Banks Settle Mortgage Fraud Allegations with U.S.

You may have seen articles in the news about the latest round of settlements between the large banks and the United States.  It is not yet known how the new settlement will affect mortgage foreclosures on the ground.  It appears, though, that all FNMA and FMAC mortgages are exempt, and these constitute 92% of all mortgages. It is likewise unclear how the settlement will affect the normal defenses to foreclosures based on fraudulent documents. We'll advise you here once we see how the settlement affects local foreclosure cases in Florida.

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Liability for Association Fees After Bankruptcy

I am frequently asked about liability of homeowners for condo and homeowner association fees, where the homeowner has surrendered their property in their bankruptcy, but the bank has not yet foreclosed for one reason or another. The answer is provided by 11 U.S.C. 523(a)(16), which provides that:

(a) A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from 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 a lot 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 such lot, but nothing in this paragraph shall except from discharge the debt of a debtor for a membership association fee or assessment for a period arising before entry of the order for relief in a pending or subsequent bankruptcy case;

Short answer: for as long as the homeowner is on the deed, that homeowner is responsible for fees and assessments arising after the bankruptcy. All pre-bankruptcy fees or assessments are discharged as provided by in each bankruptcy chapter.

Fla Supreme Court finds for Debtors in Mortgage / Wildcard Case

In Osbourne v. Dumoulin, __ Fla. ___ (February 3, 2011), the Florida Supreme Court held that debtors in bankruptcy who indicate an intent to surrender their homestead property do not "claim or receive" the benefit of the constitutional homestead exemption, and therefore, will generally be eligible to receive the statutory personal property exemption.  The Court found this result even where the debtor has no immediate plans to move out of the home. The issue was framed by the Court as follows:

Whether for the purpose of the statutory personal property exemption in section 222.25(4), a debtor in bankruptcy receives the benefits of Florida's article X, section 4, constitutional homestead exemption where the debtor owns homestead property but does not claim the homestead exemption in bankruptcy and the trustee's administration of the property is not otherwise impeded by the existence of the homestead exemption.

The Court answered: No.

However, the Court allowed that the "claim or receive" analysis was a factual one, and that cases must be decided on a case-by-case basis:

As several courts have explained, each case must be decided on its own facts because the debtor in bankruptcy may still receive the homestead examption's protections despite failing to assert the homestead exemption. In re Bennett, 395 B.R. at 790 ("A debtor who does not claim the Homestead Exemption may still receive its benefits in certain limited circumstances that can only be determined on a case-by-case basis, after a fact-intensive inquiry.").

By way of an example, the opinion cites In re Hernandez, 21 Fla. L. Weekly B299, B300 (Bankr. S.D. Fla. Apr. 10, 2008), for the proposition that a married debtor filing alone whose home remained exempt from forced sale pursuant to the homestead protection because his nonfiling spouse retained protected homestead status nevertheless received the benefit of the constitutional protection, and could not claim the statutory personal property exemption (the "wildcard").

The holding makes clear that if the trustee's ability to administer the property is not impeded or obstructed by the homestead exemption, the debtor may claim the additional $4,000 statutory personal property exemption:

[W]here a debtor in bankruptcy elects not to claim the article X, section 4, homestead exemption and the trustee's administration of the bankruptcy estate is not otherwise obstructed by the existence of the homestead exemption, the debtor does not receive the benefits of the homestead exemption and may claim the section 222.25(4) personal property exemption of $4000.

Finally, the fact that a debtor is eligible for homestead protection, or that any equity in the homestead may be subsumed by a mortgage does not affect the analysis of the trustee's ability to administer the estate:

[W]hether a debtor in bankruptcy could claim the homestead exemption, previously received the benefits of the homestead exemption, or may receive such protection after discharge from bankruptcy does not constitute receiving the benefits of the article X homestead exemption within the meaning of the personal property exemption.

Therefore, my evaluation is that this decision is favorable to debtors. If a debtor in an underwater mortgage declares an intent to surrender their homestead on their bankruptcy petition, and claims the $4,000 (or $8,000 for couples) additional wildcard exemption, the burden would seem to be on the objecting trustee to prove that factual circumstances exist that would "obstruct" the trustee's ability to administer the homestead property, even if there is no practical reason for the trustee to administer it (such as because it is fully secured).

Update 4-26-2011: Trustees are responding to this ruling by taking steps to force debtors to either move out or give back the wildcard exemption. For example, some trustees are requiring debtors who remain in their homes to pay rent to the estate, or turn over the keys to the property. At least one trustee that I am personally aware of has hired a real estate broker to try to short sell these properties.

You can download the full opinion here.

Florida’s Most Under-Utilized Bankruptcy Exemption: Section 222.11

Case Study: During the six months prior to filing chapter 7 bankruptcy, Husband and Wife each deposit their wages into separate bank accounts created for that purpose. During the six-month period, while saving their wages, the family lives off other savings. There is at least one dependent. Result: At the time of filing, HIS saved wages are 100% exempt.  Her saved wages are 75% exempt. 

To put it into dollar terms, say he earns $100,000 in annual salary and she earns $45,000. In the six months before filing, he could save as much as $35,000 in his wage account (after taxes). She might save $15,750 in her wage account. Upon filing bankruptcy, the entire $35,000 of his wages is exempt, and $11,812.50 of her wages are exempt. I.e., they keep $46,812.50 and give up $3,937.50.

Here’s how it works. Florida Statute § 222.11 provides the more or less well-known “head of family” exemption in sections 222.11(2)(a) or (b), which exempts the entirety of the six months of wages.  The wages must be “traceable” (hence the desirability for a separate wage account to make tracing easier).  The head of family must provide at least 50.1% (more than half) of the support of a dependent.

Note that the dependent does NOT need to live with the head of family.

Less well-known is the provision of § 222.11(c), which allows that the “[d]isposable earnings of a person other than a head of family” are exempt up to the limits of the Consumer Credit Protection Act, which allows garnishment of a maximum of 25% of the person’s wages. Therefore, a non head of family’s wages are 75%, exempt. Thus, the second earner’s wages are substantially exemptible just as are the head of the family’s.

With intelligent planning prior to filing, a two-earner family can protect a substantial amount of wage income.  By living off non-exempt savings or other non-exempt funds, and saving their wages, the couple can legally exempt a large portion of their pre-bankruptcy earnings at the time of filing.

Note finally that the § 222.11(2)(c) exemption is available even where there are no dependents, such as for a person who lives alone.

As always, this information should not be construed as legal advice, because every individual case is different. You should consult your bankruptcy attorney for specific application of exemptions to your case.