Chapter 13 is this magic bankruptcy chapter that allows you to “strip” the second mortgage if it is fully unsecured and to cram down the mortgage on your second home. It is great, by the time you get out and successfully complete the plan in 3-5 years, you can get rid of a LOT of debt. There is one little catch. You can only do it if you meet the debt limitations. In California that may be harder to do than you think.
Under section 109(e) of the bankruptcy code, to be eligible for Chapter 13, debtor may not have more than: $336,900 in noncontingent, liquidated, unsecured debt; and
$1,010,650 in noncontingent, liquidated, secured debt. Note, these debt limits are periodically increased.
That’s not a problem, you say. I only have about $90,000 on credit cards. I am way under the $336,900 limit. Oh wait. You want to count the second mortgage we will be stripping? That’s fine, too. I barely get in there, but I am ok. My second mortgage is only $230,000. What??? There is more? How much is my house worth now? Appraisal? You are going to count the unsecured portion of the first mortgage as well? We are going to have a problem…. Uh, we have a problem.
In re Groh, 2009 WL 1604974 (Bankr. S.D.Cal. 2009) and In re Estrada, Case No.: 09-00207 (Bankr.S.D.Cal) are the recent cases that came out holding that not only do you count the unsecured second mortgage to be stripped, but you also count the “unsecured” portion of the first mortgage, in addition to other debt you list on Schedule F (unsecured, non-priority debt, like credit cards and medical bills) to determine if you qualify under 109(e).
Here is a simple example. Client has a house worth $600,000. The first mortgage is $650,000 and the second mortgage is $200,000. Client has credit card and medical bills totaling $120,000.
We count: $120,000+$200,000=$320,000. Were we not required to include the unsecured portion of the first mortgage, Client would be ok to file for Chapter 13 (assuming other requirements are met). But, we add another $50,000 ($650,000 -$600,000) and now the unsecured debt, becomes $370,000.
Note: the same analysis applies if you have 2 properties. You are likely to run into a similar situation with 2 properties that are valued at less than the example, but as a result of combination, lead to same results.
What is the solution? There is no perfect solution.
- You can try Chapter 11 (but it’s more expensive).
- You can try to first do a Chapter 7 and get rid of the unsecured debts, but again that may make you ineligible for a Chapter 13 for a bit (or you may not qualify).
- You can wait for property values to go up and reduce the unsecured portion. Downside is of course the uncertainty and the wait.
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If the debtor’s income is below the state median, the dreaded Means Test is “done.” However, if debtor’s gross income exceeds the median (gross income for the household size chosen is greater than the state median), the rest of the Means Test Form must be completed. Debtor can deduct things like mandatory deductions from gross income, income taxes and union dues.
Debtor can also deduct secured payments to be made in the next 60 months. In other words, if debtor financed a car and there are 45 payments left. The 45 payments are added and divided by 60. The figure is then deducted from the income. Same techniques is applied to mortgage payments(also a secured debt).
What about secured payments on collateral to be surrendered in a chapter 7 or soon after
Can you still get the benefit of the deduction? Because technically the Means Test is backward looking in that even if your income at the time of filing is lower than the median, it doesn’t matter if the income during the 6 months prior to the filing exceeds the median. Likewise, shouldn’t your obligation during those 6 months be allowed to set off that income? Well, Courts are all over the place on that specific issue.
In California, the 9th Circuit is pretty settled on the answer. Thankfully for those of us practicing in the Circuit.
Intent to surrender collateral, irrelevant and deduction is still allowed in the following 9th Circuit cases:
C.D. California: In re Wilkins, 370 B.R. 815 (Bankr. C.D. Cal., July 2, 2007) (Bankruptcy Judge Meredith A. Jury) (Chapter 7 case)
E.D. California: In re Vartan, 2007 WL 640006 (Bankr. E.D. Cal., Feb. 26, 2007) (Bankruptcy Judge Robert S. Bardwil) (Chapter 7 case)
N.D. California: In re Rodrigues, 2008 WL 372742 (Bankr. N.D. Cal., Feb. 11, 2008) (Bankruptcy Judge Alan Jaroslovsky) (Chapter 7 case); In re Chang, 2007 WL 3034679 (Bankr. N.D. Cal., Oct. 16, 2007) (Bankruptcy Judge Arthur S. Weissbrodt) (Chapter 7 case);
S.D. California: In re Sederberg, Case No. 07-02065-JM7 (Bankr. S.D. Cal., Dec. 20, 2007) (Bankruptcy Judge James W. Meyers) (Chapter 7 case); In re Maya, 374 B.R. 750 (Bankr. S.D. Cal., Aug. 14, 2007) (Chief Bankruptcy Judge Peter W. Bowie) (Chapter 7 case)
Idaho: In re Kelvie, 372 B.R. 56 (Bankr. D. Idaho, July 10, 2007) (Chief Bankruptcy Judge Terry L. Myers) (Chapter 7 case)
Oregon: In re Stewart, Case No. 08-33275-rld7 (Bankr. D. Or., March 11, 2009), amended (March 16, 2009) (Bankruptcy Judge Randall L. Dunn) (Chapter 7 case); In re Oliver, 2006 WL 2086691 (Bankr. D. Or., June 29, 2006) (Bankruptcy Judge Randall L. Dunn) (both Chapter 7 and 13 cases)
W.D. Washington: In re Smith, 401 B.R. 469 (Bankr. W.D. Wash., Nov. 14, 2008) (Bankruptcy Judge Paul B. Snyder) (both Chapter 7 and Chapter 13)
From the above, it is pretty clear that you can deduct secured payments for collateral you intend to surrender in the 9th Cir. (California included).
What about collateral that was already surrendered, repossessed or foreclosed on prior to filing?
The answer is less clear. I would say that this is not something yet decided and I would advise clients, if circumstances permit and the deduction is necessary, to file before the property is surrendered, repossessed or foreclosed on. I think that the case law currently is leaning toward not permitting deductions.
Caution: sometimes it is better and necessary to wait until after and risks must be weighed to determine which option is better. I recommend consulting an experienced attorney to help you make the right decision.
Deduction was not permitted in this case:
In re Ballard, 2008 WL 783408 (Bankr. N.D. Ohio, March 25, 2008)
(Bankruptcy Judge Russ Kendig) (the creditor obtained a foreclosure judgment prepetition); Case number 07-61486.
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Foreclosure and Depression
Today Washington Post had a story on the effects of foreclosures on mental health. To read the full article click: http://www.washingtonpost.com/wp-dyn/content/article/2009/08/24/AR2009082402333.html
Unfortunately, this is a story too familiar to a bankruptcy attorney who has been practicing for more than a week. In fact, the very first client I met (while working at another firm) committed suicide. He had a complicated case. His problems were compounded by the fact that by the time he dealt with his finances he has “borrowed” a large sum from an aging parent. I don’t presume to understand what he was going through. I met the person once. I will be honest, I considered finding a new area of law to focus on, but I didn’t.
Since that horrible time, I have seen a LOT of sadness and pain come through the doors of the firm I was working for, and more when I opened my own practice. Like everyone else, I don’t like to see so much pain and loss. What has kept me practicing bankruptcy is the fact that I also see a solution for the majority of people. It isn’t always roses and it isn’t always ideal, but at times it truly is a very good option that does give people a “fresh start” and allows them to sleep again.
I hear this time and time again, “ After meeting with you, I got my first good night of sleep in a very long time.” Hearing that, keeps me coming back.
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Free and Secure Credit Report
It is important to periodically check your credit report to make sure it is accurate. While you will see a lot of advertising for a “free” report, you will often find that it requires you to sign up for their services, etc. Basically, buy this and we’ll give you YOUR report for “free.”
What these sites don’t tell you is that you are entitled by law to a TRULY FREE annual report. Go to this site: https://www.annualcreditreport.com/cra/index.jsp
If you need help disputing inaccuracies, feel free to contact our office at (213) 382-2926 for your free consultation.
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Notice of Bankruptcy
When you file for bankruptcy and you have a lawsuit pending in state it is important to give notice of your bankruptcy in that state court. Use this form in the Los Angeles, CA state courts: http://www.courtinfo.ca.gov/forms/fillable/cm180.pdf
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Credit bureau reports are limited in how they represent foreclosures today, so it’s generally not possible to tell from the credit report if a reported foreclosure is a short sale, deed in lieu of foreclosure, settled account, regular foreclosure, or some other variation.
The FICO® score treats all of these descriptions that appear on credit reports as serious delinquencies, so they have an impact on the score similar to the impact from a charge off, tax lien or account included in bankruptcy.
Repost from www.myfico.com
There is a lot of misinformation out there. Please make sure that you are getting your facts from a reliable source.
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Lenders are failing to do loan modifications despite financial incentives by the government to do just that.
http://www.boston.com/business/articles/2009/07/07/lenders_avoid_redoing_loans_fed_concludes/?page=1
What can you do? You have options, one of which is bankruptcy. Talk to an experienced bankruptcy attorney.
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Means Test/Household Size
If you are considering filing for bankruptcy, you have likely heard about the dreaded “Means Test.” It is a test under the new bankruptcy law you have to “pass” in order to qualify for Chapter 7 bankruptcy.
The way you can determine whether you pass is you look at your gross monthly income for the previous 6 months, divide the number by 6 and multiply by 12. Sounds fun! This is one of the many reasons getting an experienced bankruptcy attorney is advisable. You compare that number with the median income in your state. The median income varies depending on the size of the household. As you may guess, it goes up as the household goes up. If you are under the median income, that’s it. Your worries about the Means Test are over and it is likely that your attorney breathes a sigh of relief and you Chapter 7 bankruptcy is less costly. If you are over the median, your attorney will likely need to do more work and ask you more questions. In many cases, there will be nothing left, but to file a Chapter 13 or Chapter 11, which is more costly and in some cases infeasible and usually more complicated.
Let’s go back to the household size issue. Especially for people whose income is close to the median or over the median, determination of the number of people in the household is important, because it could mean a difference in qualifying for a Chapter 7 bankruptcy or not. In California, where I practice bankruptcy law, the current median income for 1 person is $49,182 and for 2 people it is $65,097. That is a big difference!
In some cases it is very clear what the household size is. A mother living with two minor daughters in one house. Father has passed away and no relatives/friends living with them. That is a clear household of 3.
However, some cases are not as clear, living with girlfriend who is currently in school, fiancé from another country, roommates, grandmother and her husband, adult child moving back in, gay unemployed partner and her adult child. What is the size of your household now? As you can see tell, some situations are less clear-cut and an argument can probably be made to include or exclude those people.
An experienced bankruptcy attorney will likely spot that issue right away, especially in situations where it is critical (you are above the median or close to it).
It is a bit of a balance for an attorney, because once you include the person as part of the household, you have to include their contribution to the household…As you may have guessed, while it helps to include people without income into your household, including income from people who make a lot more money may hurt your chance of qualifying. Seeing the issue and making the right decision is important.
Household size
There are several approaches on to how to calculate this size of the household and no “right” answer, though most attorneys will argue that currently the controlling approach is the “heads on bed” approach. The name basically says it all, in that the household consists of heads on bed occupying the housing unit. In re Ellringer, 370 B.R. 905 (Bankr. D. Minn. 2007). This approach is also known as Census Bureau test.
A more limited approach is the “financial dependency” approach, which basically looks to the number of people debtor is financially responsible for within the household. A less followed approach is the “IRS regulation” approach, allowing household size to be controlled by the number claimed as dependents allowed under the IRS code.
The moral of the story is to know that there are options and to know that a decision on the size of household in case of Chapter 7 is made at time of filing, therefore, the timing of your case may be as important as anything else. Consulting with an experienced bankruptcy attorney will help you make the right decision for you.
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Famous People Filing Bankruptcy
While having to file for bankruptcy is certainly not anybody’s idea of a good time or something to strive for, it is not the end, but rather a beginning or a fresh start. If you are considering filing for bankruptcy, you are in the company of some very famous and successful people.
1. Abraham Lincoln – while his face is currently on a penny, at one time, didn’t have a single cent to spare. He tried his hand at many occupations as a young man, including buying a general store in New Salem, Illinois, in 1832. Honest Abe turned out to be a poor shopkeeper, and while he didn’t have modern bankruptcy laws to protect him, he ended up losing his remaining assets, including his horse. He also continued paying off his debts well into the 1840s.
Lincoln is not the only United States president that filed for bankruptcy. Ulysses S. Grant filed for bankruptcy after leaving office. Thomas Jefferson filed for bankruptcy several times. William McKinley filed for bankruptcy and was at one point $130,000 in the red.
2. Henry Ford – automobile manufacturer’s first two companies failed. The first company filed for bankruptcy and the second ended because of a disagreement with his business partner. In 1903, at the age of forty, he created a third company. By July 1903 the bank balance of the company dwindled to $223.65, but then Ford sold its first car, and the rest is history.
3. Walt Disney – cartoon creator, filed for bankruptcy in 1920. In 1923 he formed a new company with a loan from his parents and brother and in 1928 he created “Mickey Mouse.” The rest is, you guessed it, history!
4. H.J. Heinz – When Heinz was just 25 years old he and his partners began a company that made horseradish. The condiment didn’t prove to be very lucrative. His company was bankrupt by 1875. The very next year, Heinz got together with his brother and cousin to start a new company. The reorganized company started making ketchup, and the business took off. Last year the H.J. Heinz Company had over $10 billion in revenue.
5. Milton Hershey – founder of Hershey’s chocolate, started four candy companies that failed and filed bankruptcy before starting what is now knows as Hershey’s Food Corp. Mr. Hershey had only a fourth grade education, but was certain he could make a good product. His fifth attempt was, as we all know, successful.
6. Mark Twain – the famous American writer, lost most of his money investing in a worthless machine called the Paige Compositor. He filed for bankruptcy in 1894 and discharged all his debts, but was determined to repay all the debts anyway. He knew he could earn money by giving lectures to large audiences, so he traveled to Europe and spent the next four years lecturing in all major cities. He used the proceeds from these lectures to repay all his debts. He also wrote several of his more famous books after filing bankruptcy, including Following the Equator.
7. Kim Basinger – the famous actress, earned so much money at one point from her movies that she was able to purchase the town of Braselton, Georgia. After the purchase she was sued for breach of contract for pulling out the movie, Boxing Helena. She was not able to pay the damages resulting from the suit and filed for bankruptcy in 1993. As part of her bankruptcy, she sold the town. She later married, had a child and won an Oscar for her role in L.A. Confidential.
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Fraud victim?
Sometimes my clients are forced to file for bankruptcy because their credit was ruined through fraudulent transactions by people they knew or they were victims of stolen identity. Unfortunately, these days most of us can find our selves victims of stolen identity. Here is what you can do to prevent further damage.
Placing a Fraud Alert
(888) 766-0008
Consumer Fraud Division
P.O. Box 740256
Atlanta, GA 30374
http://www.equifax.com
(888) 397-3742
Credit Fraud Center
P.O. Box 1017
Allen, TX 75013
http://www.experian.com/fraud
(800) 680-7289
Fraud Victim Assistance Department
P.O. Box 6790
Fullerton, CA 92834
http://www.tuc.com
Soon after you place a fraud alert, you will receive confirmation letters from all three credit reporting agencies, with instructions on how to order free credit reports. If you find anything that looks wrong or suspicious or that you don’t understand in a credit report, call the credit agency at the telephone number listed on the credit report. You may also wish to call your local police or sheriff’s office to file a report of identity theft.
Placing a Fraud Alert
(888) 766-0008
Consumer Fraud Division
P.O. Box 740256
Atlanta, GA 30374
http://www.equifax.com
(888) 397-3742
Credit Fraud Center
P.O. Box 1017
Allen, TX 75013
http://www.experian.com/fraud
(800) 680-7289
Fraud Victim Assistance Department
P.O. Box 6790
Fullerton, CA 92834
http://www.tuc.com
Soon after you place a fraud alert, you will receive confirmation letters from all three credit reporting agencies, with instructions on how to order free credit reports. If you find anything that looks wrong or suspicious or that you don’t understand in a credit report, call the credit agency at the telephone number listed on the credit report. You may also wish to call your local police or sheriff’s office to file a report of identity theft.
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Recent Entries
- Property value drop and catch-22 with debt limits in a Ch. 13
- Deducting Secured Payments on the Means Test for Collateral to Be Surrendered?
- Foreclosure and Depression
- Free and Secure Credit Report
- Notice of Bankruptcy
- How does short-sale and deed in lieu influence my FICO score?
- New study finds lenders fail to do loan mods.
- Means Test/Household Size
- Famous People Filing Bankruptcy
- Fraud victim?
- Foreclosure and loan modifications.
Categories
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- Debt forgiveness (1)
- etc. (2)
- Uncategorized (10)
