Kentucky Bankruptcy Law

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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

Avoiding a Judicial Lien

In a Chapter 7 or a Chapter 13, one can avoid a judicial lien on property that impairs an exemption pursuant to 11 USC Sect. 522(f).  The most common way this plays out is that a creditor has filed suit, obtained a judgment, and then filed a lien on that judgment against your real property. This lien can sit dormant against your home for fifteen years, but it must be satisfied if the property is ever sold. Or, the creditor may pursue foreclosure but they rarely do that unless they believe there is enough equity in the property.

In order to strip off the judgment lien, your bankruptcy attorney must file a motion within the bankruptcy as a contested matter. In other words, if your attorney does nothing else, then the lien will survive the discharge. Previously, this was done within the plan of a Chapter 13, but the local rules have changed so that it must be done by motion in both Chapter 7 and Chapter 13 bankruptcies.

If your attorney was unaware or the judgment lien or otherwise failed to file that motion to strip the lien, not all is lost. A decision in the Eastern District of Kentucky Bankruptcy Court, In re Cross, Case No. 93-50547, the Debtors failed to strip the lien off their real property while the bankruptcy remained open. Twenty months after the case closed, the Cross’ reopened the bankruptcy and moved to have the lien stripped. Despite the passage of time and the creditor arguing that the Debtors waived the right to strip the lien based on so much time passing, the court still granted their motion.

February 4, 2013 Posted by | Bankruptcy, Chapter 13, Chapter 7, Discharge, Security interests | , , , , , , | Leave a 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