Are You Too Far Behind on Your Mortgage for Chapter 13? Chapter 11 May Help!

 Mortgage lenders have been delaying foreclosures for people all over the country. Ask any bankruptcy attorney–they've seen cases where people haven’t made a mortgage payment for two, three, or even four years, and the mortgage company hasn't even started the foreclosure process. Loan modifications can stretch on, court proceedings are scheduled and canceled, an unsuccessful Chapter 13, can all delay things. As a result, the mortgage arrearages–the amount you’re behind on your mortgage–can add up to a lot of money.

When you go to most consumer bankruptcy attorneys to file for a Chapter 13 repayment plan, you’re told that the plan payments will be too high for you to afford, since the full amount of the arrearage must be paid over a maximum of five years. If the arrears are $60,000, for example, this would require at least a $1,000 per month payment on top of resuming the regular monthly payment. Most people just can’t afford it.
This may result in many people thinking that they have no alternative other than losing their home. But there may be another alternative: an individual Chapter 11.
Most people don’t even know that individuals can file for Chapter 11; they think that it’s just for businesses. This is not true. In a Chapter 11 case, there is no five-year limit on the repayment term for mortgage arrearages. In some Chapter 11 cases, it is possible to obtain repayment terms of up to 30 years, without interest. In the example above, instead of a $1,000 per month payment, my client is looking at a monthly payment of $166.67. This is far more doable for most people.
Of course, Chapter 11 is not for everyone.  These cases tend to be far more complex and expensive than a Chapter 13, and there are not many consumer bankruptcy attorneys who know how to steer you through an individual Chapter 11.  However, we do.  Indeed, we have successfully managed several individual Chapter 11 cases.  Give us a call today to discuss your situation and learn whether a Chapter 11 bankruptcy may be the correct answer. 

Fourth Circuit Holds Inheritances Are Estate Property In Chapter 13 Cases

Recently, the Fourth Circuit Court of Appeals issued an opinion in Carroll v Logan.  This will have an impact for future chapter 13 cases in this circuit.

In Carroll, the debtors filed a chapter 13 case in 2009.  The Carrolls’ plan provided for a payment to unsecured creditors of approximately 3.8%, that is, each unsecured creditor who filed a claim would receive approximately 4% of what they claimed was owed.

A little over three years after the debtors’ filed bankruptcy, Mr. Carroll notified the court that he would receive $100,000.00 from an inheritance.  Upon such notice, the chapter 13 trustee moved to modify their plan to provide for the $100,000.00 to be paid through the plan toward unsecured creditors.  The debtors’ objected to the trustee’s motion.

At issue were two provisions of the Bankruptcy Code:  Section 541 and Section 1306.  Section 541 defines what property interests come into the bankruptcy estate upon filing for bankruptcy protection.  In particular, Section 541(a)(5) states that any property that the debtor acquires or is entitled to within 180 days after filing bankruptcy by bequest, devise or inheritance becomes property of the bankruptcy estate.  A reason for this provision is so that if a debtor knows that a family member is going to pass on soon and the debtor has lots of debts, the debtor won’t file bankruptcy immediately before the family member passes to discharge his debts and then have the full inheritance.  If a debtor inherits property within 180 days after filing, the trustee can get those assets to pay creditors.

In the Carrolls’ case, they had filed for bankruptcy in 2009 and did not become entitled to inherit anything until well after the 180 days since filing had passed.  As such, the debtors’ argued, they should not have to submit their inheritance to the chapter 13 trustee.

The trustee countered and the Fourth Circuit agreed that Section 1306 allows the trustee to reach the inheritance.  Section 1306 states that property of the bankruptcy estate includes, in addition to the property specified in Section 541 (see above), all property that the debtor acquires after commencement of the case but before the case is closed, dismissed, or converted to a case under a different chapter.  As such, under Section 1306, even though the debtor did not acquire the property within 180 days after his bankruptcy filing as set forth under Section 541, Section 1306 states that the after acquired property does come into the bankruptcy estate until the case is closed, dismissed or converted.  Therefore, the debtors would be required to pay the $100,000.00 inheritance into the plan (less their exemptions, if any).

This can create another factor to carefully consider before choosing a chapter 7 case or a chapter 13 case.  If you do not stand to inherit much from family members, it may not be much of a factor.  If you do stand to inherit something, a chapter 13 case can go on for up to five years and any inheritance acquired could go to paying your creditors.  At the same time, if you do not qualify for a chapter 7 case because you “flunk” the means test or if you must file a chapter 13 to cure mortgage arrears or other reasons, there may not be any other bankruptcy options.


A skilled bankruptcy professional such as those on this website can help you navigate the world of bankruptcy.  If you are facing financial issues, contact one of us today.

What is a Chapter 12 bankruptcy and do I qualify?

          Chapter 12 of the Bankruptcy Code is designed to protect family farmers and fisherman.  Southern California has plenty of both.  Still, this is a very uncommon form of bankruptcy.

          An individual or married couple who farm can file Chapter 12, but so can a farm corporation, LLC or partnership. There are some requirements to file a successful Chapter 12. You must have regular annual income, your debts cannot exceed $4,031,575 (adjusted yearly), and over 50% of your debts must have been related to the farming operation. In addition, if you are an individual or couple, over 50% of your gross income must come from farming operations.

          Farm Bankruptcy was first added to the Bankruptcy Code in 1986. In the 1980’s, there were many bank failures, and credit all but dried up for farmers. The result was a farm crisis. Chapter 12 Farm Bankruptcy was supposed to be a temporary emergency response, but was periodically extended. In 2005 when Congress passed a major overhaul of the Bankruptcy Code, making it harder and more expensive for consumers to file for bankruptcy, they actually strengthened Chapter 12 and made it permanent.

          The most powerful tool found in a Chapter 12 is the ability to re-do, or modify any secured debt. This includes mortgages and loans on livestock, crops and equipment. All aspects of the loans can be modified into what is effectively a new loan. The interest rate can be lowered. The principal balance can be decreased down to the value of the collateral. The term of the loan can be increased. Any arrears will disappear into the new modified loan.

          This ability to modify ANY secured loan in Chapter 12 is one of the major advantages of Chapter 12 over Chapter 13. Others include: There is no required “means test” in a Chapter 12; you do not have to get a Court Order extending the automatic stay beyond 30 days if you were in a previous Chapter 12; The eligibility limits are greater than in a Chapter 13.

          Family farmers in America are a dying breed. The continued access farmers have to Chapter 12 bankruptcy has allowed many farms to get through tough economic times and continue their family farm business and way of life.

          If you feel you may qualify for this powerful and effective bankruptcy, call us for a free consultation.  The call just might “save the farm”.

Bankruptcy is not a “Dirty Word”

I spend a lot of time talking to clients (and prospective clients) about the social stigma of filing bankruptcy.  That is probably the primary reason that people who need the protection bankruptcy offers wait too long to file, or don’t file at all.  Many people struggle with overwhelming debt for far too long, exhausting their resources (and often the resources of family members as well) because of their perception of bankruptcy.

So I was struck by something the Seventh Circuit Court of Appeals said in a recent decision involving NBA great Scottie Pippen.  Pippen had sued several media outlets for defamation because they reported, erroneously, that he had filed bankruptcy.  The three-judge panel found that such a report was not defamation per se.   Defamation per se essentially means someone says  something so bad about you that you don’t have to show that it damaged you–we assume that damage occurred.  (Think of it like the playground taunt that is so bad you don’t get in trouble if you sock the person who said it.)  In the Pippen case, the court said.

A similar taint does not attach to the reputation of people who go bankrupt. Many innocent reasons lead to financial distress. Readers of the defendants’ statements who mistakenly believe that Pippen is insolvent readily could conclude that his advisers bear the blame.

Some people need bankruptcy because of bad financial advice, others because of an illness and resulting bills, or because of the loss of a job, or a divorce, or a combination of those things.  Some people need bankruptcy simply because their income has dropped, or just hasn't kept pace with the cost of living.  Given that there are so many factors that are out of your control, why should the perception that bankruptcy is a dirty word keep you from seeking the protection that you need?

I think of bankruptcy like surgery.  I don’t know anyone who wants to have surgery.  (From that statement you will conclude, correctly, that I don’t know any celebrity plastic surgery addicts.  Thankfully.)  But if you are sick, or in pain, and surgery will correct a problem, or give you a better quality of life, or save your life, how many of us would refuse?  Bankruptcy is financial surgery.  You eliminate the bad stuff, and start over fresh without a financial tumor weighing you down. Without the stress of bill collector calls.  Without trying to decide which bill to pay when your paycheck just won’t stretch anymore. Without worry over foreclosure or repossession.

No, bankruptcy is not a dirty word.

Should I File a Chapter 7 or a Chapter 13 Bankruptcy

While some of my clients know what bankruptcy chapter they should file under, most look to me to advise them whether to file for Chapter 7 or Chapter 13 (or Chapter 11 or Chapter 12, the topics of a later blog). What do I look at in deciding which chapter to recommend?

My “default” setting is Chapter 7. This is the least expensive, fastest and simplest chapter of the Bankruptcy Code. Unless there is a significant reason to file under a different chapter, I will normally recommend that the client file for Chapter 7.

What happens in a Chapter 7? The answer depends on the type of debt. Generally, there are three kinds of debt: priority, secured and general unsecured. Priority debt consists of recent tax debt and domestic support obligations such as alimony and child support. Priority debt is not dischargeable in a Chapter 7. Unless it’s paid in full during the case, you still owe it after you get a discharge. Most secured debt, that is, debt where you pledge something as collateral, such as mortgages and car loans, are changed from “recourse debt” to “non-recourse debt.” What does this legalese mean? It means that if the lender could sue you for a deficiency or shortfall after a foreclosure or repossession if the sale of the collateral doesn’t bring in enough to pay the debt in full, the bankruptcy discharge stops them from going after you. All they can go after is the collateral, and if it doesn’t bring in enough to pay the debt in full, tough. You’re off the hook. This means that you can walk away from the house or car if you want to. If you don’t want to, just keep the payment current and you’ll be fine. Upon the entry of a discharge, most general unsecured debt–credit cards, medical debt, personal loans, old taxes, tax penalties, foreclosure and repossession deficiencies, unpaid rent, unpaid HOA and condo fees, unpaid utility bills, etc. (but not student loans)–are wiped out. You don’t need to pay these debts at all.

A typical Chapter 7 lasts about 4 months from filing to discharge.

Why would you want to file a Chapter 13? Several main reasons:
1. You aren’t eligible for a Chapter 7. You fail the means test, or have too much disposable income to qualify for a Chapter 7. Or you might have filed a Chapter 7 case in which you received a discharge within the last eight years. None of these are problems in a Chapter 13
2. You are behind on your mortgage and need time to catch up. A Chapter 13 gives you up to five years to spread these payments out to bring the mortgage current, without interest.
3. You owe more on the first mortgage on your home than it’s worth, and have a second or third mortgage. A Chapter 13 lets you “strip off,” or wipe out, wholly unsecured second and third mortgages.
4. You’re behind on your tax or domestic support payments and need time to catch up. A Chapter 13 gives you up to five years to spread these payments out to bring them current.
5. You owe a domestic support property distribution and want to discharge it. A Chapter 13 “super discharge” allows you to do this.
In these circumstances, I would normally advise my clients to consider a Chapter 13.
This decision is not always easy or straightforward. It requires a detailed analysis of your assets, debt, income and expenses, and an in-depth knowledge of the Bankruptcy Code. An experienced bankruptcy attorney is the best person to advise you.

Forcing the Mortgage Holder to Take Back a Home through Chapter 13

Using bankruptcy to surrender a home that has become unaffordable is nearly as common as using bankruptcy to stop a foreclosure so that a home can be retained. The question whether to keep a home when filing bankruptcy is usually answered by comparing the amount of the home’s monthly mortgage payments with the income the debtor is able to devote to housing payments. If the payments are no longer affordable, the debtor might choose to surrender the home as part of either a chapter 7 or chapter 13 bankruptcy filing.

However, in practice this is sometimes more difficult than it would seem at first glance. Mortgage companies are often slow to foreclose on homes that are surrendered to the lender in bankruptcy, leaving the home vacant, and still technically under the ownership of the bankruptcy debtor, for months or even years after the bankruptcy was filed.

The slow-to-foreclose mortgage company can create a host of problems for the surrendering-the-home bankruptcy debtor, who could be held liable for post-bankruptcy homeowners association fees, property assessments, other ownership related financial obligations (but not the monthly mortgage payments, the personal obligation for which the debtor was discharged in the bankruptcy), or property owner liability for injuries occurring at the vacant home.

However, a recent ruling from a Hawaii bankruptcy court approved an ingenious solution to the problem of the non-foreclosing lender. This chapter 13 decision, In re Rosa, No. 13-00630 (Bky. Hawaii July 8, 2013), approved over the objections of the chapter 13 trustee a chapter 13 plan which contained a provision designed to solve this problem by conveying the home back to the first mortgage holder.
In the Rosa case, the debtor’s chapter 13 plan stated that title to the real estate “shall vest in City National Bank/OCWEN Loan Service upon confirmation, and the Confirmation Order shall constitute a deed of conveyance of the property when recorded at the Bureau of Conveyances.” The chapter 13 trustee objected, arguing that a “surrender” under the bankruptcy law did not transfer ownership of the surrendered property until the lender actually foreclosed.

The court disagreed with the trustee and pointed out that here, the debtor had gone beyond merely “surrendering” the property in the chapter 13 plan. Rather, the chapter 13 plan plainly stated that confirmation of the plan by the court would transfer ownership to the lender, and that the order confirming the plan would be recorded like any other deed of conveyance. The lender had been served with this plan and it had not objected to the plan in court. The plan was therefore confirmed over the objections of the chapter 13 trustee.

The result of this strategy for this debtor was a prompt solution to the potential foot-dragging behavior by the lender in foreclosing, which otherwise might have led to years of wrangling by the debtor over unpaid future property assessments.

If you feel “stuck” with a house you no longer desire to keep, call us today to discuss your options and whether a Chapter 13 makes sense for you.

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Over Median? - Get Creative to Fit into Chapter 7

Chapter 7 offers many advantages over Chapter 13:

• faster process – 3 months vs. 5 years
• lower cost
• more complete relief from debts

When I meet with a prospective client, I start my evaluation by by asking “can this person fit into a Chapter 7?”

By contrast, the Bankruptcy Code is designed to push debtors into Chapter 13, where they repay some or all of their debt. This issue – how much, if anything, should a debtor pay back to creditors – underlies most of the conflict (and litigation) that can arise in a bankruptcy case.

As an advocate who works on behalf of debtors, my goal is to help my clients obtain a fresh start – that is, complete their bankruptcy cases as quickly as possible and with as little residual debt as possible.

One hurdle that appears in just about every bankruptcy case is the means test. Designed to bar Chapter 7 relief from debtors who have the means to pay back their debts in Chapter 13 or Chapter 11, the means test uses a clunky, mechanical series of calculations to predict future earnings capacity based on past performance. How ironic that federal securities laws require sellers of investments like stocks and mutual funds to specifically disclaim that past performance is no guarantee of future results.

In any case, an astute bankruptcy lawyer should view the means test as a flexible structure and not a monolith. There are numerous angles to argue that the means test should not apply in a particular case or that the results in a particular case should be ignored. A nice example of good lawyering in this regard was published by my BLN colleague Jay Fleischman in his law firm blog, where he points out that a student loan incurred for a business purpose may make a Chapter 7 case non-consumer in nature and this eliminate the means test requirement entirely.

In cases where the means test does apply, it is important to look for every possible may be possible to end up with the result that you are eligible to file Chapter 7 if you wish. If you are an above-median debtor the first draft of your means test may yield the result that you cannot file Chapter 7 but you and your attorney must dig deeper.  Contact us today to discuss several tactics that may help you qualify for Chapter 7, even when the means test suggests that you may not be eligible.