Kentucky Bankruptcy Law

Counsel with Care

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.

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

Working knowledge of bankruptcy essential to MANY areas of law

I was just talking the other day to a client who had a real estate transaction question. The context of the real estate transaction included a co-signed debt, a family law issue, and a high risk of bankruptcy for the co-debtor. If I only understood one of those areas of law or only knew a part of the context of his question, then I would have given the wrong advice.

If I had only thought about the transfer from the family law perspective, I would have advised against the transfer. If I have only contemplate real estate law and looked at the value of the property versus the debt load, I probably also would have advised against the transfer. However, knowing the impact of the imminent filing of bankruptcy by the co-signer and how that would interplay with the family law issue and the ability to enact a transfer post-bankruptcy, made the exact opposite answer the better advice to give him.

Bankruptcy law permeates every single other area of law that involves financial transactions of any sort. This is because the bankruptcy code preempt debtor and creditor rights and obligations of state law to a huge extent. So, whether you are contemplating a divorce settlement, a real estate transfer, a debt settlement, or a multi-million dollar contract, ask your lawyer what would happen if you or the other party ended up in bankruptcy. If they have no idea, ask them to research it or consult with a bankruptcy practitioner.

September 8, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Divorce, Estate Planning, Family Law, Negotaion & conflict resolution, Planning, Pre-filing planning, property allocation | , , , , , , , , , , , | 1 Comment

Another reason to consider a Chapter 13 instead of a Chapter 7

Let me just be clear that I want people who must file bankruptcy to find their way into the best fitting chapter; I do not have a clear preference between a Chapter 13 and a Chapter 7. If I had to pick one that I tend to lean towards, it would be a Chapter 13 because they are a little more complicated and I enjoy that. While they are more work and thus more expensive, they can also be more affordable for many debtors because the fees can often be paid post-petition (See this post on C 13 plans for more of an explanation). However, I also really like that Chapter 7 bankruptcies are focused on a narrow timeframe and get folks a great fresh start relatively quickly.

I recently met with a great couple whose situation illustrated yet another reason for looking at a Chapter 13. This was an older couple and the wife had some significant health issues that were hopefully in the past, but which raised concerns about how much longer she might be walking with us on the earth. This person was understanbably concerned about how her husband would fair financially with his passing. Both hoped to keep the house which was neither in default nor had equity in excess of their exemptions. The couple’s income was such that filing a Chapter 7 would be no problem and they would most likely be able to reaffirm on the house and keep it. However, a reaffirmation would mean keeping their personal obligation on the house.

If one keeps their personal obligation on a home loan through a Chapter 7 and then falls on harder times, they could be stuck with the deficiency debt even after their house is foreclosed on. This is because once you receive a discharge in a Chapter 7, you cannot obtain a discharge through a 13 unless you wait four years to file or eight years to get a discharge in another Chapter 7 (see this post for a little more detail on this subject). So, if they reaffirm on that debt in a Chapter 7 and either of the couple passed on before four years had passed, the surviving spouse could really be in a bind on the deficiency debt because the fixed income would not be enought to keep the house current.

So, the options were doing the Chapter 7 and hoping the lendor on the home loan would just let them keep paying and remain in the house or filing a Chapter 13. Well, the first option is a bit like rolling the dice and it is hard to gamble at on such things at that stage of life with a fixed income, so the Chapter 13 presented the best alternative. The rational for this is that if they get into the Chapter 13 and circumstances change, they can convert to a Chapter 7. In other words, a Chapter 13 gave them a second layer of protection or a safety net that would not be there in a Chapter 7.

November 1, 2010 Posted by | Bankruptcy, Chapter 13, Chapter 7, Plan | , , , , , , , | Leave a comment