Wondering if any of my bankrputcy attorney friends out there care to chime in on the defeat of the cram down?
In terms of timing (for both commercial and consumer), they key is when your foreclosure sale date is set. Under all circumstances, a debtor must file before the foreclosure sale date as once title passes, there is nothing to save in a bankruptcy. If the sale is done and title has passed, debtors can still consider bankruptcy, but (in most states) the property is gone so they can only address the deficiency obligation.
As for bankruptcy strategies, in the commercial context, I always counsel clients that it is a last resort because of the costs and uncertainties. I would not consider filing a Chapter 11 unless I received a minimum of a $40,000 retainer. Chapter 11 can take over your life as everything you do is subject to approval by the bankruptcy court which means from a lawyer's perspective, its very labor intensive.
I believe a proposal which would require banks to write down principal obligations would almost be draconian and would only further the current banking crisis, not help it. I think you can get to a similar place by allowing homeowners only to pay the fair market value of the property in a bankruptcy case with any deficiencies paid pennies on the $ through a Chapter 13 Plan. Also, bankruptcy already has cramdown/stripping mechanisms to deal with 2nd mortgages which is what the real problem is for many homeowners who went out and got home equity lines (and then spent the money) at a time when the values were inflated. Many can survive and keep their homes if they can get rid of 2nd mortgages (especially at pennies on the $ on the seconds).
The DAs were really looking forward to the cramdowns as they receive an additional fee for each strip off of a second mortgage and each cramdown of a first if permitted. In the Southern District of Florida, the DAs routinely receive an additional 5K fee for each strip off or cram down. If a debtor had 2 properties and 4 mortgages (a typical debtor coming out of the boom with a home and a bad investment) the DA could make 4K for the routine Chapter 13 fee and then an additional 20K for the strip offs and cram downs. The DA is paid off the top as an administrative expense while the creditors wait for payment. Most Bks tank before the fee is paid so creditors would receive nothing. Even if the lien revives in the event of BK dismissal or conversion, the creditor may have a lien but they will be extremely prejudiced by the passage of time (further depreciation) and no money. ( I was actually considering switching back to debtor BK work if the cramdown passed as the average fee would be 15-20K per case instead of the $1,300 fee I get now for the long FC process.
Glad the cram down provision died in the Senate. In my opinion, it would have resulted in mortgages getting significantly modified and would have resulted in loss to investors including working people that have retirement plans tied up in mortgage backed securities. Procedurally flawed as well b/c Debtor attys (DAs) could have simply filed a motion and served what they think or thought to be the creditor . The “notice” to creditors could have been lost in a mailbox that receives thousands of pieces of mail a day and the creditor would not even get the motion until after the hearing and cramdown,. Many DAs don’t know who to serve. For instance, if Deutsche Bank is the plaintiff in a FC case, who does the DA serve? Deutsche Bank or the loan servicer and who would be the correct loan sevricer at the time of the motion? The holders of the mortgages change servicers quite frequently and it is difficult for us on the creditors side to keep our eye on the ball, virtually servicers quite frequently and it is difficult for us on the creditors side to keep our eye on the ball, virtually impossible for DAs. Also, how would the DA prove up the value of the property? Would they just make an allegation in the motion and perhaps win by default due to the flawed “notice”? Would they use the tax appraiser’s value? That is how DAs are stripping off second mortgages now. The provision as approved by the House put the burden of proving up value on the creditor who may or may not get notice and who may or may not want to spend more good money on an appraisal and appraiser’s testimony. Even if the creditor gets timely and good notice, …If the loan is already upside down and the borrower is not paying and not likely to pay (a very small percentage of debtors actually make all plan payments and cure delinquencies), why would the creditor want to throw more good money after bad? The other issue is that the BK Judges would have the power to modify loans contrary to the provisions of many PSAs. Back again to the loss to investors and retirement accounts and possible lawsuits for violations of the PSA. Would have perhaps forced the creditors to spend that good money in an attempt to mitigate the breach of the PSA and at least have that as a defense to the lawsuits for breach of the PSAs,
I think the cramdown would have also encouraged many people to file BK just to get the mortgage modified. So many people used their property as ATM machines in the last cycle. Why not use the BK Code to keep the cash they cashed out at the refi and then pay back only what the property may be worth now. Good deal for debtors. Bad deal for banks. I can only see that the banks would hemorrhage more money. More banks and servicers would go under and banks would not have the interest that they earn to lend out again. Don’t see where nay money would come form to make new loans.
Too much Government interference is ridiculous, especially in the financial sector. Finance and especially real estate finance should be left alone to run their usual 10-11 year cycles. Too much interference will not really help those that need it. It could even hurt the poor bastards that actually pay back what they borrowed. It will result in more little cottage industries who will benefit off of misery in the short term. No artificial or government imposed restructure can eliminate human greed. It will always exist. Just let things run their course. If a person or business made a bad investment, let them move on, file BK and start over. Don’t prolong the inevitable.