Since I do not focus on a volume practice in bankruptcy and because I have become known as someone who is able and willing to tackle some unusual situations, I get to consult with debtors that have really tough circumstances. A recent case led me down a path of seeing just how creative I could be in a bankruptcy situation to forestall and ultimately pay their home loan lender. Anyone who has talked to me or read many of my posts know that I am quite fond of Chapter 13 bankruptcies. This is partly due to the flexibility afforded by them to accomplish many things, such as saving one’s house from foreclosure. So, I fully expected to find that a Chapter 13 would be the best vehicle to solving this client’s issue where they were nigh on losing their home.
In the scenario presented to me, the debtor had a sizable asset they had not been able to touch which was in trust but not much in ongoing income. The trust was not a spendthrift trust, or else we would not even venture far down this path. However, the debtor hoped that in bankruptcy, the trust assets could be obtained in order to pay their debts – likely at 100%. There are many twists and turns to this matter which I simply cannot go into here. Negotiating this one particular twist will just bring us to another turn and so the analysis is far more complicated than I am putting forth. Other issues involve the couple being unmarried and looking at who actually owns what. There are issues related to the automatic stay when a foreclosure has already been granted, but on appeal. And, just how tight the trust actually is will determine much. However, this particular issue I am focusing on may be helpful to others. In theory, the debtor’s notion of satisfying their debts with this currently unattainable asset is appealing.
We must look at 11 USC Sect. 1322(b)(8) to start the analysis. This section allows the plan proposed by the debtor to provide for payment of all or part of a claim from their property or property of the estate (let’s not worry about that distinction too much – it is often one and the same, but not always). The debtor can do this, in part, because under 11 USC Sect. 1306(b), the debtor remains in possession of all property of the estate. In other words, if you have property you cannot cover with exemption and you really want to keep that property, the way to be assured of that and file bankruptcy is in a Chapter 13. In a Chapter 7, what you cannot exempt is subject to being liquidated.
So far, so good – the debtor keeps the trust assets and keeps the house. Oh, but then we have to look at other provisions of the code. Next, we turn to 11 USC Sect. 1325 which requires that they are able to make payments. If my debtor’s only means to make payments on the plan is accessing their trust, then we run into a problem because there is no reasonable certainty that they will get into that trust in bankruptcy. After all, they were unsuccessful before considering bankruptcy. Because of this uncertainty and the absence of regular income, the plan may not get confirmed. The second barricade the debtor hits is the dreaded “adequate protection” called for in 11 USC Sect. 361. If they cannot protect the secured creditor’s interest in the Chapter 13, then they have no right to keep the asset securing the debt. In essence, this is a carve out of the Section 1306 provision.
Oh, but the secured property is land which typically increases in value; it does not decrease in value. However, in our situation, the amount owed on the property is far more than the value of the land under current market conditions. Still, we may be able to show adequate protection if we show that the value of the land is increasing faster that the debt is accruing interest and other allowed charges. Let us leave this one alone then, since it is driven by things I do not wish to get mired in.
The real problem I find myself up against is caused by the very provision that usually helps people out so much in a Chapter 13: Section 1306. When we combine the fact that the debtor keeps possession of their assets with the other nicety of Chapter 13s: the debtor has an absolute right to convert to a Chapter 7 or dismiss their Chapter 13 case, that is where get to the rub. My debtor cannot show that she can and will make payments to unsecured creditors as required by Section 1325 when she could dismiss the case as soon as she gets hold of the trust assets. Such a plan is unlikely to get confirmed.
Only if her income could pay an amount equal to the non-exempt asset could she get confirmed because there is one other hurdle not yet mentioned. The final hurdle is back in Section 1325 which basically says that creditors have to come out at least as well as or better than if the debtor filed a Chapter 7. This is the creditor’s “best interest” test that balances out the debtor’s benefits in Chapter 13s. In our case, if the debtor filed a Chapter 7 which cannot be converted dismissed without permission and where the assets of the estate go into the trustee’s hands, my debtor cannot pass this test.
Oddly enough, given many facts that I did not go into, this case is actually one where Chapter 7 gives a better likelihood of saving the house. The trustee would be vested with the ability to crack open that trust and has more resources with which to do it than the debtor in a Chapter 7. And, if successful, the home loan would still likely be paid in full even after the commission and other expenses.
Bifurcation sounds like a painful surgical procedure, but it merely means splitting a joint bankruptcy into two separate ones. Marriage takes tremendous effort (I should know – I have been married to the same woman for 23 plus years) and when a couple is also stretched and stressed by financial tribulations, the marital relationship can take hit after hit. Often, bankruptcy can provide the relief needed on the financial front that allows the husband and wife to redirect their emotional resources to restoring the marriage.
I have encountered a few couples, though, where the relief of bankruptcy was insufficient for them to turn back towards each other. I am sad for these times when one or both decide that they have gone too far and divorce must happen. When this happens after a joint Chapter 7 has been filed, then there is no impact on the bankruptcy. However, in a Chapter 13 the couple will probably opt to split the case. At the point of divorce, the parties financial interest and desire for maximum separation makes the case split, or bifurcation, necessary. After all, who wants to keep pooling resources with an ex-spouse.
The process to bifurcate is simple enough. An entirely new filing fee is assessed by the court for the new case. A motion to split the cases must be filed and served on all creditors and the trustee in the case. Typically, the motion provides for a 14 day notice and opportunity to object to the case split, but each district is likely to have variations on this. After that period has run and the fee paid, then clerks create two identical cases.
Once the split occurs, though, each party must file new Schedules I & J showing their individual budgets. They also must create separate payment plans, modifying the confirmed plan or amending a pending plan. If there is real estate, at least one party is likely surrendering the house in their plan. If either party could have filed a Chapter 7 to begin with or their new income would qualify them for a Chapter 7, then that party may opt to convert to a Chapter 7.
A couple of days ago I wrote about ways income and expenses influence your Chapter 13 plan payments. Today I want to encourage people preparing for bankruptcy to invest time into a careful look at your income and expenses. Because your plan payment in a Chapter 13 must be at least the amount of your disposable income, then accuracy matters in figuring out what that is. Once you have put the amounts in your Schedules (Schedule I is income an Schedule J for expenses), you are locked into them unless you can verify changes with documentation.
It is incredibly common, though, that people really do not know what they spend on expenses. Sometimes, people do not have an accurate idea of income either. This is less of an issue if all your income show up on pay advices (pay stubs) from wages. It is a bigger challenge for independent contractors and business owners. Almost no one, though, accurately tracks all personal expenses.
Despite the challenge presented by the lack of tracking, it is crucial to be as accurate as possible with expenses. If you underestimate your expenses, your plan payment may end up being too high to maintain resulting ultimately in dismissal of your case. Over-estimating your expenses may keep you from being able to show a plan payment of a certain amount (an amount required to pay arrears on a house, priority tax debt, or other mandatory items) to be feasible.
So, it is worth spending a few hours going back over bank statements or other documents that can help show average monthly expenses. If you have time before filing, it would be helpful to do a detailed tracking of expenses for a month. This can be very revealing and may also help you figure where things can be cut.
This accuracy, though, in determining income and expenses can mean the difference between a successful Chapter 13 bankruptcy and one that is dismissed or converted to a Chapter 7.
I have heard from one colleague that home loan modifications do occur and I have seen a successful one, but I have heard from far more people, clients, the crazy hoops they had to jump through only to be turned down time and again. When I ask if someone has attempted a home loan modification, the answer begins playing in my mind before they ever open their mouths:
“I submitted paper work back at such and such time and waited only to call back and they could not locate my documents. This happened a couple more times. I finally received confirmation that they received my documents, but they want updated ones. They told me not to make a payment and so I haven’t made one in several months, and they said that I should have an answer here in the next 20 days. But, then I got this letter from an attorney saying they are representing Big Bank and are going to institute a foreclosure action. I called back to the modification folks to see if I could start making payments to stop the foreclosure, but they said they could not accept payments at this time.”
Give or take a few minor deviations from the above script, I have correctly anticipated the response of my client every time. Worse than this is the rude awakening my client, now the Debtor, receives after I file their Chapter 13 as their last-ditch chance to save their home. The claim invariably lists a few thousand dollars in delinquency fees and “inspection fees”. The Debtor is shocked because they were repeatedly told not to worry and not to make a payment until they got an answer on the modification. They justifiably relied on these assurances and expected that no penalties were accruing during this period of negotiating the modification. Sadly, I then ask if they have anything in writing, email, or otherwise from the Big Bank folks saying they were suspending fees they are contractually entitled to during the modification application process. Again, I correctly anticipate the answer to be simply, “No, they just kept assuring me on the phone.”
Sometimes the arrears (past due amounts) on the home loan simply are too high to make a feasible Chapter 13 plan which includes saving the house. This is because the Debtors relied on the good faith of the Big Bank in negotiating the modification and went too long without making a payment. The entire arrears must be paid in full during the three to five years of the plan. If the amount exceeds what their budget can handle, then keeping the house is no longer feasible and they have to surrender it in the Chapter 13 and possibly convert to a Chapter 7. The good faith of the Big Bank assumed to be there by Debtor was a mere figment, a glimpse of an illusion, because the underlying home loan contract was never modified in writing. Hopefully, a class action lawsuit with claims of promissory estoppel and other such legal doctrines based on the Debtors’ justifiable reliance on oral promises will bring about reform, but the Big Bank will not do so voluntarily. The promise by Big Banks of doing these modifications appears to have been mere political puffery.
None of this makes sense economically for the Big Bank or for our nation. Big Bank is simply inflating arrears making it ever more unlikely that the Debtors can cure the default on their loan and bringing about more foreclosures. This results in more houses sitting empty on streets and on bank ledgers thus continuing to erode home values. It makes no sense whatsoever, but, Big Bank would rather insist on playing this modification game. It is as if Big Bank is convinced that these home owners are secreting away riches that they will ultimately turn over if Big Bank just plays hard ball. That is not the case, though. Would Big Bank not profit more by having all the principal and most of the interest paid instead of realizing about two-thirds of the value of the home in a foreclosure? Nevertheless, Big Bank marches on oblivious to the consequences even to themselves.
If you are going to do a home loan modification, seek out an attorney who has had an experienced track record of succeeding in them. He or she will be able to tell you up front if you qualify. But, do not wait too long before consulting with a bankruptcy attorney about Chapter 13 to save your home. The clock is running.
PS: These “inspection fees” apparently are charged every time someone calls the home owner and asks if they are still living in the house – incredible!
I have written previously about the flexibility that a Chapter 13 bankruptcy affords the debtors. One reason for this flexibility is that 11 U.S.C. Sect. 1307(a) provides a debtor with the right to convert their Chapter 13 to a Chapter 7 at any time so long as they do so in good faith (11 U.S.C. Sect. 348(b)) and they qualify to be a Chapter 7 debtor (see 11 U.S.C. Sect. 1307(g)). In other words, you cannot file a Chapter 13 because you do not qualify for a Chapter 7 due to the means test and then turn around and convert into a Chapter 7. However, if you start into a Chapter 13 and you just cannot keep up, converting may be just the thing to do.
The top reasons to convert from a Chapter 13 to a Chapter 7 include being unable to keep up with plan payments or being unable to make the regular house payments outside of the plan. This can come about because of a change in circumstances like a job loss, divorce, increase in family size without additional income, or just because the plan was too ambitious to start with. But, the ability to convert does not depend on the reason why.
Although the date of filing remains fixed at the original filing date, the debtor can include new debts incurred after filing the Chapter 13 but prior to the conversion in the Chapter 7 pursuant to 11 U.S.C. Sect. 348(d) which is an added bonus to conversion. The schedules of property, debt, exemptions and executor contracts filed in the Chapter 13 carry over into the Chapter 7, but a new meeting of creditors will be held and the time for the trustee filing objections and for creditors to file claims starts afresh.
Different courts and jurisdictions have slight variances in what is required to convert. In the Eastern District of Kentucky, the debtor just files a Notice of Voluntary Conversion, a schedule of unpaid debts (new post-petition debts), and an updated disclosure of attorney fees related to the conversion. Notice is mailed out through the courts system just as in a brand new bankruptcy case. While it is not initially required, it may be a time saver to go ahead and file a new means test showing the results at the time of the conversion since some trustees request this. The court clerks add the unpaid creditors to the mailing matrix and notices are mailed out by the court. There is a conversion fee of $25.00 paid to the court. And, voila, you are now in Chapter 7.
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