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Understanding New Jersey Foreclosure Statute | Michael McLaughlin LLC.

What Do You Know About Statutes Of Foreclosure Cases In New Jersey And The Scheduling Of Sheriff’s Sales Due To Governor Murphy’s Executive Order?

As a result of an emergency declaration by Governor Murphy in New Jersey, multiple executive orders were entered by the governor. Some are very specific to secured loans and individuals who are subject to potential foreclosures. On March 19, 2020, Governor Murphy entered Executive Order 106 which states that lessees, tenants, and homeowners shall not be removed from a residential property as the result of an eviction or foreclosure proceeding. The order allows the continuation of the proceedings of foreclosure or an eviction but does not allow execution of Judgments of Possession or Warrants of Removal.

This order was recently extended and will remain in effect for 30 or 60 days after the national emergency due to Covid-19 has been lifted. This means that since mid-March in New Jersey (where sheriff’s sales occur), there have been no evictions of tenants through the landlord/tenant court. It’s unclear when foreclosure sales will actually be permitted. Again, the cases are actually starting to proceed in their earlier stages and can result in final judgments. However, the judgments themselves cannot yet be enforced. The statewide prohibition against Sheriff’s Sales of real estate is revolutionary in terms of relief; nothing like this happened in 2008 during the recession. It remains to be seen when foreclosure sales will actually be allowed to be scheduled.

What Do You Know About The Adjournment Of Sheriff’s Sales In New Jersey?

In July of 2019, the law that governs adjournment of sheriff’s sales was revised. Prior to that time, a homeowner who had a sheriff’s sale had two statutory adjournments that could be granted each for 14 days for a total of 28 days without the consent of the lender. Under prior law, the lender had unlimited authority to seek multiple adjournments of a sheriff’s sale. Due to the change that occurred in July 2019, homeowners are entitled to two adjournments, each of which is for 30 days for the fee of $28. Lenders can also request two adjournments of the sale. A fifth adjournment can be used if the homeowner and the lender consent to adjourn the sale.

The purpose of the amendments was to expedite the legal process because many foreclosure sales were adjourned for extended periods of time resulting in crowded dockets. Furthermore, the county sheriffs are now required to conduct a sheriff’s sale within 150 days of the date of a Writ of Execution. The adjournments are allowed homeowners time to address their circumstances, but sometimes the extended length of the adjournments causes homeowners to retain less focus than they did when there were only two 14-day adjournments. Currently, there is no significant pressure on debtors in terms of losing properties, but these protections will not be permanent.

What Is The Difference Between Loan Forbearance, Loan Deferral, and Requests For Loan Modification?

A lender who has a mortgage against a residential or commercial property can always forbear from proceeding with their legal remedies. In general, a lender can take action against a debtor who is in default on a contractual obligation to make payments, but also has it within their authority and discretion to forbear (i.e. not take action). As a result of the CARES Act, homeowners can request two automatic 180-day forbearance periods on federally-backed loans, which comprise about two-thirds of Fannie Mae, Freddie Mac, and FHA loans. The request must be made if they’re affected by COVID-19 and the forbearance must be granted.

A forbearance doesn’t mean that the money owed on the mortgage payments is forgiven; it means that at the end of the forbearance period, all of the payments that would have been made during the forbearance period will be due. For example, if someone requests a six-month forbearance period, then at the end of that period they will owe six months’ worth of mortgage payments, which can be an enormous amount of money and a challenge to address. If someone requests two 180-day adjournments (essentially a full year), then an entire year’s worth of payments will be due upon the end of that forbearance period. For some people, the amount owed at the end of a forbearance period will present an unsurmountable financial obligation.

It is the lender’s hope that during a forbearance period, borrowers focus on their financial issues , regain employment, provide financial information to the bank, and request some type of loan modification (i.e. change in the contractual terms of the existing mortgage loan). Whether this result is actually happening remains to be seen since people are still sorting their way through these unique times.

It may have been better if the CARES Act expressly mandated a loan deferral, which would add any amounts that would have been paid during forbearance and move them to the end of the mortgage. For instance, if someone has a 15-year mortgage and requests a loan forbearance at the end of the year the loan deferral would restructure those payments owed to the very end of the mortgage. This would mean that there could be a balloon payment at the end of those 15 years for a full year’s worth of payments, or an additional year added to the original mortgage term.

Forbearance may be a ticking time bomb for homeowners and whether there’ll be further extensions. I believe there’s an effort to try to avoid the housing crisis that occurred in 2008, but if the economy doesn’t recover and borrowers aren’t able to attend to their obligations, foreclosure cases may increase.

When A Chapter 13 Sale Plan Is Pending, What Sort of Negotiation Takes Place With Secured Parties For Adequate Protection Payments?

In most Chapter 13 cases, the main asset that an individual is trying to save is their home. Most people will have significant mortgage arrearages. If an individual cannot cure the mortgage arrears within a reasonable time in the Chapter 13, then they can consider a Chapter 13 sale plan, which means they will lose their home but preserve the equity in the home and their exemptions.

While a Chapter 13 plan is proposed, it may include a sale of a residential home. If the individuals are unemployed and can’t make monthly mortgage payments in the full amount, then they can negotiate with their lender to make what is known as an adequate protection payment during the course of the Chapter 13. This is a payment to prevent a diminution in the value of the secured party’s lien position against the home so that they’re not in a worse position as a result of non-payment of the loan.

In many cases, I have been successful in negotiating adequate protection payment agreements that also enable a marketing period for the sale of the property. In general, it is very tough to dip below the carrying costs (i.e. tax and insurance costs that are normally collected by the lender as part of the mortgage payment).

How Are Spendthrift Trusts And Self-Settled Trusts Addressed In A Chapter 7 Bankruptcy Case?

One issue that is rare but can arise in Chapter 7 cases is the issue of whether a trust that is disclosed on a bankruptcy petition is something the Chapter 7 trustee can administer, or whether it’s excluded from the bankruptcy estate. Very frequently, that trust is known as a “spendthrift trust,” which is a trust that’s created for the benefit of someone who has issues controlling their spending. An independent trustee is granted full authority to make decisions so that the trust funds are disbursed and utilized for the benefit of the beneficiary. The beneficiary of a spendthrift trust can’t give the trustee orders to pay them trust corpus or the trust principal (or any payment at all).

Creditors of the beneficiary of a spendthrift trust cannot reach the funds in the trust and the funds are not actually in control of the beneficiary who very frequently might be a Chapter 7 debtor. The trustee could decide to distribute $5,000 a month, $2,000 a month to the Debtor, or nothing. Issues regarding whether or not the trust is an exempt or excluded asset from the estate are common. Bankruptcy code section 541(c)(2) does not provide an exclusion of the estate for an asset that is not property of the bankruptcy estate and that definition does include trusts validly established under state law.

The person who creates a self-settled trust (Trustee and beneficiary are the same) receives the benefits from the trust, and this type of trust is not entitled to creditor protection. In other words, an individual who is a self-settled trustee and beneficiary doesn’t gain any protection for the trust assets, and a Chapter 7 trustee can make legitimate demands that the assets in the trust are property of the bankruptcy estate. In a self-settled trust, the person who creates the trust is known as a settlor, and the settlor is also the beneficiary of the trust. Keogh retirement plans, which are not common anymore, have essentially been interpreted by the courts to be self-settled trusts, which means they too are vulnerable in any kind of bankruptcy.

Tell Me About The Inheritance In A Chapter 7 Bankruptcy Case Versus A Chapter 13 Case?

In a Chapter 7 case, the Bankruptcy Code expressly provides that property of the bankruptcy estate under 11 U.S.C. includes any right to an inheritance to be received by the debtor within 180 days of filing the bankruptcy case. Clients are always advised that if a relative dies within 180 days of the bankruptcy filing, that inheritance is actually an asset for the trustee to administer. This creates a tricky situation, because while people might think that they actually have to receive the money in order for it to be considered an asset for bankruptcy purposes. The reality is that they just have to have acquire the right to receive an inheritance within 180 days of the bankruptcy filing. Sometimes the inheritances are sufficient to fund the creditor claims. It would be an error of judgment not advise the attorney if a Debtor becomes entitled to receive any money within 180 days of the filing of their case.

A Chapter 13 case is usually a five-year plan, and there is no such thing as a 180-day prohibition. This means that while under a Chapter 13 plan, the property of the estate includes any inheritance received during that five-year period. In most cases, the attorney won’t have a lot of communication with a client who is making payments on a Chapter 13 plan. However, the law is clear and it will be of concern should an inheritance be received and not disclosed to the attorney and trustee in a Chapter 13 case.

How Is Income Determined In The Context Of Bankruptcy, And How Do Withdrawals From IRA Or 401(k) Accounts Impact Income Determination?

An issue that often comes up when preparing a petition has to do with the proper categorization of the true amount of income an individual earns within the six-month period immediately preceding the bankruptcy. In a Chapter 7 and Chapter 13 bankruptcy, this is the “means test”. Income includes wages, W-2 earnings, 1099 earnings, and unemployment but not Social Security. Very often, income amounts are verifiable via documentation and the calculations can be simple. However, there might not be documentation for side jobs. In light of the recession and more liberal rules for withdrawing from 401(k) and IRA accounts, individuals who draw down on a retirement account in order to pay their bills must very disclose that information to their attorney. Substantial withdrawals can create a means test issue for someone who might otherwise qualify based on their income over the six-month period.

I have represented many clients who had withdrawals from retirement accounts, but also severance packages from their employers. In some cases, a severance package will skew the numbers for the means test and render the individual ineligible for Chapter 7 bankruptcy. In these cases, it is important to apply the correct mathematical analysis under the means test to properly advise the client.

For more information on Foreclosure, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (908) 373-8500 today.

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