Archive for the ‘Chapter 13’ Category
Friday, November 12th, 2010
It’s fun to read about cases where a bankruptcy debtor successfully challenged a mortgage lender’s attorney fee claims. In this Chapter 13 case GMAC mortgage filed a secured claim including $300 legal fees for work incurred by the bank’s bankruptcy attorney to protect the bank’s secured interest and rights in the debtor’s property during the Chapter 13 bankruptcy. The debtor’s first mortgage payments were current upon filing bankruptcy and the debtor proposed to pay the mortgage outside the bankruptcy proceeding.
The court denied GMAC its attorney fees. The court pointed out that the first mortgage was on the debtor’s principal residence and its terms or amount could not be modified in the Chapter 13 plan. The court found that the bankruptcy filing may have created some extra work for the mortgage lender, but that this work was administrative in nature and not legal work requiring a licensed attorney: in other words, its extra “paper work.” The court said that referring a matter to an attorneys office does not automatically create necessary legal work.
Look at the first mortgage lenders claim in your Chapter 13 bankruptcy, and if your facts are the same as in this case, consider filing an objection to the lender’s claim which includes automatic, standard legal fees. In re Jaramillo 09-33951, Southern District Florida.
Posted in Chapter 13, Court Decisions | Comments Off
Wednesday, November 10th, 2010
People with significant real estate investments have trouble qualifying for Chapter 13 bankruptcy because of Chapter 13 debt limits. Debtors cannot file bankruptcy if their secured debts exceed approximately $1 million or if their unsecured debt exceeds about $330,000. I read a case about a client with several million dollars real estate mortgages who came up with a creative plan to squeeze himself into a Chapter 13 bankruptcy.
The debtor’s petition stated that he intended to surrender all of the secured real property leaving him with no secured debt. Problem was that all the real estate was “upside down” so the surrender and resulting foreclosure would subject the debtor to large unsecured deficiency claims totaling far more than the $330,000 unsecured debt ceiling. So, the debtor argued that because amount of the deficiency claims was undetermined, that is unliquidated, at the time he filed his petition these unliquidated claims could not be computed and assessed against the unsecured debt ceiling.
Nice try, but no cigar. The bankruptcy court ruled that the majority view on this issues is that uncertainty regarding the amount of a debt is insufficient to render the claim contingent or unliquidated for the sole purpose of determining the Chapter 13 debt limits. In re Hinds 09-23764, Southern District Florida
Posted in Chapter 13, Court Decisions | Comments Off
Friday, November 5th, 2010
A reader sent me a question about Chapter 13 bankruptcy and homeowner association fees. He said he could not find on the internet a discussion of whether a Chapter 13 bankruptcy could strip off a lien filed by a condominium homeowner association when the condominium unit was worth less than the first mortgage balance.
The general rule is that a Chapter 13 plan can remove the lien of a second and third mortgage so long as the first mortgage balance exceeds the property value on filing date. With no property value to secure the junior mortgages, these mortgages are treated as general unsecured debt and the mortgage liens are stripped upon successful completion of the full Chapter 13 plan.
Florida statutes provide at a lien filed by a HOA automatically takes precedence over second and third mortgages, but remains subordinate to first mortgages. So, if a Chapter 13 debtor can strip a second mortgage it would seem that the “strip” would also eliminate the HOA lien. However, Florida statutes (F.S. 718.116) provides protection of HOA liens. A first mortgage lender who forecloses on a property must pay the HOA the lesser of six months worth of HOA dues or one percent of the mortgage balance. The issue is whether the statutes special protection of HOA liens makes HOA liens exempt from stripping in a Chapter 13 plan.
My guess, without research, is that a Chapter 13 plan can treat a pre-filing HOA lien as an unsecured debt where there is no property value securing the lien. The Florida statute applies to first mortgage liability upon foreclosure; not to bankruptcy proceedings. Although a Chapter 13 plan could propose to strip a HOA lien, if the plan fails and the first mortgage forecloses, the mortgage lender would probably remain liable to the HOA for the amounts due under the above Florida statute.
Posted in Chapter 13, Client Questions | Comments Off
Wednesday, October 27th, 2010
Chapter 13 bankruptcy can strip a second mortgage on your primary residence, and Chapter 13 can cram down to market value mortgages on investment property. Properties rented for income are investment assets subject to cram down. The debtor cannot cram down or in any other way alter the terms of a first mortgage on his primary residence. Another bankruptcy attorney suggested the following pre-bankruptcy planning for people intent on keeping their “upside down” primary residence.
Here’s the plan. The future bankruptcy debtor moves out of his homestead and lists it for rent. The debtor rents his former home on a short term lease. Meanwhile, the same debtor moves into a rental apartment or rental home. Then, the debtor files Chapter 13 bankruptcy and lists his former residence, now a rental property, as an investment property. He files a motion to cram down the first mortgage on the former homestead to current value and strip the second mortgage. Assume the court grants the motion to cram down the mortgage. A reasonable time thereafter, and as the Chapter 13 plan progresses, the debtor does not renew his tenant’s lease and moves back in to his former home, now with a crammed down mortgage. The debtor figures that as long as he his current on his Chapter 13 payments no one is going to inquire where he resides.
None of my clients have tried this so I have no experience whether the plan works. The plan is clever, but in my opinion, and I may be wrong, it’s a fraudulent plan because the debtor in this hypothetical does not intend his former residence to be an investment property. Nevertheless, this planning could work, and maybe people are utilizing this type of Chapter 13 plan. Any bankruptcy plan can work if the critical people don’t know about it; but, in the long run, secrecy is not something to rely upon.
Posted in Chapter 13 | Comments Off
Monday, October 11th, 2010
The Case Ransom v. MNBA appeared before the Supreme Court last week and raised interesting questions about the role of the means test bankruptcy filers must pass in order to qualify for protection under Chapter 7 of the U.S. Bankruptcy Code. Here's a look at what's involved in the case and what it might mean for future bankruptcy filers.
Car Payments and Income in the Means Test
The court case involves the bankruptcy petition of man named Jason Ransom.
- No car loan: Sources note that Ransom has a car that he owns fully – that is, he is no longer making payments on the vehicle.
- Ownership deduction: In his bankruptcy petition, Ransom reportedly claimed an ownership deduction of $471 per month for his vehicle.
- Court rejection: Because he had no car payment, though, the bankruptcy court rejected this deduction in his initial case filing. An appellate court upheld the decision. The Supreme Court must make a final decision.
- IRS definition: Apparently, both the district court and the appellate court denied Ransom's deduction claim based on the Internal Revenue Service's definition of an allowable deduction for car owners, which limits such deductions to people who are currently making payments on their vehicles.
So the issue at hand is whether or not a Chapter 13 filer (that is, a bankruptcy petitioner who has above-median-income levels and so does not pass the Chapter 7 means test) can keep money each month (instead of paying it to creditors) under the car ownership deduction if he or she is not currently making payments on a car.
Why It Matters: Your Money in Chapter 13 Bankruptcy
The issue may sound fuzzy, but the Supreme Court's decision could have real impact on future bankruptcy cases. Here's a look at why and how.
- The language of the Bankruptcy Code: While the language of the U.S. tax code is clear that an ownership deduction is only available to those still making payments on a vehicle, the language of the U.S. Bankruptcy Code is a bit fuzzier.
- The cost of owning a car: As Ransom's lawyers are reportedly arguing, the "ownership deduction" should be available to those who own their cars outright because such vehicles require maintenance and repairs – especially if they're older.
- The expensive car loan argument: One of the reasons that this issue is so interesting is because it essentially rewards people who have expensive car loans and newer cars and punishes those who are (perhaps more fiscally responsibly) driving older vehicles they've already paid for.
- The freedom of extra money: If the Supreme Court decides to grant the ownership deduction to people who own their cars outright, it could mean greater financial independence for car owners who file for bankruptcy. Because they'd be able to save more money each month, they could potentially catch up on other payments more easily and possibly even build savings, thus preparing themselves more fully for post-bankruptcy life.
Posted in Bankruptcy Courts, Bankruptcy Filing Requirements, Bankruptcy Law, Bankruptcy News and Events, Chapter 13, Chapter 7, Means Test, Supreme Court | Comments Off
Thursday, September 30th, 2010
A Chapter 13 debtor can strip a second mortgage from his primary residency if the value of his home is worth less than the first mortgage so that there is no equity securing the second. I received a call from one of my Chapter 13 clients who had filed Chapter 13 bankruptcy in 2007. The debtor had a first and second mortgage on his residence. At the time he filed the house was worth more than the first mortgage so the Chapter 13 plan did not attempt to strip the second mortgage. The debtor’s plan was confirmed at the end of 2007. The debtor is current on his payments. He reports that since the plan confirmation his residence has continued decreasing in value, and that currently the house is worth significantly less than the first mortgage. He wants to know if he can modify his confirmed Chapter 13 plan to strip the second mortgage.
The general rule is that a debtor’s Chapter 13 plan can and should be modified to reflect significant increases or decreases in disposable monthly due to changes in income or expenses. I have never been asked before to insert a mortgage strip into a confirmed Chapter 13 plan. My paralegal looked into the issue by asking some Chapter 13 experts. We found that the answer is that there is no answer, at least in our bankruptcy courts. We could find no one who has seen a post-modification mortgage strip.
My client decided not to pursue the issue because of the time, effort, and expense of moving forward with a legal action where the outcome was so uncertain. Nevertheless, it seems that there are many Chapter 13 debtors with confirmed plans in a similar situation. Someone will decide they have enough money at stake to try the post-confirmation mortgage stip.
Posted in Chapter 13 | Comments Off
Tuesday, September 14th, 2010
There are dozens of lawyers out there who offer to prepare and file bankruptcy cases. Some work in high volume "bankruptcy mill" firms that compete on price while others compete on experience, knowledge and service. Usually the cost differential is a few hundred dollars, but when you are considering bankruptcy, every dollar counts – so why would you want a lawyer like me as opposed to a firm that would offer to represent you for a lower price?
I could offer a glib answer like "if you needed brain surgery, would you look for the cheapest surgeon on the one with the most experience and industry recognition" but that does not really answer the question. Perhaps it would be helpful if you could look over my shoulder as I analyze a real life situation that came before me recently.
Earlier this month an email arrived from a couple who wanted information about bankruptcy. The wife wrote that she was a stay at home mom raising 2 children and that her husband lost his job about a year ago, and recently started back to work at a lower paying job. Their current household income is just under $50,000. They own a house that is now worth less than what they paid for it – the house is worth about $200,000 – the first mortgage is $210,000 and the second mortgage is $35,000. They own one older car outright and are financing a mini-van. They have also incurred around $25,000 of credit card debt – most of which was used trying to keep the mortgage current.
Earlier this year they fell behind on both the first and second mortgage. The first mortgage lender started foreclosure proceedings, but suspended foreclosure and offered to consider my potential clients for a mortgage modification. They have been making modified payments for several months but when they called the lender to ask if they had been approved for a permanent modification, the account rep told them that their modification paperwork had not been approved but that their application had been sent to another department for a reconsideration. News of this decision had not been provided to my prospective clients – the only reason they found out was from their call. No one from the mysterious reconsideration division was available and their multiple calls have not been returned for over 2 weeks.
They decided to contact me because they are getting the sense that the mortgage company is unlikely to approve their modification and they want to be prepared for a possible foreclosure. What are their options?
Here is what I advised them through my conversation with the wife:
First, I asked what was their desire regarding the house – was keeping the house a priority? The wife responded that they would like to keep their house but they were not sure they could afford it given the husband's reduced salary.
I explained that Chapter 13 is the type of bankruptcy that can stop a foreclosure but that Chapter 13 would not allow us to change the amount of the monthly payments, nor would it change the total balance due on the mortgage. Chapter 13 would allow them to "cure" their arrearage by paying that arrearage (the past due payments) over a five year period of time, along with other debts that would also be included in the Chapter 13 payment plan. However, if they were not able to afford the regular monthly payments Chapter 13 probably did not make much sense.
The only possible justification for a Chapter 13 would arise from the possibility that they could use Chapter 13 to "strip" the second mortgage and make that unsecured. Under Chapter 13 law, a second mortgage that is wholly unsecured, meaning that the balance due the first mortgage exceeds the fair market value of the home. If the second mortgage is wholly unsecured, we can file a motion to strip the lien, thereby making the second mortgage debt an unsecured claim in the Chapter 13. If our Chapter 13 plan called for paying unsecured debt at 5 cents on the dollar, then Chapter 13 might be something to consider.
In this case, the wife advised me that the monthly payment due the first lender was more than what they could afford, plus she did not seem enthusiastic about signing on for a five year payment plan, so we decided to remove Chapter 13 from consideration.
We then proceeded to discuss Chapter 7.
I pointed out that Chapter 7 would allow the couple to discharge their credit card debt as well as any potential liability arising from the surrender of their home. I felt that the real danger came from the second mortgage lender as it has been my experience that first lenders rarely pursue deficiency claims because of the Georgia law that requires them to go to court to certify the deficiency before a judge within 30 days of the foreclosure. Second mortgage holders, by contrast, need only file suit on the promissory note associated with their loans. I see far more deficiency balance claims from second mortgage lenders than from first mortgage lenders.
I also noted that since the foreclosure process could take several months, one strategy here would be to remain in the house and pay nothing – nothing to either mortgage lender and nothing to the credit card lenders. This strategy would allow my prospective clients to reduce their budget outflow dramatically for several months while they built up a small cash reserve, and then file bankruptcy in four to six months when creditors were starting to take action. I noted that this strategy was based on economics, and that they would have to be comfortable with the moral implications of this course of action. I also noted that this "wait until the last minute" strategy would cause significant damage to their credit in addition to the bankruptcy. By contrast, filing a Chapter 7 when there were few or no 120 day late references would make recovery from bankruptcy a little easier. Credit reports document payment histories and while a bankruptcy discharge will put the balances at zero, it does not delete the negative payment histories.
On the other hand, I advised the wife that if she and her husband waited to file and the husband secured a better, higher paying job, their household income might leave them with disposable income in their budget, or it might cause their household income to exceed the median income for a family of four, thereby making Chapter 7 much more difficult or impossible. It has been my experience that when household income exceeds the median (in Georgia the current median income for a family of 4 is $68,258) by $10,000 or more, it can be very difficult to qualify for Chapter 7 under the means test. Thus, if the husband was actively looking for employment and his target income was $80,000 or more, waiting to file Chapter 7 might not be the best idea.
The wife then asked me about the credit report issue – how long would it take for she and her husband to rebuild their credit. I responded by saying that it my experience, a Chapter 7 debtor can expect his credit score to remain depressed for eight months to a year following the Chapter 7 discharge. However, Chapter 7 has the positive effect of eliminating all debt and thereby causing an improvement to the debt to income ratio. Further, individuals can only file Chapter 7 once every eight years – so from a lender's perspective a recently discharged debtor has no debt and cannot file bankruptcy for at least 8 years.
I assured the wife that I made it my practice to follow up with my clients who had received a discharge to review their credit reports three to five months after discharge. I have found that at least half of the time, there are errors on the credit reports that artificially depress post bankruptcy credit scores and sometimes, the errors are actionable, meaning that we can collect damages from creditors for Fair Debt Collection Practices Act violations. In a few cases I have been able to collect enough in damages to cover the attorney's fees and filing fees associated with the original bankruptcy filing!
I ended by conversation with the wife by thanking her for contacting me. I then followed up our conversation with a brief email summarizing what we had spoken about and providing her with the "get started" link to one of my web sites.
I hope you can see that even a "simple" fact pattern can give rise to a variety of options and pratical considerations. Consumer bankruptcy is not a "one size fits all" practice and I am able to raise all of the points that I did because I have seen a lot of different issues over the past 23 years. If you have any questions about what have written here or if you want to discuss your personal situation, I encourage you to contact attorney Susan Blum or me by phone at 770-393-4985 or send us an email.
Posted in Chapter 13, Chapter 7, Credit, Current, Foreclosure, General consumer bankruptcy info, Georgia Bankruptcy, Lenders, Mortgage, a, and, because , choosing a bankruptcy lawyer, claims, deficiency, document, easier , exceeds, georgia, histories, house, household, in, income, keeping, lender, median, payment, priority , proceedings, pursue, rarely, reports, responded, started, the, wife | Comments Off
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
