Kentucky Bankruptcy Law

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Saving Your House: Mortgage Business Loans

I speak with many small business owners who have weathered tough financial struggles in their businesses and need some sort of relief. Inevitably, at least one business loan has insisted on a second mortgage against their house. This becomes problematic if the business person is forced into bankruptcy as a last resort and also wants to keep his or her residence. There are two possible sources of relief, only one of which do I address in this post and I am not going to touch on a Chapter 11 at all because that is nearly always to expensive for a small business.

11 USC Section 1322 provides for what one can and cannot do in a Chapter 13 plan. Section 1322(b)(2) basically says that you cannot modify a debt secured against one’s personal residence. However, that debt can ONLY be secured against one’s home to have this protection. In most cases, a business loans secured against the debtor’s personal residence is also secured against some other property, such as a building owned by the business or the assets and inventory of the business. These loans can be modified.

So, a business owner who wants to save their house can go into a Chapter 13 and “cram down” the principal of that business loan to the value of available equity in that home. The rest of the loan becomes unsecured and subject to discharge at the completion of the Chapter 13. If there is no equity, then the loan becomes wholly unsecured.

My usual caveat here: each particular debtors circumstance can impact whether or not the approach I am referencing would work. One should consult with a knowledgeable bankrutpcy attorney to determine whether all the details line up becuase navigating the bankruptcy code can be rather complex.

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June 29, 2017 Posted by | Bankruptcy, Business & small business, Chapter 13, Foreclosure, Plan, Planning, Pre-filing planning, Security interests, Uncategorized | , , , , , , , , , | 1 Comment

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

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

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