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Under Water Homestead Property in Bankruptcy

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Florida attorney Eric Lanigan explains under water property and what is involved if you have under water homestead property in bankruptcy.

I’m Eric Lanigan with Lanigan and Lanigan in Winter Park. I want to talk for a minute about dealing with under water homestead property in bankruptcy.

What is Under Water Homestead Property in Bankruptcy?

Basically under water property is property where you owe more than what it is worth. Very often in these situations what we will do even if the homeowner is continuing to pay the mortgage, is that we will not have the homeowner reaffirm the debt, have the debt discharged in bankruptcy.

Now what that does is a couple things. It allows the homeowner to in the future if they decide for whatever reason that they want to leave or need to leave the property, they’re no longer living with the issue of owing more than it’s worth because they’ve discharged the debt. They actually don’t have any legal obligation on the debt. But as long as they continue to pay the mortgage and are not in default, there will not, cannot be a foreclosure action.

Take Advantage of Florida’s Wildcard $4,000 Exemption

The other thing that this allows us to do is to take advantage of Florida’s statutory sometimes called wildcard exemptionIs Your House Under Water 1 of an additional $4,000 of personal property exemption. So a husband and wife go from a total of $2,000 of personal property exemption up to $10,000 of personal property exemption. Which can be a significant money saving if you’ve got a personal property that’s worth more than a couple thousand dollars.

Now, something that’s gone on recently, is the trustees are trying to say well, if you don’t take the homestead exemption, we’re going to sell the house. In other words they want you to give up your $4,000 each total of $8,000 of wildcard exemption so then you will have to buy back what now becomes non-exempt assets. They want you to give that up so that they can then recover that money from you. And they say well if you’re not protecting the house by homestead exemption we’re going to go ahead and sell it.

Who Would Buy a House That’s Under Water?

Is Your House Under Water 2Well that immediately begs the question who’s going to buy a house that’s underwater? And the answer is that there’s a little cottage industry that’s developed over the last few years. I like to think of it as about as close as you can get to legalized theft. And what these people do is they’ve raised some money, they go to the bankruptcy trustees and even though the house is underwater, they go to you and say, “well we’ll buy the title from you for $3,500.” 

And then you say, well what are they going to do with the property. And it’s very simple, they say well, they’re not going to make the mortgage payment. So if it’s not already in foreclosure it will go into foreclosure. They’ll hire a lawyer to fight and delay the foreclosure. And all the while they’ll rent the property out and make money. So if they pay $500 or $1,000 a month for a lawyer to forestall the foreclosure. They’re making two or three thousand dollars a month in rent, it’s a nice little profit.

Ultimately the foreclosure goes through and they’re out. And that’s what they’re doing. And the trustee is using it basically as a money grab. It’s basically intimidate you into taking the homestead exemption and they get then the new non-exempt assets that you have to buy back from them. Or they get $3,500 from these people who will come in and buy out the basically under water properties.

Now, you can object to this on several grounds and you absolutely should. Do not allow yourselves to be intimidated into taking a homestead exemption on a property that’s under water. And you can object to it on several grounds:

1. One is there’s no real benefit to the bankruptcy estate. The only person that’s benefitting by this is the trustee. And that’s their only motivation.

2. Second of all it’s a breach to the trustee’s fiduciary duty to the mortgage lender. They have just as much duty to the secured creditors, the mortgage lenders as they do to unsecured creditors. So what the law says is that you can’t go out and screw the secured creditors by knowingly allowing a property to go into default and the secured creditor loses money in order to get a couple of bucks for the unsecured creditors and several bucks for yourself as the middle man.

Even the trustee’s official bankruptcy manual says that they should never take underwater property and try to administer it within the bankruptcy estate that it should be abandoned. And this issue of objecting to these things has come up in a couple of cases and I want to read you exactly what a judge recently said when this situation was presented.

He said, “I’m not going to be part of approving sales to somebody that’s just going to jerk around the mortgage company, rent the property and then walk away from it after several months. That just to me doesn’t serve the public. That’s so contrary to the public interest. Simply to bring in a few dollars into the estate. We’re not going to approve these deals.

Do Not Be Intimidated by the Trustee’s Attempts to Sell Your Property

So when the trustees starts down this road, let them know that you’re going to object to any attempts to sell the interest in the property and that you’re going to raise all of these objections. And in the end, the cost of fighting those objections, will quickly exceed what the trustee would have gotten.

We’ve had several of these now where we’ve told the trustee, we’re not going to change our exemptions and you’re not going to sell the property. And we’ll object.

We had one case where they did file it both the debtor and the bank holding the mortgage both filed objections. We had another where the trustee was adamant that they were going to do this. Sure enough the time came and went and they didn’t do anything.

So don’t allow yourselves to be intimidated by the trustee. Make sure you understand what their real motiviation is when they do things like what they just talked about.

Again, I’m Eric Lanigan, with Lanigan and Lanigan in Winter Park. Find out what to do with your home if it’s under water. There are many options and the choices will vary by a range of factors including income, debt, number and type of properties owed, whether or not you want to keep the home or have it discharged in bankruptcy. 

If your home is under water and you’re considering foreclosure or have already received the lis pendens or notice that your are being sued for foreclosure because you are behind on the mortgage payments, consult with the Lanigans by calling for an appointment. Don’t wait to make your decision, act immediately and come in for a consultation. 

You may choose to meet in the Lanigan’s 310 E. Pine Street, Ste. 250, Orlando, Florida, location. Or you may come to the 831 W. Morse Blvd., Winter Park, Florida, location. 

Watch the corresponding video on this topic on the Lanigan&Lanigan YouTube channel.

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