It is an unusual circumstance, but occasionally I come across a home loan that can be crammed down in a Chapter 13. Cramming down a debt is a shorthand description of taking a debt that is secured against some sort of property and decreasing the amount that is secured down to the present day replacement value of that property. Debts can be secured against all sorts of property, but the two most common ones I see in consumer bankruptcies are votor vehicles and real estate. If there is a lienholder listed on the title of your car, then that indicates there is a debt owed which is linked to that car. Usually it is the money borrowed to buy the car, but not always. If you have a mortgage, then means your house is tied to a debt creating a secured debt.
Basically, a secured debt is a debt is where you personally owe the money and your property is also obligated to that debt. In bankruptcy, your personal obligation to repay the loan goes away, but you can almost never get rid of the obligation of the property to satisfy the debt. If you stop paying, then the property is taken to help satisfy (pay) the debt. When that happens with real estate, then a lawsuit is filed called a foreclosure (Kentucky law – some states vary the process). It is called a foreclosure because the plaintiff is asking that your interest in the property gets closed out so that only their interest remains. With a car, they just repossess the vehcle.
Cramming down a debt, then, tends to mirror what would happen outside of bankruptcy if the secured property is taken to satisfy the debt. So, if you go into a Chapter 13 owing $12,000 that is secured against a car that is worth only $8,000.00, then the secured debt gets lowered to $8,000.00 (subject to a 910 day time limitation). There is speicial rule for a debt owed on real estate which can be found in 11 USC Sect. 1322(b)(2). This special rule keeps the debtor from decreasing the principal owed now matter how little the house is worth.
This special rule is limited, though. First, the real property securing the debt must be the primary place where the debtor lives. So, if it is rental property, the rule does not prevent cramdown. Second, the loan must be secured solely against that residence. If the lender secured their loan against both your residence and against some other piece of property, then cramming down the debt is not barred.
The way I see this second condition falling through for the lender are in bridge loans where the debtor moved out of one place and into a new place they purchased. Then, when their first residence does not sell right away, then it just sits empoty or they convert it into rental property. The loan remains secured against the old property, but is also secured against the new place. This creates the circumstance where a bankruptcy lawyer can help you decide whether the values of the proeprty are such so as to cram down the loan and whether one of the properties should be surrendered in the bankruptcy.
I have written about this before, but it bears repeating. I am not offering smoke and mirrors here, but just straight up information. There is a competitor’s ad campaign that has garnered considerable attention and it promises to get a bankruptcy started for $78.00. The ad goes on to note that certain restrictions and qualifications apply to this offer. And, I am sure they do explain those once your come in to meet with them. I have not interviewed my competitors on this issue, so I cannot say with certainty, but I can only contemplate one way that they can actually get a bankruptcy started for $78.00 and that is in a Chapter 13. It just so happens that you can pay the $310.00 filing fee that the court charges for a Chapter 13 (or the $335.00 for a Chapter 7) in four monthly installments. Each installment for the Chapter 13 would be $77.50 and thus we have you entering into a Chapter 13 paying only that first installment (and rounding it up gives you the $78).
I can do this for you also. However, I would need to figure out how much of a plan payment you would be able to afford because paying payments each month makes up a Chapter 13 in contrast to a Chapter 7. That would be the restriction. The Chapter 13 can run as short as 36 months or as long as 60 months depending on your household income. Attorney fees run higher in a 13 than a 7 but those higher fees can be paid through the plan itself. I only recommend going this route if it is the only way you can get into a bankruptcy and get the relief you need. You must qualify for a Chapter 13 which includes having a regular source of income and that income must be sufficient to pay enough in a plan payment to cover the attorney fees, trustee commission, certain tax debts, and certain secured debt arrears. The hitch with going this route is that the less your pay up front on attorney fees, the higher the plan payment has to be after filing. That may be perfectly fine and work well, I just want you to know that in advance rather than when I have you already in my office. There is also a credit counseling course that must be done through a third party prior to filing and this can run anywhere from $10 to $25 directly to that company. This a legal requirement of the law and not something that can be circumvented.
How would I be able to go beyond a firm that can get you into a bankruptcy for $78.00? Well, I do all the work myself. From the initial phone call to the initial meeting all the way through to the discharge order being issued at the end of the bankruptcy – it is all with me personally. That is to say, you will not be interacting with secretaries, paralegals or other attorneys (unless there is a true emergency); you will be interacting with me. I will be the familiar face that shows up with you at the meeting of creditors and the same voice on the phone who helps explain things along the way. That is simply how I chose to practice law, by keeping overhead low and doing it myself rather than shooting for high volume. That competitor does a fine job from what I can tell; it just done using lots of staff. If my individualized and personal approach appeals to you, then come in to see me and I will see if I can match any competitors’ offer for a bankruptcy or even go beyond what they have to offer. There is no charge for that initial consultation and I do NOT limit it to 1/2 an hour.
There is a nice little Kentucky Supreme Court opinion called Howard v Howard, 336 S.W.3d 433 (Ky. 2011) every Kentucky family lawyer and consumer bankruptcy lawyer should read. The first part of the opinion addresses child support and contempt sanctions, which to be sure are fun things to know about, but the meat of the opinion spells out the concurrent jurisdiction of Kentucky Courts with the Federal Bankruptcy Courts and how that effects discharge of certain kinds of debt.
Under 28 U.S.C. Sect. 1334(b), a state court has the same and concurrent jurisdiction as a bankruptcy court to make a determination as to whether a particular debt is discharged by a bankruptcy. In the Howard case, the ex-husband had agreed to be responsible for certain debts the ex-wife had also co-signed. However, he went into a Chapter 7 and received a discharge of that debt. Even though the ex-wife had notice of the bankruptcy and did NOT file any objection in the Chapter 7, she was still able to go to the Kentucky Circuit Court where the divorce had occurred and get a ruling that ex-husband still owed the obligation to her.
You see, the divorce decree created an obligation between the ex-husband and ex-wife even though a third party was the direct creditor. This obligation was found to be an 11 U.S.C. Sect. 523(a)(15) obligation as a result of a divorce. Therefore, by operation of that law, that obligation to the ex-wife was not touched by the bankruptcy. When the original creditor came back to collect from the ex-wife, she was able to pursue contempt against the ex-husband and win. This saved ex-wife from having to pay for a lawyer in the bankruptcy in addition to paying for a lawyer in the Circuit Court case.
Chapter 13s last either three (3) years or five (5) years depending on a households income at the inception. That is quite a long time and it can be easy to let it fade into the background of one’s mind after settling into the rhythm of monthly payments to a Chapter 13 trustee. A debtor in a Chapter 13 likely had considerable contact with their attorney at the very beginning of the case, but this becomes less and less frequent after the plan is confirmed and all the claims have come in. After a couple of years, some old habits can creep back in, and the debtor may never think to contact their lawyer when faced with certain financial decisions.
Many of my Chapter 13 clients come to me to help save their home from foreclosure. A Chapter 13 is a grand tool for just such a thing. Most of these clients got to the point of facing a foreclosure action in State court because they made choices between paying a house payment and getting needed car repairs or paying for a necessary medical procedure. That first time of missing the payment, they likely started getting some calls, but nothing earth shattering happened. Next thing they knew, several missed payments have racked up, they are served with a civil summons, and the only way to catch them up is through a five-year Chapter 13.
Then Christmas rolls around that second year into the Chapter 13 and the belt-tightening budget worked out with the trustee really only left room for macrame’ gifts for the children or perhaps a Chia pet or two. It is heartbreaking for a parent when their children’s friends are getting the newest iPhone or PlayStation 4. Perhaps the car broke down again or the refrigerator they had been nursing along for an extra 10 year lifespan finally goes out. Well, that old pattern kicks in and it seems pretty harmless to miss a house payment. After all, nothing bad happened before until a good six months down the line. Well, bankruptcy is a different world.
Most home loan creditors will file a motion for relief from the automatic stay (the law that precludes them from going ahead with the foreclosure once bankruptcy is filed) with just one or two missed payments post-petition. Being in Chapter 13 basically puts them on high alert and they are much quicker to pull the trigger.
This is not the end of the world – yet. Their attorney can object to the motion and almost always work out an Agreed Order to get caught back up again in about six (6) months. However, there is a hefty price to be paid. The creditor will add in their own attorney fees and they will also likely insist on a drop-dead provision where if those payments do not roll in on time, the stay will be lifted without filing another motion and they can then proceed with the foreclosure.
The better course of action is to call one’s bankruptcy attorney to do some problem solving when an unforeseen expense comes about. In the Eastern District of Kentucky, the Chapter 13 Trustee typically does not oppose a motion to suspend plan payments for a month or three if there is a good reason. That is often enough to get past some unexpected expense and get back on track making up the payments. The upside to this is that the debtor will not get hit with hundreds more in attorney fees or end up on a probation sort of situation. So, even if it has been a long time since you talked to your bankruptcy attorney, if things go awry, call them first and get help.
May you each experience the joy and hope promised by this Christmas season and may you spend responsibly. If you have already slipped up on that last part, be sure to come see me in the new year. Actually, you can come see me if that first part did not pan out either.
This post will only apply to a narrow segment of people forced to consider bankruptcy – those who have a bunch of equity in their house along with a hefty debt in which their spouse does not have liability. Most often, this would be an entrepreneur whose business venture took a downturn.
I have discussed previously how Chapter 13 is a great mechanism for preserving one’s house if there are arrears to be dealt with or if there is excess equity beyond what can be covered by a homestead exemption. However, Chapter 13 is not for everyone. There are debt ceilings in a Chapter 13 that can operate to knock out business people who have personally guaranteed large amounts of unsecured business debt or even larger levels of secured debt. There also needs to be a somewhat predictable income upon which to base the budget and plan payment. This makes Chapter 13 difficult for people who may go months at a time without income due to the way their employment is structured, such as an entrepreneur.
Going into a Chapter 7, though, with excess equity in one’s house can be dangerous. Excess equity exists if there is a substantial value to the house even after subtracting the secured debt on it and the exemptions available. You see, a Chapter 7 trustee only makes about $60.00 per case unless they find non-exempt assets they can liquidate and distribute to unsecured creditors. The trustee gets a percentage of all such assets.
This brings us to the strategy that relies on a number of “ifs” being true. This strategy can be helpful (though certainly not a panacea): 1) If the Debtor is married and their spouse is NOT also indebted on the majority of debt so that they do not have to file also, 2) If the husband and wife share the home as tenants in the entirety (the deed gives then ownership “for their joint lifetimes with the remainder in fee simple to the survivor of them”), and 3) the Debtor has some exempt or non-estate resource to make a lump-sum offer to the trustee. The strategy is simply to go into Chapter 7 bankruptcy as an individual and then hope your spouse outlives you or you can make a deal with the Trustee.
The Trustee can seize non-exempt assets of the Debtor and liquidate them in a Chapter 7, but they must do this liquidating under state law. Kentucky law only allows a creditor (or Trustee) to sell the expectancy interest of a Debtor in real estate that they own as tenants in the entirety with a non-debtor spouse. The expectancy interest is that if they outlive their non-debtor spouse, then they have the entire undivided homestead as their own, but if their spouse outlives them then there is nothing – the entire undivided homestead goes to the surviving non-debtor spouse. So, the question becomes: “How much would someone pay for a chance that the non-debtor spouse dies first?” That amount, whatever it may be, is the actual value that the trustee would receive in selling the Debtor’s interest in the house.
In other words, a home owned in the way I described by a husband and wife cannot be stripped away from the non-debtor spouse. He or she is entitled to all of that home concurrently with the Debtor; it cannot be divided. A creditor cannot even get half the rents, if there were any. They can only obtain that expectancy – that chance that they may get it all. Because of that, many Trustee’s would be open to a reasonable lump-sum payment from the Debtor to retain their expectancy interest rather than risk coming up with a goose-egg by trying to sell what essentially amounts to a lottery ticket on the court house steps.
Bankruptcy continues to evoke this notion of getting something for nothing. For some,that results in feeling a bit of judgment or disdain towards the whole idea of filing bankruptcy or the people who end up there. To that I say, “There, only by the grace of God go I”. Others see it with a bit of a glimmer in their eye as a great way to get free stuff. Both views are askew. Bankruptcy is a tough process to go through that is humbling and often anxiety provoking which is why people prefer to hire a lawyer than attempt it pro se. Few people actually abuse the system; most who file have tried everything they could think of to avoid it, but life’s curve balls and the accumulation of mistakes here and there just prove too daunting without assistance. For those hard working folks who end up in a bad spot, I do what I can to make the process smooth and effective so they can get on rebuilding their lives financially.
One of the things I do to ease the way is to stress the imperative in Chapter 13 bankruptcies that if you want to keep it, you must pay for it. This applies to bigger ticket items with a loan secured against it like a house or a car. Many people opt for a Chapter 13 because they fell behind in their house payments or their car payments but they do not want to lose that property. Well, a Chapter 13 can certainly make that happen, but they must still pay for the house or the car. There are NO free houses out there – and the only free cars are ones your would not want to drive.
Chapter 13 only halts the secured lenders collection process (and helps reduce interest costs in certain ways). That means that foreclosure proceedings for a house are stopped and repossession of a car is nixed. Then, the arrears that had accumulated must still be paid through the Chapter 13 plan payments as well as each ongoing payment as it comes due. Unfortunately, many home owners had the pre-bankruptcy experience of months going by without making house payments before the bank took legal action. That will NOT be the experience in the bankruptcy. The secured lenders are much quicker to file a Motion for Relief from the Stay (the automatic collection halting part of a bankruptcy). This motion allows them to then resume the foreclosure in state court if it is granted.
Often, this motion is filed by the lender quickly after a payment or two is missed as a wake-up call to the debtor. They really just want the debtor to get caught up on their payments and so they typically will enter into an agreed order with the debtor to do just that over the next few months rather than force their motion through. However, this is an exceedingly expensive process. The lenders insist on getting reimbursed for the hundreds of dollars they spent on an attorney and filing fees for that motion. So, you may have used that $1,000.00 house payment or two to buy Christmas gifts or cover an unexpected medical bill, but you will end up eating around $600 or $700 on top of catching up those missed payments.
To make it through your Chapter 13 smoothly and retain your house and car, those payment simply have to be a non-negotiable. There is no wiggle room on secured debt payments in a Chapter 13. If you want to keep it, you must pay for it.
No, this sort of garnishment is not found on a fancy Christmas dinner plate. This is a legal mechanism by which creditors can get the money you owe them without your consent. Once a creditor has obtained a judgment against you in a court of law (and there are some government creditors that do not have to go through the court process, but still have to issue notice), they can obtain a garnishment order that you will not be aware of until it hits.
Garnishments typically take two forms. The one most people are aware of is a wage garnishment. This is an order issued to the debtor’s employer to withhold up to a certain percentage of the pay. This can actually be a huge hit, but it is only the “one” punch that leaves your head spinning. The “two” knockout punch that often surprises people is a bank account garnishment. So, if your paycheck is direct deposited into an account, the creditor can scoop the rest of your income right out of the bank leaving you with no means to pay electricity, rent or a house payment.
While a wage garnishment is an ongoing order that allows for up to a certain percentage to be seized each month, the bank account is a one time hit, yet it takes all. However, the creditor can issue new bank account garnishments so as to hit the accounts repeatedly over time getting whatever happens to be in there at that moment.
The only defense once this barrage of punches starts flying is to file bankruptcy. If an individual creditor seizes more than $600.00 through these garnishments in the 90 days immediately preceding filing, then there is a chance of recovering them. So, it is important to take action and seek the counsel of a bankruptcy attorney before you are down for the count.
Well, no one does. That is a given. However, there are a few things to remain aware of if bankruptcy is something you have been contemplating here recently:
1) Any gifts you receive of substantial value at Christmas are going to have to be listed in your bankruptcy on Schedule B and exempted on Schedule C. You will need to individually identify any particular item you received that is worth hundreds of dollars.
2) Any expensive item you purchase, whether keeping it in house or giving it away to someone else, will have to be reported as well. If it is a luxury item, that is something costing more than $650.00, you will be raising red flags and risk losing the discharge of that debt.
3) Your right to receive a tax refund arises on December 31st of each year if you overpaid your income taxes. This is true whether you file a tax return right away or wait until the last minute. That tax refund is an asset of the bankruptcy estate upon filing your petition and must be listed on Schedule B and exempted on Schedule C even if you do not know the exact amount you will be receiving.
If you own a home and have a large amount of equity in that property (equity meaning value minus secured debt), you may have a very limited amount of exemption to put towards these assets mentioned above. Consulting with a bankruptcy attorney prior to Christmas may be a wise gift to yourself.
- Saving Your Home: When can you cramdown a home loan?
- Matching the Competition? How about going beyond!
- Let’s try this again: Please check out our new Troutman & Napier website
- Concurrent Jurisdiction of State and Bankruptcy Courts
- Chapter 13 lasts awhile, but stay in touch
- Merry Christmas
- Keeping the Homestead Safe in Bankruptcy: Chapter 7
- Keeping the Homestead Safe in Bankruptcy: Chapter 13
- The One, Two Punch of Garnishment
- Who wants to file bankruptcy right before Christmas!?!
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- Overcoming a “Presumption of Abuse” in Chapter 7 Bankruptcy
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