Kentucky Bankruptcy Law

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Saving Your Home: When can you cramdown a home loan?

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.

October 23, 2015 Posted by | Uncategorized | , , , , , , , , , | 1 Comment

Name It, Claim It

Claims play a major role in Chapter 13 bankruptcies. They are essentially superfluous in a “no asset” Chapter 7 so they are often not filed in such cases except for secured creditors. If there are non-exempt assets that will be liquidated in a Chapter 7, then it is an “asset” Chapter 7 and claims serve a similar function as I’ll describe for the Chapter 13.

In a Chapter 13, a plan is proposed by the Debtor that spells out what the Debtor will pay in over time. The plan also describes how various creditors will be treated. Some districts, such as the Eastern District of Kentucky, treat provisions of the plan as motions that become orders of the court once the plan is confirmed (blessed by the court). In such districts the plan provisions can “cram down” or “strip off” liens by secured creditors based on the value of the asset they have a lien against pursuant to 11 U.S.C. Section 506. However, I am venturing a bit off of the topic of claims.

For a creditor to actually receive what is owed to them per the plan, they must file a claim. There is a form available just for this purpose and the creditor can either send it in to the court clerk to be electronically filed or, if they have set up an account, they can electronically file it themselves. The claims for most creditors (other than governmental agencies) must be filed by a deadline specified in the Notice that is sent out to all creditors when a bankruptcy is filed. If they miss the deadline, their claim will likely be denied and the full debt discharged as to the Debtor.

The claim also puts the Debtor on notice of any additional fees and penalties that the creditor may be entitled to receive under the loan contract or by law. It is up to the Debtor to review the claims and object to anything that is erroneous or to excessive fees. It is also good practice to object to secured claims if the plan calls for them to be crammed down or stripped off. The reason to object to claims is because they are presumed to be sufficient proof, on their face, to establish the existence and amount of a debt. This is because there are hefty penalties to filing false claims. In the next post I will give a little more detail as to when it is beneficial to object to a claim.

June 14, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Plan payments, Proof of Claim, Secured loan arrears | , , , , , , , , | Leave a comment

Bankruptcy Myth of Non-dischargeable Car Loans

I have heard from two different people looking for relief from their debt that they thought they could not discharge their car loan debt in a bankruptcy. In fact, one person said they had consulted an attorney on this very issue and they were told they could not discharge their car debt in a bankruptcy even though the vehicle was already repossessed. The source of the myth is one of the reforms that occurred to the bankruptcy code in 2005. The change was that if you had purchased a vehicle within 910 days (about 2.5 years) prior to filing your bankruptcy petition, that purchase money debt secured against the vehicle could not be “crammed down”.

Cramming down a debt is where the amount of the debt secured against property, such as a car, is reduced to the value of that property on the date of filing the petition. For a car, you may owe $15,000.00 but the vehicle is only worth $10,000.00. That debt could be crammed down so that you would have to reaffirm (agree to pay) only $10,000.00. Under the old law, the $5,000.00 debt above the value of the car was discharged. The change in the law prevents this from being done on cars purchased within 910 days.

However, what did NOT change is that the debt of a car loan can be discharged. If your car was repossessed or if you surrender it, then the whole remaining debt will be treated as unsecured and will be discharged. If you keep the car and you purchased it over 910 days prior to the bankruptcy you may want to consider a Chapter 13. In the Chapter 13, you propose a plan that includes valuing a car secured by a debt. You suggest what you believe to be the value of the car. The creditor can challenge that, but usually a compromise is reached. You then only pay the value of the car in the Chapter 13 while the rest of the debt’s principal is treated as an unsecured debt. Any remaining unsecured debt after the plan payments are paid in full gets discharged.

In a Chapter 7, if you have the resources, you could attempt to redeem the vehicle at its fair market value. This hardly ever occurs, however, because few debtors have the resources to pay a lump sum sufficient to redeem a vehicle. So, most debtors either have to reaffirm the debt for the full debt or surrender it. The Chapter 13, then, offers the most viable option to cram down debt on a car.

March 27, 2013 Posted by | Bankruptcy | , , , , , , , , | 9 Comments

Saving One’s Home: What can be done with junior liens?

Many people who own a home have more than one loan secured against their residence. These junior liens (a consensual lien against real property is also called a mortgage) may be home equity lines of credit, business loans where the lender insisted on a personal residence as security, judgment liens, and so on. Judgment liens can be “stripped off” (the security interest ended) in either a Chapter 7 or Chapter 13 if it cuts into the debtor’s exemption. 11 USC Sect 522(f)(A). However, voluntary liens (one the debtor consented to) are more challenging.

The Sixth Circuit Court of Appeals made clear that voluntary security interests against real estate in this neck of the woods (including Kentucky) cannot be stripped off in a Chapter 7. In re Talbert, 344 F.3d 555 (6th. Cir. 2003). They stuck with the pre-code rule that “real property liens emerge from bankruptcy unaffected.” Id. at 561. This case focused on the role of 11 USC Sect. 506 which provides for the determination of a secured debt status.

So, if the only way to save your home is to get rid of (strip off) a second or third mortgage, you must file a Chapter 13 bankruptcy. However, the relief provided in a 13 is limited as well. If the loan is secured solely against the debtor’s real property which is also their principal residence, then the loan cannot be modified. 11 USC Sect. 1322(b)(2). The one exception to that takes us back to 11 USC Sect. 506: If the loan is completely underwater – that is, if there is zero equity in the property for the security interest to attach to (and I mean not even $1), then even such a loan can be stripped off and treated as wholly unsecured debt in the Chapter 13. When home prices were dropping consistently, this was a more common occurrence but it still happens.

What can be done with junior loans where there is some equity to which their lien attached? Well, this is where your bankruptcy attorney needs to take a careful look at the promissory notes, mortgages, and secured property. In an interesting case coming out of Ohio, the Sixth Circuit took a look at the meaning of the words “only”, “real property” and “principal residence” and found that they all three must come together for the 1322 protection to come into play. The In re Reinhardt, 563 F.3d 558 (6th. Cir. 2009) case involved a loan secured against a mobile home and the real property upon which it sat. Most would see that as real property which is the principal residence, but under Ohio law, the mobile home was personal property. Just like in Kentucky, that mobile home only became real property (affixed thereto) when the title was surrendered and the proper documents filed with the County Clerk.

Because the Reinhardt’s never surrendered the title of the mobile home, the loan was secured BOTH in the real property and an item of personal property. Therefore, the terms of the loan could be modified by the Chapter 13 plan. Basically, this means that the loan could be valued under 11 USC Sect. 506 and split into a secured claim and an unsecured claim. The part that was secured (equal to the value of the property at the time of the filing) would be paid in full (not necessarily in the plan though) and the rest would be paid pro-rata as with all the other unsecured debts. The other place where it is common for a loan to be secured against both one’s principal residence real estate and other property is with business loans. These lenders often want security in the home and in any assets of the business. However, this makes those loans vulnerable to modification (cram down).

Be sure that you bankruptcy attorney takes a careful look at all the factors that come into whether a secured debt with a lien against your home can be stripped off or crammed down.

February 13, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Exemptions, Foreclosure, Home loan modifications, Plan, Plan payments, Planning, PMSI (purchase money), Pre-filing planning, Property (exempt, Secured loan arrears, Security interests, The estate | , , , , , , , , , , , , , , , | Leave a comment

Post Holiday Pitfalls for Bankruptcy part 1a

I just wrote about purchase money security interests (PMSI) and bankruptcy for the post-Christmas filer and offer this tidbit in follow-up. If you did make some PMSI purchases for the holidays and you want to make sure you or the person you gave it to is able to keep the items, then there are two options that can still offer some relief.

First, you may want to look at is 11 USC Sect. 506. This provisions allows the debt secured against most items (there are exceptions related to cars and residences) to be “crammed down”. This means that the amount that is secured is no more than the actual value of the item on the date of filing. This is helpful in a Chapter 13 because you may have purchased a $1,500.00 television, but when you file a little more than three months later (this time will be explained in another post) the television is worth only $500.00, then the amount that must be paid in order to keep the television is only $500.00 over the course of the plan.

Section 506 also comes into play in Chapter 7 in conjunction with 11 USC Sect. 722. This provision gives the debtor the right to redeem personal property that would ordinarily be exempt property by paying the creditor a lump sum in the amount of the value of that property.

January 3, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Plan, PMSI (purchase money), Redeem / Redemption, Security interests | , , , , , , , , , , , , | Leave a comment

Chapter 13 Plan: What’s in, what’s out?

In a Chapter 13 bankruptcy, everything is driven by the Debtor’s proposed plan. The plan determines payment amount, treatment of secured debts and the assets to which they attach, and a number of other items. You may hear your bankruptcy attorney use the phrases, “pay inside the plan” and “pay outside the plan”. To pay inside the plan means that part of your payment to the Trustee is distributed to that creditor or class of creditors by the trustee. To pay outside the plan simply means that you, the Debtor, must continue to make payments directly to the creditor for that specific debt in addition to your plan payment.

The reason why it may be valuable to you to pay some debts outside the plan is that the Chapter 13 Trustee earns their money by receiving a commission from your payments. This percentage is different from State to State or District to District. In the Eastern District of Kentucky, the Chapter 13 receives around 5.4 or 5.5 percent of each payment. So, the lower your payment, the less you pay in Trustee’s commissions. Likewise, the Trustee has some motivation to get the highest plan payment possible within the structure of the bankruptcy. It is also beneficial, though, to the Chapter 13 to have a successful Chapter 13 – one which the Debtor is able to see through.

Generally speaking, it is in the discretion of the Chapter 13 Trustee what can be paid outside the plan because they are the gatekeeper that recommends approval or rejection of the plan (confirmation or not). In the Eastern District of Kentucky, it is routine for secured debts that will mature (need to be paid in full) later than the end of the plan to be paid outside of the plan. So, ongoing house payments are best paid outside the plan.

Some attorneys prefer to have car payments made outside of the plan even though they will be paid in full before the close of the Chapter 13. This results, though, in having to do a “step-up” of payment amounts when the car is paid off. My recommendation is to pay all car payments inside of the plan. Usually this draws out the payments, allows for a lower interest rate, and possibly a reduction in the principal (this depends on when the debt was incurred). I often find the plan payment actually ends up being really close to what the ongoing car payment was and sometimes even less.

If the interest rate on the car loan is below 4.25%, and the car was purchased within 910 days of the filing date, then paying it outside the plan would be best, even if a step-up payment has to be built into the plan. The step-up payment basically takes whatever that car payment is and adds it to the plan payment the month after the car loan is paid in full.

It is very important that Debtors the importance of remaining current on payments to be made outside of the plan. Failing to make a few payments to a creditor outside the plan can probably be remedied, but the Debtor needs to quickly advise their attorney of the circumstance. Eventually, though, if missed payments are chronic, it will go beyond the point of remedy within the Chapter 13 and the lender will take steps to foreclose. That usually results in changing the Chapter 13 to a Chapter 7 or it means modifying the plan to surrender the house.

November 28, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Conversion, Foreclosure, Plan, Security interests | , , , , , , , , , , , , , , , | 2 Comments

What Chapter 13 can do for your car loan

I really do not understand this considering what the economy has been like, but most of the people I talk to are paying at least 10% interest on their car loan. So, when I am explaining the differences between a Chapter 7 and a Chapter 13 bankruptcy, I happily toss in that they could reduce that interest rate to around 5.25% (the prime rate plus 2 points). This happens by operation of 11 USC Section 1325(a)(5)(B)(ii) and a U.S. Supreme Court Case known as Till v. SCS Credit Corp., 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004) or more affectionately, just “Till“. 

In the Till case, the Supreme Court decided upon using the prime interest rate plus around 2% to satisfy the requirement that: “the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such [secured] claim”. 1325(a)(5)(B)(ii). Basically, the secured creditor must get an equivalent of the value of the asset plus the time value of the money involved plus a pinch for the risk of non-payment. This decision was made prior to the BAPCPA amendments to the bankruptcy code in 2005. However, other cases have ratified its applicability to post-BAPCPA cases. Thus the Till rate was born. Prime rate has been 3.25% for over a year now, so the Till rate is 5.25% give or take a point.

There is one potential catch, though. In BAPCPA, there is an odd “hanging paragraph” in Section 1325 that basically says that if you bought your car less than 910 days (2.5 years roughly) prior to the day you file your bankruptcy, then you cannot “cram” down the debt on the car. A cramdown refers to using Section 506 to split the debt secured against an asset, like a car, into two parts: the secured part up to the value of the asset and the unsecured part. To keep the asset, the secured part has to be paid in full while the unsecured part can get discharged.

So, crafty creditor lawyers, o what a cunning breed they are, seized on this hanging paragraph to argue that since one cannot split the loan into secured and unsecured parts, then the interest rate must be the contracted rate. Of course, they have also argued early on in cases where the contract rate was LOWER than the Till rate that the higher rate should apply. On those earlier type cases, the creditors WON, but now that the Till rate is usually much lower than the contract rate, they are stuck with their prior wins and it has turned to loss EVEN when the car was purchased less than 910 days prior to the bankruptcy.

September 5, 2012 Posted by | Bankruptcy, Chapter 13, Plan, Security interests | , , , , , , , , , , , , , | 1 Comment

Objecting to a claim in a Chapter 13 for a 506 cram down

I previously talked about the purpose of claims in bankruptcy. I want to focus in now on objecting to a claim. Some districts, including the Eastern District of Ketucky Bankruptcy Court, treat a confirmed plan as a court order. The plan contains motions made to the court and upon confirmation, these motions are granted. One such motion is an 11 U.S.C. Sec. 506 motion to value a secured claim.

This code section, 506, allows for certain secured debts to be altered based on the value of the underlying collateral. Practitioners refer to this as “cramming down” or “stripping off” a secured loan. An example of using 506 to “cram down” a loan would be where the debtor has a car they purchased for $15,000.00. However, at the time of filing, the fair market value of the car is only $10,000.00. They still owe $12,000.00 on the car. Under the 506 cram down, the secured part of the debt is only $10,000.00 and the rest is treated as unsecured in the Chapter 13 plan. For a car, this can only be done on vehicles purchased more than 910 days (about 2.5 years) prior to the bankruptcy petition is filed. On other secured items, there is no such limitation with the exception of real property.

There no longer is an ability to “cram down” a debt voluntarily secured against your home. This is where “stipping off” comes into play. If your home is now only worth $150,000.00 and your first mortgaged loan payoff is $155,000.00, then any other debt secured against the house is considered to be wholly “under water”. So if there is a second mortgage such as a home equity line of credit, that is completely “under water” in terms of equity in you home, then under 506 it can be treated as wholly unsecured through the plan.

By now you are wondering what this has to do with objecting to claims. Well, the secured creditor on that second mortgage and the lien holder on that car are going to file claims that say the amount of the secured debt is the entire loan. There is a presumption that a claim filed is valid since to file a false claim carries heavy penalties. So, which wins in a contest later on: the presumed valid claim or the confirmed plan? It is my opinion that the confirmed plan is going to win every time, but here is the question: why wait until then and find out? So, if you want an extra margin of confidence that your 506 motion and confirmed plan cram down or strip off that secured debt, then object to the claim.

Two strategy points come to the fore here. First, you want to wait and object to the claim only after the plan has been confirmed. There is no hard and fast rule as to when objections to claims must be filed, but you also want to do it in a reasonable time. So, objecting to the claim just after the plan is confirmed is the optimal time. Second, since this involves additional work, fees and a court appearance or two, you only want to object to claims when it is really important to get it right. In other words, to do so in the case of cramming down a car loan by a few thousand dollars would be like deer hunting with a bazooka. But, if you have tens of thousands of dollar in a second mortgage that can be stripped off, it may well be worth the extra work and effort.

January 29, 2011 Posted by | Uncategorized | , , , , , , , , , | 4 Comments