New Jersey Law Blog

Two labor unions representing American Airlines plans on spending the day protesting the airline's recently outlined bankruptcy reorganization plan. The airline proposes to reduce labor costs by renegotiating contract terms and laying off 13,000 employees.

It remains to be seen whether the recent settlement between the nation's five largest banks and State and federal officials on Thursday will help homeowners. On Thursday $26 billion settlement was announced, making it the largest government-industry settlement in more than a decade.

The deal is supposed to help troubled borrowers by reducing the amount they owe on their mortgages, reducing their interest rates and paying restitution to homeowners who suffered mortgage-related abuses. Thankfully, banks will have to make sure borrowers have a single point of contact with a lender, rather than being moved around to different employees with each interaction. The shuffle to different bank employees is a true nightmare for our Law Firm in trying to deal with these banks on loan modifications and settlements.

U.S. Attorney General Eric Holder criticized lenders for their conduct that he said "pushed borrowers into foreclosure" and "fueled the downward spiral of our economy." Once the settlement is approved by the Federal Court, banks would have to deposit money into a trust account, and the government would distribute the funds to qualified homeowners.

Banks have only three years to complete principal writedowns, refinancings and other relief pursuant to the settlement. A big part of the deal is that about $17 billion would go toward foreclosure-prevention measures, such as reducing the mortgage balance for borrowers who owe more than their homes are worth. Credits would be given to banks for different ways in which they write off existing debts for homeowners.

Another positive of the settlement is a provision providing for lowering interest rates for homeowners who are current on their loans. A big complaint is by those who have remained current on their mortgages during this mess; now some relief for them potentially.

Bankruptcy Code Needs Change Allowing First Mortgage Principal to be Reduced

The five banks now involved in the settlement are Wells Fargo, Bank of America, J.P. Morgan Chase, Ally Financial and Citigroup. To get this real estate market moving and help homeowners, in addition to this settlement an amendment to the Bankruptcy Laws needs to be made allowing homeowners to strip off principal on their first mortgage if their home is below the value of the outstanding balance on the mortgage.  Presently, homeowners do not have this ability on a first mortgage securing their residence.  This change would incentivize homeowners to try to save their homes instead of walking away. This would also help stabilize the real estate market because not as many foreclosed and vacant properties would be hitting the market. This would also force banks to negotiate with homeowners before they file bankruptcy because if the bank knows its principal balance can be knocked down in a bankruptcy, the bank would be more willing to reduce that mortgage balance outside of bankruptcy.

We will see whether the settlement helps homeowners and hopefully the banks cooperate as per the settlement. I still believe more needs to be done.

The government's Home Affordable Modification Program ("HAMP") provides opportunities for homeowners in bankruptcy to modify their home mortgages and avoid foreclosure. Homeowners may apply for this program before, during, or after their bankruptcy proceeding. To qualify for HAMP:

· The mortgage loan to be modified must be on a one- to four-family home that is used by the homeowner as their primary residence (investment properties are not eligible);

· The loan must have been originated prior to January 1, 2009;

· The present housing payment (including taxes, insurance, and association dues) is more than thirty-one percent of the gross (before taxes) household income.

· The first mortgage loan balance must be no greater than $729,750 (the balance may be higher for two- to four-unit homes).

· And, the homeowner must have a documented financial hardship.

With the passage of legislation legalizing same-sex marriage seeming likely in New Jersey, a question that has not been fully wrought out in the federal courts is whether same sex couples - whether that be joined through civil union or marriage - are permitted to file a joint petition for bankruptcy. A recent California Bankruptcy Court ruled that the federal "Defense of Marriage Act", which bars federal recognition of same sex marriages, is unconstitutional. Judge Thomas Donovan held that two legally married California men should be permitted to file a joint Chapter 13 petition and be granted the same bankruptcy rights as any other married couple.

How Does the Bankruptcy Code Define Spouse?

Well that is one Judge's opinion but the Bankruptcy Code is not so clear. The Code permits only spouses to file joint petitions. 11 USC 302 of the Bankruptcy Code specifically provides:

(a) A joint case under a chapter of this title is commenced by the filing with the bankruptcy court of a single petition under such chapter by an individual that may be a debtor under such chapter and such individual's spouse. The commencement of a joint case under a chapter of this title constitutes an order for relief under such chapter. (emphasis added)

Are civil union partners or married same sex couples each other's "spouse"? In 2004, the Bankruptcy Court in In re Kandu, dealt with this issue in dismissing a joint case filed by a same-sex couple whose marriage was legal under Canadian Law. 315 B.R. 123 (Bankr. W.D. Wash. 2004). In Kandu, the Bankruptcy Court held:

The language of the Defense of Marriage Act is clear and unambiguous. It states that, in all acts of Congress, the term "marriage" means only the legal union between one man and one woman, and the word "spouse" refers only to a person of the opposite sex that is a husband or wife.

However, it is exactly this provision in the Defense of Marriage Act that Judge Donovan ruled was unconstitutional. Judge Donovan ruled that the Defense of Marriage Act - which defines "spouse" under federal law as "a person of opposite sex who is a husband or a wife" - violates the couple's equal protection rights under the due process clause of the Fifth Amendment.

The reason why any couple -whether a same sex couple or a traditionally married husband and wife - are better off filing a joint petition is because they have joint debt: the mortgage loan is in both their names, the car loan, credit cards etc.. In the past, I have filed separate petitions and subsequently made a motion to administratively consolidate the cases. This is more expensive for the debtors: there are two filing fees, and attorney fees are much more than otherwise. It is also administratively burdensome and doubly stressful for the petitioners.

The seminal case of Butner v. United States held that the bankruptcy court is to look to the state law when determining property rights, it seems to make sense that same-sex domestic couples should be able to file a joint petition; especially, now that there appears to be some support in the federal judiciary. 440 U.S. 48, 49 (1979). Since New Jersey's passage of the Domestic Partnership Act, wherein same-sex couples may form civil unions and be granted the same rights and privileges as married couples, I have been tempted to file a joint bankruptcy petition for domestic partners. If same sex marriage is legalized, I will be sure to try it out. It may be that a same sex partner is not a "spouse", at least as far as the Bankruptcy Code is concerned. However, judging from how 18 of the 24 bankruptcy judges in California have viewed the definition, it may be time to test the waters here in New Jersey.