Kentucky Bankruptcy Law

Counsel with Care

The danger of short term loans on your house

You home is an incredible source of collateral for loans when there is equity (value minus debt secured against it), but there is also danger in using your home this way. There are still lenders who will do rather large, short-term loans secured against a private residence. These loans can be tempting because they often will provide for relatively low-interest loans. However, they can be dangerous. especially when they are balloon loans. Such loans are seductive because they have low monthly payments with a final huge payment due at the end.

I have seen these often used by people trying to get a business venture off the ground. However, people sign up for them for many reasons. The business folks are essentially betting on having a solid and very profitable business going in three to five years. I admire their confidence, but most businesses that survive take three years just to start making a modest return. And so, many find their balloon payment looming without adequate resources to cover the debt. Sometimes banks will roll it into a new loan, but there is no guarantee of this. Therefore, it is wise to talk to a lawyer who knows about bankruptcy prior to that maturity date.

Banks like loans against your personal residence because the revisions to the bankruptcy code back in 2005 gave special treatment to loans secured solely against one’s residence. Basically, 11 USC Section 1322(b)(2) prevents such loans from being modified in a Chapter 13 bankruptcy. Therefore, the only thing one can do is cure the arrears through the bankruptcy, but the underlying agreement remains intact. There is a nice little exception, though, found in 11 USC Section 1322(c)(2) for loans that come due DURING the Chapter 13. So, if one times things right and files a Chapter 13 BEFORE the last payment on your short-term loan is due, a Debtor CAN modify that loan to some extent.

The most likely use for this exception is to move the maturity date of the loan out for the duration of the Chapter 13 plan and thus provide for the cure of arrears on that loan. The Debtor still has to show that the lender is adequately protected, but that hurdle is usually overcome easily with real estate that is either holding its value or increasing in value. This is NOT a complete remedy, but it can buy more time for a Debtor to either find alternative financing that has no balloon payment or make those profits they hoped for that would cover the debt.

September 9, 2014 Posted by | Additional Debt, Adequate protection, Bankruptcy, Chapter 13, Financing, Foreclosure, Home Loan Modification, Home loan modifications, Plan, Plan payments, Planning, Pre-filing planning, Secured loan arrears, Security interests | , , , , , , , , , , , , , , , | Leave a comment

That Pesky Equity Line of Credit

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.

November 8, 2013 Posted by | Bankruptcy, Chapter 13, Exemptions, Foreclosure, Home loan modifications, Planning, Pre-filing planning, Property (exempt | , , , , , , , , , , , , , , | Leave a comment

Forget Foreclosure: Save your home

Chapter 13 is an extremely effective legal mechanism for saving one’s house if it is being threatened with foreclosure. The trend these days is for home loan lenders to refuse to accept payments while “modifications” are being “reviewed”. This means arrears mount higher and higher. I have known of an extremely few home loan modifications actually coming to fruition. However, I have heard person after person recount to me how the lenders “lost” paperwork submitted for modifications multiple times, countless delays, requests for more information, and ultimately refusal to modify. This whole process can destroy the chances of a Chapter 13 to save your home.

In a Chapter 13, the entire arrears on a house have to be paid in full during the 60 months of the plan duration. The arrears can include certain fees, penalties, and other costs prior to the filing, but gets zero (0%) percent interest in the plan in the Eastern District of Kentucky.  So, if the arrears mount too high prior to filing the Chapter 13, then the plan payment can end up being so high that the plan is not feasible. On top of the plan payments, one has to resume making the ongoing regular monthly payment.

I strongly recommend that you consult a bankruptcy attorney about a Chapter 13 early in the process because modification efforts are usually unsuccessful. I do not know why lenders are taking the approach they are to home owners because it does not seem economically logical, but then we are talking about huge, mindless organizations. But, in a Chapter 13, the lenders HAVE to play by the rules.

Debtors also must play by the rules and they MUST make those monthly payment to the lender and their Chapter 13 plan payments for the whole thing to work. So, their budget must support both payments. This means taking action early.

September 16, 2013 Posted by | Bankruptcy, Chapter 13, Foreclosure, Home Loan Modification, Home loan modifications, Pre-filing planning | , , , , , , , , , | Leave a comment

Refinancing during Chapter 13: Do not shoot yourself in the foot!

A couple of days ago I wrote a post about refinancing your home loan during an active Chapter 13. In that post I addressed the issue of how such refinancing impacts your budget and plan payment. You need to think long-term in refinancing, because your will not be able to hold onto the savings from the lower mortgage payments. This is aggravating, but benign.

There is a much more sinister trap that refinancing can land you in. You need to be careful when looking at refinancing within an active Chapter 13 as to how to any existing arrears on the original loan are treated. If you are paying substantial arrears through the plan, but refinance, then those pre-petition arrears are most likely to be paid off with the new loan. Essentially, a lender with arrears is not going to release their lien to allow a new lien to take priority over theirs until all sums due are paid. This includes those arrears.

If that happens, then your plan payment is still going to be just as high or higher depending on your new loan payment. But, where a certain amount of those payments were going to pay off the arrears at zero (0%) percent interest, now you will be paying interest on the same arrears in the new loan. Not only that, but the percentage of your plan going to unsecured creditors will likely increase significantly. This may all be fine with you if your heart’s desire is to pay as much of your debts as possible. However, it needs to be a conscious decision rather than one your stumble into.

So, if you are paying $10,000 in arrears at 0% interest in the plan on the original loan and then refinance, the $10,000 arrears gets “paid” from the proceeds of the new loan. Your principal is now $10,000 higher than on the original loan, but your plan payment stays the same or higher. You essentially just cost yourself $10,000 plus interest. Your may not feel it, though, because the actual month to month cost remains relatively stagnant.

When looking at refinancing, it is best to look at all factors to make a wise decision: new interest rate and savings from that, length of time left on mortgage, amount of arrears in the plan, and how much additional interest you will pay if the arrears are then out of the plan and in the new note.

August 8, 2013 Posted by | Additional Debt, Bankruptcy, Chapter 13, Home Loan Modification, Home loan modifications, Plan, Plan payments, Planning, Secured loan arrears, Uncategorized | , , , , , , , , , | Leave a comment

Refinancing your Mortgage within a Chapter 13

Interest rates on mortgages can vary considerably during the lifespan of the average Chapter 13 bankruptcy, that being five (5) years. For example, rates on fifteen (15) year fixed home loans were down below 3.5% interest recently. The traditional rule of thumb I have heard on refinancing is that if you can cut your interest rate by one percentage point (1%), then it is worth the closing costs to pursue it. This refinancing is NOT out of reach for a Chapter 13 debtor.

Even though in bankruptcy, a Chapter 13 debtor has a decent chance of finding a lender who will refinance their home loan while the bankruptcy is still pending. They will require an Application to Incur New Debt to be made and they will only approve the loan is an order approving the application is entered by the court. The courts will typically approve these applications if your Chapter 13 is in good standing and the debt appears to be manageable.

However, there are other ramifications to keep in mind. First, if the refinancing of the loan decreases your monthly loan payment made directly (outside the plan) to the lender, then your budget is affected. That means your will also have to file an amendment to your Schedule J expenses. If the change is significant, you may be required to modify your plan payment and pay the savings your realized into the plan each month.

This may be discouraging because you refinanced to save money each month and then that very savings still has to get paid out; you do not realize any of the savings. So, it must be a long-term gain to make it worthwhile during the Chapter 13. If you have several years to pay on the mortgage beyond the Chapter 13, then it will be worthwhile.

There is a second ramification to be careful of, though, and this one is potentially very costly. I will write about that one in my next post.

August 6, 2013 Posted by | Bankruptcy, Chapter 13, Home Loan Modification, Plan, Plan payments, Planning, Uncategorized | , , , , , , , , , , | Leave a comment

Letting go is hard to do (or Home loan arrears)

We grow very attached to our homes. There is such a long heritage of home ownership being part of the American dream. Many who immigrated here long ago could have never attained to being a land owner and the new life in America created the opportunity and hunger for this hallmark of the gentry in the old country. This latest recession took a huge swipe at that American dream and one of the hardest parts of my job is helping a debtor realize when they just cannot hang onto their land.

The most common way this plays out is when a home owner has done all they can to stay on top of debts in the face of dwindling resources. They seek out a home loan modification to stave off financial devastation. Most lenders, though they are not required to do so, insist that the home owner stop making payments while they “process” the paperwork. This creates a bind, though, because almost no one sets that money aside to cure the arrears in the event the modification fails. And, once that payment is missed, then lender has the right to accelerate the mortgage and foreclose.

Chapter 13 is a great tool to save a home because it forces the lender to allow arrears to be paid, without additional interest, over 60 months. But, they home owner debtor must show they can afford the payments needed to pay the ongoing loan obligation PLUS pay enough plan payments to cure the arrears. There comes a point for each debtor where the arrears simply surpass their ability to catch them up in that 5 year window. When this point is reached, I am forced to give them the news that they cannot revive their home; it is too late. Some receive the news and surrender to the inevitable and others refuse to believe they are out of options.

The important thing to do if you have arrears mounting on your home loan debt, is to get solid bankruptcy counsel early on. When you allow time for planning, the chances of saving the home are maximized.

June 26, 2013 Posted by | Bankruptcy, Chapter 13, Foreclosure, Home Loan Modification, Property (exempt | , , , , , , , , , | 1 Comment

Balloon or Bust!

A number of people took out balloon payment loans (interest only loans) prior to the whole mortgage mess and economic downturn. They seemed like a great idea at the time because it allowed folks to buy more of a house than they could actually afford at the time with the notion that they would either have turned around and sold the home for a profit in a few years or they anticipated greater incomes. Of course, the economic crevasse we fell into precluded sales for profit and kept salaries from rising.

So now, many people are either facing that final payment in a few months or that balloon has already popped leaving them with massive arrears. There is a remedy IF your income can sustain it: Chapter 13. Let’s say you have $50,000.00 in arrears on one of these loans and your income would support a plan payment of $900 or $1,000 per month (about what you would pay in rent anyway), then you could save your home.

In the Eastern District of Kentucky, the entire arrears can be paid through the plan at 0% interest. Obviously there are other factors that can be considered, but if you have a balloon house payment that has already come due or about to come due, then it would be worth consulting with a bankruptcy attorney to see if saving the house can work.

As a side note, even if a judgment has been issued in a foreclosure action, you can still filed a Chapter 13 and turn things around. So long as the house has not sold at auction, then a Chapter 13 can stop the litigation and give you a chance to work out a plan to save your home. Frankly, this works best for lenders as well, because they will get 100% principal rather than the 2/3 that would come through a Master Commissioner sale.

May 17, 2013 Posted by | Bankruptcy, Chapter 13, Discharge, Foreclosure, Plan, Plan payments, Planning, Pre-filing planning | , , , , , , , | Leave a comment

$@&# HAMPens: Home loan modification revisited

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.

October 31, 2012 Posted by | attorney fees, Bankruptcy, Chapter 13, Foreclosure, Home loan modifications, Planning, Pre-filing planning, Property (exempt, reaffirm or surrender), Security interests | , , , , , , , | Leave a comment

Miracles HAMPen

I met with a new client recently and listened as they described their fifteen month attempt at getting a home loan modification. This time, though, the client had retained a national law firm to negotiated the modification. Did I mention they had been at this for fifteen months with professional assistance? The arrears now extended into the tens of thousands of dollars. They want to save their home!

My heart went out to them and I ended up feeling bad for being so negative about their prospects for finally getting the modification in place. They showed me a correspondence asking for just two more documents. So close….oh, why can I not encourage them on and give them some hope that these last two documents really would be the last two? What if they really are that close and here I am discouraging them? I am sure I mentioned the fifteen months invested so far…Sorry, I really want to be hopeful for them and I just keep being negative.

I want this home loan modification to work, but the best I can muster is this: I absolutely believe that miracles happen every day. Truly I do. I know this may sound like sarcasm and to a certain extent it is because I find it easier to believe the lame walking and the blind seeing than I do a bank modifying a loan voluntarily. But, I do believe in miracles and so I believe that home loan modifications happen. In fact, I have personal knowledge of one. I just ask that folks consider where their hope is springing from. If your hope is based solely in the representations made by the bank, then it is time to get a back up plan and start preparing along other lines. If you have hired an agency or law firm to do a modification, they need to be able to show you if your income, expenses and home loan debt fall within the ranges where you should qualify. Otherwise, take your business elsewhere.

September 25, 2012 Posted by | Bankruptcy, Chapter 13, Debt solution centers, Foreclosure, Home loan modifications, Plan, Pre-filing planning, Property (exempt, Security interests | , , , , , , , , , , | 1 Comment

The Dark Side of Home Loan Modifications

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!

August 21, 2012 Posted by | Bankruptcy, Chapter 13, Chapter 7, Conversion, Foreclosure, Home loan modifications, Plan, Plan payments, Planning, Pre-filing planning, Property (exempt, Security interests | , , , , , , , , , , , | 1 Comment