Archive for the ‘Chapter 13’ Category
Thursday, August 12th, 2010
There is the well-known proverb that, to a carpenter everything in the world looks like a nail. Or, surgeons want to operate to cure any and all ailments. The same is applicable to some bankruptcy attorneys. I assisted a couple with asset protection last year. The couple faced joint liability from a failing business investment. They had $150,000 liquid cash, and they were expecting another $200,000 from the proceeds of a real estate sale. I explained that they would lose the cash in bankruptcy. I advised them to spend down the cash and possibly invest in a new homestead which would be exempt I they were sued.
Since my advice, the creditor sued and obtained a judgment against the couple. The couple too al their liquid cash remaining, about $310,000, about bought a $400,000 homestead with a small mortgage. The creditor began aggressive collection efforts. The collection fight made the couple nervous and fearful about their assets so they consulted a bankruptcy attorney with the hope of putting the problem behind them.
As the couple reports, the bankruptcy attorney told them that the money used to purchase the house was not exempt in a Chapter 7 bankruptcy first, because the amount of equity invested in the homestead exceeded the bankruptcy exemption(about $275,000) permitted within 40 months of purchase, and two, because the conversion of substantially all their cash to a homestead could be attacked as a fraudulent conversion in bankruptcy. He told these people to file a Chapter 13 bankruptcy so that their house would not be liquidated and they could pay only their available monthly cash flow to their creditors.
I think Chapter 13 bankruptcy would be a poor idea for these debtors. In a Chapter 13 bankruptcy the debtors have to pay through a five year plan not only what they clear each month after reasonable expenses but also all the money their creditors would have received in a Chapter 7 liquidation. If these people had filed Chapter 7 the trustee would have claimed as non-exempt part or all of the $310,000 they invested in their homestead. The non-exempt homestead equity (it could be all if seen as fraudulent conversion) would still have to be paid to the Chapter 13 trustee during a five year plan. In any bankruptcy, 7 or 13, their homestead equity is at risk.
If they simply stayed far away from bankruptcy as I had originally advised their creditor had no way to attack any of their homestead exemption in state court collection. I think their bankruptcy attorney pushed them to Chapter 13 because bankruptcy is the only tool in his legal toolbox- just like the carpenter or the surgeon only uses the tools he is comfortable with. The bankruptcy attorney failed to appreciate that these people had better legal protection tools outside of bankruptcy court.
For most people heavily in debt bankruptcy is the only tool to fix their situation. People with assets should get a second and even a third opinion before filing bankruptcy. Bankruptcy filings are usually irrevocable- once you go in you cannot get out.
Posted in Chapter 13, Chapter 7, True Stories | Comments Off
Thursday, August 5th, 2010
If you plan on marrying someone facing bankruptcy do you also marry their debt? Generally, the answer is "no", but in some cases, your fiance’s debt walks down the aisle. You are not liable for your spouse’s debt- that’s the general rule. Sometimes you end up paying the debt anyway. Consider the case of young couple who came to my office this week.
A young lady had over $50,000 of credit card and related debts. She was a school teach with income of approximately $30,000, well below median income. She had no non-exempt assets and based on her income alone she could solve her debt problems with a Chapter 7 bankruptcy. She stated that she recently married a man whose income was near $75,000. The husband had no unsecured debts. Because means test income is based on "family income" her new husband’s income had to be considered in the wife’s means test even though the husband had no need to file bankruptcy. I explained to the new client that because she was living with her relatively affluent new husband she had become ineligible to file Chapter 7, and her only bankruptcy option was a repayment plan under Chapter 13. In effect, her she and her husband would have to use the husband’s earning to repay part of the wife’s debt in Chapter 13. The husband married his wife’s debt.
People considering both bankruptcy and marriage should speak with a bankruptcy attorney before they get married. In this case, the wife could have, and should have, filed Chapter 7 bankruptcy before the wedding day (or, at least before she and her husband began living together as one household). In other instances, marriage can increase household size to help qualify for Chapter 7, or marriage can result in the merging of financial accounts and other property that make valuable assets exempt in a subsequent Chapter 7. Marriage, divorce, and bankruptcy are interrelated; proper legal planning can either save or cost you substantial money.
Posted in Chapter 13, Chapter 7 | Comments Off
Wednesday, July 28th, 2010
I was involved in my first mortgage modification today under the Orlando bankruptcy court’s mortgage mediation program for Chapter 13 debtors. The scheduled mediation was a complete waste of time.
The bankruptcy court issued its newly adopted standard mediation order requiring attendance of a bank representative with full settlement authority. A mediation conference was scheduled at the office of the creditor’s attorneys. Before the scheduled mediation conference my office prepared a notebook containing all of the debtor’s relevant financial information such as pay stubs, bank statements etc. My client, I , and the mediator (a bankruptcy attorney himself) showed up on time at the designated location. The location was a 35 minute drive to and from my office and about the same distance from my client’s location.
When we all sat down to begin discussions the bank (Bank of America) representative announces he is unable to proceed with the mediation because he does not have escrow information from his own bankruptcy department. He says the bank will need a few days to acquire their own data and compute offers to present my client. The mediation is continued; the meeting adjourns with nothing accomplished. A total waste of two hours of time for my client and myself.
The mediation program is new. Some snafues will occur. What really ticked me off, however, was that the BOA representative did not even apologize for ruining a mediation conference scheduled mutually in advanced pursuant to a court order. Not one word of apology or regret for BOA's lack of preparation. Don't they teach their employees manners? Who do they expect is going to pay for my time and the time my client took off from work? I may address that issue later in this bankruptcy.
So, if you are getting ready for a Chapter 13 mortgage mediation do not assume the bank representative will be prepared at the scheduled conference. I will for all future mediation conferences confirm in writing prior to the meeting that the bank and their attorney have all the information they need from the debtor, and that they also have all the information from their own records which they need to proceed. Unless the bank attorney confirms their total and complete readiness to mediate with my client I am not getting up from my desk. I've wasted enough of my time.
Posted in Chapter 13, True Stories | Comments Off
Tuesday, June 22nd, 2010
I’ve been involved in Chapter 7 bankruptcy cases where the debtor became entitled to an inheritance or insurance death benefit after he had already filed Chapter 7 bankruptcy. The rule is that any inheritance to which the debtor becomes entitled within six months subsequent to the filing date becomes part of the Chapter 7 bankruptcy estate. The bankruptcy trustee will take the debtor’s inheritance and use it to pay the debtor’s unsecured creditors.
This week I encountered for the first time a Chapter 13 case where the debtor became entitled to an inheritance over a year after the filing date and after the court confirmed the Chapter 13 bankruptcy plan. There is a general rule that once the court confirms the debtor’s Chapter 13 plan ownership and title of all property in the bankruptcy estate reverts to the debtor. Does this general rule apply to a debtor’s post-confirmation inheritance so that the Chapter 13 debtor gets to keep all of his post-confirmation inheritance and continue to pay the confirmed amounts to his unsecured creditors?
No. Any windfall the debtor receives during a Chapter 13 becomes part of his bankruptcy estate and increases the total amount payable to the unsecured creditors. I found a few court decisions dealing with Chapter 13 debtors who won a lottery or received large inheritances years after filing their Chapter 13 case, and almost all courts held that the debtor cannot keep the windfall unless he pays all of his unsecured debts.
Posted in Chapter 13 | Comments Off
Friday, June 18th, 2010
Debtors in Chapter 13 bankruptcy cannot cram down or force a reduction in the balance of a first mortgage on their principal residence. Debtors can cram down first mortgages on all real estate other than their residence. Cram down means that the Chapter 13 bankruptcy will reduce the principal mortgage balance to the property’s current market value, and the mortgage debt above market value will be treated as an unsecured debt.
One of my new bankruptcy clients owns seven rental properties. All the rental properties are upside down, but all are currently rented and producing income. Most investors today are walking away from investment properties and filing Chapter 7 bankruptcy, if necessary, to protect themselves from commercial mortgage liability. This client wants to file Chapter 13, cram down the rental property mortgages to fair value, and keep all the properties. He says he needs to keep the properties because he uses the rental income to pay normal living expenses. The debtor is not otherwise employed and has no other source of income. Will it work?
In this case, the Chapter 13 cram down of multiple mortgages may work because these properties are this debtor’s primary source of income.. Where a Chapter 13 debtor uses his available cash flow to pay mortgages on investment properties there is that much less money available to pay other unsecured creditors. All debt not repaid to the general creditors will be wiped out at the end of the bankruptcy.
When a Chapter 13 debtor is employed and maintains rental properties as an investment the properties are not essential to the maintenance of the debtor and his family. The bankruptcy trustee will usually object to the such debtor’s cram down on multiple investment mortgages on the basis that the debtor’s cash flow is funding the multiple investment loans instead of the debtor’s general unsecured creditors. Debtors in Chapter 13 should not finance discretionary investments unless they pay back 100% of their other creditors. Where, as in this case, the debtor’s primary business is the maintenance or renovation of rental real estate the trustee is more likely to accept the plan because the investments are required for the debtor’s support
Posted in Chapter 13 | Comments Off
Thursday, June 3rd, 2010
I’ve posted before about mortgage mediation program in Chapter 13 bankruptcy initiated by the Orlando Division of Florida’s bankruptcy courts. The program is now in place; the bankruptcy court has issued a standard order to be issued upon request by Chapter 13 debtors requiring mediation with their mortgage lenders.
This past week I had my first experience where a client is filing bankruptcy in order to take advantage of the Chapter 13 mortgage mediation program. This debtor has about $35,000 of credit card debt and an upside down house with two mortgages. He could "strip" his second mortgage in Chapter 13, but even then, he cannot afford the first mortgage payments given his current household income. He qualifies for Chapter 7 which would enable him to wipe out all debts and surrender the house, but he really wants to stay in his house. After considering his bankruptcy options, he has decided to file Chapter 13 bankruptcy and seek mortgage mediation as soon as possible.
This client believes that if he just talk to a mortgage company representative he can work out a modified payment. If mediation reduces his first mortgage payment he can use the Chapter 13 plan to strip his second mortgage and pay part of his credit card debts. If the mediation is not successful this bankruptcy debtor has the option convert to a Chapter 7 bankruptcy and walk away from both mortgages; the Chapter 7 option may motivate the mortgage lenders to be more flexible.
I explained to this client that he can also mediate with his lender in a state court foreclosure proceeding. Florida state courts require mediation during contested foreclosures. The disadvantage of this option is that my client would have to let his house go into default for at least three months before foreclosure would begin, he would have to hire an attorney to defend the foreclosure, and it would be several months after the foreclosure is filed before mediation would be scheduled. In Chapter 13 bankruptcy, mediation will be ordered soon after the case if filed.
Chapter 13 mortgage mediation requires that debtors contribute 31% of their net income to a modified mortgage payment. Also, "mediation" is not the same as "modification." Chapter 13 bankruptcy cannot force your lender to modify or reduce your mortgage, but it can facilitate discussions with the lender to see if a modification is feasible.
Posted in Chapter 13 | Comments Off
Tuesday, May 18th, 2010
In my office we learn something new every week. One of our Chapter 13 bankruptcy clients was paying a confirmed Chapter 13 plan. The plan included payments of the debtor’s car lease. Last month, the debtor called us to explain that his car lease was over the end of April, he wanted to turn the car in, and asked if he could buy an inexpensive replacement vehicle.
The general rule is that a Chapter 13 debtor cannot incur any new debts during a Chapter 13 plan without Trustee permission. We explained this debtor’s situation, and the Trustee told the Debtor he could buy a new car as long as the car loan payments were equal to or less than the current lease payments so that the unsecured creditors would receive no less money in the Chapter 13 plan. The debtor bought the new car.
We asked the Chapter 13 Trustee office what we needed to do with the Chapter 13 plan to show the new car payment.. They told us to file a motion to approve a modified plan with new car payment amount being made through the modified plan. We prepared a modified plan, the debtor signed it, and we filed it with the bankruptcy court. Today, the same Chapter 13 trustee office told us that upon further review they had provided some misinformation.
Here is what the Chapter 13 debtor needs to do in situations like that of this client. Debts incurred during the Chapter 13 case with Trustee approval must be paid by the debtor outside the bankruptcy plan. This means that the debtor writes a separate monthly payment to the car lender. The debtor also would file a plan modification that removes the lease payment from the plan. Otherwise, the debtor would not have enough money to pay for the new car because he would be paying the bankruptcy trustee the old car lease payment as well.
Chapter 13 cases can be complicated. Each debtor has a somewhat unique situation, and the issues sometimes stump experienced attorneys as well as trustee office administering these bankuptcies.
Posted in Chapter 13 | Comments Off
Thursday, May 13th, 2010
Clients, husband and wife, filed Chapter 13 bankruptcy in 2007. This couple filed bankruptcy to save their home which is subject to a first and a second mortgage. The bankruptcy court approved a five year bankruptcy plan, and clients are current on their plan payments. The couple also has a large second mortgage. Chapter 13 bankruptcy can "strip" a second mortgage if and when the home is worth less than the first mortgage balance. This couple did not qualify to stip their second mortgage because when they filed their Chapter 13 their home was worth in excess of their first mortgage balance.
Now, after years of declining home values, the couple called my office to report that their home value is less than their first mortgage balance. They asked if they can modify their Chapter 13 plan to strip their second mortgage under the changed circumstances.
This is the first time I’ve been asked this question. I suspect that many Chapter 13 debtors are in similar situations. I do not think the debtors easily can change their existing plan to strip the mortgage. I think that the debtors would have to file a petition with the bankruptcy court to revoke their plan confirmation if they want to re-do their plan to treat their second mortgage as an unsecured debt. I suspect the Chapter 13 Trustee would not support the debtor’s petition.
Another option would be for the debtors to voluntarily dismiss their Chapter 13 case. If the debtors are current on their plan payments, and they are, the court likely will not prohibit refiling a new case. In the new Chapter 13 filing the debtors could seek to strip their second mortgage. Debtors would incur the expense of a completely new case and would start a Chapter 13 plan payment schedule from the beginning.
Posted in Chapter 13 | Comments Off
Wednesday, March 31st, 2010
As a general rule debtors who file Chapter 13 bankruptcy must pay in full during their bankruptcy plan all of their "priority debts." Priority debts include among other things federal income taxes. Many people file Chapter 13 in order to pay without further interest a federal income tax liability over the course of a five-year bankruptcy plan.
A couple retained me to file Chapter 13 bankruptcy in order to deal primarily with an income tax debt. When we received their income and expense information and prepared a draft bankruptcy plan we found that they did not make enough money to pay all of their priority tax debt in their five-year Chapter 13 plan. We checked with the Chapter 13 trustee’s office to see if there was any way that Chapter 13 could help our clients, and the trustee’s staff said that, in fact, there was an alternative.
The Chapter 13 trustee explained that our bankruptcy judges in Orlando had approved Chapter 13 plans that did not fully pay all priority tax debt when the debtors were paying all of their disposable income into their plan for five years. The court may require also a reasonable payment to unsecured creditors. Taxes not fully paid in the Chapter 13 plan are not discharged by bankruptcy and remain owed and payable to the IRS after the court enters a discharge order at the end of the plan. The exception to the general rule of fully-paid priority claims in found in Section 1322 (a)(4).
I had never encountered a client with this issue. The Chapter 13 trustee office was helpful to me and to my client in this instance. In the Orlando jurisdiction the trustee’s office is the attorney’s best resource to deal solve your clients’ problems in Chapter 13 cases. The Chapter 13 trustee will not prepare your clients’ bankruptcy plans for you or otherwise do the attorney’s job, but they are willing source of assistance if you are unsure about how to handle an issue in a Chapter 13 case.
Posted in Chapter 13 | Comments Off
Friday, March 12th, 2010
Many taxpayer rely on their tax refunds to pay certain expenses they cannot afford on their normal salary. People who have filed Chapter 13 bankruptcy sometimes ask me what happens to their tax refunds during their bankruptcy. Do they have to hand over their refund to the Chapter 13 trustee, or can they keep their refund as long as they are current on their bankruptcy plan payments?
In most cases, a tax refund is part of the bankruptcy estate and must be surrendered to the trustee who would allocate the refund to the creditors. In our bankruptcy court the Chapter 13 exercises some discretion and may permit a debtor to keep a future refund for "emergencies" or priority expenses. Medical expenses and reasonable home repairs usually are consider valid reasons for keeping a tax refund, for example. The trustee can permit the debtor to apply a tax refund to pay property taxes for his home if they are not paid by the mortgage lender.
It is important that debtors request permission to keep tax refunds before they spend the refund. A Chapter 13 should ask their bankruptcy attorney to submit a request on their behalf as soon as they know the refund amount. Do not spend your refund unless your attorney tells you they have actually received trustee approval. If the trustee denies your request then you must surrender the tax refund to the Chapter 13 trustee.
Posted in Chapter 13 | Comments Off
