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It's just another kick in the teeth. After losing homes in foreclosure a few years ago, borrowers may be getting another big surprise soon as mortgage lenders are now gearing up to file lawsuits against homeowners for the balance of the mortgage.

A Washington Post article this past weekend highlighted the rise in so-called mortgage "deficiency" court actions.

Many homeowners who were foreclosed upon don't know it, but most still owe money to the mortgage lender.

A foreclosure on a home works like this:

1. The mortgage lender declares a "default" (breach of the contract) after payments are missed and "accelerate the mortgage" so that the WHOLE mortgage now becomes due and payable. (This is why a mortgage payment is often returned to the homeowner after several missed payments - the whole loan is due. One payment will not pay it off. The lender sends it back to avoid a legal defense from the homeowner that by accepting the payment the lender was reinstituting the loan.)
2. The foreclosure auction is advertised in the newspaper for a specific date and time. In "non-judicial foreclosure" states -- which is the case for DC, Maryland and Virginia -- there is no actual court involvement in the process. (In Maryland, a foreclosure case is "docketed" in the county court, but there is no actual suit where the lender has to prove his right to foreclose.)
3. At the auction, investors can, and sometimes bid, but usually it's the mortgage lender itself that bids a part - but only a part -- of its loan. For example, on a house with a $400,000 loan outstanding, and worth only $300,000, the lender may bid only $250,000 of its loan to win the auction. The balance of the loan - $150,000 in this example - is what is known in legal terminology as the "deficiency." The lender can re-sell the house at a profit, but that is solely the lender's to keep.

Most of the states in the US, including MD, VA and DC permit the mortgage lender to sue the borrower to get a judgment from a court for that deficiency.

And once the lender has a judgment, it can proceed to forcibly enforce that judgment through a variety of means it chooses including seizing the borrower's bank accounts, placing a lien on the borrower's property and/or requiring an employer to deduct from the borrower's paycheck and send it to the judgment creditor (known as garnishment). In this area, the judgment creditor is permitted to take up to 25% of the debtor's take-home pay.

It's a worrisome state of affairs, for borrowers who thought they were out of the woods after the foreclosure and after years of no communication from the bank.

During the past few years second mortgage lenders had been pretty aggressive and could almost be counted on to pursue borrowers after a foreclosure (since in most foreclosures it's conducted by the first mortgage holder and leaves the second mortgage holder with nothing).

But, until recently, the first mortgage holders had NOT been pursuing borrowers. Most of us lawyers who specialize in debt and foreclosure issues assumed they would NEVER sue for deficiencies. It may not turn out that way. In Maryland, according to the article, in 2006 there were deficiency lawsuits involving 19 homes that resulted in a total of $432,115 in judgments. Last year, in 2012, there were similar lawsuit involving 120 properties demanding $13.6 million.

So, how do you know if you owe? And what steps can you take to protect yourself? We'll discuss that in the next blog post here.

But if you're in a hurry, call our law office for an appointment. We specialize in legal representation of individuals and small business with financial distress issues in DC, Virginia and Maryland.

Written by: Robert DeMarco
– Lowes to Buy Over 60 Store Locations
Orchard Supply Hardware Stores Corporation [“Orchard”], a neighborhood hardware and supply store with locations in California and Oregon, has filed for chapter 11 bankruptcy protection.  The San Jose based company said that Lowe’s Companies, Inc. [“Lowes”], will acquire the majority of its assets for $205 million in cash, plus the assumption of payables owed to nearly all of Orchard’s supplier partners. The chapter 11 bankruptcy petition was filed in order to facilitate the sale and restructure its balance sheet.  Orchard filed the bankruptcy case in the United States Bankruptcy Court for the District of Delaware; Bankruptcy Case No. 13-11565-CSS.  During the fiscal period immediately preceding the commencement of the bankruptcy case, Orchard generated revenue of $657 million.
The asset purchase agreement [“Agreement”] between Orchard and Lowe’s constitutes the initial stalking horse bid under the terms of a proposed Section 363 sale.  Under the terms of the Agreement, Lowe’s will acquire at least 60 of Orchard’s 91 stores. Orchard expects the sale process to be concluded in approximately 90 days, pending receipt of the necessary approvals from regulators and the Bankruptcy Court.  Orchard plans on liquidating any stores not acquired by the successful bidder.
Orchard, under the terms of the Agreement, will operate as a separate, standalone business, retaining its brand, management team and associates.  Robert A. Niblock, Chairman, President and CEO of Lowe’s, said in a June 17, 2013, press release, “Orchard’s neighborhood stores are a natural complement to Lowe’s strengths in big-box retail, offering smaller-format hardware and garden stores catering to the needs of local customers. Strategically, the acquisition will provide us with immediate access to Orchard’s high density, prime locations in attractive markets in California, where Lowe’s is currently underpenetrated, and will enable us to participate more fully in California’s economic recovery.
“Overall, Orchard’s business model offers great potential but it has been burdened with a high level of debt. With the debt addressed through the Chapter 11 process and appropriate support from Lowe’s, we believe that Orchard will be positioned for profitable growth as a standalone business within our portfolio,” added Mr. Niblock.
DATED:  June 21, 2013

Can a bankruptcy trustee search my house?  I don’t get that question every day, but it comes up.  The answer is yes, but it almost never happens.  The follow-up question, “do they need a search warrant?”  The answer is usually no.  Most people assume that you have to have a search warrant to search someone’s home.  However, the Fourth Amendment warrant requirement is much less stringent than most people assume.
The Fourth Amendment only applies to government actions.  A private citizen is not required to get a search warrant.  However, if a private citizen randomly searches your home that is a trespass, but more on that later.  A private citizen is only required to get a search warrant, if the government knew of and acquiesced to the search and was the search for a private purpose or a governmental purpose.
A chapter 7 trustee is a private party charged with overseeing the bankruptcy estate.  The chapter 7 trustee is not an employee of the government; and therefore, is not a government agent.  The fact that the chapter 7 trustee works closely with the government – the US Trustee’s Office – does not change this fact.  Additionally, and this where trespass comes into play, the chapter 7 trustee is the legal owner of the bankruptcy estate.  That means that the chapter 7 trustee can arguably enter a debtor’s residence to look for property of the estate without committing trespass, because the trustee is actually asserting their legally recognized ownership interest.
Another important angle is that bankruptcy is voluntary.  A debtor voluntarily submits themselves to the bankruptcy process for the purpose of obtaining a discharge of their debts.  This means that courts are more likely to find implied consent for a search.  Does this mean that a bankruptcy trustee can just walk into your house unannounced?  No.  However, it does mean that the chapter 7 trustee can require you to give them access to your property, they can bring a sheriff on civil standby, and if you refuse entry they can deny your discharge or get a court order allowing them to enter your property.
The last question is whether it is likely that the trustee is going to search your house.  The answer is that it is extremely unlikely.  The chapter 7 trustee have very little interest in the contents of your house, unless there is a good reason to believe that you 1) hid property from the trustee, or 2) that the property is significantly more valuable than you disclosed on the petition.
My advice is not to worry about the trustee searching your house.  All you need to do is make sure that your bankruptcy schedules are complete and accurate to the best of your knowledge, remember that you cannot leave property off of your schedules for any reason, and you will be fine.
The post The 4th Amendment and Bankruptcy appeared first on Bankruptcy Attorney Seattle and Kent.

The bankruptcy court has the power to surcharge a debtor’s exemptions.  What does this mean?  When an exemption is surcharged, the court takes the exemption away from the debtor; because the debtor committed a wrongful act that caused waste to the bankruptcy estate.  This is a controversial practice because there is nothing in the Bankruptcy Code that explicitly permits the court to do this.  Instead, the court relies on its equitable powers under 11 U.S.C. § 105.  Basically, 11 U.S.C. § 105 is a catch-all provision that gives the court power to do things that are for the benefit of the integrity of the bankruptcy system, but not actually defined anywhere in the Bankruptcy Code.  This is controversial for two reasons.
Surcharging Exemptions Harms Debtors
First, it is controversial because it can hurt debtors very badly.  Imagine that you have a house with $85,000 in equity.  The Washington State homestead exemption protects up to $125,000 in equity.  When you file bankruptcy, you justifiably believe that your house is safe.  Now let’s say that you get into a dispute with the trustee over some property.  You choose to litigate the dispute and lose.  The trustee collects the property, but that property is worthless to your creditors, because the trustee had to pay litigation expenses.  So what does the trustee do?  The trustee files a motion to surcharge your homestead exemption.
If the court grants the motion to surcharge your homestead exemption, then the trustee gets to sell your house; but you don’t get to apply your homestead exemption.  This means that you could be current on your mortgage, have equity that is 100% protected by the homestead exemption, and still lose your house; all because you decided to litigate.  That is exactly what happened in the case of Law v. Siegel that is going to be heard by the US Supreme Court in October, 2013.
Surcharging Exemptions Is Not Regulated By Statute
The second reason that surcharging exemptions is controversial is that it is not regulated by statute.  A bankruptcy court cannot surcharge your exemptions simply because you litigated with the trustee and lost.  The court has to find that you committed some kind of act of bad faith or an act that was intended to harm either the bankruptcy estate or the integrity of the bankruptcy process.  The problem is that there is no clear standard for how a court determines your exemptions should be surcharged or whether your actions damaged the integrity of the bankruptcy process.  See Lattman v. Burdette, 366 F.3d 774, 785 (9th Cir. 2004) (originally a Seattle bankruptcy case).
Basically, “integrity of the bankruptcy process” is defined by the bankruptcy judge using their equitable authority under 11 U.S.C. § 105.  This is problematic because exemptions are defined under 11 U.S.C. § 522.  That section states what exemptions are available and the limitations on those exemptions.  Significantly, there is no provision for surcharging exemptions in Section 522.  This is problematic for bankruptcy practitioners, because it can be difficult to predict when you are at risk for having your exemptions surcharged.
Conclusion
Exemptions are only very rarely surcharged.  It is not something that the average debtor needs to worry about.  However, exemption surcharging is a very serious matter when it occurs.  In some cases, it is obvious why an exemption was surcharged.  For example, a debtor hid property or committed bankruptcy fraud.  In other cases, it is less clear.  My concern is that an aggressive creditor will push the trustee to litigate; and that litigation will result in surcharged exemptions.  This is a big issue in bankruptcy law that has been unresolved for some time.  Hopefully, the US Supreme Court will shed some light on whether surcharging exemptions is permissible and under what circumstances.  The ideal solution would be for Congress to amend the Bankruptcy Code to explicitly provide for or prohibit exemption surcharging.
The post Surcharging Exemptions appeared first on Bankruptcy Attorney Seattle and Kent.