New Haven Independent

Nor does it necessarily portend a happy real estate ending. To paraphrase the language of the law, a bankruptcy proceeding does not relieve the owners of the liability for liens like mortgages or taxes. So the lender retains the right to foreclose if you don’t pay, even if you’re bankrupt.

A mere filing of a bankruptcy does, however, immediately translate into a stay or delay of execution of a foreclosure sale. The delay may last up to several months, with the idea being that a filer gets what’s called a “fresh start.” That frequently means that discharable debt, which is usually consumer debt, is forgiven, and perhaps that frees up capital to pay delinquent mortgages payments. That, anyway, is the theory.

Ossi and Mabel Gay bought bought the 1925-era, two-family at 691 Elm, which is between Winthrop and Sherman, in 1993, with a loan of approximately $82,000. They began having trouble, according to the record, in making payments. That was about April 2006.

With the house appraised at $197,000, and a debt ballooned to $128,000, a foreclosure judgment was issued in July, 2007, for later in the year. In August, the owners filed a bankruptcy petition.

In September, Ossi Gay died. (Click here and scroll down for the obituary.) In February, 2008, the note holder, which by now had grown the impossibly long legal moniker of” Associates First Capital Corp/successor by merger with Associates Financial Services Co/successor by merger with Associates Financial Services of America, Inc.,” successfully had the bankruptcy dismissed.

The debt was now apparently reduced to $85,000 because $30,000 in interest had been deferred. Still, a new foreclosure by sale date was set for July 19, 2008.

A month before that foreclosure sale, on June 8, the attorney representing the bank was ordered not to proceed. That apparently was not another bankruptcy filing but rather due to a technicality in the notification of a party to the dispute.

On June 16, the foreclosure was re-opened by the court, a new appraisal of the property was ordered — it turned out to be the same $197,000 — and a new sale by foreclosure auction date was set for Saturday, Sept. 27.

That was the sale that was suspended on Friday when the court-appointed attorney, Robert Harrington, was notified that the owners were filing another bankruptcy petition.

Trustee’s View

If overdue mortgage debt only continues to grow during a bankruptcy, why do people in that precarious situation continue to file?

The Independent sat down with Richard Coan (pictured at the top of this story), one of nine trustees of the federal bankruptcy court located in Connecticut, to ask.

NHI: Why do people having trouble with mortgage payments file for bankruptcy?

Coan: Well, just the Chapter 7 filing, does, temporarily, stop a foreclosure, and all debt collection is stopped too in its tracks. A trustee like me is appointed to liquidate non-exempt property to pay the debt. In 99 percent of the cases, most of what a debtor has is exempt, so the debtor is discharged and can start again. That’s the idea.

NHI: How much time might that get a filer?

Coan: The bank has to file a motion to continue. It’s usually granted. Then they have to set a date. At most, maybe three months.

NHI: And the house?

Coan: What we’re increasingly seeing in this kind of market is, say, a house worth $300,000 and a debt of $300,000, that is, not any equity in the house. But in Connecticut, a couple is allowed to have up to $150,000 of equity [the difference between the note owed and the fair market price], or $75,000 for each partner, exempted. That means that equity cannot be considered as an asset to pay off creditors.

NHI: So in your experience, why do people do it?

Coan: Look, there’s an illness, a job loss, who knows. People will generally time a bankruptcy to get the most time for living in their house. Who can blame them? Sometimes a husband can file. And then the wife. I guess it’s possible that people can work the system, although you don’t see much of that. If the court suspects someone’s gaming the system with too many unwarranted delays, the court might accept the bank’s motion to bar the owners from filing bankruptcy for, say 180 days.

NHI: Apart from securing additional time, why would people file?

Coan: Well, when the real estate is eventually sold, there could be a deficiency judgment against the owner. That is, the difference between the note owed and what the bank can get for selling the house. That deficiency debt is discharged through bankruptcy; it’s a measure of protection for when a foreclosure does go through.

NHI: You’ve mentioned Chapter 7, which I take to be the simple, most popular bankruptcy, the fresh start. Is there another “chapter’?

Coan: The other is Chapter 13. That’s a little different. If you were behind, say, six months, but the bank is being not cooperative, you can get a plan approved by the court where the mortgage holder is required to accept the re-payment arrangement.

NHI: Are you seeing any new trends?

Coan: Yes, as I said, it used to be that consumer debt was the main trigger of a bankruptcy. And while that’s still perhaps the major factor, in, for example, 30 of the last 40 cases I’ve gone through, there’s real estate involved. I’ve noticed that in most of those cases the sum of the debt is $50,000 to $100,000 greater than the value of the property, and that there are two mortgages on the property. I never used to see that as much.

NHI: What’s your surmise as to why?

Coan: Two factors: The decline in the real estate market and the practice within recent years to allow people in effect to buy real estate with nearly 100 percent financing.

NHI: Permit me to ask that if you’re dealing with people who clearly have little or no money, how does a bankruptcy trustee such as yourself get paid?

Coan: Ah! The court pays me $60 per case. If there are assets involved, that is, something to be sold in order to pay off a creditor, for that legal work, I am allowed to bill. Most of, say, the 400 cases that come my way every year, are non-asset cases.

The U.S. Bankruptcy Court in New Haven is located on the 18th floor of 157 Church St.

Previous Independent coverage of New Haven’s foreclosure crisis:

• Bank Outbids Akbar; Family May Keep Home
• “So Don’t Worry About Pablo”
• Next-Door Foreclosures, 53 Years Apart
• They Met On Foreclosure Way
• Little Garage Draws Big Bids
• A 2nd Chance on Lewis Street
• Foreclosure Attracts New Breed of “Specialist”
• In Foreclosures, Judge’s Hands Tied
• Home Saved From Foreclosure. Cycle, Too
• A House For Precious?
• Deutsche Bank Grabs Dixwell Condo
• Reluctant Bidder Snags F. Haven Bargain
• Well, There’s Always Powerball
• Neighbors Retrieve Home From Bank
• Somebody Has Plans For Bassett Street
• Foreclosed, the Khennavongs Leave the Santanas
• Foreclosure Steal May Be Too Good
• 2nd Foreclosure in 3 Months Dims Bright St.
• After Foreclosure, W’ville Owner Still Hopes To Sell
• He’s Not Buying, Yet
• Quiet Foreclosure on Porter Street
• 3 Minutes Too Late
• Historic Gambardella Property Foreclosed
•2 Homes Lost, 1 Gained
• “Everybody’s Got To Eat”
• More Foreclosures, More Signs
• Foreclosure Sale Benefits Archie Moore’s
• Rescue Squad Swings Into Action
• A Bidder Shows Up
• Bank Beats Tanya’s Bid
• Westville Auction Draws A Crowd
• DeStefano: Foreclosure Plan Ready
• Can They Help?
• “We Should Over-Regulate These Bastards”
• Rosa Hears of Rescues
• WPCA Grilled on Foreclosures
• WPCA’s Targets Struggle To Dig Out
• Sue The Subprimers?
• WPCA Hearing Delayed
• Megna’s “Blood Boils” at WPCA Tactics
• Goldfield Wants WPCA Answers
• 2 Days, 8 Foreclosure Suits
• WPCA Goes On Foreclosure Binge
• A Guru Weighs In
• WPCA Targets Church
• Subprime Mess Targeted
• Renters Caught In Foreclosure King’s Fall
• She’s One Of 1,150 In The Foreclosure Mill
• Foreclosures Threaten Perrotti’s Empire
•“I’m Not Going To Lay Down And Let Them Take My House”
• Struggling Couple Sues Over “Scam”

To learn about the ROOF Project, a community-wide effort to help New Haveners navigate the foreclosure crisis, click here.

The following links are to various materials and brochures designed to help homeowners avoid foreclosure.

How to prepare a complaint to the Department of Banking; Department of Banking Online Assistance Form; Connecticut Department of Banking, Avoiding Foreclosure; FDIC Consumer News; Statewide Legal Services of Connecticut, Inc; Connecticut Bar Association Lawyer Referral Service.

For lawyer referral services in New Haven, call 562-5750 or visit this website. For the Department of Social Services (DSS) Eviction Foreclosure Prevention Program (EFPP), call 211 to see which community-based organization in the state serves your town.

Click here for information on foreclosure prevention efforts from Empower New Haven.