We know that Congress squelched the proposal that mortgages on your home could be modified in chapter 13. Too bad. Mortgage foreclosures went ahead at the highest pace in recent history as a result. Mortgage modifications are as rare as hen’s teeth.

Some mortgages, however, can be modified.

The key is that mortgages on your home can be modified when the mortgage is not the only security given for the loan.

For example, a client gave the bank a mortgage on their home to further secure a loan on their business, a liquor store. The liquor store failed.

Normally, you can’t eliminate a mortgage on your home except in chapter 13 and then only if the lien is totally unsecured – meaning your house is worth less than the mortgages which come ahead of the lien you want to eliminate.

However, in the case of the bank’s lien which was also given to secure the debt on the liquor store and its assets, it doesn’t matter if the mortgage is fully secured, partially secured or undersecured.  The mortgage can be modified. It can be broken into two parts. The secured part can be paid over a period of 5 years at a reduced interest rate.  The unsecured part can be lumped in with all other unsecured debts and is paid to the extent that it can be from the debtor’s projected disposable income over 5 years under a chapter 13 plan – with no interest.

Some creative lawyers are now arguing that residential mortgage loans further secured by a tax escrow can be modified in chapter 13 just like the mortgage further securing the liquor store loan. Whether that will be allowed remains to be seen.

Rely on creative attorneys on the Bankruptcy Law Network to help you solve your financial problems.

The question of whether a single bankruptcy debtor is limited to one motor vehicle allowance on the means test has vexed bankruptcy debtors since the inception of the 2005 Bankruptcy Reform Act.  While Form B22 does not explicitly limit the number of motor vehicle allowances to the number of debtors in the bankruptcy case (that is to say, at most, two), many have assumed that Form B22 authorizes only one motor vehicle allowance in a case involving only one debtor.

However, a New York bankruptcy court recently ruled that the only limit on the number of motor vehicle allowances claimed on the means test is that of reasonableness in the circumstances.

In re Daniel-Sanders, 2009 WL 5227839 (W.D.N.Y. Dec. 30, 2009), involved a divorced mother of three children, ages two through ten years.  She worked one full time job and also had a part time job in the evenings.  The debtor owned a 2004 Honda Odyssey with a loan balance of $9,368.53, as well as a 2007 Ford 500 with a loan balance of $27,737.44.  The second vehicle was needed because the debtor’s ex-husband cared for their children while she worked, and the second vehicle supplied reliable transportation while he did so.

The chapter 13 trustee objected to the diversion of funds from unsecured creditors by reason of the debtor’s two car loans being paid through the chapter 13 plan.

The bankruptcy court first ruled that the debtor’s claim of two motor vehicle operating allowances, and two ownership allowances, on the means test was proper.  The IRS website’s explanation of allowed transportation expenses simply stated that “normally” a debtor may have only one allowance.  To the court, this indicated that the IRS standards contemplated that in some circumstances, more than one allowance, and more than one vehicle, could be authorized.  The debtor’s claim of two vehicle allowances was therefore upheld.

However, the court denied confirmation of the debtor’s chapter 13 plan due to its view that any vehicle subject to a loan in excess of $16,000 was a luxury item.  As such, the debtor could not propose to pay the vehicle loan because to do so violated the good faith requirement of section 1325(a)(3).

Brett Weiss, BLN blogger and Maryland bankruptcy attorney, tells why the present mortgage modification programs are “Band-Aids on gaping wounds” and why changing the law to allow home mortgages to be modified in bankruptcy would be a solution to the mortgage foreclosure crisis.

Debt limits for Chapter 13 increase April 1, 2010, to $360,475 of unsecured debt and $1,081,400 of secured debt.  This change represents an increase of about 7% over the Chapter 13 debt limits in effect prior to the change.  Congress limited the amount of debt owed by the debtor in a Chapter 13 case but adjustments to the debt limits are scheduled to occur every three years on the first day of April in the year of adjustment beginning April 1, 1998.  The Bankruptcy Code in §109(e) prohibits use of Chapter 13 by individuals with debts that exceed the specified limits.  The adjustments are required by §104(a) of the code and an adjustment is due this year.

The adjustment of various dollar amounts specified in the bankruptcy code is intended by statute to reflect the change in the Consumer Price Index for All Urban Consumers, published by the Department of Labor, for the most recent 3-year period ending on December 31 of the prior year.  The dollar amounts are rounded to the nearest $25 increment and apply to a number of different dollar limits impacting Chapter 7, 11, 12 and 13 cases.

Today, a Wisconsin client asked what we could do to help save his investment property. It’s worth only about $70,000. It has a first mortgage for $80,000 and a second mortgage for $30,000. Our client bought the property at the top of the market. He can afford the first mortgage, but not the second. And he certainly doesn’t want a short sale or a deficiency judgment. He makes enough money that he could afford to pay it. What can be done?

Our client has little other unsecured debt.

But the entire second mortgage really is unsecured – there’s no equity in the building to support it. So in chapter 13, we can treat that debt as unsecured and strip away the second mortgage.  Instead of paying 11% interest on the second mortgage, our client can pay it off in full over a period of five years – and he could afford to do that.  Not only that, but $10,000 of the first mortgage can also be treated as unsecured and paid off in full over 5 years – without interest. That’s because it is perfectly OK to modify a non-residential mortgage loan in chapter 13 even though you can’t modify a mortgage loan secured by your personal residence. Wasn’t that a smart idea of Congress to reject mortgage modification? Gee, we really could have made some progress with our mortgage crisis.

Anyway, our client will be able to keep his building, reduce the mortgage considerably, pay off his debts over a reasonable period of time without interest and get the second mortgage lien released, thanks to the creative use of chapter 13.

            With the recent housing boom and bust, many people find themselves with debt in excess of the eligibility limits for Chapter 13, which since 2007 have been $1,010,650 in  secured debt, and $336,900 in unsecured debt.  But on April 1, 2010, those debt limits (along with most other dollar amounts in the Bankruptcy Code, including exemption amounts) will increase in accordance with the increase in the Consumer Price Index for the last 3 years.  While the Judicial Conference of the United States has yet to issue the official new numbers, the Department of Labor has issued the CPI numbers for the relevant period (December 2006 – December 2009), showing an increase of 7.01%.   So we can estimate, pretty accurately, that the new limits will be $1,081,500 for secured debt, and $360,525 in secured debt.  

            To count towards these limits, debt must be liquidated (generally meaning fixed or easily calculable) and non-contingent (owed without depending on whether something may or may not happen in the future).   And how to apply these limits to mortgages on homes that are now worth less than the mortgage debt is an issue on which the bankruptcy courts do not all agree, but they are usually treated as unsecured to the extent the home is “under water,” forcing debtors into Chapter 11 or precluding effective bankruptcy relief altogether.

            While this is the smallest increase since the Chapter 13 debt limits started increasing in 1998 (they were originally $750,000 and $250,000 when enacted in 1994), it will help many consumers qualify for Chapter 13 relief.

If a chapter 13 debtor suffers employment discrimination years after filing her bankruptcy, and then fails to amend her bankruptcy papers to say she can sue her employer, “judicial estoppel” prevents her from ever suing her employer over the discrimination.  In this recent decision by the U.S. Court of Appeals, Eleventh Circuit, one judge on the court was troubled by the result, and he wrote a separate opinion explaining why.

This decision, Robinson v. Tyson Foods, 2010 WL 396130 (11th Cir. Feb. 5, 2010), means that in the Eleventh Circuit, and possibly anywhere else in the United States, a chapter 13 debtor has to amend the bankruptcy papers as soon as he or she acquires a right to sue someone.  Otherwise, the courts will say that the debtor has concealed the lawsuit from the judicial system, and thus the lawsuit cannot be pursued.

In this case, the debtor filed a chapter 13 in 2002.  In 2005, she resigned from Tyson Foods, claiming racial discrimination forced her to do so.  She sued Tyson Foods in 2006.  In 2007, she paid off her chapter 13 plan and received a discharge.  Because she never amended her bankruptcy papers to include the lawsuit as an asset she owned, her case against Tyson Foods was later dismissed.

The appeals court ruled that whenever a chapter 13 debtor experiences a change of circumstances or acquires an asset, the bankruptcy papers have to be amended, as long as the bankruptcy case is still pending.  Although one of the appeals court judges was concerned by the possibly unintentional nature of the omission, he nevertheless concurred in the result.

What with the residential mortgage meltdown and credit card defaults, student loan debt can get lost in the shuffle.

But $740 billion of it is out there, and with jobs hard to come by, repaying student loans can be tough, or, impossible.

Even doctors are having trouble repaying student loans, as shown in a Wall Street Journal story by Mary Pilon.

Many people took out loans believing that the income from the job they got due to the schooling the loans paid for, would be more than enough to re-pay the loans.

Then, with the recession, jobs pay less, and even disappear.

If you did not take out any loans yet, or, are considering getting more student loans, beware! The loan does not go away, and the interest does not go away.

Even in bankruptcy.

In order to discharge, or wipe out these loans, whether in a Chapter 7 liquidation bankruptcy, or a Chapter 13 payment plan bankruptcy, you have to file a separate suit, in the bankruptcy court, and prove it would be an undue hardship on you to repay the loan.

Make conservative assumptions, about what kind of job you can get, and how much it will pay.

Realize money paid for student loans is not available to you to buy a house, or a vehicle, or pay the cost of raising kids yourself.

Don’t believe the hype.

Most colleges are more than happy to have you take out loans, after all, they get the money!

The propaganda in our culture is, “to get a good job, you need a good education.”

You hear it on the radio “the average college graduate makes over a million dollars more over a working lifetime than a high school graduate.”

Hey, college is great.

If you can afford it.

Don’t forget, the four or five years or more that you spend in college, you could be working.  (OK, assuming you can get a job)

That is what the economists call, opportunity cost.

You lose the opportunity to work full time.

Then, look at how much you need to pay.

If you are borrowing $50,000 per year of college, not likely you are going to get a financial return on that amount.

If you had the $50,000, you could invest it, or, buy a pizza franchise!

And, then there would be a return, or payment, on that money.

If you borrow it, you have to pay interest, so there is additional cost.

Hey, student loans make you feel like school is free.

But the piper must be paid, so check for other sources of financing, take time off, work, save some money, commute from home, go to the school that charges less.

Do not be like the doctor in the story, who is on track to pay off her student loans when she is 70.

Student Loan Disasters

In the Northern District of Georgia, where I practice, Chapter 13 debtors pay their mortgage payments directly to the mortgage lenders, rather than sending their mortgage payments to the Chapter 13 trustee for subsequent disbursement to the mortgage lender.

What happens when a Chapter 13 debtor falls behind “post petition” – after his plan has been filed and confirmed?

When a post-petition mortgage delinquency occurs, the lender’s recourse is to file a motion for relief from stay, which is a request that the judge lift bankruptcy protection to allow the lender to initiate foreclosure proceedings.  In my experience, lenders will first have their lawyers send the debtor’s attorney a letter, with the motion coming after the debtor has fallen behind by two or three months.

The filing fee for a motion for relief is $150, and of course the lender’s attorneys will also charge a fee.

When I receive a motion for relief, I will contact my client to find out what happened and to see if he wants me to try to work out a settlement.  Generally mortgage companies are amenable to settling motions for relief because they know that most bankruptcy judges will not grant their motion if there is any reasonable chance that the debtor can catch up his mortgage payments.  Judges generally want Chapter 13 debtors to keep their homes and in my district the judges expect that the debtor’s lawyer and the lenders lawyer will try to work out a deal.

The settlement of a motion for relief takes the form of a Consent Order that denies the motion but obligates the debtor to pay back the missed payments over a 6 to 8 month period.  In addition, judges will allow the lender to tack on the $150 filing fee and between $400 and $600 in attorney’s fees for having brought the motion for relief.

My clients are sometimes upset to learn that not only are they going to have to catch up on two or three missed payments over the next 6 months, but that they are also going to have to pay an extra $750 to the lender for attorney’s fees and costs, even when the case is settled prior to a hearing.

Unfortunately, you will incur these extra costs if you do not cure the post petition default prior to the time a motion for relief is filed.  While you have the right to challenge the attorney’s fees in court before the judge, you run the risk that the judge might order a less generous settlement or that the judge might grant the motion and all the foreclosure process to start.

Obviously the best solution is not to fall behind at all, but if you do, call your lawyer as soon as you realize that you will become delinquent post petition.  It is in your best interest to avoid motions for relief and the associated costs that you will ultimately pay.

Ever dream of dictating realistic repayment terms to the IRS for your back taxes?  Welcome to Chapter 13.  Even better, under bankruptcy law, you may have to pay far less to the taxing authorities than you owe.

Chapter 13 is a reorganization plan for an individual with regular income.  The Chapter 13 plan must provide for repayment of priority taxes in full over the three to five year life of the plan.  Taxes that are not priority, however,  may be paid little or nothing.

Better yet, you get to write the payment plan that, by bankruptcy law, must provide for your reasonable living expenses during the plan.  And the taxes, so long as they are unsecured, are interest free during the plan and penalties may be paid little or nothing.

The final advantage of Chapter 13 for dealing with  taxes is that it addresses all your other creditors and prevents them from trying to collect from you during the plan, and discharges their claims at the end of the plan.  So, really, what’s not to like?