New Jersey Lawyer & Attorney : Stark & Stark Law Firm : New Jersey Law Blog

The State of New Jersey recently (on January 17, 2010) passed the New Jersey Foreclosure Fairness Act (the “Act”) which will effect how foreclosures cases are handled in the State of New Jersey.  The Act becomes effective February 16, 2010, however, certain notice requirements become effective January 26, 2010 as noted below.

RESIDENTIAL UNITS WITH TENANTS
A person who takes title to a residential property containing tenants by way of a sheriff’s sale or deed in lieu of foreclosure, must provide notice no later than ten (10) business days after the sale, to any tenants of the property informing them that ownership has changed hands and that the tenants are not required to vacate the premises. 

This notice must be served by the new owner on the tenants by regular and certified mail, must be in both English and Spanish, must contain contact information to whom future rent is due and include a basic explanation of the tenant’s rights under the “Anti-Eviction Act”.  There is a particular form of notice required that the Department of Community Affairs will make  available on its website in a printable English and Spanish format that may be used.  (see www.state.nj.us/dca/ search Foreclosure Fairness Act)

The notice must also be posted prominently on the front door of each tenant’s unit. If the property contains ten (10) or more units, the new owner must post the notice in a common area of each residential building or structure on the property.

A similar notice with some additional information is also required if a summons and complaint or initial communication by a foreclosing creditor who seeks the tenant to vacate prior to the transfer of the property.

There must be no communication meant to persuade the tenant to vacate the premises except by way of a bona fide monetary offer, which must be in a made in a specific manner, and from which the tenant would have five (5) business days from receipt of the offer to accept and vacate or reject the offer.  Acceptance must be in writing.  No person or person’s agent may (1) make any misrepresentations of the rights of the tenant under the “Anti-Eviction Act” in order to induce the tenant to vacate the property; (2) state actions the owner may take against the tenant or imply the tenant is obligated to accept the offer; or, (3) any other form of harassment, such as failure to maintain the premises or rent increase in violation of municipal rent control or rent increase in violation of the Anti-Eviction Act or any other State, Federal or Municipal ordinance.

Any violation of the notice requirements or treatment of the tenants may result in triple damages or damages in the amount of $2,000.00 per violation plus attorney’s fees and costs.  Further civil or criminal actions may also be commenced against the creditor who violates this Act.

NOTICE REQUIREMENTS EFFECTIVE JANUARY 27, 2010
This Act requires that creditors serving foreclosures summons and complaints on residential property must within ten (10) days of service of the summons and complaint, notify the municipal clerk where the property is located. This will also affect any foreclosures filed  30 days before  February 16, 2010 which must also be reported to the respective municipal clerks.  The creditor must also notify the municipality if the owner of a residential property vacates or abandons a property on which a foreclosure action has been initiated. There is also a requirement to specify in the Foreclosure Complaint and notify the municipal Clerk with specified Act defined details if the property being foreclosed is an “Affordable Housing” unit. This notice must also be supplied to the municipal clerk within 10 days of the summons and complaint’s service.

After such notice if such property is found to be a nuisance or in violation of any applicable State or local code, the municipality must notify the creditor, whose responsibility it will be to correct the nuisance or violation. If the municipality expends public funds to abate a nuisance or correct a violation the municipality shall have the same recourse against the creditor as it would have against the “title owner”.

FORECLOSURE REPORTING REQUIREMENTS
Any creditor that initiates a mortgage foreclosure action in the Superior Court of New Jersey must report to the Department of Banking and Insurance, on a quarterly basis and in a specific format (organized by municipality), information about the number of mortgage foreclosures initiated by the creditor.

FORBEARANCE PERIOD FOR HIGH RISK MORTGAGE FORCLOSURES
If a foreclosure action is filed subject to the Fair Foreclosure Act, on a “high risk” mortgage loan, must grant the borrower a six (6) month forbearance upon request of the borrower to permit the borrower  to pursue a work out, loan modification or refinance. 

A “high risk loan” includes those loans that are interest only with a future reset rate; has a reset mortgage interest rate that increases the interest rate; contains payment option plan or “pick a payment” plan; contains a negative amortization schedule; is a subprime loan; contains an enforceable prepayment penalty; or, is a high cost home loan as defined by the New Jersey Home Ownership Security Act A subprime loan would include a consumer transaction secured by the consumer’s principal dwelling if it carries a rate of interest that exceeds the average prime offer rate as of the date the interest is set by 1.5 or more percentage points for loans secured by a first lien or 3.5 percentage points for loans secured by a subordinate lien. .

During this six (6) month period, the interest rate on the subject mortgage can not increase and the creditor may take no further action to pursue foreclosure. Notice of the forbearance right must be served with the summons and complaint.  If the borrow requests such a forbearance, it shall begin upon receipt of the borrower’s request. 

The forbearance notice must be include whether the loan is eligible to receive forbearance, that the borrower has the right to request forbearance no later than thirty (30) days after receipt of the summons and complaint; contact information as to where to send the request and that upon receipt of the request, the creditor shall inform the court to place a six (6) month stay on the foreclosure action. Once the forbearance period begins the borrower and creditor must participate in the foreclosure mediation process.

Should the borrower vacate the property anytime during the forbearance period, the forbearance period shall end. The forbearance right will only be effective until February 16, 2012 at which time this right shall expire.

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Stark & Stark Bankruptcy & Creditor’s Rights Group Chair, Timothy P. Duggan, authored the January 18, 2010 New Jersey Law Journal article, Bankruptcy Do’s & Don’ts for Personal Injury Attorneys: Ease your pain with a useful road map for the system.

The article discusses the recent increase in consumer bankruptcy filings and how a bankruptcy filing can impact a personal injury lawsuit.  Mr. Duggan offers several “Do’s & Don’ts” in order to assist personal injury lawyers through the United States Bankruptcy Code after their clients have been forced to file for bankruptcy.

You can read the full article online here. (PDF)

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Timothy P. Duggan, Chair of Stark & Stark’s Bankruptcy & Creditor’s Rights Group, was quoted in the September 1, 2009 FinancialPlanning.com article, Staying Alive. The article discusses the challenges financial advisors have faced for years when economic troubles being. While filing for bankruptcy looks bad for anyone, when a financial advisor files for bankruptcy, the repercussions could cost them their future, and their future business. However, in today’s economic climate, it is important for financial planners to understand how filing for bankruptcy could affect their job, from a legal and financial standpoint.

Mr. Duggan states, “Advisors should find counsel as soon as they begin to consider bankruptcy as an option. All too often, in an effort to keep their business afloat, small business owners deplete resources that could otherwise be protected in a bankruptcy case.”

You can read the full article online here.

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Collect Post-Petition Assessments from Chapter 13 Trustee in a Converted Chapter 7 Case

Bankruptcy filings around the country are up, due to among other things, the decline in the real estate market.  Previously, debtors used the equity in their home to fund a Chapter 13 bankruptcy plan and pay back condominium, homeowners, and cooperative associations (“Associations”).  Now, many debtors no longer have any equity in their homes. As such, this is leading some Chapter 13 cases to be converted to Chapter 7 liquidation cases. 
 

For Associations, such a scenario often means that the debtor stops paying their post-petition assessments.  But what happens to all the money that the debtor paid the Chapter 13 Trustee during the  bankruptcy? Does this money get distributed to creditors, the debtor or does the Chapter 13 Trustee keep it?  And importantly, can the Associations get any of those funds back?

 

Opportunity to Recoup Post-Petition Assessments
During the life of a Chapter 13 case, the Chapter 13 Trustee has a duty to hold onto all plan payments made by the debtor.  Upon conversion to a Chapter 7 case, the Chapter 13 Trustee is required to account for these funds and notice creditors that these funds will be returned to the debtor. When this occurs, Associations have one last chance to get some or all of this money back, rather than letting the debtor get a windfall.
 

Questions for Associations to Ask Bankruptcy Counsel
It is imperative that the Associations take quick action and file opposition to the Chapter 13 trustee’s notice so it can possibly recoup these funds. Sometimes there may be a few thousand dollars held by the Chapter 13 Trustee. The Associations should talk with their bankruptcy attorney immediately.  Following are some questions to ask:

1. How much is owed post-petition?  It is advisable for the Association to provide its attorney an account history for the post-petition fees due and owing.  For instance, if it will cost $500 to file an objection and make an appearance, but there is only $100 held by the Chapter 13 Trustee for a $200 post-petition claim, it may not be worth pursuing.                      
2. Is there a consent order providing for an administrative claim?  There may be a consent order with the debtor providing for an administrative claim.  Bankruptcy Code §1326(a), specifically provides that the Chapter 13 Trustee is to pay all allowed administrative claims by such a consent order. 
3.  Will an objection automatically mean allowance of the administrative claim?  The short answer is no.  The Associations still needs to prove the validity of the post-petition claim.  The debtor may assert a defense to the claim.  As such, sometimes the Associations may wish to negotiate with the debtor to avoid unnecessary litigation expenses.

These and many other issues should be addressed by your bankruptcy attorney as soon as possible.  Although the bankruptcy process is complex, thoughtful and sound legal advice throughout the bankruptcy case can help address many thorny issues that Associations regularly face as a creditor in a bankruptcy proceeding and, hopefully, not leave money on the table.

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Timothy P. Duggan, Shareholder and Chair of Stark & Stark's Bankruptcy & Creditor's Rights group, authored the article, Credit Card Reform - What Does It Mean?, for the July 2009 edition of Mercer Business Magazine.

The article discusses the Credit Card Accountability, Responsibility and Disclosure Act which was signed by President Barack Obama in May of 2009. The Act mandates specific reforms to the credit card industry in an attempt to curb the abuse by certain credit card companies while at the same time allowing financial institutions the ability to price credit against risk. You can read the full article online here. (PDF)

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On May 18, 2009, the United States Bankruptcy Court for the District of New Jersey issued a General Order with respect to the New Jersey Judiciary Foreclosure Mediation Program.  This Order clarifies that participation in the Foreclosure Mediation Program, where the homeowners have filed for Bankruptcy, does not violate the automatic stay.  Furthermore, a mortgagee does not have to obtain relief from the automatic stay to participate in the Foreclosure Mediation Program.

In addition, this Order makes it clear that in Chapter 13 cases, the debtor is obligated to continue to make regular monthly mortgage payments as well as required payments to the Chapter 13 trustee during the time the mediation process is pending.

This Order further makes clear that if the automatic stay was in place during participation in the program, it remains in place.  If the mortgagee wishes to continue with any foreclosure proceeding, relief from stay must be granted by the Bankruptcy Court.

Finally, this Order directs that any resolution or settlement, including any modification to the mortgage, must be approved by the Bankruptcy Court.  If any settlement impacts a provision of a Chapter 13 Plan, a modified plan must be filed.

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Timothy P. Duggan, Shareholder in Stark & Stark's Bankruptcy & Creditor's Rights group, was  quoted in the March 29, 2009 Asbury Park Press article, Already owed thousands, Kara Homes contractors now told to pay back what they already got.

Mr. Duggan discusses the effects the Kara Homes bankruptcy is still having on contractors throughout New Jersey over two years after the company initially filed for bankruptcy. Contractors who were paid by Kara Homes within 90-days of the bankruptcy filing are now being told they have to pay back any money they received from the builder. You can read the full article here. (PDF)

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With the downturn in the economy, many New Jersey residents are strapped for cash. A possible reprieve for some people is to file for bankruptcy protection. In the past, many unit owners with equity in their units would simply file for Chapter 13 bankruptcy protection.  Chapter 13 protection would allow the debtor to pay their secured debt in-full and their unsecured debt pro rata through a three to five year bankruptcy plan, while keeping current their monthly obligations.  For condominium, homeowners, and co-operative associations (“Associations”), a successful Chapter 13 proceeding would lead to payment in-full, overtime of their pre-petition secured condominium lien, a pro rata payment of any unsecured claim and being kept current with the Association’s monthly assessments.  

Many Debtors Now Filing for Chapter 7 Bankruptcy Protection
However, now many units are “underwater” - meaning that the value of the home is less than the mortgages and liens on the property.  Instead of filing for Chapter 13 protection and attempting to re-pay debts overtime, many debtors are beginning to file for a Chapter 7 bankruptcy liquidation.  In some cases, Chapter 7 debtors have simply ceased paying any post-petition monthly assessments.  When this happens, Associations are left asking:

• Who’s liable for the post-petition assessments?
• Will we be paid all secured pre-petition assessments?
• How does the debtor’s discharge effect the Association?
• Can we proceed with foreclosure efforts?

   
Following is a brief overview on the Associations’ rights and remedies when a unit owner files for Chapter 7 bankruptcy protection.

The Chapter 7 Discharge
When a debtor files for Chapter 7 bankruptcy protection, they are seeking a discharge of all pre-petition obligations. Generally, the Chapter 7 discharge releases a debtor from personal liability for pre-petition debts and prevents the creditors from pursuit of those debts against the individual debtor. For Associations, this means that it cannot pursue the individual debtor for the any of its pre-petition claims.  Associations can, however, pursue claims secured by collateral, such as Association lien claims. Valid Association liens pass through bankruptcy unaffected, while unsecured pre-petition Association claims are discharged and only paid pro rata if the Trustee finds assets to sell.

Unit Is Property of the Estate at Beginning of Chapter 7 Proceeding
Like a Chapter 13 bankruptcy proceeding, all of the debtor’s property, including interest in the unit, is placed into the bankruptcy estate (the “Estate”). Bankruptcy Code Section 541 defines property (“Property”) very broadly as all legal and equitable interests of the debtor. Included as Property of the Estate is the unit. Acts against the Property of the Estate are prohibited by Section 362 of the Bankruptcy Code (the “Automatic Stay”) and sanctionable.  For Associations, just like in a Chapter 13 bankruptcy proceeding, this means all actions, including collection efforts, such as filing lien claims, foreclosure, seeking judgment and/or wage executions, must cease until otherwise allowed by the court.

Chapter 7 Trustee Determines Whether to Abandon or Sell the Unit 
Overseeing this Estate, in a Chapter 7 Bankruptcy, is a Chapter 7 trustee (the “Trustee”).  It is the Trustee’s job to liquidate the non-exempt Property of the Estate for the benefit of creditors, including the Association.  However, in this economy, many units have little or no equity because either the value of the unit fell or the debtors leveraged all the equity.

To determine if equity exists, the Trustee will perform an equity analysis of the unit. Generally, the Trustee takes the value of the unit and subtracts all mortgages, liens, exemptions and costs of sale.  As a rule of thumb, if there is less than $10,000 in equity remaining after the equity analysis, then the Trustee will abandon the unit.  If there is equity in the unit, the Trustee can sell it to pay secured creditors in-full and make a pro rata distribution to unsecured creditors.

More often, the Trustee will abandon the unit because little or no equity exists. When abandonment occurs, the unit is removed from the Estate and placed back in control of the debtor.  Any mortgages or liens, such as an Association lien, that were valid prior to the bankruptcy filing remain intact.  By abandoning the unit, the protections of the Bankruptcy Code cease and the unit may be pursued by the Association.

Mere Ownership in Unit Obligates Debtor to Pay Post-Petition Assessments
A statutory exception to discharge is the debtor’s obligations to pay post-petition assessments.  So long as the debtor has a mere ownership interest in the unit, the debtor is liable for post-petition assessments. The debtor’s liability was clarified by statute in October 2005 when Congress amended Bankruptcy Code Section 523(a)(16):  

(a)     A discharge under section 727,...does not discharge an individual debt for any debt -

(16)     for a fee or assessment that becomes due and payable after the order for relief to a membership association with respect to the debtor's interest in a unit that has condominium ownership, in a share of a cooperative corporation, or in a homeowners association, for as long as the debtor or the trustee has a legal, equitable or possessory ownership interest in such unit, such corporation or lot.
 

(See 11 USC 523(a)(16), Emph added).

Prior to the 2005 amendments, post-petition assessments due to an association were non-dischargeable, so long as the debtor physically occupied the unit or rented the unit. See prior 11 USC § 523(a)(16), pursuant to the Bankruptcy Reform Act of 1994.  See also, Matter of Mattera, 203 B.R. 565, 572 (Bankr.D.N.J. 1997) (chapter 13 debtor’s non-occupancy of an association unit permitted her to discharge post-petition obligations due to the association). The 2005 amendments eliminated these two provisions entirely and added language that mere ownership creates the non-dischargeability of the post-petition assessments.
 

Association’s Rights to Enforce its Obligations
Until the unit is either sold or abandoned, it remains under the protections of the Automatic Stay.  Bankruptcy Courts in New Jersey will permit an Association relief from the Automatic Stay to pursue its interest in the unit, only (i.e lien claim and or foreclosure), if the debtor has not paid approximately three months of post-petition assessments. 

From a strategic and cost standpoint, the Association must make the decision to either expend money and file a motion for relief from the Automatic Stay or wait for the Trustee to abandon the unit.  Although the motion will provide certainty and allow the Association to pursue the unit, the costs may be prohibitive and may not be collectible within the foreclosure action.  Further, Trustees rarely abandon the unit within 90 days of the filing.  Often, the Trustee must confirm the reasonableness of the value of the unit through an appraisal.  This could take six months or more.  With all these factors, it is vital to have effective communications between the Association’s bankruptcy attorney and the Trustee.  These communications can provide the Association information that needs to make the best decision to enforce its rights. 
 

With the increase in Chapter 7 filings, Associations must not only be vigilant to protect their interests, but also strategic in how to protect themselves. Although the bankruptcy process is complex, thoughtful and sound legal advice at the beginning of a bankruptcy case can help address many thorny issues that Associations regularly face as a creditor in a bankruptcy proceeding.  

For more information on an Association’s rights in bankruptcy, please contact Thomas Onder at Stark & Stark in the Creditor’ Rights Group at (609) 219-7458 or tonder@Stark-Stark.com.

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Timothy P. Duggan, Shareholder in Stark & Stark's Bankruptcy & Creditor's Rights group authored the article Stub Rent Revisited: No entitlement to immediate payment for the January 12, 2009 edition of the New Jersey Law Journal.

Mr. Duggan discusses the fact that the recent increase in retail bankruptcies has caused the bankruptcy courts and litigants to revisit a variety of legal issues, including the debtor’s obligation to pay post-bankruptcy rent while it decides which leases to assume or reject. You can read the full article online here.

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This installment of the New Jersey Legal Update is an interview with Bari Gambacorta, Shareholder in Stark & Stark's Bankruptcy & Creditor's Rights group, Allyson Cofran, member of Stark & Stark's Bankruptcy & Creditor's Rights group, and Kevin Wolfe, of the State of New Jersey's Civil Practice Division. The podcast is a discussion of the New Jersey Foreclosure Mediation Program which went into effect Monday January 5, 2009 in order to assist homeowner's throughout New Jersey who are facing foreclosure delinquencies.

The State of New Jersey has released the list of CDR (Complimentary Dispute Resolution) point persons, who will be creating mediation calendars and coordinating the foreclosure mediation program in county courthouses. You can access the list here. (PDF)

You can download the full interview here. (15.5 MB)

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