable Foreclosure Alternatives (HAFA), “How can I be considered for HAFA?,” available at http://www.makinghomeaffordable.gov/faqs/homeowner-faqs/Pages/default.aspx (last visited February 20, 2011).
[cxxvii] See JP Morgan Chase Bank v. Fankhauser, 383 Ill. App. 3d 254, 265-66 (2nd Dist. 2008)(holding that an interested party’s failure to defend a case did not preclude it from challenging confirmation of sale).
[cxxviii] See generally Commercial Credit Loans, Inc. v. Espinoza, 293 Ill. App. 3d 915, 927-30 (1st Dist. 1997).
[cxxix] Id.
[cxxx] Id.
Standing, Securitization, and “Show Me The Note” Endnotes
[cxxxi] This may not be an accurate number based on loan value and APR, but this is an example, not an amortization exercise.
Reopening A Bankruptcy Case –A Debtor’s Liability Considerations Endnotes
[cxxxii] In Re: Shondel, 950 F. 2d 1301, 1304 (7th Cir. 1991).
[cxxxiii] Id.
[cxxxiv] Fed. R. Bankr. P. 5010.
[cxxxv] Id.
[cxxxvi] See In re Lopez, 283 B.R. 22 (9th Cir. BAP 2002)(debtor was allowed to reopen her case to schedule a non-scheduled pre-petition sexual harassment claim as it provided a benefit to the creditors); In re Upshur, 317 B.R. 446 (Bankr. Ct. N.D. GA 2004)(pre-petition EEOC claim was grounds to reopen case and add to Schedule B as it provided a benefit to the creditors).
[cxxxvii] In re Lopez, 283 B.R. at 28.
[cxxxviii] 11 U.S.C. §727(d)(1).
[cxxxix] 11 U.S.C. §727(d)(2).
[cxl] 11 U.S.C. §727(d)(3).
[cxli] 11 U.S.C. §1328(e)(1)-(2).
[cxlii] In re Berry, 190 B.R. 486, 490-91 (Bankr. Ct. S.D. GA 1995).
[cxliii] 11 U.S.C. §524.
[cxliv] Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 367 (2007).
[cxlv] 11 U.S.C. §541(a)(5)(A)-(C).
[cxlvi] 11 U.S.C. §541(a)(7).
[cxlvii] 11 U.S.C. §554(c).
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