Bankruptcy – The Briefest Of Primers

Readers of our alerts are a sophisticated audience. Foreclosure and the seemingly inevitable bankruptcies which follow are what they address every day. But for those newer to the arena, or for those seeking a refresher on the elemental basics, this perspective may be well worthy.

And so it can be observed immediately that the common response to a mortgage foreclosure action of filing a petition in bankruptcy is usually not nearly as portentous a threat to the mortgagee as it might first appear.

There is a temptation to note that the bane of a lender or mortgage servicer’s existence is encountering wild and delaying defenses. But mortgage holders suffer such a host of annoyances in the foreclosure process that untoward defenses are just one of many.

Certainly high on the list of pesky ripostes to the foreclosure process is the bankruptcy filing. Experienced mortgagees recognize, however, that most often the bankruptcy does not pose a real threat. (Yes, of course multiple filings under the bankruptcy code are more than troublesome.) For example, if the borrower (now debtor) files a Chapter 13 petition, he is obliged to both begin remitting mortgage payments on a current basis and present a plan to amortize all arrears. Because a valid plan must provide present value interest, compliance with Chapter 13 dictates may not be unwelcome to the lender. The debtor’s failure to adhere to the requirements is a basis for the lender to apply for lifting of the automatic stay which was imposed by the initial filing.

In the instance of a Chapter 11 filing, the debtor must provide, or the lender will seek, “adequate protection.”  While this may not make a secured lender immune from damage when faced with a bankruptcy, the theory is that an appropriate modicum of comfort is to be afforded.

For the Chapter 7 situation – the traditional “straight bankruptcy” – if the value of the property exceeds the mortgage, the premises will likely be sold through the bankruptcy court and the mortgage holder will be made whole. In the reverse scenario, with the mortgage debt greater than the value of the property, the lender has a solid basis to vacate the stay and proceed with the foreclosure.

In part because a bankruptcy filing can add considerable delay to the foreclosure case, and also because the bankruptcy code is subject to the abuse of multiple filings, it would be inaccurate to suggest that lenders and mortgage servicers treat bankruptcy filings as inconsequential. But a filing is certainly not fatal to a foreclosure.

However, should a borrower (again, denominated a “debtor” once a bankruptcy petition has been filed) be discharged in bankruptcy, personal liability for a mortgage obligation is extinguished. That does not mean the foreclosure cannot proceed – only that the debtor is not personally liable for the debt and a deficiency cannot be pursued.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.