Bankruptcy and Your Co-op
In New York there are several different types of cooperatives, i.e., a co-op. The traditional co-op owner has shares of stock and a proprietary lease. This essentially boils down to having a membership with a right to lease in a particular apartment building. Typically, the tenant pays a monthly mortgage, maintenance charges and a prorated building assessment based on improvements.
If the co-op owner falls behind on his or her mortgage payments the bank often begins the foreclosure process. If you have a co-op in New York and have gotten a 90-day acceleration notice from your bank you are in danger of losing your co-op. If you intend on keeping the apartment, your options are to get a mortgage modification, pay off your mortgage arrears (amounts owed) or file for bankruptcy. In bankruptcy the strategy changes based on whether the property is your home residence or an investment property, how much equity you have in the property and how many mortgages there are.
How to Deal With Foreclosure on a Co-op, Which is My Primary Residence
When a bank or other entity begins foreclosure proceedings the tenant/owner often attempts to get a mortgage modification. Please note that in order to qualify for a mortgage modification the co-op must be your primary residence and the principal balance on the first mortgage must be less than $729,750 or up to $1,000,000 on a larger home.
Usually, clients who come to my office have been applying for different mortgage modifications for several months and are now in danger of an actual foreclosure. So, if the mortgage modification is not working out the next step is bankruptcy. Usually a Chapter 13 bankruptcy proceeding gives the most leverage for co-op owners. In a Chapter 13 bankruptcy case here are a few of the things we can do:
- Enter into New York City’s bankruptcy loss mitigation program.
- Completely get rid of all mortgages aside from the first mortgage.
- Pay off mortgage arrears over 3 or 5 years.
- Instantly stop the foreclosure process.
- Challenge the bank’s right to foreclose on your property.
Many of my clients are interested in getting rid of a second mortgage or “lien stripping”. You can dissolve a second or third mortgage on your primary residence if you have no equity on the property. That is, if the principal balance on your first mortgage is greater than the value of your co-op. If the co-op is your primary residence we cannot touch the first mortgage; however, we still can lower the first mortgage with investment property (see below). Please note if you have received a discharge in another bankruptcy in the past this may not be an option. In a Chapter 7 most judges will not allow us to lien strip and you will not be able to catch up on payments but the foreclosure process will still be halted and most judges in New York City engage in the New York’s loss mitigation program.
How to Deal With a Bank Foreclosure on My Investment Co-op
Essentially, the rules are the same with an investment property with one major benefit. We can still get rid off second and third mortgages but with an investment property we can also lower the amount of the primary mortgage to its secured value. For example, lets say you have an investment house in Brooklyn and it is worth $300,000 and the first mortgage has $500,000 remaining on it and a second mortgage for $100,000. We can get rid of the second mortgage entirely and strip down the first mortgage to $300,000. Please note the investment property must have renters who pay at least the mortgage and operating costs in order to be allowed in a Chapter 13.
What Happens to the Stripped Mortgage Debt in a Chapter 13?
All mortgage debt that is stripped is treated just like general unsecured debt. So they will not be discharged until the Chapter 13 plan is completed and the bankruptcy court grants a discharge. If the Chapter 13 plan is not completed the mortgage liens survive as they were before the case was filed.
If you live in New York and are interested in saving your co-op please call 212-244-2882 anytime. The Law Office of William Waldner only practices Bankruptcy Law and is always here to help you.
This article is intended for educational purposes only. By reading this article no attorney-client relationship has been created.