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Archives for March 2014

Cramming: Overview of Bankruptcy – Chapter 13 and Why to File, Part 3

March 28, 2014 by TomScottLaw

Series: #8 0f 13
Last time, we discussed curing a mortgage, one of the reasons a debtor would want to file a Chapter 13 bankruptcy rather a Chapter 7. Next, we look at “cramming.”

What does “Cramming” Mean in Reference to Bankruptcy?

“Cram” is a word of art in bankruptcy practice. It literally means reducing a secured debt to the fair market value of the subject collateral. It is most often used with regard to automobiles, but it may also be used for household goods or even mobile homes.
When cramming in a plan, the debtor offers the fair market value of the collateral with interest; the balance of the debt is treated as an unsecured claim.
Cramming a car.
In the past when cramming a car in a plan, it was advisable to include language that required that the title be released upon payment of the value offer. However, pursuant to the revised 11 USC §1325*(a)(d)(B), a secured creditor may object and the plan can not be confirmed unless the secured claim holder retains their lien until the debt is paid in full or the case is discharged.
However, because paragraph (5) gives three options (acceptance, satisfaction of enumerated terms, or surrender), arguably, if the plan specifies that title will be released upon payment of the secured portion of the claim, and the creditor fails to object, upon confirmation the creditor is deemed to have accepted the plan and is bound by the terms of the plan.
11 U.S.C. § §506*(a)(2) codifies Associates Financial Corp. v. Rash, 117 S.Ct. 1879 (1997) and mandates that the “allowed secured claim shall be determined based on the replacement value” and not the liquidation value. If there is still a dispute regarding the replacement value, courts have generally favored concrete evidence of the value, but have recently indicated a willingness to look at “book” values, preferring the NADA guide.
In addition to the collateral itself, oftentimes, the original financing agreement includes credit-like insurance and/or a warranty of some sorts. It has been our experience that debtors generally surrender those policies and/or warranties in reaching a value offer. See In re Sharon, 200 B.R. 281 (Bankr. D. Or. 1995), holding that the value of an extended service contract is not included in the allowed secured claim. Of course, the debtor is free to reaffirm those contracts and add those costs to the fair market value offer.
The ability to cram a recently purchased vehicle (or other personal property) has been limited by the BAPCPA amendments (referred to as the 910-Rule). The unnumbered paragraph at the end of §1325(a) excludes any vehicle acquired for personal use or any other personal property purchased within 910 days of filing from the application of §506. In short, this means that the claim may not be bifurcated and treated as only partially secured.
In re Till, 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004) is still assumed to be the appropriate standard for establishing the interest rate to be offered on secured claims. Till, using the formula approach, established that the interest rate should be the national prime rate plus a risk factor (between 1 and 3%) depending on the circumstances of the particular debtor. A recent decision out of the Southern District of Illinois by Judge Coachys of the Indianapolis Division, In re Rushing (05-37004), applied Till to both cram downs and 910 vehicles.
Finally, keep in mind that cramming any car into a plan limits that debtor’s ability to convert to Chapter 7 later on and keep that vehicle as the payments will not be current based upon the underlying contract. Signing a reaffirmation agreement following a conversion to Chapter 7 may automatically subject your client to the default provisions.
It may also not be advantageous financially to file a Chapter 13 solely for the purpose of cramming a vehicle after the debtor has paid the Till rate of interest and the attorney fees.
Cramming other personal property.
Subject to only a one-year limitation (similar to the 910 rule addressed above) debtors may offer the fair market value on virtually any piece of personal property, including furniture, appliances and boats. If no objections are received, the trustee will pay the value offer with interest, and will treat the remaining balance of the claim as unsecured. Interest should be offered as §1325(a)(5) requires that the creditor must receive “present value” of the collateral. However, it would seem that if interest were not offered and the creditor failed to object, the value could be paid at a flat rate (no interest).
Use caution when “cramming” the debtor’s personal property in a plan however, as the Best Efforts test will have some bearing. That is, if the debtors are attempting to retain collateral that is not “reasonable and necessary” as contemplated by §1325(b), the trustee may raise an objection to the utilization of estate funds to retain an unnecessary item. This objection may be resolved by either a surrender of the collateral in question, or by a modification of the plan that will increase the amount offered to general creditors by the amount of funds necessary to retain the property. Some items that may merit a trustee’s “BEF” objection include additional or luxury cars, a big screen TV, a boat, or a baby grand piano.
Next: Liquidating Tax Debt

* Source: Cornell University Law School Legal Information Institute

Filed Under: Chapter 13 Tagged With: collateral, cramming, secured debt

Curing a Mortgage: Overview of Bankruptcy – Chapter 13 and Why to File, Part 2

March 14, 2014 by TomScottLaw

Series: #7 0f 13
Previously, we took a look at reasons why a debtor might be disqualified from filing Chapter 7, and have to file for bankruptcy under Chapter 13. Now, we will begin to discuss reason why a debtor would want to file a Chapter 13 instead of Chapter 7, the first being curing a mortgage.

What does Curing a Mortgage Mean? How does it Affect My Bankruptcy?

Put simply, a mortgage is cured by paying all outstanding payments currently in arrears, along with any fines, late fees, attorney’s fees, and any penalties that may be due and owing.
Mortgage creditors are afforded special protection in Chapter 13; a debt secured by a principal residence of the debtor cannot be modified through the filing of a bankruptcy. See 11 U.S.C. §1322*(b)(5) and Nobleman v. American Savings Bank, 113 S. Ct. 2106 (1993)*, holding that home mortgages secured only by the debtor’s personal residences cannot be modified to discharge any unsecured portion of the claim.
With the few exceptions discussed below, a Chapter 13 is useful for curing mortgage arrears, as it provides up to five years to accomplish the cure.
In Indiana, a sheriffs’ sale is not final until the gavel falls, and many Chapter 13’s are filed on the eve of the sale to save the family home.
When curing a mortgage in a plan, the cure runs through the month that the petition is filed and the current mortgage payments begin the following month.
When setting up a mortgage cure in a plan, it is important to estimate the amount of the arrears as closely as you can. Note that pursuant to Southern District of Indiana General Order 09-0005, for all cases filed on or after August 1, 2009, if there is a pre-petition arrearage claim on a mortgage secured by the debtor’s residential real property, then both pre-petition arrears and post-petition mortgage installments shall be made through the trustee.
Keep in mind then that the mortgage installment is also subject to the trustee percentage fee (currently anywhere from 6.5-10% in the Indianapolis division).

Exceptions to Curing a Mortgage

  1. Balloon mortgages.
    Plans can also propose to “cure” a balloon payment. If the balloon payment became due before the Chapter 13 was filed, and can be paid in full over the life of the plan, several cases hold that this is a proper use of a Chapter 13. See In re Nepil, 206 B.R. 72 (Bankr. D.N.J. 1997) and In re Chang, 185 B.R. 50 (Bankr. N.D. Ill. 1995), interpreting §1322(c)(2) to allow the payment of a balloon mortgage that matured pre-petition.
    It is not as clear whether an unmatured balloon payment (unmatured at the date of filing) can be cured in a Chapter 13 plan. Arguably, if the balloon payment becomes due during life of the plan, it is proper to provide for the full payment in the plan. Again, it is important to provide both the amount of the balloon and the interest factor.
  2. Cramming a mortgage – cross-collateralization.
    In some limited instances, case law has provided circumstances in which a residential mortgage can be crammed.First, if the mortgage is cross-collateralized with any other collateral, it loses the protection afforded under the Code. §1322(b)(2) provides that secured claim holders may be modified “other than a claim secured only by a security interest in real property that is the debtor’s principal residence.”
    Case law has interpreted that to mean if the real estate is income-producing (rental income), if the mortgage includes the residence and commercial property, or if the mortgage includes the residence and equipment, other acreage or anything other than the personal residence, the mortgage can be “crammed” to the fair market value.
    If you have a mortgage that you wish to cram, valuation becomes the primary issue, and value agreements become more difficult to orchestrate. If you are attempting a mortgage cram, it would be in your best interests to have a recent appraisal of the property available to the creditor to substantiate your offer.
    Also, remember that you need to deduct the value of the other pledged collateral, and the other pledged collateral must also be provided for in the plan – either with a payment offer or to surrender.
  3. Cramming an undersecured junior mortgage.
    Additionally, there have been some decisions that allow the debtor to cram a junior mortgage if there is absolutely no equity to support the note. For more about this issue, see:

    1. Matter of Sanders, 202 B.R. 986 (Bankr. D. Neb. 1996), holding that the “creditor must have a secured claim in both the literal and Code sense to have its rights protected by the anti-modification clause.”
    2. In re Geyer, 203 B.R. 726 (Bankr. S.D. Cal. 1996), “where the estate’s interest in property is zero, the claim under §506(a) is completely unsecured and thus not entitled to §1322(b)(2) protection.”

    In determining the amount of equity available to support a mortgage, you may not deduct any exemptions to which the debtor may be entitled. Again, an appraisal is vital in attempting this type of cram.

  4. Tax Sale Redemption.
    A Chapter 13 plan may be proposed to allow for the redemption of a property from a tax sale.In Indiana, a debtor has one year from the date of the tax sale to redeem the subject real estate.
    The trustee is often reluctant to take on the responsibility of redeeming tax sale properties due to the changing redemption amount and deadline for making the redemption. As a result, the trustee will usually require the redemption to be accomplished outside the plan by the debtor prior to the payment of any mortgage arrears by the Trustee.
    Another possibility is that the mortgage creditor may redeem the property, and then include the redemption amount in their arrears claim. This is probably the best method because the mortgage company is assured that the property has been redeemed, and they are often in a position to redeem it much more quickly than is the debtor.

Next: Cramming

* Source: Cornell University Law School Legal Information Institute

Filed Under: Chapter 13, Mortgage

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