Archive for the ‘Chapter 13’ Category
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.
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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
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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.
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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.
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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.
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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.
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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.
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Wednesday, March 10th, 2010
The general rule in Chapter 13 bankruptcy is that the debtor makes one monthly payment to the Chapter 13 trustee who then distributes monthly payments to the debtor’s creditors- the trustee is the collection agent for all creditors. Some debtors ask whether they can pay one or more of their creditors directly each month; its called making payments "outside the plan."
Why would a debtor want to make payments outside the plan. Possibly, to minimize the costs of Chapter 13 bankruptcy. The bankruptcy trustee charges a fee to administer a Chapter 13 payment plan. The fee ranging from 6% to 10% is assessed against all plan payments collected and administered. Debtor payments outside the plan directly to creditors are not subject to the trustee fee.
Our bankruptcy court will permit payments to secured creditors outside the plan if the debtor has arranged for automatic payments to the creditor from the debtor’s employer or his bank account. The automatic payments system must have been in place before the debtor filed his Chapter 13 petition.
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Monday, December 14th, 2009
I have been representing debtors in bankruptcy cases filed in the Northern District of Georgia for over 20 years. Until the law changed in 2005, filing bankruptcy was a fairly straightforward process – often I would meet with a client, decide whether to file and select Chapter 7 or Chapter 13, collect information about creditors, develop a budget, then file that day.
Attorney's fees and filing fees in those days were relatively low and relatively hassle free. Most Chapter 7 cases processed through to discharge, and Chapter 13 cases worked as long as the debtor remained employed and committed to making his case work.
Fast forward to October, 2005 – the time that the BAPCPA amendment to the Bankruptcy Code went into effect. The system became significantly more complicated. Clients were expected to gather page after page of documents, lawyers were charged with performing extensive budget calculations (the median income and means test).
Fees went up because both the attorney's liability and the amount of work required increased greatly. And what is the end result? Many people with limited income and no hope of paying it back are filing Chapter 7. Others who would have fit into Chapter 7 sometimes do not qualify immediately and end up having to delay their filing for a few months. Folks with some capacity to pay end up in Chapter 13, but trustees are more demanding and Chapter 13 plans that would have worked under the old law do not always work now.
Honest, hardworking men and women have to jump through hoops and pay a lot more money. In my career I can count on the fingers of one hand the number of clients or potential clients who I felt were dishonest. Those with the goal of gaming the system are not deterred. If the purpose of the BAPCPA amendments were to ferret out fraudsters, it has been a complete waste of time.
Another unintended consequence of the BAPCPA laws – deserving debtors do not seek the relief to which they are entitled because they get frustrated with all the paperwork required. Many of these folks remain in financial limbo – unable to save or psychologically move forward because of crushing debt. In a macro-economic sense I wonder if the country is better off with these folks living in financial purgatory rather than moving on with a fresh start.
My colleague, South Carolina bankruptcy lawyer Russ DeMott, and I were chatting about this tendency of deserving debtors to give up or delay filing because of the burden that the Bankruptcy Code places on debtors in terms of document production, costly credit counseling that offers marginal benefit and record keeping. Russ calls this syndrome "financial repression" and he has written a compelling and thoughful article about this problem. Russ has given me permission to republish his article on this blog, which will be the next post published here. You should also check out Russ' Charleston bankruptcy blog. Your feedback is welcomed.
Posted in BAPCPA, Chapter 13, Chapter 7, Credit Counseling, General consumer bankruptcy info, Georgia Bankruptcy, New Bankruptcy Law | Comments Off
Monday, November 9th, 2009
Here's a blog post of interest to anyone considering a Chapter 13 bankruptcy and who owns a car subject to a car lien. South Carolina Bankruptcy Lawyer Unleashes Vulcan Intellect on Hanging Paragraph. The post authored by South Carolina bankruptcy attorney Russell DeMott explains the law pertaining to the treatment of car loans in Chapter 13. If you purchased a car more than 910 days before filing Chapter 13 you can cram down the secured portion of the car loan to the car's current value. The balance of the car loan, the "upside down" amount, is treated just like an unsecured credit car. Part of the unsecured car loan amount may be discharged in a Chapter 13.
There is an exception to the rule. The rule prohibing cram downs of car loan made within 910 days of filing only applied to cars purchased for your personal use. Mr. DeMott's blog post explains a case where a husband purchased a car for his wife within the 910 days. The debtor husband, not the wife, signed the car loan. The husband and wife filed a joint Chapter 13. The judge ruled that the joint Chapter 13 plan could cram down the car loan even though it was taken out within 910 days of the bankruptcy.
The post quotes part of the bankruptcy attorney's argument:
““while section 302 permits the filing of a joint case, if the court were to find that the hanging paragraph applied to Mr. Brown’s purchase of the vehicle, it would result in the Browns being penalized for filing a joint case.”
Read the post for a full explanation. If you are filing Chapter 13 with a car purchased within 910 days make sure you consider whether the car was purchased for the personal use of the debtor who signed the car loan. Cars purchased for children, for business use, for your spouse may be outside the cram down restrictions.
posted by Jonathan Alper, banrkuptcy and asset protection attorney, Orlando, Florida
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