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You Cannot Modify a Primary Mortgage in Chapter 13 Bankruptcy… Except When You Can.

I have said it here before, and I will say it again. You cannot bifurcate and cram down an under-secured primary mortgage when your primary residence is named as the securing property.

Loan Modification in Chapter 13 Bankruptcy

Let me take a step back. Chapter 13 bankruptcy allows for the modification of liens secured by property other than the debtor’s primary residence. Specifically, see 11 U.S.C. §§ 1322(b)(2) below:

Subsection (b)(2) permits a plan to “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims”

In most cases, the modification of such secured claims involves reducing the amount owed to fair market value of the securing property or reducing the accrued interest rate to current economic standards. Again, much to the dismay of Arizona home-owners, this modification cannot be applied to the primary lien on a principle residence.

A recent chapter 13 bankruptcy case in Arizona confirmed a notable exception to the above standard. In this case, a creditor holding two short term loans consecutively secured by the debtor’s primary residence filed proof of claims in excess of $700,000.

The value of the securing property was estimated at less than $40,000, and the debtor proposed to pay as much to the secured creditor through the plan. As you can imagine, the creditor objected to this treatment based upon the above mentioned code.

Ultimately, the bankruptcy court ruled in favor of the debtor, according to another section of the bankruptcy code that I have withheld from you thus far. Section 1322(c)(2) of the code, included below, permits modification of a claim secured by a principal in cases where the obligation matures and becomes due in full before or during the Chapter 13 plan term.

In a case in which the last payment on the original payment schedule for a claim secured only by a security interest in real property that is the debtor’s principal residence is due before the date on which the final payment under the plan is due, the plan may provide for the payment of the claim as modified pursuant to section 1325(a)(5) of this title.

Can My Creditors Force Involuntary Bankruptcy?

There is no denying that Americans watch too much TV. Don’t get me wrong, I’m as guilty as the rest. Today is Thursday? I’m only a little embarrassed to admit that there may be a little GTL in my near future. YEEEEAH BOY. Regardless, I tend to believe this American past time has honed our flair for the dramatics. That birthmark on your shoulder? Probably Sarcoidosis. Your colleague calls in sick? A conspiracy. On a similar note, below is a dramatized version of a common fear expressed by my bankruptcy clients:

Oh jeez, gosh darn. Creditors are forcing me into bankruptcy. Involuntary petition? Why won’t they leave me alone. I won’t do it. They can’t make me. Can they make me? WHAT CAN I DOOOO? [proceeds to pull out hair]

What is an Involuntary Bankruptcy?

arizona bankruptcy attorneyBankruptcy Code Section 303(b)(1) states that an involuntary case can be commenced against a person by the filing of a petition by “three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, or an indenture trustee representing such a holder, if such noncontingent, undisputed claims aggregate at least $14,425 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims.”

This provision allows creditors to seek recovery of their claim in instances when a debtor may be trying to unfairly divert funds away from legitimate creditors. Through the appointment of a bankruptcy trustee to the case, creditors are ensured that all available funds will be used to satisfy claims set forth by the creditors and that all claims will be treated without preference. In addition, it allows creditors to submit a claim for actual and necessary expenses.

Who Can Force an Involuntary Bankruptcy?

An individual or business can be forced into involuntary bankruptcy under chapter 7 or chapter 13 of bankruptcy code, provided that several provisions are met. The first involves the number of creditors. If the debtor has more than twelve creditors, the case must be commenced by at lease three non-insider creditors. One creditor is sufficient when the debtor has less than 12 creditors. A second provision states that claims may not be contingent on pending lawsuits or subject to a “bona fi de dispute.” In aggregate, they must include $12,300 of unsecured debt.

If the creditors meet the above requirements outlined above and in § 303, they must file an involuntary petition, providing proper service to the debtor in question. Subsequent to service, the debtor has only 20 days to respond to the involuntary petition. There are numerous plausible defenses against an involuntary petition, which can be explained further by any experienced bankruptcy attorney.

Why You Shouldn’t be Scared of an Involuntary Bankruptcy

As previously mentioned, when a debtor has 12 or more creditors the commencement of an involuntary petition depends on the combined effort of 3 or more creditors. In addition, the creditors must be non-insiders and the debts non-contingent. Such a combined efforts is uncommon.

In addition, there is little reason to initiate an involuntary petition against most individual debtors. Remember that the majority of chapter 7 bankruptcy cases filed in Arizona are classified as “no-asset,” meaning the bankruptcy trustee has found no assets worth liquidating in partial fulfillment of any unsecured debts. This means the creditors initiating the bankruptcy proceedings are arguably worse off than prior to filing, when the debtor was still liable for their claim.

Though the possibility exists for creditors to commence an involuntary petition against an individual debtor, it is rarely carried out in actuality. More commonly such petitions are filed to force a corporation to address their debts, when funds are unjustly diverted away from creditors.

On a final note, if you are currently struggling to repay your debts and are at risk of an involuntary bankruptcy petition, you may consider whether bankruptcy is actually a good option for you. Filing for bankruptcy can be a prudent financial decision for those struggling with burdensome debt and consulting with an experienced Arizona bankruptcy attorney may actually be your best option.

Is This Debt Secured? How To Determine If You Qualify For Bankruptcy Under The Chapter 13 Debt Limits.

For those of you filing for Arizona chapter 7 bankruptcy protection, please stop reading now. No, this isn’t confidential information for members of some secret club – so don’t feel left out. However, I am going to say a few things about the Chapter 13 bankruptcy secured debt limit, and I don’t want to confuse anybody. The last thing I want is to get a frantic phone call from a chapter 7 bankruptcy clients, 5 minutes after this post is live.

What are the chapter 13 bankruptcy debt limits? An individual can file a Chapter 13 case if they have non-contingent, liquidated unsecured debts LESS than $360,475 and non-contingent, liquidate secured debts of LESS than $1,081,400. Note that these values are not set in stone, they change every few years based on the changing economy.

It has been my experience that the secured debt limit is more often a problem than the unsecured. How can that be when the secured debt allowance is roughly 3x that of the unsecured? There are two reasons. The most obvious is that high ticket items such as homes and cars are secured forms of debt. In addition, there are additional categories of secured debt that are often overlooked.

So, what types of debt are secured? I have already mentioned the typical home mortgage and car loan – these are pretty easy to understand. The creditor financing these loans generally retains a security interest in the property so that they have recourse in the case of default. Below you can find a discussion of debts less commonly understood to be secured.

Purchase Money Security Interests:

These security interest are lien rights that the seller retains in the goods purchased when the seller finances the purchase. Want me to simplify? This means that, when you finance an item and a PMSI is formed, the financing company has a right to the item(s) purchased in the case of default. Note that the lien can be expicitly created by a specific written agreement or more commonly may covertly arise when the item is financed on the seller’s revolving credit plan or store credit card. 

What does this mean? Well, for one, it means that any time a client of mine includes a Best Buy credit card on their petition, I get notice that the debtor must wither relinquish the property or may the secured debt. How can this be? The presence of the PMSI means that, in theory, if the buyer discharges his personal liability on the debt through bankruptcy, the seller retains the right to reclaim the goods. 

In general, your big box retailers have wised up and have structured their store credit cards as PMSI. This includes Sears, Good Guys, Circuit City and Zales credit plans give the seller a security interest in the goods purchased. Contrast this with your typical MasterCard or Visa, where their are no liens attached to the items purchased.

Fortunately, for most debtors the items purchased have little value. This means that creditors with purchase money security interests in consumer goods almost never file a law suit to enforce their interest in the goods. It is more of a scare tactic than anything else.

Tax Liens

Tax liens are a formed of secured debt. The recordation of a tax lien perfects a lien on all of the taxpayer’s property, real and personal.  It is a statutory lien, so cannot be avoided as a lien impairing an exemption under § 522(f), remember that certain liens can be avoided in bankruptcy to the extent that they impair an exemption.

Unfortunately, only judicial liens (like a judgment or a garnishment), or a non possessory, nonpurchase money security interest in household goods or tools of the trade are avoidable. It is also important to keep in mind that, not only are tax liens secured, but they may attach to assets beyond the reach of other creditors (i.e. retirement savings and 401(k) plans).

Judgement Liens

A judgement lien may or may not be a secured debt, depending on your state laws. In many cases, a judgment does not automatically create a lien and, to create one, the creditor must record the judgment with the designated agency.  

Because I would hate to give readers in Chattanooga or Kalamazoo misleading advice, I ask that you check with an experienced bankruptcy attorney regarding the laws of your state to determine how judgment liens are perfected.  In addition, you can also contact the secretary of state and request a report of liens on file to determine the presence and seniority of any liens present.

If you have been paying attention, you may remember that I mentioned judgement liens above, in my brief discussion of avoiding liens in bankruptcy. It is possible for judgement liens to be avoided in bankruptcy. So there, I have given you even more incentive to correctly determine the status of any judgements and the presence or absence of associated liens.

Well, I am beat. There are surely more we could talk about – creditors are pretty sneaking about finding ways to ensure they receive proper compensation for their goods or services. Case in point – have you heard about the New York law firm securing payment from clients with second mortgages? Yep, if you don’t pay your lawyer they can foreclose on your home. Messy, if you ask me.

Phoenix Bankruptcy Chapter 13 to Chapter 7 Conversions

Hello folks, I hope you are all having a great Thursday. It is almost the end of the week, so there is at least one thing to be happy about today. If you are anything like me, your mind is already starting to wander towards mashed potatoes and pumpkin pie.

Let me be frank and say that this post is probably not for the bankruptcy novice. It applies to the very specific scenario of converting your previously filed chapter 13 bankruptcy to a chapter 7 bankruptcy. Now, that isn’t to say that this is a rare occurrence – in fact, it is relatively either to covert your chapter 13 bankruptcy case provided that you qualify for chapter 7. However, because a majority of my clients start out in chapter 7 bankruptcy, this article may not apply.

Regardless, here goes nothing. Let’s say that your are currently involved in a chapter 13 bankruptcy. For whatever reason, your Chapter 13 case is in trouble. The stay has been lifted on your house, or the plan payments are behind and the trustee is threatening to dismiss your case, or you’ve finally decided that the house isn’t worth the headaches you’re going through, and you just want out. What do you do?

One option is to convert your chapter 13 bankruptcy to a chapter 7. It is pretty easy, but it does require a little more paperwork – namely a Notice of Conversion - from your attorney (= additional fees for you) and a conversion fee paid to the court.

What happens next is as follows: 1. Any money that the Chapter 13 Trustee is holding, less any administrative fees that the Trustee is due, will be returned to you, 2. A chapter 7 trustee is appointed to your case, and 3. A meeting a creditors is scheduled. Oh yeah, and there may be some additional paper shuffling based on changes in circumstances, again that is more paperwork for your lawyer (=additional fees for you).

The above was just to get your familiar with the process…this is where it gets good.

  • Lien Stripping and Chapter 13 to Chapter 7 Conversions:

The BAPCPA (bankruptcy Abuse and Consumer Protection Act of 2005) amended rules so that, as it currently stands, a debtor is unable to reduce secured liens to the value of the collateral (lien stripping, for those scratching their chin) in their chapter 13, before converting to a chapter 7 ( §348(f)(1)(B) for all you go-getters out there). Remember, lien stripping is a benefit of chapter 13 bankruptcy that is not available to chapter 7 debtors.

Let’s clear things up a little with an example: consider the debtor with an auto loan of $30,000 secured by a car with a Kelley Blue Book value of $15,000 (Ouch). Prior to BAPCPA, the debtor could theoretically file a chapter 13 bankruptcy to reduce the loan value, and later convert to a chapter 7. The money paid through the plan payments would further reduce the loan amount.

Then, while in chapter 7 bankruptcy, the debtor was able to redeem the car for the value of the collateral minus any plan payments made. In the above example, our debtor would save in excess of $15,000.

However, because the current rules don’t allow lien stripping to pass through chapter 13 to chapter 7 conversions, the debtor would be required to pay the full loan amount (minus payments made of the life of the plan, of course). In our fun example above, that would mean the redemption value of the car was pushing $30,000 (double-ouch).

  • Post-Filing Debts and Chapter 13 to Chapter 7 Conversions:

Okay, this is where it gets fun. Normally, when you file for bankruptcy, all of your dischargeable prepetition debts will be included in the case. However, debts acquired after the date of filing are not.

When a chapter 7 in a conversion from another chapter, then debts incurred postpetition but pre-conversion become part of the debts that are paid out of the bankruptcy estate and subsequently discharged.

Consider the debtor that is filing bankruptcy because of a catastrophic, ongoing illness. If they are facing foreclosure or repossession, the may choose to file for chapter 13 bankruptcy protection to take advantage of the automatic stay. However, if circumstances change and they accumulate additional medical debt after their filing date, they may consider converting to a chapter 7 bankruptcy to include this additional debt in their case. See how nice that works out?

In addition, as part of a 1994 amendment (my life would be much easier if they just got it right the first time), in cases of good faith conversion from a chapter 13 to chapter 7, property acquired post-petition but pre-conversion are excluded from the bankruptcy estate.

Well, that’s it for today - you have been a great audience. If you have any additional questions regarding filing for chapter 13 bankruptcy in Arizona or converting your Phoenix chapter 13 bankruptcy to a chapter 7, please don’t hesitate to contact me. I am a Phoenix bankruptcy attorney with boat-loads of knowledge and experience. I offer free consultations, so come in and pick my brain.

Why in the World Would I File a Chapter 13 Bankruptcy, and Pay a Monthly Payment for the Next 5 Years, When I Could File a Chapter 7 Bankruptcy and Eliminate My Debt Immediately?

Why in the world would I file a chapter 13 bankruptcy, and pay a monthly payment for the next 5 years, when I could file a chapter 7 bankruptcy and eliminate my debt immediately?

Good question. And believe me; you are not alone in wondering this. However, I have been doing this a while so believe me when I say there are benefits to a chapter 13 bankruptcy. Below I have listed a few.

Consolidation of Debts:

Chapter 13 bankruptcy allows you to consolidate all of your current debt into a single monthly payment. Over the course of your plan (3-5 years) you will pay back your secured debt, and a portion of the unsecured.

One important thing to note is that your plan payment amount is calculated based on your specific financial situation – basically the amount your unsecured creditors are paid depends on your disposable monthly income. This means that your plan payment, when correctly calculated, is entirely feasible.

Less Stringent Qualifying Criteria:

Many people file for chapter 13 protection because they do not qualify for chapter 7 bankruptcy protection. Remember that in order to qualify for chapter 7 bankruptcy, you must pass the means test. If you income and current financial picture exclude you from chapter 7 bankruptcy, chapter 13 bankruptcy may be an option for you.

You Can Keep Your Home When in Default on your Mortgage:

Unlike chapter 7 bankruptcy, where you must be current on your home mortgage in order to keep it, chapter 13 bankruptcy allows you to keep your home while in default. This is true even if a foreclosure complaint has been filed.

In addition, you are not required to make a large lump payment to bring your mortgage up to date. Instead, you can clear a mortgage delinquency in small monthly payments over the course of your entire plan. No additional penalty or interest will accrue.

You May be able to Discharge a 2nd Mortgage:

If you second mortgage is entirely unsecured in home equity, it may be stripped of secured status in chapter 13 bankruptcy. This means that both the lien and the personal liability associated with the secured debt will be discharged in bankruptcy so you won’t ever need to pay it.

You May be able to Reduce the Amount of Your Car Loan:

It the current principle of your car loan exceeds fair market value, you may be able to cram down your loan to the current fair market value. That is, regardless of the loan amount, you are only expected to pay fair market value for the car. In addition, we may be able to reduce the interest rate attached to your car loan – which will further decrease the amount you pay on the loan.

You May be able to Reduce the Amount You Owe on your Mobile Home:

Did you read number 5 above? Great, if you own a mobile home, simply re-read what is written above……replace “car loan” with “mobile home loan” as loans associated with mobile homes may also be crammed down when excessive depreciation causes the loan principle to exceed fair market value.

You Can Avoid Additional Penalties on Non-Dischargeable Tax Debt:

Income taxes less than 3 years old are generally non-dischargeable in bankruptcy which means that they won’t be discharged in bankruptcy. However, chapter 13 does allow you to pay these debts over a period of 3-5 years without accumulating additional penalties.

Your Credit May Benefit from Your Chapter 13 Repayment Plan:

Many creditors look favorably upon chapter a 13 bankruptcy because it offers some repayment to unsecured creditors and requires a degree of financial discipline. Provided that you make you plan payments consistently and punctually, your credit score may very well increase as you progress through the chapter 13 plan.

You Can Convert to a Chapter 7 at any Time:

If your circumstances change, you can convert your chapter 13 bankruptcy to a chapter 7 at any time. What’s more, you can include debts incurred after the filing of your chapter 13 petition in your chapter 7 conversion.

 

See what I mean? Chapter 13 bankruptcy offers many possibilities not available to debtors under chapter 7 bankruptcy protection.

Lien Talk Part 2: Lien Stripping and the Cramdown

Well folks, it’s time for part two of how to maximize your bankruptcy exemptions: lien stripping. Last week we discussed lien avoidance as a way to remove the secured status of certain lien that impair your bankruptcy exemptions.

Today I want to say a few words about lien stripping, which refers to the stripping of the secured status of a lien that is not adequately secured by equity in an asset.

Lien stripping, also referred to as a lien cramdown, involves the removal of a secured portion of a lien in cases where the present market value of the asset is not sufficient to secure the entire lien. That is, a lien is only a secured claim to the extent that the asset to which it attaches has value. In situations where the lien exceeds the value of the asset, that portion of the lien exceeding asset value is unsecured.

To clarify let’s consider the following situation regarding automobile loans, which is a common application of lien stripping. Pretend you currently have a remaining balance of $20,000 on your car loan. According to Kelley Blue Book, the current market value of your car is only $13,000.

Lien stripping may be applied during your bankruptcy proceedings such that the secured portion of your car loan is reduced to $13,000 and the remaining $7,000 of your loan is stripped of its secured status, to unsecured.

Lien stripping is a valuable tool available in both chapter 13 and chapter 11 bankruptcy. Unfortunately, lien stripping does not apply when filing chapter 7 bankruptcy.

Unlike the avoidance of specific liens that impair exemptions, most liens can be stripped if they meet these requirements. The one big exception to this is the primary home mortgage.

Currently, bankruptcy law states that voluntary liens secured only by the residence of the debtor cannot be stripped in chapter 11 or chapter 13 bankruptcy. The bright side is that, in Arizona Bankruptcy Court, second mortgages that are wholly unsecured may be stripped of their secured status. Keep in mind that these details may change as congress reviews and revises bankruptcy law.

Another important point to make is that the recent changes to bankruptcy law appear to limit lien stripping of automobile loans to those vehicles purchased outside of 2 ½ years. That is, the amendment says that §506 does not apply to those vehicles purchased within the last 910 days. Thus lien stripping may not help you recover that large chunk of value your new car loses when you drive it off the lot.

To sum it up, both lien stripping and lien avoidance can be powerful tools that may save you a large sum of money when filing for bankruptcy. These are pretty complex topics, and thus best handled by a qualified bankruptcy attorney.

As always, I am a licensed bankruptcy lawyer available for free consultations at my Phoenix office if you need any questions answered regarding your Arizona Bankruptcy.

Lien Avoidance: How To Maximize Exemptions When Filing Chapter 7 Bankruptcy

I was recently asked to explain the difference between a lien avoidance and lien stripping, and I am happy to oblige. Here is part 1.

A lien can be thought of as a right to retain the lawful possession of the property of another until the owner fulfills a legal duty to the person holding the property. In common terms, you can think of a lien as a debt for which your property is collateral – for example your mortgage is a common lien. In bankruptcy, lien holders are generally considered secured creditors, which changes the way they are compensated in bankruptcy proceedings. At the risk of oversimplifying the scenario, secured creditors are generally guaranteed the value of the debt or the value of the collateral, whichever is less.

There are ways in bankruptcy to avoid or eliminate liens against your property by removing the secured status and thus reassigning the debt as unsecured. Both lien stripping and lien avoidance are directly supported by the bankruptcy code. Today I will talk a little about lien avoidance, and leave the stripping for another day.

The bankruptcy code calls for discharge of ‘in personam’ liability (personal liability); however, ‘in rem’ liability (property liability) remains. What this means is that, in cases of secured debt, your personal liability to the debtor is discharged but your property as collateral is not. That is, secured debts such as unavoided liens can pass through a bankruptcy discharge. Thus even after discharge, your creditor may still foreclose or repossess the property.

The good news is that in certain cases a lien avoidance can remove the secured status of a lien, which removes the in remliability and thus the ability of the creditor to foreclose or repossess the property. The reason for this is simple. Chapter 7 bankruptcy exists for those people burdened by their debt such that they cannot recover from it. Explicit in the bankruptcy code is the means to facilitate a fresh start for the debtor. A chapter 7 bankruptcy filing does not leave a debtor destitute, and instead affords the right to certain exempt property deemed necessary to successfully move forward.

You can see how the presence of a secured lien would impact these exemptions. If a consensual lien passes through bankruptcy discharge intact, it would undermine an exempt asset deemed necessary by the bankruptcy code for a fresh start. The debtor would be placed in the unfortunate position of having to decide whether to relinquish the securing property to the creditor or keep the burden of the original debt.

With certain liens, the bankruptcy code permits lien avoidance to protect your exempt assets from such secured debts that impair the exemption. What does this mean? Well, simply speaking, the lien must encroach on your allowed exemption for that property in order for lien avoidance to apply. If you like numbers, then the following examples may help to clarify.

Consider that your home is currently valued at $250,000, with a mortgage balance of $100,000 and a judicial lien against the property for $50,000. As a reminder, the homestead exemption allowance in Arizona is $150,000. After the mortgage is repaid, there is a remaining equity of $150,000. This is not enough equity to both repay the judicial lien and allow for the homestead exemption. If the lien were to pass through bankruptcy it would reduce the amount of your exempt equity, which is provided under the bankruptcy code. Thus the lien may be avoided in chapter 7 or 13 bankruptcy.

To complicate things, a lien can also be partially avoided. Consider again the above scenario. Let’s pretend that the housing crisis did not hit quite as hard(wishful thinking?), and the current value of your home is actually $275,000. In this case after the $100,000 remaining mortgage balance is paid, there is a remaining equity of $175,000. If you were to pay the entire $50,000 judicial lien, there would not be sufficient equity remaining to maximize your homestead exemption. However, the entire $175,000 is not exempt under the bankruptcy code. In this case, the lien is reduced to $25,000 and the remaining portion of that lien may be avoided.

Don’t get too excited, as not all liens can be avoided. If that was the case, you can just imagine that bankruptcy would invalidate all mortgage debt that impacted exemptions, because remember that a mortgage is a type of lien. Specifically, only judicial liens (such as a judgment or garnishment) or non-possessory, non-purchase money security interests in household goods may be avoided.

A qualified bankruptcy attorney can determine whether your lien qualifies for avoidance.  If not, there may be other options to consider, such as lien stripping. As always, if you have any questions feel free to contact me at my Phoenix bankruptcy office.