The Lingering Effect of Hurricane Sandy

So much of our region has been physically and materially devastated over the last months. Added to the already existing weak and fragile economic situation, the overall effects of this storm may be beyond repair for many.

Bankruptcy may a legitimate be part of the necessary rebuilding process, as pre-existing debts become unsustainable, or as new obligations cripple an already weak situation. Obviously, the focus for most will be the physical rebuilding to the extent possible, by use of insurance money if covered by flood insurance or by other insurance for non-flood damages, or by the use of FEMA grants or other government loans that may be available.

One must be exceedingly careful however as the entitlement to these monies may have significant impact on any potential bankruptcy filing. Cashing or depositing a large settlement check just prior to bankruptcy may result in those monies being attached by a bankruptcy trustee for satisfaction of other debts. Alternatively, the lack of any such assistance to repair a damaged dwelling may result in the devaluation of the property, opening up other avenues in a bankruptcy such as elimination of a second or third mortgage, or forcing a mortgage company to consider a substantial modification of the mortgage they would have unlikely approved prior to the reduction of value.

Some may decide to simply walk away or allow the municipality to condemn a damaged property. That may not be quite as easy as it sounds, as obligations to the municipality will still exist, and the financial losses sustained by the mortgage companies can be taxable to the property owner as “foregiveness of debt,” thus making an already bad situation far worse. Bankruptcy can be of assistance, but must be carefully considered and planned thoroughly prior to filing.