I have written in the past about the ability to “force” down interest high interest rates on car loans in a Chapter 13 and even to decrease the principal mount due on cars purchased over two and a half years prior to the bankruptcy. These are tremendous benefits to a Chapter 13, but there is a downside to including your vehicle to be paid through the plan. That is, at least in the Sixth Circuit which includes Kentucky.
The case, In re Nolan, 232 F.3d 528 (6th Cir. 2000) is the prevailing law in Kentucky on surrendering a car after a Chapter 13 plan has been confirmed. Whereas some other courts have adopted only a “good faith on the totality of the circumstances test” as to whether surrendering a car post-confirmation allows the claimed debt to become an unsecured debt, the Nolan case precludes such judicial discretion.
Nolan dictates that if a debtor seeks to surrender a car that is being paid through a confirmed Chapter 13 plan, the creditor still gets paid in full through the plan. The creditor gets to seize the car and auction it, applying the sale price to the debt owed. However, cars rarely auction for much and so most of the debt remains. Since that debt, which outside of bankruptcy would become an unsecured deficiency debt, must be paid in full, then debtor will likely not be able to decrease their plan payment much if at all. All the other unsecured creditors realize no benefit, nor any noticeable harm.
The debtor’s position is harmed even though they will be making the same plan payment as before. This is because they are likely having to purchase a new vehicle which will NOT be paid through the plan. This makes the debtor budget all the tighter and possibly untenable.
A decision in the Bankruptcy Court for the Eastern District of Kentucky highlights a mistake made too often in Chapter 7s where the debtor lives in a mobile home. In Kentucky, mobile homes are not terribly mobile and often remain in place for decades. So, the name “mobile home” is a bit misleading. The legal term for mobile homes is “manufactured home” which also seems silly because all homes are manufactured in one way or another. Anyway, mobile homes get physically fixed to the land and people stop thinking of them as titled property such as cars, boats, trucks and trailers. However, they are titled. Even though physically fixed to the land, they may not be legally affixed to the land.
Now, when one files a Chapter 7, everything they own and everything they owe goes into an estate. They pull things back out by using exemptions and reaffirming secured debts. Often debtors keep their homes because they have enough exemption to cover the equity in their home and are able to pay the secured debt payments (the mortgage) when all their other debts are discharged. Each person can claim almost $23,000 in homestead exemption using the Federal exemptions. So, if you own a home worth $120,000 and you owe $100,000 secured on the house, then you can use the exemption and keep the house by reaffirming the $100,000 secured debt with the remainder exempted.
Here is where the problem comes in for mobile homes. The only way a loan is secured against a mobile home is on the title as described in KRS 186A.190. Actually, there is one other way, but it involves surrendering the title and filing stuff with the county clerk and effectively converting the mobile home into a house from a legal standpoint. Anyway, most people do not do that. So, if there is a defect with the security interest on the title, then the loan is not perfected and cannot be reaffirmed. That may leave a very HIGH amount of equity in the mobile home requiring exemption.
If the mobile home is also on land that you own, then you have the challenge of applying the homestead exemption to your land and then also hoping you have sufficient exemption to cover the value of the mobile home. If the title has not been surrendered and the mobile home affixed to the land legally, then you must exempt two separate assets: the land and the manufactured home. If the home has been affixed, you are in far better shape because it is one asset, but you still must make sure the loan is properly secured.
Like in In re Owens, 09-62087 (Bankr.E.D.Ky., 2010), if the title is defective in regards to the security interest, then you could lose your home. In other words, if there is a problem with the title then you may have no secured loan to reaffirm and not enough exemption to cover the difference. Then, the trustee will keep the mobile home, sell it (if you can’t come up with money to redeem it), and distribute the proceeds to all unsecured creditors. If you live in a mobile home, be sure that your bankruptcy attorney examines the title and makes sure that any security interest is properly in place.
The bottom line is that if your home is a manufactured home and you are looking at bankruptcy, make sure your attorney does a thorough check as to the title, security interest, and exemption issues.
I am currently sitting in a continuing legal education training with hundreds of other Kentucky lawyers listening to a foreclosure defense seminar. Of the approximately 10% of the attorneys who have attempted to help make home loan modifications for clients, NONE have had success. This is not a scientific study, but I thought I would offer it as a follow-up to my prior post, Miracles HAMPen.
Other information offered include: though the foreclosure crisis has plateaued it has not abated; banks only have to decide if the modification will profit THEM more than foreclosure, they have no incentive to get good information to KNOW the answer, so they default to “no, it won’t profit us”; short sale offers are being denied even if reasonable; and nothing has really changed in the court system.
Now, there are many strategies to defend against foreclosure actions, but the real dilemma is that people who have not been able to catch up on their home loans are not likely to be able to afford a lawyer. I explain to people that they can pay me to defend against a foreclosure, but most of the time the bank will likely prevail AND they will likely still have to look at bankruptcy though I will be able to buy some time. Or, they can invest the legal fees into going ahead and doing a Chapter 13 which forces the banks and other creditors onto a level playing field. I just want people to make an informed choice based on the circumstances.
This is the second most common question people ask me when considering a bankruptcy. It is not always a car debt, but they often ask if they can leave some specific debt out of the schedules. Sometimes they ask because they want to preserve some asset and they are concerned that reporting the debt in the bankruptcy jeopardizes their goal. Other times, it is because they want to make sure they can keep one credit card. They fear having some emergency that they must use credit to resolve or they get really good discounts at Kohl’s or Macy’s. Finally, sometimes people just want to repay a friend or family member who has helped them out.
The answer invariably is “no”. One cannot pick or choose what debts are “bankrupted”. All debts, even to poor Aunt Sally must be listed on the schedules included in the bankruptcy filing. What is required to be scheduled is found in Federal Rules of Bankruptcy Procedure 1007(b)(1) and there is no list of exceptions to liabilities (debts). Similarly, all assets have to be listed.
The way to address the concern of keeping an asset that is secured by a lien (such as a car debt) is to look at any arrears on the debt and consider a Chapter 13. The way to address the concern over having a credit card to deal with emergencies (or even discounts) is to assure debtors that they will likely be inundated with credit card offers even before the bankruptcy is closed out (note: in a Chapter 13, one must get court approval to incur new debt!). I encourage people to live without any credit, though. The way to deal with the concern about not leaving poor Aunt Sally high and dry is to note that a debtor can voluntarily repay any creditor they wish AFTER the bankruptcy is closed out. Doing so before filing creates a preference or fraudulent conveyance – both are bad. Doing so afterward has no restrictions at all. The debtor simply is not under any legal obligation to repay the debt and should not sign anything re-obligating themselves on the debt.
I have talked in here before about the risks involved in doing all your banking with one institution. What I am cautioning against is having your bank accounts with the same institution where you have a car loan, home loan, and signature loan or any combination thereof. To explain one of the reasons to avoid this, I will describe a common scenario: Debtor buys a car using their bank or credit union because of the rates or because of the ease of doing business in the same place. Later, Debtor needs a little extra cash and so they take out a signature line of credit. The bank is eager to offer this line of credit and even gives Debtor a lower interest rate so long as they cross-collateralize the loan against the car. Of course, it is no longer really a signature loan, but a secured loan but we will call it “signature” for convenience.
Debtor ends up having to file bankruptcy and they want to keep their car. Let us say the car is worth $5,000.00 and the purchase loan balance is $7,000.00 with the signature line of credit being another $3,000.00. Debtor qualifies for a Chapter 7 and their budget shows they can afford the payments to reaffirm on the $7k loan, but it is too tight to be able to also reaffirm on the $3k loan. Here is the problem: the bankruptcy court will be reticent to approve a reaffirmation where you are promising to pay back two loans instead of just the purchase money loan AND where your budget does not support it. Your lawyer would be a bit foolish to sign off on such a reaffirmation, but their signature promises that they have reviewed it and that reaffirming both loans would not create a hardship, when clearly it would be a hardship. So, it the reaffirmation has to go to the judge for approval.
The bank is holding all the cards here because that second loan, even though it is a non-possessory, non-purchase money security interest under 11 USC 522(f)(1)(B), is not one that can be stripped off in a Chapter 7 because it is secured against a car rather than household goods or the like. So, to go into a Chapter 7, the Debtor has to decide what is most important and what they can let go of. The Debtor has to play a financial game of chicken and say to the credit union to either let them just pay the purchase money loan alone and keep the car or come on and pick the car up (not literally, there are motions to be filed). Some banks will cut their losses and at least get paid for the purchase money part, but others refuse to make deals believing it makes them look weak.
There is one other option: Chapter 13. If the car was purchased more than 910 days prior to filing bankruptcy and the second loan was incurred more than a year before filing, then great things happen. Under provision 11 USC 506 and 11 USC 1325(a)(hanging paragraph), then the purchase money debt of $7k gets crammed down to the $5k value of the car and the $3k non-purchase loan gets stripped off as an unsecured debt.
To figure out what the best approach is going to be in this circumstance, your attorney will need to look at a lot of different factors and advise you as to the best course of action.
Reality has set in. The home loan modification you so desperately hoped for fell through after they strung you along for months (“Just keep making the payments during the trial period” or “Your application is being processed, just keep paying”). Your budget is so tight that even in a Chapter 13 your would not be able to pay off the arrearage on the loan for the house and you can take Chapter 7 according to the means test. It is now unavoidable that you will not be able to keep the house and so you tell your attorney to check the “Surrender” button for your intentions on your principal residence. It feels like surrender too, but not entirely in a bad way. Surrender also means the fight is over and the fresh start of debt free living can begin. But, what do you do with the house now?
Some people feel compelled to get out of the house as quickly as possible. It is a desire to get going on that fresh start by getting the old out of the picture and finding a new place; renting an apartment where they will not be reminded of the lost home. Sometimes it is because of a fear that someone will show up unexpectedly and toss you and all your stuff out on the lawn (which won’t happen unless you have some in-laws that are also outlaws and mad at you). Lastly, sometimes it is just a sense of guilt for staying someplace and not paying for it. I understand those driving emotions, but I caution you to sit tight for as long as possible.
Before I explain why you should sit tight, I need to revisit a core principle of Chapter 7. This type of bankruptcy establishes a single point in time where everything you owe and eveything you own goes into a fictional pot called an estate. Then, you use exemptions and reaffirmations to pull assets back out of that pot that you want to keep while leaving most debts behind. Once that point in time is created, everything you earn and every debt you create after that moment remains yours; new assets and new debts do not go into the estate. So, what does that have to do with a house I have surrendered? Aren’t my debts on that house going to be discharged?
Well, yes, those loans you had that were secured against the house will likely be discharged (barring any kind of pre-filing fraud or other bad acts that can prevent a discharge). However, you have a nice, tempting, empty piece of property just sitting there inviting neighborhood kids, hoodlums and other roustabouts to come in and have at it. However, your name remains on the deed for the house until after the Master Commissioner sale is confirmed or your provide them a quitclaim deed. Because this is all AFTER you filed your petition, you are liable for potential debts that could arise as the titled owner of the house.
If someone were to be injured on your property after the filing of the Chapter 7, you could get hit with damages from the injury. Additionally, the mortgage holder of the property could make a case for damages done to the property itself that decreases its value or for the insurance policy they obtain (I’m not saying they would be successful, but who wants the aggravation and expense of finding out if they would be?). You could propably afford to pay the insurance premium on the property if you are not paying the house payment, but home owner’s policies usually become void or voidable if no one resides in the house for over a certain period of time. So, there are several reasons to remain in the house until either the Master Commissioner’s sale is confirmed or a quitclaim deed is filed transferring ownership of the house.
Here is a recap of those reasons:
1) You are potentially liable for injuries that occur on property you still have title to after the Chapter 7 is filed.
2) You will have a hard time getting insurance coverage on an empty house (though there are specialty companies that do this for a high premium).
3) An empty home is an open invitation to high risk behavior that can lead to injury.
4) You are in financial dire straits and living there while not paying the house payment can help you get ahead and find a nice place to move to once the ownership is transferred. Yes, it may feel uncomfortable, but not as uncomfortable as having a post filing debt and not being able to get another discharge for a number of years.
So, plan on staying in your surrendered home for several months even after filing Chapter 7. If you must move, negotiate transferring title to the mortgagee while the bankruptcy is pending.
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